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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020
OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-13149
STRYKER CORP ORATION
(Exact name of registrant as specified in its charter)

Michigan |  |  |  |  |  | 38-1239739
(State of incorporation) |  |  |  |  |  | (I.R.S. Employer Identification No.)
2825 Airview Boulevard | Kalamazoo, | Michigan |  | 49002
(Address of principal executive offices) |  | (Zip Code)
|  | (269) | 385-2600 |  |
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered
Common Stock, $.10 Par Value | SYK | New York Stock Exchange
1.125% Notes due 2023 | SYK23 | New York Stock Exchange
0.250% Notes due 2024 | SYK24A | New York Stock Exchange
2.125% Notes due 2027 | SYK27 | New York Stock Exchange
0.750% Notes due 2029 | SYK29 | New York Stock Exchange
2.625% Notes due 2030 | SYK30 | New York Stock Exchange
1.000% Notes due 2031 | SYK31 | New York Stock Exchange
Floating Rate Notes due 2020 | SYK20A | New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ☒ |  | Accelerated filer | ☐ |  | Emerging growth company | ☐
Non-accelerated filer | ☐ |  | Small reporting company | ☐ |  |  |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 375,378,477 shares of Common Stock, $0.10 par value, on March 31, 2020.

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

PART I – FINANCIAL INFORMATION

ITEM 1. | FINANCIAL STATEMENTS

Stryker Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

| Three Months
| 2020 |  | 2019
Net sales | $ | 3,588 |  |  | $ | 3,516 |
Cost of sales | 1,257 |  |  | 1,233 |
Gross profit | $ | 2,331 |  |  | $ | 2,283 |
Research, development and engineering expenses | 254 |  |  | 225 |
Selling, general and administrative expenses | 1,330 |  |  | 1,403 |
Recall charges | (6 | ) |  | 13 |
Amortization of intangible assets | 118 |  |  | 114 |
Total operating expenses | $ | 1,696 |  |  | $ | 1,755 |
Operating income | $ | 635 |  |  | $ | 528 |
Other income (expense), net | (45 | ) |  | (48 | )
Earnings before income taxes | $ | 590 |  |  | $ | 480 |
Income taxes | 97 |  |  | 68 |
Net earnings | $ | 493 |  |  | $ | 412 |
Net earnings per share of common stock: |  |  |
Basic | $ | 1.32 |  |  | $ | 1.10 |
Diluted | $ | 1.30 |  |  | $ | 1.09 |
Weighted-average shares outstanding (in millions): |  |  |
Basic | 374.8 |  |  | 373.3 |
Effect of dilutive employee stock compensation | 4.9 |  |  | 6.0 |
Diluted | 379.7 |  |  | 379.3 |
Cash dividends declared per share of common stock | $ | 0.575 |  |  | $ | 0.52 |

Anti-dilutive shares excluded from the calculation of dilutive employee stock options were de minimis in all periods.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

| Three Months
| 2020 |  | 2019
Net earnings | $ | 493 |  |  | $ | 412 |
Other comprehensive income (loss), net of tax: |  |  |
Marketable securities | — |  |  | 1 |
Pension plans | (4 | ) |  | (4 | )
Unrealized gains (losses) on designated hedges | (26 | ) |  | (16 | )
Financial statement translation | 13 |  |  | 85 |
Total other comprehensive income (loss), net of tax | $ | (17 | ) |  | $ | 66 |
Comprehensive income | $ | 476 |  |  | $ | 478 |

See accompanying notes to Consolidated Financial Statements.

Dollar amounts are in millions except per share amounts or as otherwise specified. | 1

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

CONSOLIDATED BALANCE SHEETS

| March 31 |  | December 31
| 2020 |  | 2019
| (Unaudited) |  |
Assets |  |  |
Current assets |  |  |
Cash and cash equivalents | $ | 3,964 |  |  | $ | 4,337 |
Marketable securities | 84 |  |  | 88 |
Accounts receivable, less allowance of $100 ($88 in 2019) | 2,646 |  |  | 2,893 |
Inventories: |  |  |
Materials and supplies | 738 |  |  | 677 |
Work in process | 187 |  |  | 178 |
Finished goods | 2,434 |  |  | 2,427 |
Total inventories | $ | 3,359 |  |  | $ | 3,282 |
Prepaid expenses and other current assets | 683 |  |  | 760 |
Total current assets | $ | 10,736 |  |  | $ | 11,360 |
Property, plant and equipment: |  |  |
Land, buildings and improvements | 1,419 |  |  | 1,263 |
Machinery and equipment | 3,357 |  |  | 3,451 |
Total property, plant and equipment | $ | 4,776 |  |  | $ | 4,714 |
Less accumulated depreciation | 2,169 |  |  | 2,147 |
Property, plant and equipment, net | $ | 2,607 |  |  | $ | 2,567 |
Goodwill | 9,025 |  |  | 9,069 |
Other intangibles, net | 4,107 |  |  | 4,227 |
Noncurrent deferred income tax assets | 1,537 |  |  | 1,575 |
Other noncurrent assets | 1,428 |  |  | 1,369 |
Total assets | $ | 29,440 |  |  | $ | 30,167 |
Liabilities and shareholders' equity |  |  |
Current liabilities |  |  |
Accounts payable | $ | 736 |  |  | $ | 675 |
Accrued compensation | 430 |  |  | 955 |
Income taxes | 227 |  |  | 171 |
Dividends payable | 216 |  |  | 213 |
Accrued expenses and other liabilities | 1,450 |  |  | 1,527 |
Current maturities of debt | 1,103 |  |  | 859 |
Total current liabilities | $ | 4,162 |  |  | $ | 4,400 |
Long-term debt, excluding current maturities | 9,404 |  |  | 10,231 |
Income taxes | 1,026 |  |  | 1,068 |
Other noncurrent liabilities | 1,733 |  |  | 1,661 |
Total liabilities | $ | 16,325 |  |  | $ | 17,360 |
Shareholders' equity |  |  |
Common stock, $0.10 par value | 38 |  |  | 37 |
Additional paid-in capital | 1,676 |  |  | 1,628 |
Retained earnings | 12,024 |  |  | 11,748 |
Accumulated other comprehensive loss | (623 | ) |  | (606 | )
Total shareholders' equity | $ | 13,115 |  |  | $ | 12,807 |
Total liabilities and shareholders' equity | $ | 29,440 |  |  | $ | 30,167 |

