# STRYKER CORP (SYK) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from STRYKER CORP's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/310764/000031076423000017/syk-20221231.htm
Accession: 0000310764-23-000017
Filing date: 2023-02-10
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/SYK/
All MD&A years: /company/SYK/mda/
Previous year: /company/SYK/mda/fy2021/ (FY 2021)
Next year: /company/SYK/mda/fy2023/ (FY 2023)

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

About Stryker

Stryker is one of the world's leading medical technology companies and, together with our customers, we are driven to make healthcare better. We offer innovative products and services in Medical and Surgical, Neurotechnology, Orthopaedics and Spine that help improve patient and healthcare outcomes. Alongside our customers around the world, Stryker impacts more than 130 million patients annually. Our goal is to achieve sales growth at the high-end of the medical technology (MedTech) industry and maintain our long-term capital allocation strategy that prioritizes: (1) Acquisitions, (2) Dividends and (3) Share repurchases.

Macroeconomic Environment

The global economy is experiencing increased inflationary pressures in part due to global supply chain disruptions, labor shortages and other impacts of the COVID-19 pandemic and current macroeconomic environment which we anticipate will continue. Higher interest rates and capital costs, higher shipping costs, increased costs of labor and weakening foreign currency exchange rates are creating additional economic challenges. These conditions may cause our customers to decrease or delay orders for our products and services, and we expect the higher interest rates to impact demand for our capital products.

Our operations have been adversely impacted by the inflationary pressures primarily related to labor, steel and transportation costs as well as the impact of purchasing electronic components at premium prices on the spot market. Sales growth in certain products has been constrained by the continuing supply chain challenges and electronic component shortages, especially impacting the capital products in our MedSurg businesses, although the supply chain constraints eased somewhat in the fourth quarter.

Russia and Ukraine Conflict

The military conflict in Russia and Ukraine and the sanctions imposed by the United States government and other nations in response to this conflict have caused significant volatility and disruptions to the global markets. Given that we provide life-saving and life-enhancing products, we plan to continue operating in Russia provided we can safely do so. In 2022 net sales in Russia were approximately 0.3% of our revenues. Although Russia does not constitute a material portion of our business, there is uncertainty around the impact it will have on the global economy, supply chains and fuel and energy prices generally, and therefore our business.

China Volume-Based Procurement and Import Purchase Evaluation

The government in China has launched regional and national programs for volume-based procurement (VBP) of high-value medical consumables to reduce healthcare costs. Each VBP program has specific requirements to award contracts to the lowest bidders who are able to satisfy the quality and quantity requirements. The successful bidders may be guaranteed sales volume for certain products, while unsuccessful bidders may lose unit sales volume. We have been a winning bidder in certain national and regional VBP programs, including those for joint

replacement and trauma products in 2021 and certain neurovascular products in the fourth quarter of 2022. The prices required for a successful bid have negatively impacted the commercial operations of joint replacement, trauma and certain neurovascular products in China.

We were unsuccessful in our bids in the VBP program for spine products that took place in the third quarter of 2022 and as a result we are exiting the spine business in China. To date our other businesses have not been significantly impacted, but may be in the future as a result of additional VBP programs. China has also issued national guiding standards for Import Purchase Evaluation (IPE) which has increased the purchase of locally sourced equipment in China's public hospitals and is impacting our MedSurg business in China. Our business in China represented approximately 2.4% our revenues in 2022.

Overview of 2022

In 2022 we achieved reported net sales growth of 7.8%. Excluding the impact of acquisitions and divestitures, sales grew 9.7% in constant currency. We reported net earnings of $2,358 and net earnings per diluted share of $6.17. Excluding the impact of certain items, we achieved adjusted net earnings(1) of $3,571 and adjusted net earnings per diluted share(1) of $9.34 representing growth of 2.8%.

We continued our capital allocation strategy by investing $2,563 in acquisitions and paying $1,051 in dividends to our shareholders.

In February 2022 we entered into a $1.5 billion term loan agreement that matures on February 22, 2025 and bears interest at a base rate based on the Term Secured Overnight Financing Rate (SOFR) plus 0.725%. In 2022 we repaid $650 of this term loan. Refer to Note 10 to our Consolidated Financial Statements for further information.

In February 2022 we completed the acquisition of Vocera for $79.25 per share, or an aggregate purchase price of $2.6 billion, net of cash acquired ($3.0 billion including convertible notes). Vocera is a leader in the digital care coordination and communication category. Vocera is part of our Medical business within MedSurg and Neurotechnology. Goodwill attributable to the acquisition reflects the strategic benefits of expanding our presence in adjacent markets, diversifying our product portfolio, advancing innovations, and accelerating our digital aspirations. Refer to Note 6 to our Consolidated Financial Statements for further information.

In 2022 we recorded a goodwill impairment charge of $216 related to our Spine business. Refer to Note 8 to our Consolidated Financial Statements for further information.

