STRYKER

Stryker 2015 FORM 10-K

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and medical products partially offset by lower shipments of sustainability products. Neurotechnology and Spine Net Sales Neurotechnology and Spine net sales in 2015 increased 5.0% as reported and 9.5% in constant currency, as foreign currency exchange rates negatively impacted net sales by 4.5%. Excluding the 0.1% impact of acquisitions, net sales in constant currency increased 9.4%, including 11.6% from increased unit volume and changes in product mix, partially offset by 2.3% lower prices. The increase was led primarily by higher shipments of neurotechnology products. Neurotechnology and Spine net sales in 2014 increased 5.0% as reported and 6.2% in constant currency as net sales were negatively impacted by 1.2% due to the impact of foreign currency exchange rates. Excluding the 0.5% impact of acquisitions, net sales increased 5.7% in constant currency, including 8.1% from increased unit volume and changes in product mix, partially offset by 2.4% lower prices. The increase was led primarily by higher shipments of neurotechnology products. Gross Profit Gross profit in 2015 increased to 66.4% from 65.7% in 2014, primarily due to product mix and the favorable impact of foreign currency exchange rates offset by decreases in the selling price of our products. Gross Profit decreased to 65.7% in 2014 compared to 66.7% in 2013, primarily due to decreases in the selling prices of our products, unfavorable product mix and the unfavorable impact of foreign currency exchange rates. Gross Profit Adjustments 2015 2014 2013 $ % Net Sales $ % Net Sales $ % Net Sales AS REPORTED $ 6,602 66.4 % $ 6,356 65.7 % $ 6,019 66.7 % Inventory stepped up to fair value 7 0.1 27 0.3 28 0.3 Restructuring- related charges 7 — 1 — 11 0.1 Regulatory and legal matters — — — — 7 0.1 ADJUSTED $ 6,616 66.5 % $ 6,384 66.0 % $ 6,065 67.2 % Research, Development and Engineering Expenses Research, development and engineering expenses represented 6.3% of net sales in 2015 and 2014 compared to 5.9% in 2013. The increased spending levels in 2015 and 2014 were driven by the timing of projects and investments in new technologies. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of net sales in 2015 decreased to 36.3% from 36.7% in 2014 and 38.4% in 2013. Excluding the adjustments in the table below, selling, general and administrative expenses increased in 2015 due to increased expenses related to our European regional headquarters, higher compensation costs, due in part to sales performance- related commissions, partially offset by disciplined expense management. Selling, General and Administrative Adjustments 2015 2014 2013 $ % Net Sales $ % Net Sales $ % Net Sales AS REPORTED $ 3,610 36.3 % $ 3,547 36.7 % $ 3,467 38.4 % Acquisition and integration- related (28 ) (0.3 ) (75 ) (0.8 ) (70 ) (0.7 ) Restructuring- related charges (125 ) (1.2 ) (116 ) (1.2 ) (52 ) (0.6 ) Regulatory and legal matters 53 0.5 — — (62 ) (0.7 ) Donations — — — — (25 ) (0.3 ) ADJUSTED $ 3,510 35.3 % $ 3,356 34.7 % $ 3,258 36.1 % Recall Charges, Net of Insurance Proceeds Recall charges, net of insurance proceeds, were due to the previously disclosed Rejuvenate and ABG II voluntary recall and other recall matters and were $296, $761 and $622 in 2015, 2014 and 2013. We received $53 and $179 of insurance proceeds in 2015 and 2014. Refer to Note 8 in the Notes to the Consolidated Financial Statements for further information. Intangibles Amortization Intangibles amortization was $210, $188 and $138 in 2015, 2014 and 2013. The increases were due to acquisitions. Other Income (Expense), Net Other income (expense), net was ($126), ($86) and ($44) in 2015, 2014 and 2013. The increase in other expense was primarily driven by higher interest costs on income tax reserves and the unfavorable impact of foreign currency exchange rate changes. Income Taxes The effective income tax rate on earnings was 17.1%, 55.6% and 17.0% for the 2015, 2014 and 2013. The effective income tax rate for 2014 included the tax impact of the establishment of our European regional headquarters and the planned cash repatriation that was executed in 2015. Net Earnings Net earnings in 2015 increased to $1,439 or $3.78 per diluted share from $515 or $1.34 per diluted share in 2014 and $1,006 or $2.63 per diluted share in 2013. The impact of foreign currency exchange rates reduced net earnings per diluted share by approximately $0.26 and $0.14 in 2015 and 2014. Net Earnings Adjustments 2015 2014 2013 $ % Net Sales $ % Net Sales $ % Net Sales AS REPORTED $ 1,439 14.5% $ 515 5.3% $ 1,006 11.2% Inventory stepped up to fair value 4 — 15 0.2 21 0.2 Acquisition and integration- related 20 0.2 50 0.5 51 0.6 Amortization of intangible assets 147 1.5 133 1.4 98 1.0 Restructuring- related charges 97 1.0 78 0.8 46 0.5 Rejuvenate and other recall matters 210 2.1 628 6.5 460 5.1 Regulatory and legal matters (46 ) (0.5 ) — — 63 0.7 Donations — — — — 15 0.2 Tax matters 78 0.8 391 4.0 (46 ) (0.5 ) ADJUSTED $ 1,949 19.6 % $ 1,810 18.7 % $ 1,714 19.0 % STRYKER CORPORATION 2015 Form 10-K 11 Dollar amounts in millions except per share amounts or as otherwise specified.

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