See accompanying notes to Consolidated Financial Statements.

Dollar amounts are in millions except per share amounts or as otherwise specified. | 2

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)

| Three Months
| 2020 |  | 2019
Common stock shares outstanding (in millions) |  |  |
Beginning | 374.5 |  |  | 374.4 |
Issuance of common stock under stock compensation and benefit plans | 0.9 |  |  | 1.3 |
Repurchase of common stock | — |  |  | (1.9 | )
Ending | 375.4 |  |  | 373.8 |
Common stock |  |  |
Beginning | $ | 37 |  |  | $ | 37 |
Issuance of common stock under stock compensation and benefit plans | 1 |  |  | — |
Ending | $ | 38 |  |  | $ | 37 |
Additional paid-in capital |  |  |
Beginning | $ | 1,628 |  |  | $ | 1,559 |
Issuance of common stock under stock compensation and benefit plans | (8 | ) |  | (48 | )
Repurchase of common stock | — |  |  | (8 | )
Share-based compensation | 56 |  |  | 35 |
Ending | $ | 1,676 |  |  | $ | 1,538 |
Retained earnings |  |  |
Beginning | $ | 11,748 |  |  | $ | 10,765 |
Net earnings | 493 |  |  | 412 |
Repurchase of common stock | — |  |  | (299 | )
Cash dividends declared | (217 | ) |  | (195 | )
Ending | $ | 12,024 |  |  | $ | 10,683 |
Accumulated other comprehensive (loss) income |  |  |
Beginning | $ | (606 | ) |  | $ | (631 | )
Other comprehensive income (loss) | (17 | ) |  | 66 |
Ending | $ | (623 | ) |  | $ | (565 | )
Total Stryker shareholders' equity | $ | 13,115 |  |  | $ | 11,693 |
Non-controlling interest | — |  |  | — |
Total shareholders' equity | $ | 13,115 |  |  | $ | 11,693 |

See accompanying notes to Consolidated Financial Statements.

Dollar amounts are in millions except per share amounts or as otherwise specified. | 3

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

| Three Months
| 2020 |  | 2019
Operating activities |  |  |
Net earnings | $ | 493 |  |  | $ | 412 |
Adjustments to reconcile net earnings to net cash provided by operating activities: |  |  |
Depreciation | 80 |  |  | 76 |
Amortization of intangible assets | 118 |  |  | 114 |
Share-based compensation | 56 |  |  | 35 |
Recall charges | (6 | ) |  | 13 |
Sale of inventory stepped-up to fair value at acquisition | 6 |  |  | 24 |
Changes in operating assets and liabilities: |  |  |
Accounts receivable | 204 |  |  | 50 |
Inventories | (122 | ) |  | (139 | )
Accounts payable | 63 |  |  | (12 | )
Accrued expenses and other liabilities | (550 | ) |  | (166 | )
Recall-related payments | (4 | ) |  | (20 | )
Income taxes | 84 |  |  | 9 |
Other, net | 169 |  |  | (83 | )
Net cash provided by operating activities | $ | 591 |  |  | $ | 313 |
Investing activities |  |  |
Acquisitions, net of cash acquired | (23 | ) |  | (180 | )
Purchases of marketable securities | (8 | ) |  | (20 | )
Proceeds from sales of marketable securities | 12 |  |  | 19 |
Purchases of property, plant and equipment | (144 | ) |  | (122 | )
Net cash used in investing activities | $ | (163 | ) |  | $ | (303 | )
Financing activities |  |  |
Proceeds (payments) on short-term borrowings, net | 4 |  |  | (12 | )
Payments on long-term debt | (500 | ) |  | (1,341 | )
Dividends paid | (215 | ) |  | (195 | )
Repurchases of common stock | — |  |  | (307 | )
Cash paid for taxes from withheld shares | (56 | ) |  | (97 | )
Other financing, net | (1 | ) |  | 5 |
Net cash provided by (used in) financing activities | $ | (768 | ) |  | $ | (1,947 | )
Effect of exchange rate changes on cash and cash equivalents | (33 | ) |  | (5 | )
Change in cash and cash equivalents | $ | (373 | ) |  | $ | (1,942 | )
Cash and cash equivalents at beginning of period | 4,337 |  |  | 3,616 |
Cash and cash equivalents at end of period | $ | 3,964 |  |  | $ | 1,674 |

See accompanying notes to Consolidated Financial Statements.