On August 16, 2022 the Inflation Reduction Act (IRA) was enacted into law. The IRA includes a 15% corporate alternative minimum tax effective in 2023 and a 1% tax on share repurchases after December 31, 2022. We do not expect the tax-related provisions of the IRA to have a material impact on our Consolidated Financial Statements. The impact of the excise tax on share repurchases will be dependent on the extent of share repurchases made in future periods.

(1)    Refer to "Non-GAAP Financial Measures" for a discussion of non-GAAP financial measures used in this report and a reconciliation to the most directly comparable GAAP financial measure.

[[GREPCENT_TABLE]]
[["Dollar amounts in millions except per share amounts or as otherwise specified.","12"]]
[[/GREPCENT_TABLE]]

STRYKER CORPORATION 2022 FORM 10-K

CONSOLIDATED RESULTS OF OPERATIONS

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[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Geographic and Segment Net Sales","","","Percentage Change"],["","","2022 vs. 2021","","2021 vs. 2020"],["","2022","2021","2020","","As Reported","Constant Currency","","As Reported","Constant Currency"],["Geographic:"],["United States","$","13,638","","$","12,321","","$","10,455","","","10.7","%","10.7","%","","17.9","%","17.9","%"],["International","4,811","","4,787","","3,896","","","0.5","","11.7","","","22.8","","18.8"],["Total","$","18,449","","$","17,108","","$","14,351","","","7.8","%","11.0","%","","19.2","%","18.1","%"],["Segment:"],["MedSurg and Neurotechnology","$","10,611","","$","9,538","","$","8,345","","","11.2","%","14.1","%","","14.3","%","13.3","%"],["Orthopaedics and Spine","7,838","","7,570","","6,006","","","3.5","","7.0","","","26.0","","24.8"],["Total","$","18,449","","$","17,108","","$","14,351","","","7.8","%","11.0","%","","19.2","%","18.1","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Supplemental Net Sales Growth Information"],["","","","","","Percentage Change"],["","","","","","2022 vs. 2021","","2021 vs. 2020"],["","","","","","","","United States","International","","","","United States","International"],["","2022","2021","2020","","As Reported","Constant Currency","As Reported","As Reported","Constant Currency","","As Reported","Constant Currency","As Reported","As Reported","Constant Currency"],["MedSurg and Neurotechnology:"],["Instruments","$","2,279","","$","2,111","","$","1,863","","","8.0","%","10.4","%","10.6","%","(0.9)","%","10.0","%","","13.4","%","12.5","%","11.3","%","20.9","%","16.6","%"],["Endoscopy","2,423","","2,141","","1,763","","","13.2","","15.9","","14.6","","8.2","","20.8","","","21.5","","20.8","","18.6","","32.7","","29.4"],["Medical","3,031","","2,607","","2,524","","","16.2","","18.6","","20.6","","1.5","","11.7","","","3.3","","2.2","","5.1","","(2.4)","","(6.6)"],["Neurovascular","1,200","","1,188","","973","","","1.1","","7.2","","(0.9)","","2.3","","12.2","","","22.0","","19.5","","18.3","","24.4","","20.3"],["Neuro Cranial","1,376","","1,214","","972","","","13.3","","15.4","","14.9","","6.1","","17.5","","","24.9","","24.3","","23.4","","32.4","","28.6"],["Other","302","","277","","250","","","9.2","","9.3","","8.9","","25.3","","29.9","","","10.4","","10.3","","10.0","","48.9","","40.8"],["","$","10,611","","$","9,538","","$","8,345","","","11.2","%","14.1","%","14.2","%","3.0","%","13.8","%","","14.3","%","13.3","%","13.0","%","18.1","%","14.0","%"],["Orthopaedics and Spine:"],["Knees","$","1,997","","$","1,848","","$","1,567","","","8.0","%","11.2","%","10.6","%","1.0","%","12.9","%","","18.0","%","16.9","%","15.4","%","25.5","%","21.3","%"],["Hips","1,413","","1,342","","1,206","","","5.3","","10.1","","9.1","","(0.6)","","11.5","","","11.2","","9.9","","5.8","","21.1","","17.2"],["Trauma and Extremities","2,807","","2,664","","1,722","","","5.4","","8.7","","9.0","","(3.2)","","8.0","","","54.6","","53.0","","63.8","","36.8","","32.3"],["Spine","1,146","","1,167","","1,047","","","(1.8)","","1.1","","0.6","","(7.7)","","2.4","","","11.5","","10.5","","8.7","","19.1","","15.2"],["Other","475","","549","","464","","","(13.3)","","(10.3)","","(16.9)","","(0.9)","","12.8","","","18.2","","18.0","","10.1","","58.8","","57.4"],["","$","7,838","","$","7,570","","$","6,006","","","3.5","%","7.0","%","6.0","%","(2.2)","%","9.3","%","","26.0","%","24.8","%","25.0","%","28.6","%","24.5","%"],["Total","$","18,449","","$","17,108","","$","14,351","","","7.8","%","11.0","%","10.7","%","0.5","%","11.7","%","","19.2","%","18.1","%","17.9","%","22.8","%","18.8","%"]]
[[/GREPCENT_TABLE]]

nm - not meaningful

Consolidated Net Sales

Consolidated net sales increased 7.8% as reported and 11.0% in constant currency, as foreign currency exchange rates negatively impacted net sales by 3.2%. Excluding the 1.3% impact of acquisitions and divestitures, net sales in constant currency increased by 10.6% from increased unit volume partially offset by 0.9% due to lower prices. The unit volume increase was primarily due to higher shipments across all MedSurg and Neurotechnology products and most Orthopaedics and Spine products.

