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| SYK > SEC Filings for SYK > Form 10-K on 13-Feb-2012 | All Recent SEC Filings |
13-Feb-2012
Annual Report
We supplement the reporting of our financial information determined under GAAP
with certain non-GAAP financial measures, including percentage sales growth in
constant currency, adjusted net earnings and adjusted diluted net earnings per
share. We believe that these non-GAAP measures provide meaningful information to
assist shareholders in understanding our financial results and assessing our
prospects for future performance. Management believes percentage sales growth in
constant currency, adjusted net earnings and adjusted net earnings per diluted
share 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, for analyzing potential future business trends in
connection with our budget process and bases certain annual bonus plans 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 earnings performance on
a consistent and comparable basis, we exclude certain items that affect the
comparability of operating results and the trend of earnings. 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, 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.
ABOUT STRYKER
Stryker is one of the world's leading medical technology companies, with 2011
revenues of $8,307 and net earnings of $1,345. We are dedicated to helping
healthcare professionals perform their jobs more efficiently while enhancing
patient care. We offer a diverse array of innovative medical technologies,
including reconstructive, medical and surgical, and neurotechnology and spine
products, to help people lead more active and more satisfying lives.
In 2011 we began segregating our reporting into three reportable business
segments: Reconstructive, MedSurg, and Neurotechnology and Spine. See Note 13 to
our Consolidated Financial Statements for additional information.
Recent Business Developments
In January 2012 we reached a settlement regarding a 2009 indictment charging
Stryker Biotech LLC and certain then-current employees and a former employee of
Stryker Biotech with wire fraud, conspiracy to defraud the FDA, distribution of
a misbranded device and false statements to the FDA. We reached a settlement
with the United States Attorney's Office for the District of Massachusetts,
under which Stryker pled to one misdemeanor charge and paid a non-tax deductible
fine of $15. As a result of this resolution, the Department of Justice dismissed
all thirteen felony charges against Stryker Biotech contained in the 2009
federal grand jury indictment. All of the charges against the then-current and
former employees of Stryker Biotech have also been dismissed. The settlement
represented a recognized subsequent event and accordingly was recorded in our
fourth quarter 2011 results.
In 2011 we recorded $38 in severance and related costs in connection with
focused reductions of our global workforce and other restructuring activities
that are expected to reduce our global workforce by approximately 5% by the end
of 2012. The targeted reductions and other restructuring activities are being
initiated to provide efficiencies and realign resources in advance of the new
Medical Device Excise Tax scheduled to begin in 2013, as well as to allow for
continued investment in strategic areas and drive growth. In addition, we
recorded $25 in intangible asset impairments and $13 in contractual and other
obligations, as certain of our restructuring actions resulted in the
discontinued use of specific assets and the exit of certain lease and other
commitments.
In 2011 we recorded an income tax benefit related to a favorable settlement with
the United States Internal Revenue Service (IRS) regarding its proposed
adjustment to our previously filed 2003 through 2007 income tax returns related
to income tax positions we had taken with respect to our cost sharing
arrangements with two wholly owned entities operating in Ireland, and we
recorded charges for other uncertain tax positions related to the outcome of the
IRS settlements. The net benefit of these adjustments for uncertain tax
positions was $99 (net of tax).
In October 2011 we acquired Concentric Medical, Inc. (Concentric), which
manufactures and markets minimally invasive products for the treatment of acute
ischemic stroke, in an all cash transaction for $135. The acquisition of
Concentric enhances our product offerings within our Neurotechnology and Spine
segment.
In July 2011 we completed the acquisition of Memometal Technologies (Memometal)
in an all cash transaction for $150, including the assumption of $9 in debt, as
well as an additional $12 to be paid upon the completion of certain milestones.
The acquisition of
Dollar amounts in millions except per share
9 amounts or as otherwise specified.
Memometal enhances our product offerings within our Reconstructive segment.
In June 2011 we completed the acquisition of Orthovita, Inc. (Orthovita) in an
all cash transaction for $316. The acquisition of Orthovita complements our
existing product offerings, primarily within our Neurotechnology and Spine
business segment.
In February 2011 we completed the previously announced sale of our OP-1 product
family for use in orthopaedic bone applications and our manufacturing facility
based in West Lebanon, NH for total consideration of $60.