Dollar amounts are in millions except per share amounts or as otherwise specified. | 4

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
General Information
Management believes the accompanying unaudited Consolidated Financial Statements contain all adjustments, including normal recurring items, considered necessary to fairly present the financial position of Stryker Corporation and its consolidated subsidiaries (the "Company," "we," us" or "our") on March 31, 2020 and the results of operations for the three months 2020. The results of operations included in these Consolidated Financial Statements may not necessarily be indicative of our annual results. These statements should be read in conjunction with our Annual Report on Form 10-K for 2019.
Certain prior year amounts have been reclassified to conform with current year presentation of segment results.
New Accounting Pronouncements Not Yet Adopted
We evaluate all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) for consideration of their applicability. ASUs not included in our disclosures were assessed and determined to be either not applicable or are not expected to have a material impact on our Consolidated Financial Statements.
Accounting Pronouncements Recently Adopted
On January 1, 2020 we adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses for accounts receivables, loans and other financial instruments. The adoption of this update did not have a material impact on our Consolidated Financial Statements.
NOTE 2 - REVENUE RECOGNITION
Our policies for recognizing sales have not changed from those described in our Annual Report on Form 10-K for 2019.
We disaggregate our net sales by product line and geographic location for each of our segments as we believe it best depicts how the nature, amount, timing and certainty of our net sales and cash flows are affected by economic factors.

Net Sales by Product Line |  |
| Three Months
| 2020 | 2019
Orthopaedics: |  |
Knees | $ | 432 |  | $ | 439 |
Hips | 316 |  | 336 |
Trauma and Extremities | 392 |  | 396 |
Other | 82 |  | 79 |
| $ | 1,222 |  | $ | 1,250 |
MedSurg: |  |
Instruments | $ | 513 |  | $ | 461 |
Endoscopy | 455 |  | 470 |
Medical | 587 |  | 531 |
Sustainability | 67 |  | 65 |
| $ | 1,622 |  | $ | 1,527 |
Neurotechnology and Spine: |  |
Neurotechnology | $ | 483 |  | $ | 469 |
Spine | 261 |  | 270 |
| $ | 744 |  | $ | 739 |
Total | $ | 3,588 |  | $ | 3,516 |

Net Sales by Geography |  |  |  |  |
| Three Months 2020 |  | Three Months 2019
| United States | International |  | United States | International
Orthopaedics: |  |  |  |  |
Knees | $ | 322 |  | $ | 110 |  |  | $ | 320 |  | $ | 119 |
Hips | 201 |  | 115 |  |  | 213 |  | 123 |
Trauma and Extremities | 260 |  | 132 |  |  | 254 |  | 142 |
Other | 69 |  | 13 |  |  | 63 |  | 16 |
| $ | 852 |  | $ | 370 |  |  | $ | 850 |  | $ | 400 |
MedSurg: |  |  |  |  |
Instruments | $ | 410 |  | $ | 103 |  |  | $ | 365 |  | $ | 96 |
Endoscopy | 364 |  | 91 |  |  | 376 |  | 94 |
Medical | 454 |  | 133 |  |  | 416 |  | 115 |
Sustainability | 66 |  | 1 |  |  | 64 |  | 1 |
| $ | 1,294 |  | $ | 328 |  |  | $ | 1,221 |  | $ | 306 |
Neurotechnology and Spine: |  |  |  |  |
Neurotechnology | $ | 301 |  | $ | 182 |  |  | $ | 300 |  | $ | 169 |
Spine | 196 |  | 65 |  |  | 208 |  | 62 |
| $ | 497 |  | $ | 247 |  |  | $ | 508 |  | $ | 231 |
Total | $ | 2,643 |  | $ | 945 |  |  | $ | 2,579 |  | $ | 937 |

Contract Assets and Liabilities
On March 31, 2020 there were no contract assets recorded on our Consolidated Balance Sheets.
Our contract liabilities arise as a result of consideration received from customers at inception of contracts for certain businesses or where the timing of billing for services precedes satisfaction of our performance obligations. We generally satisfy performance obligations within one year from the contract inception date. Our contract liabilities were $361 and $313 on March 31, 2020 and December 31, 2019.
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (AOCI)

Three Months 2020 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total
Beginning | $ | (3 | ) | $ | (179 | ) | $ | 47 |  | $ | (471 | ) | $ | (606 | )
OCI | 1 |  | (6 | ) | (39 | ) | 55 |  | 11 |
Income taxes | — |  | — |  | 11 |  | (37 | ) | (26 | )
Reclassifications to: |  |  |  |  |
Cost of sales | — |  | — |  | 3 |  | — |  | 3 |
Other (income) expense | (1 | ) | 3 |  | (1 | ) | (7 | ) | (6 | )
Income taxes | — |  | (1 | ) | — |  | 2 |  | 1 |
Net OCI | $ | — |  | $ | (4 | ) | $ | (26 | ) | $ | 13 |  | $ | (17 | )
Ending | $ | (3 | ) | $ | (183 | ) | $ | 21 |  | $ | (458 | ) | $ | (623 | )