Consolidated net sales in 2021 increased 19.2% as reported and 18.1% in constant currency. Excluding the 5.5% impact of acquisitions and divestitures, net sales in constant currency increased by 13.4% from increased unit volume partially offset by 0.8% due to lower prices. The unit volume increase was primarily due to higher shipments across all product lines.

MedSurg and Neurotechnology Net Sales

MedSurg and Neurotechnology net sales in 2022 increased 11.2% as reported and 14.1% in constant currency, as foreign currency exchange rates negatively impacted net sales by 2.9%.

[[GREPCENT_TABLE]]
[["Dollar amounts in millions except per share amounts or as otherwise specified.","13"]]
[[/GREPCENT_TABLE]]

STRYKER CORPORATION 2022 FORM 10-K

Excluding the 2.3% impact of acquisitions and divestitures, net sales in constant currency increased by 11.2% from increased unit volume and 0.6% due to higher prices. The unit volume increase was due to higher shipments across all MedSurg and Neurotechnology products.

MedSurg and Neurotechnology net sales in 2021 increased 14.3% as reported and 13.3% in constant currency, as foreign currency exchange rates positively impacted net sales by 1.0%. Excluding the 0.2% impact of acquisitions and divestitures, net sales in constant currency increased by 13.6% from increased unit volume partially offset by 0.5% due to lower prices. The unit volume increase was due to higher shipments across all MedSurg and Neurotechnology products.

Orthopaedics and Spine Net Sales

Orthopaedics and Spine net sales in 2022 increased 3.5% as reported and 7.0% in constant currency, as foreign currency exchange rates negatively impacted net sales by 3.5%. Net sales in constant currency increased by 9.9% from increased unit volume partially offset by 2.9% due to lower prices. The unit volume increase was primarily due to higher shipments across most Orthopaedics and Spine products.

Orthopaedics and Spine net sales in 2021 increased 26.0% as reported and 24.8% in constant currency, as foreign currency exchange rates positively impacted net sales by 1.2%. Excluding the 12.8% impact of acquisitions and divestitures, net sales in constant currency increased by 13.2% from increased unit volume partially offset by 1.2% due to lower prices. The unit volume increase was due to higher shipments across all Orthopaedics and Spine products.

Gross Profit

Gross profit as a percentage of net sales decreased to 62.8% in 2022 from 64.1% in 2021. Excluding the impact of the items noted below, gross profit decreased to 63.1% from 65.9% in 2021 primarily due to increased costs from purchases of electronic components at premium prices on the spot market and other inflationary pressures, primarily related to labor, steel and transportation, as well as inefficiencies from supply chain disruptions and unfavorable product mix.

Gross profit as a percentage of net sales increased to 64.1% in 2021 from 63.1% in 2020. Excluding the impact of the items noted below, gross profit increased to 65.9% from 63.8% in 2020 primarily due to leverage from higher sales volumes and favorable product mix, partially offset by lower selling prices.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Research, Development and Engineering Expenses

Research, development and engineering expenses as a percentage of net sales increased to 7.9% in 2022 from 7.2% in 2021 and 6.9% in 2020. Expenses in 2022 included the write-off of certain intangible assets. Excluding the impact of the items noted below, expenses increased to 6.7% in 2022 from 6.6% in 2021 and 6.3% in 2020. The increases reflect our continued investment in innovation and integration of recent acquisitions.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of net sales in 2022 decreased to 35.0% from 37.6% in 2021 and 37.4% in 2020. Both 2022 and 2021 included charges related to certain asset impairments. Refer to Note 15 to our Consolidated Financial Statements for further information. In 2022 we determined that certain commercial and regulatory milestones related to technology acquired in the purchase of Mobius Imaging and Cardan Robotics were no longer probable of being achieved and recorded $110 to reduce the fair value of contingent consideration. In addition, share-based awards for Vocera employees vested upon our acquisition in 2022 and a charge of $132 was recorded.

Excluding the impact of the items noted below, expenses decreased to 32.7% in 2022 from 33.6% in 2021 and 33.1% in 2020 which reflects our increased focus on discretionary cost control and headcount discipline to offset inflationary pressures.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Recall Charges, Net

Recall charges, net were ($15), $103 and $17 in 2022, 2021 and 2020. In 2022 we recorded a net benefit for recall matters related to adjusting existing reserves to reflect our best estimate of our remaining obligation for LFIT Anatomic CoCr V40 Femoral Heads voluntary recalls partially offset by charges primarily related to Wright hip products.