In January 2011 we completed the previously announced acquisition of assets of
the Neurovascular division of Boston Scientific Corporation (Neurovascular) in
an all cash transaction for $1,450, with an additional $50 payment to be made
upon completion of certain milestones. The acquisition of Neurovascular
substantially enhances our presence in the neurotechnology market, allowing us
to offer a comprehensive portfolio of products in both neurosurgical and
neurovascular devices.
In September 2011 we sold $750 of senior unsecured notes due September 2016 and
in January 2010 we sold $500 of senior unsecured notes due January 15, 2015 and
$500 of senior unsecured notes due January 15, 2020. The net proceeds from the
offerings have been and will continue to be available for working capital and
other general corporate purposes, including acquisitions, stock repurchases and
other business opportunities.
RESULTS OF OPERATIONS
Our consolidated results of operations were:
Percent Change
2011 2010 2009 2011/ 2010 2010/ 2009
Net Sales $8,307 $7,320 $6,723 13.5 8.9
Gross Profit 5,496 5,034 4,539 9.2 10.9
Research, development & engineering
expenses 462 394 336 17.3 17.3
Selling, general & administrative
expenses 3,150 2,707 2,506 16.4 8.0
Intangible amortization 122 58 36 110.3 61.1
Property, plant and equipment
impairment - 124 - (100.0 ) -
Restructuring charges 76 - 67 - (100.0 )
Other income (expense) - (22) 30 (100.0 ) -
Income taxes 341 456 517 (25.2 ) (11.8 )
Net Earnings $1,345 $1,273 $1,107 5.7 15.0
Diluted Net Earnings per share $3.45 $3.19 $2.77 8.2 15.2
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Our geographic and segment net sales were:
Percentage Change
2011/2010 2010/2009
Net Sales Constant Constant
2011 2010 2009 Reported Currency Reported Currency
Geographic sales:
United States $ 5,269 $ 4,793 $ 4,317 9.9 9.9 11.0 11.0
International 3,038 2,527 2,406 20.2 13.4 5.0 2.2
Total net sales $ 8,307 $ 7,320 $ 6,723 13.5 11.1 8.9 7.8
Segment sales:
Reconstructive $ 3,710 $ 3,549 $ 3,384 4.5 1.5 4.9 3.5
MedSurg 3,160 2,803 2,427 12.7 11.2 15.5 14.7
Neurotechnology and Spine 1,437 968 912 48.5 46.4 6.1 5.6
Total net sales $ 8,307 $ 7,320 $ 6,723 13.5 11.1 8.9 7.8
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Net sales increased 13.5% in 2011 after increasing 8.9% in 2010. In 2011, net
sales grew by 6.1% as a result of increased unit volume and changes in product
mix, 2.4% due to the favorable impact of foreign currency and 6.8% due to
acquisitions, which were partially offset by an unfavorable impact of 1.8% due
to changes in price. In 2010, net sales grew by 6.9% as a result of increased
unit volume and changes in product mix, 1.0% due to the favorable impact of
foreign currency and 2.6% due to acquisitions, which were partially offset by an
unfavorable impact of 1.7% due to changes in price.
In the United States, net sales increased 9.9% in 2011, after increasing 11.0%
in 2010. In constant currency, international sales increased 13.4% in 2011,
compared to 2.2% in 2010. In 2011 acquisitions contributed $496 or 6.8% to net
sales, compared to $177 or 2.6% in 2010. The remaining increases in 2011 and
2010 were primarily due to higher United States shipments of Medsurg products
and higher international shipments of MedSurg products and Neurotechnology and
Spine products.
The following geographical sales growth information by segment is provided to
supplement the net sales information presented above:
Dollar amounts in millions except per share
10 amounts or as otherwise specified.