Three Months 2019 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total
Beginning | $ | (4 | ) | $ | (137 | ) | $ | 50 |  | $ | (540 | ) | $ | (631 | )
OCI | 1 |  | (6 | ) | (19 | ) | 94 |  | 70 |
Income taxes | — |  | 1 |  | 6 |  | (9 | ) | (2 | )
Reclassifications to: |  |  |  |  |
Cost of sales | — |  | — |  | (2 | ) | — |  | (2 | )
Other (income) expense | — |  | 1 |  | — |  | — |  | 1 |
Income taxes | — |  | — |  | (1 | ) | — |  | (1 | )
Net OCI | $ | 1 |  | $ | (4 | ) | $ | (16 | ) | $ | 85 |  | $ | 66 |
Ending | $ | (3 | ) | $ | (141 | ) | $ | 34 |  | $ | (455 | ) | $ | (565 | )

Dollar amounts are in millions except per share amounts or as otherwise specified. | 5

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

NOTE 4 - DERIVATIVE INSTRUMENTS
We use operational and economic hedges, foreign currency exchange forward contracts, net investment hedges (both derivative and non-derivative financial instruments) and interest rate derivative instruments to manage the impact of currency exchange and interest rate fluctuations on earnings, cash flow and equity. We do not enter into derivative instruments for speculative purposes. We are exposed to potential credit loss in the event of nonperformance by our counterparties on our outstanding derivative instruments but do not anticipate nonperformance by any of our counterparties. Should a counterparty default, our maximum loss exposure is the asset balance of the instrument. We have not changed our hedging strategies, accounting practices or objectives from those disclosed in our Annual Report on Form 10-K for 2019.
Foreign Currency Hedges

March 2020 | Cash Flow | Net Investment | Non-Designated | Total
Gross notional amount | $ | 837 |  | $ | 1,094 |  | $ | 5,275 |  | $ | 7,206 |
Maximum term in days |  |  |  | 1555 |
Fair value: |  |  |  |
Other current assets | $ | 30 |  | $ | — |  | $ | 100 |  | $ | 130 |
Other noncurrent assets | 5 |  | 105 |  | — |  | 110 |
Other current liabilities | (2 | ) | — |  | (27 | ) | (29 | )
Other noncurrent liabilities | — |  | — |  | — |  | — |
Total fair value | $ | 33 |  | $ | 105 |  | $ | 73 |  | $ | 211 |

December 2019 | Cash Flow | Net Investment | Non-Designated | Total
Gross notional amount | $ | 801 |  | $ | 1,113 |  | $ | 6,174 |  | $ | 8,088 |
Maximum term in days |  |  |  | 1646 |
Fair value: |  |  |  |
Other current assets | $ | 5 |  | $ | — |  | $ | 180 |  | $ | 185 |
Other noncurrent assets | 1 |  | 40 |  | — |  | 41 |
Other current liabilities | (10 | ) | — |  | (11 | ) | (21 | )
Other noncurrent liabilities | (2 | ) | — |  | — |  | (2 | )
Total fair value | $ | (6 | ) | $ | 40 |  | $ | 169 |  | $ | 203 |

In December 2019 and November 2018 we designated the issuance of €2,400 and €2,250 of senior unsecured notes as net investment hedges to selectively hedge portions of our investment in certain international subsidiaries. The currency effects of our euro-denominated senior unsecured notes are reflected in AOCI within shareholders' equity where they offset gains and losses recorded on our net investment in international subsidiaries. On March 31, 2020 the total after tax gain amount in AOCI related to these designated net investment hedges was $83.
In July 2019 we entered into €1.0 billion in certain forward currency contracts and designated these as net investment hedges to hedge a portion of our investments in certain of our entities with functional currencies denominated in Euros.
Net Currency Exchange Rate Gains (Losses)

|  | Three Months
Derivative instrument | Recorded in: | 2020 | 2019
Cash Flow | Cost of sales | $ | (3 | ) | $ | 2 |
Net Investment | Other income (expense), net | 7 |  | — |
Non-Designated | Other income (expense), net | (7 | ) | (2 | )
| Total | $ | (3 | ) | $ | — |

Pretax gains (losses) on derivatives designated as cash flow of $26 and net investment hedges of $27 recorded in AOCI are expected to be reclassified to cost of sales and other income (expense) in earnings within 12 months as of March 31, 2020. This cash flow hedge reclassification is primarily due to the sale of inventory that includes previously hedged purchases. A component of the AOCI amounts related to net investment hedges is reclassified over the life of the hedge instruments as we elected to exclude the initial value of the component related to the spot-forward difference from the effectiveness assessment.
Interest Rate Hedges
In conjunction with our offering of senior unsecured notes in November 2019 we terminated cash flow hedges with gross notional amounts of €600 designated as forward starting interest rate swaps of our interest rates, the impact of which will be recognized over time as a benefit within interest expense. Pretax gains recorded in AOCI related to closed interest rate hedges of $6 are expected to be reclassified to other income (expense) in earnings within 12 months of March 31, 2020.
On March 31, 2020 we had interest rate swap agreements with notional amounts of $750 designated as forward starting interest rate swaps in anticipation of future debt issuances. Pretax losses of $62 were recorded in AOCI as of March 31, 2020. Upon the probable issuance of the debt, these amounts will be released to interest expense over the term of the debt. The cash flow effect of these hedges is recorded in cash flow from operations.
NOTE 5 - FAIR VALUE MEASUREMENTS
Our policies for managing risk related to foreign currency, interest rates, credit and markets and our process for determining fair value have not changed from those described in our Annual Report on Form 10-K for 2019.
There were no significant transfers into or out of any level in 2020.

