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SYK > SEC Filings for SYK > Form 10-K on 13-Feb-2012All Recent SEC Filings

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Form 10-K for STRYKER CORP


13-Feb-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

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

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

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

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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