--------------------------------------------------------------------------------
Year Ended December 31
% Change
U.S. International
Constant Constant
2011 2010 As Reported Currency As Reported As Reported Currency
Reconstructive
Hips 1,228 1,154 6.4 2.9 2.1 11.2 3.8
Knees 1,316 1,306 0.8 (1.5 ) (2.3 ) 6.8 0.1
Trauma and Extremities 931 845 10.2 6.5 10.2 10.2 3.4
Total Reconstructive 3,710 3,549 4.5 1.5 0.9 9.3 2.3
MedSurg
Instruments 1,187 1,085 9.4 7.4 9.4 9.5 2.9
Endoscopy 1,080 985 9.6 7.9 7.5 15.4 9.1
Medical 722 583 23.8 22.8 25.5 16.7 11.5
Total Medsurg 3,160 2,803 12.7 11.2 12.6 13.2 6.9
Neurotechnology and Spine
Spine 687 648 6.0 4.0 2.5 14.4 7.6
Neurotechnology 750 320 134.4 132.3 78.6 283.6 275.7
Total Neurotechnology and Spine 1,437 968 48.5 46.4 28.1 99.6 92.4
Year Ended December 31
% Change
U.S. International
Constant Constant
2010 2009 As Reported Currency As Reported As Reported Currency
Reconstructive
Hips 1,154 1,098 5.1 3.1 4.9 5.3 1.2
Knees 1,306 1,255 4.1 2.8 5.6 1.2 (2.5 )
Trauma and Extremities 845 787 7.4 6.9 10.0 5.2 4.4
Total Reconstructive 3,549 3,384 4.9 3.5 5.6 3.9 0.8
MedSurg
Instruments 1,085 1,020 6.4 5.7 8.4 1.9 (0.2 )
Endoscopy 985 920 7.1 6.3 6.2 9.1 6.6
Medical 583 487 19.7 18.5 23.7 5.0 (0.3 )
Total Medsurg 2,803 2,427 15.5 14.7 19.5 5.0 2.4
Neurotechnology and Spine
Spine 648 632 2.5 2.2 0.6 8.1 6.5
Neurotechnology 320 280 14.3 13.3 11.9 20.9 17.2
Total Neurotechnology and Spine 968 912 6.1 5.6 4.1 11.8 9.6
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Reconstructive net sales in 2011 increased 4.5% from 2010, primarily due to a
3.4% increase in unit volume and changes in product mix. The increase in units
sold was due to higher industry demand. In addition, net sales were negatively
impacted by the unfavorable impact of changes in price, which were partially
offset by the favorable impact of foreign currency. In constant currency
Reconstructive net sales increased by 1.5% in 2011. Reconstructive net sales for
2010 increased 4.9% from 2009, primarily due to increases in unit volumes for
Hips, Knees, and Trauma and Extremities products, due to higher worldwide
industry demand. In constant currency Reconstructive net sales increased by 3.5%
in 2010.
MedSurg net sales in 2011 increased 12.7% from 2010, led by Medical while
Endoscopy and Instruments also increased, primarily due to a 9.5% increase in
unit volume and changes in product mix, the favorable impact of foreign currency
and acquisitions. In constant currency MedSurg net sales increased by 11.2% in
2011. MedSurg net sales in 2010 increased 15.5% from 2009, led by increases in
Medical as well as increases in Endoscopy and Instruments. Net sales in 2010
were positively impacted by 7.1% from acquisitions; the remainder is due to
increases in unit volume from higher worldwide demand. In constant currency
MedSurg net sales increased by 14.7% in 2010.
Neurotechnology and Spine net sales in 2011 increased 48.5% from 2010, primarily
due to the acquisition of Neurovascular; sales growth from acquisitions was
42.6%. The remainder of the increase included 6.3% due to increases in unit
volume and changes in product mix and the favorable impact of foreign currency,
which were partially offset by an unfavorable impact of changes in price. In
constant currency Neurotechnology and Spine net sales in 2011 increased by
46.4%. Neurotechnology and Spine net sales in 2010 increased 6.1% from 2009,
primarily due to increases in unit volumes in both Spine and Neurotechnology
product lines, from higher worldwide demand. In constant currency
Neurotechnology and Spine net sales in 2010 increased by 5.6%.
Consolidated Cost of Sales
Cost of sales increased 23.0% from 2010 to 33.8% of sales compared to 31.2% in
2010. Cost of sales in 2011 includes an additional cost of $143 ($97 net of
taxes) related to inventory that was stepped up to fair value following the
acquisitions of Neurovascular,
Dollar amounts in millions except per share
11 amounts or as otherwise specified.