Assets Measured at Fair Value | March | December
2020 | 2019
Cash and cash equivalents | $ | 3,964 |  | $ | 4,337 |
Trading marketable securities | 127 |  | 149 |
Level 1 - Assets | $ | 4,091 |  | $ | 4,486 |
Available-for-sale marketable securities: |  |
Corporate and asset-backed debt securities | $ | 32 |  | $ | 32 |
United States agency debt securities | 3 |  | 2 |
United States Treasury debt securities | 45 |  | 49 |
Certificates of deposit | 4 |  | 5 |
Total available-for-sale marketable securities | $ | 84 |  | $ | 88 |
Foreign currency exchange forward contracts | 240 |  | 226 |
Interest rate swap asset | — |  | 17 |
Level 2 - Assets | $ | 324 |  | $ | 331 |
Total assets measured at fair value | $ | 4,415 |  | $ | 4,817 |

Liabilities Measured at Fair Value | March | December
2020 | 2019
Deferred compensation arrangements | $ | 127 |  | $ | 149 |
Level 1 - Liabilities | $ | 127 |  | $ | 149 |
Foreign currency exchange forward contracts | $ | 29 |  | $ | 23 |
Interest rate swap liability | 62 |  | — |
Level 2 - Liabilities | $ | 91 |  | $ | 23 |
Contingent consideration: |  |
Beginning | $ | 306 |  | $ | 117 |
Additions | — |  | 298 |
Change in estimate | — |  | (10 | )
Settlements | — |  | (99 | )
Ending | $ | 306 |  | $ | 306 |
Level 3 - Liabilities | $ | 306 |  | $ | 306 |
Total liabilities measured at fair value | $ | 524 |  | $ | 478 |

Dollar amounts are in millions except per share amounts or as otherwise specified. | 6

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

Fair Value of Available for Sale Securities by Maturity
| March 2020 | December 2019
Due in one year or less | $ | 46 |  | $ | 50 |
Due after one year through three years | $ | 38 |  | $ | 38 |

On March 31, 2020 and December 31, 2019 the aggregate difference between the cost and fair value of available-for-sale marketable securities was nominal. Interest and marketable securities income recorded in other income (expense), net, was $40 and $39 in the three months 2020 and 2019.
Our investments in available-for-sale marketable securities had a minimum credit quality rating of A2 (Moody's), A (Standard & Poor's) and A (Fitch). We do not plan to sell the investments, and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis, which may be maturity.
NOTE 6 - CONTINGENCIES AND COMMITMENTS
We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor, intellectual property and other matters that are more fully described below. 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, 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 estimated by management, additional expense may be incurred, which could unfavorably affect future operating results. We are self-insured for product liability 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.
Recall Matters
In June 2012 we voluntarily recalled our Rejuvenate and ABG II Modular-Neck hip stems and terminated global distribution of these hip products. Product liability lawsuits relating to this voluntary recall have been filed against us. In November 2014 we entered into a settlement agreement to compensate eligible United States patients who had revision surgery prior to November 3, 2014 and in December 2016 the settlement program was extended to patients who had revision surgery prior to December 19, 2016. We continue to offer support for recall-related care and reimburse patients who are not eligible to enroll in the settlement program for testing and treatment services, including any necessary revision surgeries. In addition, there are remaining lawsuits that we will continue to defend against.
In August 2016 and May 2018 we voluntarily recalled certain lot-specific sizes and offsets of LFIT Anatomic CoCr V40 Femoral Heads. Product liability lawsuits and claims relating to this voluntary recall have been filed against us. In November 2018 we entered into a settlement agreement to resolve a significant number of claims and lawsuits related to the recalls. The specific terms of the settlement agreement, including the financial terms, are confidential.
We have incurred, and expect to incur in the future, costs associated with the defense and settlement of these matters. Based on the
information that has been received, we have estimated the remaining range of probable loss related to these matters globally to be approximately $290 to $535. We have recorded charges to earnings representing the minimum of the range of probable loss. The final outcomes of these matters are dependent on many factors that are difficult to predict. Accordingly, the ultimate cost related to these matters globally may be materially different than the amount of our current estimate and accruals and could have a material adverse effect on our results of operations and cash flows.

Leases | March |  | December
2020 |  | 2019
Right-of-use assets | $ | 393 |  |  | $ | 384 |
Lease liabilities, current | $ | 89 |  |  | $ | 86 |
Lease liabilities, non-current | $ | 306 |  |  | $ | 301 |
Other information |  |  |
Weighted-average remaining lease term | 5.9 years |  |  | 6.2 years |
Weighted-average discount rate | 3.09 | % |  | 3.34 | %
| Three Months
| 2020 |  | 2019
Operating lease cost | $ | 36 |  |  | 34 |