In 2021 charges were primarily due to the previously disclosed Rejuvenate and ABGII Modular-Neck hip stems and LFIT Anatomic CoCr V40 Femoral Heads voluntary recalls.

Refer to Note 7 to our Consolidated Financial Statements for further information.

Amortization of Intangible Assets

Amortization of intangible assets was $627, $619 and $472 in 2022, 2021 and 2020. Compared to 2020, the increases in 2022 and 2021 were due to the first quarter 2022 and fourth quarter 2020 acquisitions of Vocera and Wright. Refer to Notes 6 and 8 to our Consolidated Financial Statements for further information.

Goodwill Impairment

In 2022 we recorded a goodwill impairment charge of $216 related to our Spine business. Refer to Note 8 to our Consolidated Financial Statements for further information.

Operating Income

Operating income increased as a percentage of sales to 15.4% in 2022 from 15.1% in 2021. Excluding the impact of the items

[[GREPCENT_TABLE]]
[["Dollar amounts in millions except per share amounts or as otherwise specified.","14"]]
[[/GREPCENT_TABLE]]

STRYKER CORPORATION 2022 FORM 10-K

noted below, operating income decreased to 23.8% of sales in 2022 from 25.6% in 2021, primarily due to inflationary pressures and unfavorable foreign exchange partially offset by cost discipline.

Operating income as a percentage of sales in 2021 decreased to 15.1% from 15.5% in 2020. Excluding the impact of the items noted below, operating income increased to 25.6% in 2021 from 24.4% in 2020 primarily due to leverage from higher sales volumes partially offset by disciplined spending.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Other Income (Expense), Net

Other income (expense), net was ($158), ($303) and ($269) in 2022, 2021 and 2020. The decrease in net expense in 2022 was primarily due to favorable investment returns and the reversal of accrued interest of $50 related to the effective settlement of the United States federal income tax audit for years 2014 through 2018. Refer to Note 11 to our Consolidated Financial Statements for further information. The increase in net expense in 2021 compared to 2020 was primarily due to increased interest expense driven by the additional debt from the bond offerings completed in June 2020 and November 2020 related to the Wright acquisition.

Income Taxes

Our effective tax rate was 12.1%, 12.6% and 18.2% for 2022, 2021 and 2020. The effective income tax rate for 2022 decreased due to the effective settlement of the United States federal income tax audit for years 2014 through 2018 of $162 and the reversal of deferred income tax on undistributed earnings of foreign subsidiaries. In addition, the effective income tax rates for 2022, 2021 and 2020 reflect the continued lower effective income tax rates as a result of our European operations, the tax effect related to the transfers of intellectual property between tax jurisdictions, the tax effect of future remittances of the undistributed earnings of foreign subsidiaries and certain discrete tax items.

Net Earnings

Net earnings increased to $2,358 or $6.17 per diluted share from $1,994 or $5.21 per diluted share in 2021 and $1,599 or $4.20 per diluted share in 2020. Adjusted net earnings per diluted share(1) was $9.34 in 2022 compared to $9.09 in 2021 and $7.43 in 2020.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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; adjusted selling, general and administrative expenses; adjusted research, development and engineering expenses; adjusted operating income; adjusted other income (expense), net; adjusted effective income tax rate; adjusted net earnings; adjusted net earnings per diluted share (Diluted EPS); free cash flow; and free cash flow conversion. We believe these non-GAAP financial 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 and prior year results at the same foreign currency exchange rate. To measure percentage organic sales growth, we remove the impact of changes in foreign currency exchange rates, acquisitions and divestitures, which affect the comparability and trend of sales. Percentage organic sales growth is calculated by translating current year and prior year results at the same foreign currency exchange rates excluding the impact of acquisitions and divestitures. 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. To measure free cash flow, we adjust cash provided by operating activities by the amount of purchases of property, plant and equipment and proceeds from long-lived asset disposals and remove the impact of certain legal settlements and recall payments. To measure free cash flow

[[GREPCENT_TABLE]]
[["Dollar amounts in millions except per share amounts or as otherwise specified.","15"]]
[[/GREPCENT_TABLE]]

STRYKER CORPORATION 2022 FORM 10-K

conversion we divide free cash flow by adjusted net earnings. These adjustments are irregular in timing and may not be indicative of our past and future performance. The following are examples of the types of adjustments that may be included in a period:

1.Acquisition and integration-related costs. Costs related to integrating recently acquired businesses (e.g., costs associated with the termination of sales relationships, workforce reductions and other integration-related activities), changes in the fair value of contingent consideration and specific costs (e.g., inventory step-up and deal costs) related to the consummation of the acquisition process.

2.Amortization of purchased intangible assets. Periodic amortization expense related to purchased intangible assets.

