Stryker 2015 FORM 10-K

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Page 10 of 40

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ABOUT STRYKER Stryker Corporation is a global leader in medical technology with 2015 revenues of $9,946 and net earnings of $1,439. 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 the United States most of our products are marketed directly to doctors, hospitals and other healthcare facilities. We generally maintain separate dedicated sales forces for each of our principal product lines to provide focus and a high level of expertise to each medical specialty served. Our products are sold in approximately 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 orthopaedic implant surgeries is typically lower during the summer months and sales of capital equipment are generally higher in the fourth quarter. Making healthcare better is at the heart of what we do. We do this by collaborating with our customers to develop innovative products and services that ultimately improve patients' lives. We express this through our mission statement: "Together with our customers, we are driven to make healthcare better." We believe our success in the highly competitive product categories in which we operate depends on our ability to develop new products and make improvements to existing products. We are committed to internal innovation to develop products and services that improve outcomes and deliver greater cost savings and efficiencies and to augment our efforts with focused acquisitions. Our success further depends on the ability of our people to execute effectively, every day. Our goal is to achieve sales growth at the high-end of the medical technology industry (MedTech) industry and maintain our capital allocation strategy that prioritizes: 1. Acquisitions 2. Dividends 3. Share repurchases Overview of 2015 In 2015 we achieved sales growth of 2.8% in line with our ongoing goal to grow organic sales at the high-end of MedTech. Excluding the impact of acquisitions, sales grew 6.1% in constant currency. We reported net earnings per diluted share of $3.78 in 2015 and achieved an 8.2% growth in adjusted net earnings per diluted share (See page 12 for a reconciliation of reported net earnings per diluted share to adjusted net earnings per diluted share). We continued our capital allocation strategy by investing $153 in acquisitions, paying $521 in dividends to our shareholders and using $700 for share repurchases. In 2015 we acquired CHG Hospital Beds, Inc. ("CHG"). CHG designs, manufactures and markets low-height hospital beds and related accessories. Recent Developments On January 26, 2016 we announced that William R. Jellison has elected to retire from his role as Vice President, Chief Financial Officer effective April 1, 2016. Glenn S. Boehnlein, who currently serves as Group Vice President, Chief Financial Officer for MedSurg & Neurotechnology, has been promoted to Vice President, Chief Financial Officer effective April 1, 2016. On February 1, 2016 we entered into a definitive agreement to acquire Sage Products, LLC (Sage) in an all cash transaction for $2,775. Sage develops, manufactures and distributes disposable products targeted at reducing "Never Events," primarily in the intensive care unit and MedSurg hospital unit setting. Sage's products include solutions for oral care, skin preparation and protection, patient cleaning and hygiene, turning and positioning devices and heel care boots. This transaction is expected to close during the second quarter of 2016. RESULTS OF OPERATIONS Percentage Change 2015 % Net Sales 2014 % Net Sales 2013 % Net Sales 2015/2014 2014/2013 Net sales $ 9,946 100.0 % $ 9,675 100.0 % $ 9,021 100.0 % 2.8 % 7.3 % Gross profit 6,602 66.4 6,356 65.7 6,019 66.7 3.9 5.6 Research, development and engineering expenses 625 6.3 614 6.3 536 5.9 1.8 14.6 Selling, general and administrative expenses 3,610 36.3 3,547 36.7 3,467 38.4 1.8 2.3 Recall charges, net of insurance proceeds 296 3.0 761 7.9 622 6.9 (61.1 ) 22.3 Intangibles amortization 210 2.1 188 1.9 138 1.5 11.7 36.2 Other income (expense), net (126) (1.3 ) (86) (0.9 ) (44) (0.5 ) 46.5 95.5 Income taxes 296 645 206 (54.1 ) 213.1 Net earnings $ 1,439 14.5 % $ 515 5.3 % $ 1,006 11.2 % 179.4 % (48.8 )% Net earnings per diluted share $ 3.78 $ 1.34 $ 2.63 182.1 % (49.0 )% Adjusted net earnings per diluted share $ 5.12 $ 4.73 $ 4.49 8.2 % 5.3 % See "Non-GAAP Financial Measures" on page 12 for a discussion of non-GAAP financial measures used in this report. STRYKER CORPORATION 2015 Form 10-K 9 Dollar amounts in millions except per share amounts or as otherwise specified.

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