NOTE 7 - ACQUISITIONS
We acquire stock in companies and various assets that continue to support our capital deployment and product development strategies. The aggregate purchase price of our acquisitions, net of cash acquired was $23 and $308 in the three months 2020 and 2019.
In October 2019 we completed the acquisition of Mobius Imaging and Cardan Robotics for net cash consideration of $360 and future regulatory and commercial milestone payments of up to $130. Mobius Imaging is a leader in point-of-care imaging technology focused on integrating advanced imaging technologies into medical workflow. Cardan Robotics is working to develop innovative robotics and navigation technology systems for surgical and interventional radiology procedures. Mobius Imaging and Cardan Robotics (Mobius) are part of our Spine business within Neurotechnology and Spine. For income tax purposes the acquisition was treated as an asset purchase. Goodwill attributable to the acquisition is deductible for tax purposes.
In March 2019 we completed the acquisition of OrthoSpace, Ltd. (OrthoSpace) for net cash consideration of $110 and future regulatory milestone payments of up to $110. OrthoSpace is a medical device company specializing in orthopaedic biodegradable technology for the treatment of irreparable rotator cuff tears. OrthoSpace is part of our Endoscopy business within MedSurg. Goodwill attributable to the acquisition is not deductible for tax purposes.
In November 2019 we announced a definitive agreement to acquire all of the issued and outstanding ordinary shares of Wright Medical Group N.V. (Wright) for $30.75 per share, or an aggregate purchase price of approximately $5.4 billion (including convertible notes). Pursuant to the agreement, on December 13, 2019 our wholly owned subsidiary, Stryker B.V., commenced a tender offer to purchase all of the outstanding ordinary shares, par value €0.03 per share, of Wright at a price of $30.75 per share, without interest, but subject to any applicable withholding of taxes. We expect the acquisition to close in the second half of 2020, subject to the expiration of the waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of other required approvals and clearances under applicable antitrust laws and other customary conditions. Wright is a global medical device company focused on extremities and biologics. Following closing, we plan to integrate

Dollar amounts are in millions except per share amounts or as otherwise specified. | 7

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

Wright into our Trauma and Extremities business within Orthopaedics.
Purchase price allocations for our significant acquisitions are presented below:

Purchase Price Allocation of Acquired Net Assets
| 2019
| Mobius |  | OrthoSpace
Tangible assets: |  |  |
Accounts receivable | $ | 3 |  |  | $ | 1 |
Inventory | 6 |  |  | 1 |
Other assets | 2 |  |  | 1 |
Contingent consideration | (4 | ) |  | — |
Other liabilities | (10 | ) |  | (29 | )
Intangible assets: |  |  |
Customer relationship | 7 |  |  | — |
Developed technology and patents | 59 |  |  | 120 |
In-process research and development | 98 |  |  | — |
Non-compete agreements | 9 |  |  | — |
Goodwill | 303 |  |  | 114 |
Purchase price, net of cash acquired | $ | 473 |  |  | $ | 208 |
Weighted-average life of intangible assets | 12 |  |  | 18 |

The purchase price allocation for Mobius is based on preliminary valuations, primarily related to intangible assets that are subject to change within the measurement period. The purchase price allocation for OrthoSpace was finalized in 2020.

Estimated Amortization Expense
Remainder of 2020 | 2021 | 2022 | 2023 | 2024
$ | 341 |  | $ | 440 |  | $ | 438 |  | $ | 417 |  | $ | 386 |

NOTE 8 - DEBT AND CREDIT FACILITIES
We have lines of credit issued by various financial institutions that are available to fund our day-to-day operating needs. Certain of our credit facilities require us to comply with financial and other covenants. We were in compliance with all covenants on March 31, 2020.
Our commercial paper program allows us to have a maximum of $1,500 in commercial paper outstanding with maturities up to 397 days from the date of issuance. On March 31, 2020 there were no amounts outstanding under our commercial paper program.

Summary of Total Debt | March 2020 |  | December 2019
Senior unsecured notes: |  |  |
| Rate |  | Due |  |  |
| 4.375% |  | January 15, 2020 | $ | — |  |  | $ | 500 |
| Variable |  | November 30, 2020 | 328 |  |  | 333 |
| 2.625% |  | March 15, 2021 | 749 |  |  | 749 |
| 1.125% |  | November 30, 2023 | 599 |  |  | 609 |
| 3.375% |  | May 15, 2024 | 588 |  |  | 587 |
| 0.250% |  | December 3, 2024 | 923 |  |  | 938 |
| 3.375% |  | November 1, 2025 | 746 |  |  | 746 |
| 3.500% |  | March 15, 2026 | 991 |  |  | 991 |
| 2.125% |  | November 30, 2027 | 815 |  |  | 829 |
| 3.650% |  | March 7, 2028 | 596 |  |  | 596 |
| 0.750% |  | March 1, 2029 | 869 |  |  | 884 |
| 2.625% |  | November 30, 2030 | 700 |  |  | 712 |
| 1.000% |  | December 3, 2031 | 809 |  |  | 823 |
| 4.100% |  | April 1, 2043 | 392 |  |  | 391 |
| 4.375% |  | May 15, 2044 | 395 |  |  | 395 |
| 4.625% |  | March 15, 2046 | 981 |  |  | 981 |
Other | 26 |  |  | 26 |
Total debt | $ | 10,507 |  |  | $ | 11,090 |
Less current maturities of debt | 1,103 |  |  | 859 |
Total long-term debt | $ | 9,404 |  |  | $ | 10,231 |

| March 2020 |  | December 2019
Unamortized debt issuance costs | $ | 56 |  |  | $ | 58 |
Available secured borrowing capacity | $ | 1,403 |  |  | $ | 1,403 |
Fair value of senior unsecured notes | $ | 10,904 |  |  | $ | 11,910 |