3.Restructuring-related and other charges. Costs associated with the termination of sales relationships in certain countries, workforce reductions, elimination of product lines, certain long-lived and intangible asset write-offs and impairments and associated costs and other restructuring-related activities.

4.Goodwill impairment. Charges to impair the carrying value of goodwill.

5.Medical device regulations. Costs specific to updating our quality system, product labeling, asset write-offs and product remanufacturing to comply with the new medical device reporting regulations and other requirements of the European Union.

6.Recall-related matters. Our best estimate of the minimum of the range of probable loss to resolve the Rejuvenate, LFIT

V40, Wright legacy hip products and other product recalls.

7.Regulatory and legal matters. Our best estimate of the minimum of the range of probable loss to resolve certain regulatory matters and other legal settlements.

8.Tax matters. Charges represent the impact of accounting for certain significant and discrete tax items.

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, selling, general and administrative expenses, research, development and engineering expenses, operating income, other income (expense), net, effective income tax rate, net earnings and net earnings per diluted share, the most directly comparable GAAP financial measures. These non-GAAP financial measures are an additional way of viewing aspects of our operations when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures at the end of the discussion of Consolidated Results of Operations below. 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 weighted-average diluted shares outstanding used in the calculation of non-GAAP net earnings per diluted share are the same as those used in the calculation of reported net earnings per diluted share for the respective period.

Reconciliation of the Most Directly Comparable GAAP Financial Measure to Non-GAAP Financial Measure

[[GREPCENT_TABLE]]
[["2022","Gross Profit","Selling, General & Administrative Expenses","Research, Development & Engineering Expenses","Operating Income","Other Income (Expense), Net","Net Earnings","Effective Tax Rate","Diluted EPS"],["Reported","$","11,578","","$","6,455","","$","1,454","","$","2,841","","$","(158)","","$","2,358","","12.1","%","$","6.17"],["Acquisition and integration-related costs:"],["Inventory stepped-up to fair value","12","","\u2014","","\u2014","","12","","\u2014","","9","","\u2014","","0.02"],["Other acquisition and integration-related","\u2014","","(138)","","\u2014","","138","","\u2014","","104","","0.5","","0.27"],["Amortization of purchased intangible assets","\u2014","","\u2014","","\u2014","","627","","\u2014","","495","","1.7","","1.30"],["Restructuring-related and other charges","56","","(206)","","(87)","","349","","\u2014","","283","","0.7","","0.74"],["Goodwill impairment","\u2014","","\u2014","","\u2014","","216","","\u2014","","216","","(1.1)","","0.57"],["Medical device regulations","3","","\u2014","","(137)","","140","","\u2014","","115","","0.2","","0.30"],["Recall-related matters","\u2014","","\u2014","","\u2014","","(15)","","\u2014","","(12)","","\u2014","","(0.03)"],["Regulatory and legal matters","\u2014","","(76)","","\u2014","","76","","\u2014","","69","","(0.2)","","0.18"],["Tax matters","\u2014","","\u2014","","\u2014","","\u2014","","(75)","","(66)","","0.1","","(0.18)"],["Adjusted","$","11,649","","$","6,035","","$","1,230","","$","4,384","","$","(233)","","$","3,571","","14.0","%","$","9.34"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["2021","Gross Profit","Selling, General & Administrative Expenses","Research, Development & Engineering Expenses","Operating Income","Other Income (Expense), Net","Net Earnings","Effective Tax Rate","Diluted EPS"],["Reported","$","10,968","","$","6,427","","$","1,235","","$","2,584","","$","(303)","","$","1,994","","12.6","%","$","5.21"],["Acquisition and integration-related costs:"],["Inventory stepped-up to fair value","266","","\u2014","","\u2014","","266","","\u2014","","203","","1.0","","0.53"],["Other acquisition and integration-related","\u2014","","(319)","","\u2014","","319","","\u2014","","244","","1.2","","0.64"],["Amortization of purchased intangible assets","\u2014","","\u2014","","\u2014","","619","","\u2014","","489","","1.6","","1.28"],["Restructuring-related and other charges","28","","(358)","","\u2014","","386","","11","","345","","(0.3)","","0.90"],["Goodwill impairment","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014"],["Medical device regulations","5","","\u2014","","(102)","","107","","\u2014","","90","","\u2014","","0.24"],["Recall-related matters","\u2014","","\u2014","","\u2014","","103","","\u2014","","89","","\u2014","","0.23"],["Regulatory and legal matters","\u2014","","2","","\u2014","","(2)","","(7)","","(12)","","0.2","","(0.02)"],["Tax matters","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","32","","(1.4)","","0.08"],["Adjusted","$","11,267","","$","5,752","","$","1,133","","$","4,382","","$","(299)","","$","3,474","","14.9","%","$","9.09"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Dollar amounts in millions except per share amounts or as otherwise specified.","16"]]
[[/GREPCENT_TABLE]]

