2014 Annual ReviewA Message
From The Ceo
Kevin A. Lobo Chairman And Chief Executive Officer
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In 2014 we continued to build on our legacy of above market performance by strengthening our leadership in Orthopaedics, Medical and Surgical (MedSurg) and Neurotechnology & Spine. We delivered solid growth and financial results, completed a number of acquisitions, opened a new European Regional Headquarters (RHQ) and articulated our unique culture through a new mission statement and core values.
Our organic growth of nearly 6% was once again at the high end of the medical technology industry. The return to market of an improved Neptune Waste Management System led to an impressive 13% growth in our Instruments business; this contributed to an overall constant currency growth of almost 12% for our MedSurg business segment. In addition, our Orthopaedics and Neurotechnology & Spine segments both grew above 6% in constant currency.
We had another strong year of double-digit growth in emerging markets, although there was volatility in several countries. We delivered stellar results in China in both the premium and lower-priced markets, and our performance in India was strong. However, tough macroeconomic conditions in Russia, Turkey, Brazil and Mexico held back performance in those countries.
We had a difficult year in Japan, particularly in Hips, Knees and Trauma & Extremities, largely due to issues related to the implementation of an enterprise resource planning system early in the year. The implementation issues have been overcome and we are working to recapture lost market share.
We completed a number of acquisitions in 2014 including Pivot Medical, Inc.; Patient Safety Technologies, Inc.; CoAlign Innovations, Inc.; Berchtold Holding AG; and Small Bone Innovations, Inc.:
- Pivot and Berchtold add a premium portfolio of innovative hip arthroscopy products and operating room equipment to our Endoscopy offering.
- Patient Safety adds a compliance software solution to our portfolio of Instruments products that prevents foreign objects from being retained in patients after surgery.
- CoAlign provides our Spine business with unique inter-body devices for this fast-growing segment of the market.
- Small Bone Innovations strengthens our product offering in Trauma & Extremities with a leading total ankle implant and other extremity products.
Additionally, we completed our first full year following the acquisition of MAKO Surgical Corp. and its robotic-arm assisted surgery technology. While we had some initial challenges bringing the two organizations together, I am excited about our recent successes and the product launches planned for 2015. In our second year following the acquisition of Trauson Holding Company Limited, we continue to achieve excellent growth in China. We have worked through some product registration challenges outside of China and now look forward to launching Trauson products in India and Brazil over the next two years.
Meanwhile, we have continued our focus on internal research and development. Our spending in this area has increased at a compound annual growth rate in excess of 10% over the past three years. I am pleased with these innovation efforts and the strength of our product pipelines, as well as service innovations like Flex Financial financing solutions that help our customers acquire capital equipment.
Dr. Stryker, our founder, was passionate about high quality medical care, improving outcomes and enhancing the patient experience. His drive and passion live on in the hearts and minds of Stryker employees today.
on display at the European Regional Headquarters
We achieved net sales of $9.7 billion and growth of 7% and delivered adjusted diluted earnings per share1 of $4.73, an increase of 5%. Sales and net earnings were negatively impacted by the strong U.S. dollar. Adjusting for the impact of foreign exchange, we delivered solid earnings leverage in 2014. Gross margins as a percent of sales decreased due to price pressure, product mix and the impact of foreign exchange. However, we had strong leverage in our selling, general and administrative expenses and increased our investments in research and development as a percent of sales to drive continued new product growth into the future. Cash provided by operations remained steady at $1.8 billion and we increased our spending in information technology systems and plant automation.
Our balance sheet continues to be strong, as we finished the year with $5 billion of cash and current marketable securities and $4 billion of debt. We announced a 13% increase in our dividend rate and in March 2015 announced an additional $2 billion of share repurchase authorization, increasing our total remaining authorization to more than $2.5 billion. In the fourth quarter we announced a U.S. Settlement Program for Rejuvenate and AGB II modular neck hip stem product liability cases and settled our OtisKnee litigation with the Department of Justice. Finally, we opened a European Regional Headquarters and announced our intention to repatriate to the U.S. approximately $2 billion in cash in 2015.
1 please refer to footnotes 1, 2 and 4 on the financial highlights
for 2014
At the beginning of 2015, we went live with our new Transatlantic Operating Model that is designed to accelerate growth in Europe where we have had historically lower market share. We spent 2014 preparing for this change — ideally timed with the opening of our European Regional Headquarters — and have appointed new divisional leaders in Europe to drive the businesses forward.
We are fortunate to have a talented leadership team, which now includes Michael Hutchinson, General Counsel, and Bijoy Sagar, Chief Information Officer. While we remain committed to our decentralized model, we are working hard to streamline our systems and drive improved operational efficiency and effectiveness.
I thank the entire Stryker team for its efforts in an extremely busy year of integrating acquisitions, preparing for a new organizational model, launching the new European Regional Headquarters and driving large regulatory projects, such as Unique Device Identification and Physician Payment Reporting.
The Stryker culture remains our most distinguishing characteristic, embodied in our mission: Together with our customers, we are driven to make healthcare better; and in our values: Integrity, Accountability, People and Performance.
Regardless of the business segment, function or geography, there is a common purpose that unites us and a work ethic that sets us apart. We were recognized again by FORTUNE Magazine as among the 100 Best Companies to Work For in the U.S. and we received many other accolades from organizations such as Glassdoor and Gallup, as well as from similar groups in other countries.
Exceptional performance is highly valued at Stryker and we remain committed to operating as a sustainable and socially responsible business. We have achieved U.S. LEED and European BREEAM green building certifications in many of our facilities and have contributed millions of dollars’ worth of equipment, personnel, training and funding for medical missions that bring resources to those in desperate need of care.
WELL POSITIONED FOR THE FUTUREWhile healthcare environments around the world are challenged, there continue to be opportunities for innovation that drive long-term value. For example, our Power-LOAD cot fastener system is designed to prevent injuries to ambulance workers and our SurgiCount Safety-Sponge System is designed to prevent foreign objects from being retained in patients after surgery. We will continue to focus on strengthening our businesses, delivering improved outcomes for patients, enhancing caregiver safety and providing economic value. This focus, combined with our financial and organizational strength and our aligned leadership team and Board of Directors, positions us well for the future.
Sincerely,
KEVIN A. LOBO
Chairman and Chief Executive Officer