The fair value of the senior unsecured notes was estimated using quoted interest rates, maturities and amounts of borrowings based on quoted active market prices and yields that took into account the underlying terms of the debt instruments. Substantially all of our debt is classified within Level 2 of the fair value hierarchy.
In January 2020 we repaid $500 of senior unsecured notes with a coupon of 4.375% that were due on January 15, 2020.
On April 30, 2020 we amended our primary credit facility. The principal change was to increase the leverage ratio financial covenant from 3.5:1 to 4.5:1 at the end of each fiscal quarter ending on or prior to June 30, 2021.
On April 30, 2020 we entered into a credit agreement that provides for up to $1,500 of borrowings in U.S. Dollars pursuant to a 364-day revolving credit facility, which matures on April 29, 2021 and is available for working capital and general corporate purposes.
NOTE 9 - INCOME TAXES
Our effective tax rates were 16.4% and 14.2% in the three months 2020 and 2019. The increase in the effective tax rate for the three months was primarily due to a lower tax benefit related to share-based compensation.
In March 2020 the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law in the United States. We do not expect the provisions of the CARES Act to have a material impact on our annual effective tax rate or Consolidated Financial Statements in 2020.
NOTE 10 - SEGMENT INFORMATION

| Three Months
| 2020 | 2019
Orthopaedics | $ | 1,222 |  | $ | 1,250 |
MedSurg | 1,622 |  | 1,527 |
Neurotechnology and Spine | 744 |  | 739 |
Net sales | $ | 3,588 |  | $ | 3,516 |
Orthopaedics | $ | 392 |  | $ | 437 |
MedSurg | 401 |  | 377 |
Neurotechnology and Spine | 206 |  | 199 |
Segment operating income | $ | 999 |  | $ | 1,013 |
Items not allocated to segments: |  |
Corporate and other | (137 | ) | (132 | )
Acquisition and integration-related charges | (37 | ) | (138 | )
Amortization of intangible assets | (118 | ) | (114 | )
Restructuring-related charges | (54 | ) | (56 | )
Medical device regulations | (24 | ) | (7 | )
Recall-related matters | 6 |  | (13 | )
Regulatory and legal matters | — |  | (25 | )
Consolidated operating income | $ | 635 |  | $ | 528 |

There were no significant changes to total assets by segment from information provided in our Annual Report on Form 10-K for 2019.

Dollar amounts are in millions except per share amounts or as otherwise specified. | 8

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ABOUT STRYKER
Stryker Corporation ("we" or "our") 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 Orthopaedics, Medical and Surgical, and Neurotechnology and Spine that help improve patient and hospital outcomes.
We segregate our operations into three reportable business segments: Orthopaedics, MedSurg, and Neurotechnology and Spine. Orthopaedics products consist primarily of implants used in hip and knee joint replacements and trauma and extremities surgeries. MedSurg products include surgical equipment and surgical navigation systems (Instruments), endoscopic and communications systems (Endoscopy), patient handling, emergency medical equipment and intensive care disposable products (Medical), reprocessed and remanufactured medical devices (Sustainability) and other medical device products used in a variety of medical specialties. Neurotechnology and Spine products include neurosurgical, neurovascular and spinal implant devices.
COVID-19 Pandemic
The COVID-19 outbreak, which has been declared a global pandemic, has led to severe disruptions in the market and the global and United States economies that may continue for a prolonged duration and trigger a recession or a period of economic slowdown. In response, various governmental authorities and private enterprises have implemented numerous measures to contain the pandemic, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns. A significant number of our global suppliers, vendors, distributors and manufacturing facilities are located in regions that have been affected by the pandemic, such as, among others, the United States, China, France, Germany, Switzerland and the United Kingdom. Those operations have been, and will continue to be, materially adversely affected by restrictive government and private enterprise measures implemented in response to the pandemic.
Some of our products are particularly sensitive to reductions in elective medical procedures. Elective medical procedures were suspended in the first quarter of 2020 in many of the markets where our products are marketed and sold, which negatively affected our business, cash flows, financial condition and results of operations. To the extent individuals are required to continue to de-prioritize or delay elective procedures as a result of the COVID-19 pandemic or otherwise, our business, cash flows, financial condition and results of operations could be negatively affected.
In addition, certain of our MedSurg products, such as emergency relief beds and personal protective equipment, have experienced, and could continue to experience, higher demand as our customers focus on treating COVID-19 patients. Unpredictable increases in demand for certain of our products could exceed our capacity to meet such demand timely, which could adversely affect our customer relationships and result in negative publicity. In this regard, the accelerated development and production of products and services in an effort to address medical and other requirements as a result of the pandemic could increase the risk of regulatory enforcement actions, product defects or related claims.
Further, in an effort to increase the wider availability of needed medical and other supplies and products in response to the
pandemic, governments may require us (such as under the United States Defense Production Act) to allocate manufacturing capacity in a way that adversely affects our regular operations, results in differential treatment of customers and/or adversely affects our reputation and customer relationships. It is also possible that certain of our operations are deemed non-essential and thus subject to suspension or other restrictions by government orders. We cannot predict how these changes in operations, if implemented, would affect our future operations and commercial activities as the impact of the pandemic begins to subside.
In addition, in March 2020 the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law in the United States. We do not expect the provisions of the CARES Act to have a material impact on our annual effective tax rate or Consolidated Financial Statements in 2020.
Finally, the COVID-19 pandemic’s significant disruption on global financial markets may limit our ability to access capital, and the terms on which we are able to access capital may be substantially less favorable than those existing prior to the pandemic.
Overview of the Three Months
The response to the COVID-19 pandemic has included unprecedented measures to slow the spread of the virus taken by local governments and health care authorities globally, including the deferral of elective medical procedures and social contact restrictions, which have had, and we expect will continue to have, a significant negative impact on Stryker’s operations and financial results. While we reported an overall increase in unit volumes in the quarter, most of our businesses saw significant declines in the month of March 2020.
In the three months 2020 we achieved sales growth of 2.0%. Excluding the impact of acquisitions sales grew 2.4% in constant currency. We reported operating income margin of 17.7%, net earnings of $493 and net earnings per diluted share of $1.30. Excluding the impact of certain items, adjusted operating income margin contracted by 110 basis points to 24.0%, with adjusted net earnings(1) of $699 and a reduction of 2.1% in adjusted net earnings per diluted share(1).
Recent Developments
In January 2020 we repaid $500 of our senior unsecured notes with a coupon of 4.375% that were due on January 15, 2020.
In the three months 2020 we did not repurchase any shares of our common stock under our authorized repurchase program. The total dollar value of shares of our common stock that could be acquired under our authorized repurchase program was $1,033 as of March 31, 2020. As previously announced we intend to suspend our share repurchase program for 2020 and 2021.
On April 30, 2020 we amended our primary credit facility. The principal change was to increase the leverage ratio financial covenant from 3.5:1 to 4.5:1 at the end of each fiscal quarter ending on or prior to June 30, 2021.
On April 30, 2020 we entered into a credit agreement that provides for up to $1,500 of borrowings in U.S. Dollars pursuant to a 364-day revolving credit facility, which matures on April 29, 2021 and is available for working capital and general corporate purposes.
(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.