STRYKER CORPORATION 2022 FORM 10-K

[[GREPCENT_TABLE]]
[["2020","Gross Profit","Selling, General & Administrative Expenses","Research, Development & Engineering Expenses","Operating Income","Other Income (Expense), Net","Net Earnings","Effective Tax Rate","Diluted EPS"],["Reported","$","9,057","","$","5,361","","$","984","","$","2,223","","$","(269)","","$","1,599","","18.2","%","$","4.20"],["Acquisition and integration-related costs:"],["Inventory stepped-up to fair value","48","","\u2014","","\u2014","","48","","\u2014","","36","","0.3","","0.10"],["Other acquisition and integration-related","\u2014","","(194)","","\u2014","","194","","\u2014","","157","","0.7","","0.41"],["Amortization of purchased intangible assets","\u2014","","\u2014","","\u2014","","472","","\u2014","","381","","1.6","","1.00"],["Restructuring-related and other charges","53","","(406)","","\u2014","","458","","\u2014","","397","","0.2","","1.04"],["Goodwill impairment","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014"],["Medical device regulations","2","","\u2014","","(79)","","81","","\u2014","","63","","0.4","","0.17"],["Recall-related matters","\u2014","","\u2014","","\u2014","","17","","\u2014","","13","","0.1","","0.03"],["Regulatory and legal matters","\u2014","","(6)","","\u2014","","6","","\u2014","","8","","(0.1)","","0.02"],["Tax matters","\u2014","","\u2014","","\u2014","","\u2014","","4","","173","","(8.8)","","0.46"],["Adjusted","$","9,160","","$","4,755","","$","905","","$","3,499","","$","(265)","","$","2,827","","12.6","%","$","7.43"]]
[[/GREPCENT_TABLE]]

FINANCIAL CONDITION AND LIQUIDITY

[[GREPCENT_TABLE]]
[["Net cash provided by (used in):","2022","2021","2020"],["Operating activities","$","2,624","","$","3,263","","$","3,277"],["Investing activities","(2,924)","","(859)","","(4,701)"],["Financing activities","(749)","","(2,365)","","(11)"],["Effect of exchange rate changes","(51)","","(38)","","41"],["Change in cash and cash equivalents","$","(1,100)","","$","1","","$","(1,394)"]]
[[/GREPCENT_TABLE]]

We believe our financial condition continues to be of high quality, as evidenced by our ability to generate substantial cash from operations and to readily access capital markets at competitive rates despite the current macroeconomic environment. Operating cash flow provides the primary source of cash to fund operating needs and capital expenditures. Excess operating cash is used first to fund acquisitions to complement our portfolio of businesses. Other discretionary uses include dividends and share repurchases. We supplement operating cash flow with debt to fund our activities as necessary. Our overall cash position reflects our business results and a global cash management strategy that takes into account liquidity management, economic factors and tax considerations.

Operating Activities

Cash provided by operating activities was $2,624, $3,263 and $3,277 in 2022, 2021 and 2020. The decrease from 2021 was primarily due to higher costs for certain electronic components and pre-buying of critical raw materials to manage supply chain delays as well as higher accounts receivable as a result of sales occurring near the end of the year, partially offset by increased net earnings.

Investing Activities

Cash used in investing activities was $2,924, $859 and $4,701 in 2022, 2021 and 2020. The increase in cash used in 2022 was primarily due to the acquisition of Vocera and investments in capital projects, partially offset by settlements of certain foreign currency forward contracts designated as net investment hedges.

Financing Activities

Cash provided by (used in) financing activities was ($749), ($2,365) and ($11) in 2022, 2021 and 2020. Cash used in 2022 was primarily driven by dividend payments of $1,051 and repayments of debt, including $650 of payments on the $1,500 term loan used to fund the acquisition of Vocera. In 2021 we made payments of $1,151 on long-term debt and dividend payments of $950. In 2020 we secured a $400 term loan in November, and issued $600 of notes in November and $2,300 of notes in June, which was offset by total debt repayments of $2,297 and dividend payments of $863. There were no share repurchases in 2022, 2021 or 2020.

We maintain debt levels that we consider appropriate after evaluating a number of factors including cash requirements for ongoing operations, investment and financing plans (including acquisitions and share repurchase activities) and overall cost of capital. Refer to Note 10 to our Consolidated Financial Statements for further information.

[[GREPCENT_TABLE]]
[["","2022","2021","2020"],["Dividends paid per common share","$","2.78","","$","2.52","","$","2.30"],["Total dividends paid to common shareholders","$","1,051","","$","950","","$","863"]]
[[/GREPCENT_TABLE]]

Liquidity

Cash, cash equivalents and marketable securities were $1,928 and $3,019, and our current assets exceeded current liabilities by $3,972 and $5,468 on December 31, 2022 and 2021. We anticipate being able to support our short-term liquidity and operating needs from a variety of sources including cash from operations, commercial paper and existing credit lines. In October 2021 we entered into a new revolving credit agreement that replaces our previous agreement dated August 19, 2016. The primary changes were to increase the aggregate principal amount of the facility by $750 to $2,250, extend the maturity date to October 26, 2026, increase the leverage ratio to 3.75 and provide LIBOR replacement language.