Orthovita, Memometal and Concentric. The remaining increase in the cost of sales
percentage was primarily due to the impact of lower pricing on sales resulting
in an increase in cost of sales as a percent of sales and the impact of changes
in product mix and of a weaker United States dollar on purchases from
international manufacturing operations. Cost of sales in 2010 decreased 4.7%
from 2009 to 31.2% of sales compared to 32.5% in 2009. The decrease in the cost
of sales percentage was primarily due to lower excess and obsolete inventory
charges, higher absorption due to higher production levels as well as a
favorable impact from the effect of foreign currency on costs from our
euro-based manufacturing sites.
Research, Development and Engineering Expenses
Research, development and engineering expenses represented 5.6% of sales in 2011
compared to 5.4% in 2010 and 5.0% in 2009. The higher spending levels are the
result of our focus on new product development for anticipated future product
launches and continued investments in new technologies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in 2011 increased 16.4% and
represented 37.9% of sales compared to 37.0% in 2010 and 37.3% in 2009. In 2011
we recorded $66 ($45 net of taxes) in transaction and acquisition costs and
integration-related charges associated with the acquisitions of the
Neurovascular, Orthovita, Memometal and Concentric businesses. In addition, in
2011 general and administrative expenses include the payment of an intellectual
property infringement claim, offset by a favorable resolution of a value added
tax issue. In 2010 we sold a manufacturing facility in France and recorded a
gain of $24 ($13 net of taxes), which is included in general and administrative
expenses. In 2009 we settled an outstanding patent infringement lawsuit and
received $62 ($43 net of taxes) pursuant to a legal agreement.
Restructuring Charges
In 2011 we recorded $76 ($60 net of taxes) in restructuring charges related to
focused reductions of our global workforce and other restructuring, expected to
reduce our global workforce by approximately 5% and be substantially complete by
the end of 2012 at a total cost of approximately $150 to $175. The actions were
initiated in 2011 to provide efficiencies and realign resources in advance of
the new Medical Device Excise Tax scheduled to begin in 2013, as well as to
allow for continued investment in strategic areas and drive growth. In 2009 we
recorded $67 ($49 net of taxes) in restructuring charges related to agency
conversion charges associated with the termination of certain third-party agent
agreements, asset impairment charges related primarily to identifiable
intangible assets as a result of our decision to discontinue selling certain
products, severance and related costs resulting from our decision to simplify
the organization structure at our Biotech, EMEA, Japan and Canada divisions and
contractual obligations and other charges in connection with the termination of
various supplier contracts as well as other incidental costs related to the
discontinued product lines.
Property, plant and equipment impairment
In 2010 we recorded a $124 ($76 net of taxes) non-cash impairment charge to
reduce the carrying amount of certain assets to fair value related to our OP-1
product family and related manufacturing facility.
Other Income (Expense)
Other expense in 2011 decreased $22 from 2010, primarily due to reductions of
accrued interest expense resulting from settlements reached with the United
States Internal Revenue Service (IRS). We reached a favorable settlement
regarding an IRS proposed adjustment to our previously filed 2003 through 2007
income tax returns, related to the income tax positions we had taken for our
Irish cost sharing arrangements. We also reached a settlement with the IRS with
respect to the allocation of income with a wholly owned subsidiary operating in
Puerto Rico for the years 2006 through 2009. The positive effect on interest
expense from these tax settlements helped offset lower average yields on our
investments combined with lower cash and cash equivalent and marketable
securities balances compared to 2010. The decrease in these balances and the
corresponding reduction in interest and investment income was primarily due to
the purchases of the Neurovascular, Orthovita, Memometal and Concentric
businesses, which were funded with cash. Other expense in 2010 increased $52
from 2009 primarily due to lower average yields on our investments combined with
higher interest cost on the debt issued in January 2010.