We raised funds in the capital markets in the past and may continue to do so from time-to-time. We continue to have strong investment-grade short-term and long-term debt ratings that we believe should enable us to refinance our debt as needed.

Our cash, cash equivalents and marketable securities held in locations outside the United States was approximately 36% and 26% on December 31, 2022 and 2021.

Guarantees and Other Off-Balance Sheet Arrangements

We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, of a magnitude that we believe could have a material impact on our financial condition or liquidity.

CONTRACTUAL OBLIGATIONS AND FORWARD-LOOKING CASH REQUIREMENTS

In 2022 we recorded a net benefit for recall matters related to adjusting existing reserves to reflect our best estimate of our remaining obligation for LFIT Anatomic CoCr V40 Femoral Heads recall matters partially offset by charges primarily related to Wright hip products recall matters. As further described in Note 7 to our Consolidated Financial Statements, our recorded product liabilities include Wright hip products, Rejuvenate and ABG II and LFIT Anatomic CoCr V40 Femoral Heads recall matters. Recorded reserves represent the minimum of the range of probable cost remaining to resolve these matters. The final outcome of these matters is dependent on many variables that

[[GREPCENT_TABLE]]
[["Dollar amounts in millions except per share amounts or as otherwise specified.","17"]]
[[/GREPCENT_TABLE]]

STRYKER CORPORATION 2022 FORM 10-K

are difficult to predict. The ultimate cost to entirely resolve these matters may be materially different from the amount of the current estimates and could have a material adverse effect on our financial position, results of operations and cash flows. We are not able to reasonably estimate the future periods in which payments will be made.

As further described in Note 11 to our Consolidated Financial Statements, on December 31, 2022 we had a reserve for uncertain income tax positions of $286. Due to uncertainties regarding the ultimate resolution of income tax audits, we are not able to reasonably estimate the future periods in which any income tax payments to settle these uncertain income tax positions will be made.

As further described in Note 12 to our Consolidated Financial Statements, on December 31, 2022 our defined benefit pension plans were underfunded by $253, of which approximately $250 related to plans outside the United States. Due to the rules affecting tax-deductible contributions in the jurisdictions in which the plans are offered and the impact of future plan asset performance, changes in interest rates and potential changes in legislation in the United States and other foreign jurisdictions, we are not able to reasonably estimate the amounts that may be required to fund defined benefit pension plans.

[[GREPCENT_TABLE]]
[["Contractual Obligations","Total","2023","2024 - 2025","2026 - 2027","After 2027"],["Total debt","$","12,958","","$","1,208","","$","3,700","","$","1,750","","$","6,300"],["Interest payments","3,193","","290","","524","","397","","1,982"],["Unconditional purchase obligations","1,845","","1,595","","121","","115","","14"],["Operating leases","466","","126","","169","","95","","76"],["United States Tax Cuts and Jobs Act Transition Tax","463","","109","","354","","\u2014","","\u2014"],["Other","175","","12","","16","","12","","135"],["Total","$","19,100","","$","3,340","","$","4,884","","$","2,369","","$","8,507"]]
[[/GREPCENT_TABLE]]

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our financial statements in accordance with generally accepted accounting principles, there are certain accounting policies, which may require substantial judgment or estimation in their application. We believe these accounting policies and the others set forth in Note 1 to our Consolidated Financial Statements are critical to understanding our results of operations and financial condition. Actual results could differ from our estimates and assumptions, and any such differences could be material to our results of operations and financial condition.

Inventory Reserves

We maintain reserves for excess and obsolete inventory resulting from the potential inability to sell certain products at prices in excess of current carrying costs. We make estimates regarding the future recoverability of the costs of these products and record provisions based on historical experience, expiration of sterilization dates and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write downs may be required, which could unfavorably affect future operating results.

Income Taxes

Our annual tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary

and reverse over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities.

Deferred tax assets generally represent the tax effect of items that can be used as a tax deduction or credit in future years for which we have already recorded the tax benefit in our income statement. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment was deferred, the tax effect of expenditures for which a deduction was taken in our tax return but has not yet been recognized in our financial statements or assets recorded at fair value in business combinations for which there was no corresponding tax basis adjustment.

Inherent in determining our annual tax rate are judgments regarding business plans, tax planning opportunities and expectations about future outcomes. Realization of certain deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. Although realization is not assured, management believes it is more likely than not that our deferred tax assets, net of valuation allowances, will be realized.

We operate in multiple jurisdictions with complex tax policy and regulatory environments. In certain of these jurisdictions, we may take tax positions that management believes are supportable but are potentially subject to successful challenge by the applicable taxing authority. These differences of interpretation with the respective governmental taxing authorities can be impacted by the local economic and fiscal environment. We evaluate our tax positions and establish liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. We review these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and adjust them accordingly. We have a number of audits in process in various jurisdictions. Although the resolution of these tax positions is uncertain, based on currently available information, we believe that it is more likely than not that the ultimate outcomes will not have a material adverse effect on our financial position, results of operations or cash flows.

Due to the number of estimates and assumptions inherent in calculating the various components of our tax provision, certain changes or future events, such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans, could have an impact on those estimates and our effective tax rate.

Acquisitions, Goodwill and Intangibles, and Long-Lived Assets

Our financial statements include the operations of an acquired business starting from the completion of the acquisition. In addition, the assets acquired and liabilities assumed are recorded on the date of acquisition at their respective estimated fair values, with any excess of the purchase price over the estimated fair values of the net assets acquired recorded as goodwill.

Significant judgment is required in estimating the fair value of intangible assets and in assigning their respective useful lives. Accordingly, we typically obtain the assistance of third-party valuation specialists for significant items. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. We typically use an income method to estimate the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants and include the amount and timing

[[GREPCENT_TABLE]]
[["Dollar amounts in millions except per share amounts or as otherwise specified.","18"]]
[[/GREPCENT_TABLE]]

STRYKER CORPORATION 2022 FORM 10-K

of future cash flows (including expected growth rates and profitability), the underlying product or technology life cycles, the economic barriers to entry and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur that could affect the accuracy or validity of the estimates and assumptions.

Determining the useful life of an intangible asset also requires judgment. With the exception of certain trade names, the majority of our acquired intangible assets (e.g., certain trademarks or brands, customer and distributor relationships, patents and technologies) are expected to have determinable useful lives. Our assessment as to the useful lives of these intangible assets is based on a number of factors including competitive environment, market share, trademark, brand history, underlying product life cycles, operating plans and the macroeconomic environment of the countries in which the trademarked or branded products are sold. Our estimates of the useful lives of determinable-lived intangibles are primarily based on these same factors. Determinable-lived intangible assets are amortized to expense over their estimated useful life.

In some of our acquisitions, we acquire in-process research and development (IPRD) intangible assets. For acquisitions accounted for as business combinations, IPRD is considered to be an indefinite-lived intangible asset until the research is completed (then it becomes a determinable-lived intangible asset) or determined to have no future use (then it is impaired). For asset acquisitions, IPRD is expensed immediately unless there is an alternative future use.

Indefinite-lived intangible assets and goodwill are not amortized but are tested annually for impairment or whenever events or circumstances indicate such assets may be impaired. We perform our annual impairment test for goodwill as of October 31 each year. For indefinite-lived intangible assets and goodwill, we perform a qualitative assessment when it is unlikely that an asset or reporting unit is impaired. For our goodwill impairment test, we periodically corroborate our qualitative assessment with quantitative information. When necessary, we determine the fair value of our indefinite-lived intangible assets and reporting units using an income approach. The income approach calculates the present value of estimated future cash flows and requires certain assumptions and estimates be made regarding market conditions and our future profitability. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows used to measure fair value. Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal business plans. We believe such assumptions and estimates are also comparable to those that would be used by other marketplace participants.

In the fourth quarter of 2022 we determined that our Spine reporting unit’s carrying value was in excess of its estimated fair value and recognized an impairment charge of $216. The fair value of the Spine reporting unit was determined using a discounted cash flow analysis, which is a form of the income approach. Significant inputs to the analysis included assumptions for future revenue growth, operating margin and the weighted average cost of capital. A hypothetical 1% increase in our estimate of the rate used to discount the estimated future cash flows to their present value would result in an additional impairment charge of $220. Refer to Note 8 to our Consolidated Financial Statements for further discussion and the factors that contributed to these impairment charges.

For our other reporting units, we considered qualitative indicators of impairment as it was considered more likely than not that the fair values of those reporting units exceeded their respective carrying values. No impairment was identified for those reporting units in 2022. Future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill and indefinite-lived intangible assets, including discount and tax rates and future cash flow projections, could result in significantly different estimates of the fair values. A significant reduction in the estimated fair values could result in impairment charges that could materially affect our results of operations.

We review our other long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows, which is at the individual asset level or the asset group level. The undiscounted cash flows expected to be generated by the related assets are estimated over their useful life based on updated projections. If the evaluation indicates that the carrying amount of the assets may not be recoverable, any potential impairment is measured based upon the fair value of the related assets or asset group as determined by an appropriate market appraisal or other valuation technique. Assets classified as held for sale, if any, are recorded at the lower of carrying amount or fair value less costs to sell.

Legal and Other Contingencies

We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor and intellectual property, and other matters that are more fully described in Note 7 to our Consolidated Financial Statements. 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 had 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, which could unfavorably affect future operating results. We are currently self-insured for certain 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.

NEW ACCOUNTING PRONOUNCEMENTS

Refer to Note 1 to our Consolidated Financial Statements for further information.