Income Taxes
Our effective income tax rate on earnings was 20.2%, 26.4% and 31.8% in 2011,
2010 and 2009, respectively. The effective income tax rate for 2011 includes the
net impact of the settlement with the IRS of income allocation issues with a
wholly owned subsidiary operating in Puerto Rico and our Irish cost sharing
arrangements, effective settlement of all United States federal tax matters for
tax years 2003 through 2007 and charges for other uncertain income tax
positions. The effective income tax rate for 2010 includes the impact of the
property, plant and equipment impairment charge, the gain on sale of a
manufacturing facility and the favorable income tax expense adjustment
associated with the repatriation of foreign earnings to the United States
completed in 2009. The effective income tax rate for 2009 includes the impact of
restructuring charges, the patent litigation gain and the impact of the income
tax expenses associated with the repatriation of foreign earnings.
Dollar amounts in millions except per share
12 amounts or as otherwise specified.
Net Earnings
Net earnings in 2011 increased 5.7% from 2010 to $1,345. Basic net earnings per
share in 2011 increased 8.4% from 2010 to $3.48, and diluted net earnings per
share in 2011 increased 8.2% from 2010 to $3.45. Net earnings in 2010 increased
15.0% from 2009 to $1,273. Basic net earnings per share in 2010 increased 15.0%
to $3.21 as compared to $2.79 in 2009, and diluted net earnings per share in
2010 increased 15.0% to $3.19 as compared to $2.77 in 2009.
Reported net earnings includes benefits from settlements and other adjustments
related to uncertain tax positions, restructuring and related charges and
acquisition and integration related charges related to the Neurovascular,
Orthovita, Memometal and Concentric acquisitions, including transaction costs,
integration related costs and additional cost of sales for inventory sold in the
year that was "stepped up" to fair value. Excluding the impact of these items,
adjusted net earnings in 2011 increased 9.0% to $1,448 after increasing 12.6% in
2010. Adjusted diluted net earnings per share in 2011 increased 11.7% to $3.72
after increasing 12.9% in 2010.
The following reconciles the non-GAAP financial measures adjusted net earnings
and adjusted diluted net earnings per share with the most directly comparable
GAAP financial measures, reported net earnings and diluted net earnings per
share:
2011 2010 2009
Reported net earnings $ 1,345 $ 1,273 $ 1,107
Acquisition and integration-related charges:
Cost of sales - inventory step-up 97 - -
Selling, general and administrative expenses -
acquisition and integration-related charges 45 - -
Restructuring charges 60 - 49
Uncertain income tax position adjustments (99 ) - -
Gain on sale of property, plant and equipment - (13 ) -
Income taxes on repatriation of foreign earnings - (7 ) 67
Impairment of property, plant and equipment - 76 -
Patent litigation gain - - (43 )
Adjusted net earnings $ 1,448 $ 1,329 $ 1,180
2011 2010 2009
Diluted net earnings per share of common stock:
Reported diluted net earnings per share $ 3.45 $ 3.19 $ 2.77
Acquisition and integration-related charges:
Cost of sales - inventory set-up 0.25 - -
Selling, general and administrative expenses -
acquisition and integration-related charges 0.12 - -
Restructuring charges 0.16 - 0.12
Uncertain income tax position adjustments (0.26 ) - -
Gain on sale of property, plant and equipment - (0.03 ) -
Income taxes on repatriation of foreign earnings - (0.02 ) 0.17
Impairment of property, plant and equipment - 0.19 -
Patent litigation gain - - (0.11 )
Adjusted diluted net earnings per share $ 3.72 $ 3.33 $ 2.95
Weighted-average diluted shares outstanding 389.5 399.5 399.4
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The weighted-average basic and diluted shares outstanding used in the
calculation of our non-GAAP financial measures are the same as the
weighted-average shares outstanding used in the calculation of our reported per
share amounts.
FINANCIAL CONDITION AND LIQUIDITY
Operating Activities
Operating cash flow was $1,434 in 2011, a decrease of 7.3% from 2010. Operating
cash flow resulted primarily from net earnings adjusted for non-cash items
(depreciation and amortization, stock-based compensation, sale of inventory
stepped-up to fair value at acquisition and deferred income taxes), partially
offset by an increase in working capital. The net of accounts receivable,
inventory, loaner instrumentation and accounts payable consumed $498 of
operating cash flow in 2011. Inventory consumed $166 of operating cash flow
primarily due to the building of inventory related to acquisitions and other
business growth, increased stock levels in advance of new product introductions
. . .
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