Dollar amounts are in millions except per share amounts or as otherwise specified. | 9

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

CONSOLIDATED RESULTS OF OPERATIONS

| Three Months
|  |  | Percent Net Sales | Percentage
| 2020 | 2019 | 2020 | 2019 | Change
Net sales | $ | 3,588 |  | $ | 3,516 |  | 100.0 | % | 100.0 | % | 2.0 | %
Gross profit | 2,331 |  | 2,283 |  | 65.0 |  | 64.9 |  | 2.1 |
Research, development and engineering expenses | 254 |  | 225 |  | 7.1 |  | 6.4 |  | 12.9 |
Selling, general and administrative expenses | 1,330 |  | 1,403 |  | 37.1 |  | 39.9 |  | (5.2 | )
Recall charges | (6 | ) | 13 |  | (0.2 | ) | 0.4 |  | nm |
Amortization of intangible assets | 118 |  | 114 |  | 3.3 |  | 3.2 |  | 3.5 |
Other income (expense), net | (45 | ) | (48 | ) | (1.3 | ) | (1.4 | ) | (6.3 | )
Income taxes | 97 |  | 68 |  |  |  | 42.6 |
Net earnings | $ | 493 |  | $ | 412 |  | 13.7 | % | 11.7 | % | 19.7 | %
Net earnings per diluted share | $ | 1.30 |  | $ | 1.09 |  |  |  | 19.3 | %
Adjusted net earnings per diluted share(1) | $ | 1.84 |  | $ | 1.88 |  |  |  | (2.1 | )%

nm - not meaningful

Geographic and Segment Net Sales | Three Months
|  |  | Percentage Change
| 2020 | 2019 | As Reported | Constant Currency
Geographic: |  |  |  |
United States | $ | 2,643 |  | $ | 2,579 |  | 2.5 | % | 2.5 | %
International | 945 |  | 937 |  | 0.8 |  | 4.2 |
Total | $ | 3,588 |  | $ | 3,516 |  | 2.0 | % | 2.9 | %
Segment: |  |  |  |
Orthopaedics | $ | 1,222 |  | $ | 1,250 |  | (2.1 | )% | (1.2 | )%
MedSurg | 1,622 |  | 1,527 |  | 6.2 |  | 7.0 |
Neurotechnology and Spine | 744 |  | 739 |  | 0.7 |  | 1.5 |
Total | $ | 3,588 |  | $ | 3,516 |  | 2.0 | % | 2.9 | %

Supplemental Net Sales Growth Information
| Three Months
|  | Percentage Change
|  |  |  | United States | International
| 2020 | 2019 | As Reported | Constant Currency | As Reported | As Reported | Constant Currency
Orthopaedics: |  |  |  |  |  |  |
Knees | $ | 432 |  | $ | 439 |  | (1.7 | )% | (0.8 | )% | 0.6 | % | (7.8 | )% | (4.5 | )%
Hips | 316 |  | 336 |  | (5.9 | ) | (4.8 | ) | (5.7 | ) | (6.4 | ) | (3.2 | )
Trauma and Extremities | 392 |  | 396 |  | (0.8 | ) | 0.2 |  | 2.7 |  | (6.9 | ) | (4.3 | )
Other | 82 |  | 79 |  | 4.7 |  | 5.3 |  | 9.4 |  | (14.3 | ) | (11.5 | )
| $ | 1,222 |  | $ | 1,250 |  | (2.1 | )% | (1.2 | )% | 0.3 | % | (7.3 | )% | (4.3 | )%
MedSurg: |  |  |  |  |  |  |
Instruments | $ | 513 |  | $ | 461 |  | 11.1 | % | 11.9 | % | 12.0 | % | 7.8 | % | 11.4 | %
Endoscopy | 455 |  | 470 |  | (3.2 | ) | (2.4 | ) | (2.9 | ) | (4.1 | ) | (0.4 | )
Medical | 587 |  | 531 |  | 10.5 |  | 11.5 |  | 9.1 |  | 15.5 |  | 20.3 |
Sustainability | 67 |  | 65 |  | 2.8 |  | 2.8 |  | 3.1 |  | nm |  | nm |
| $ | 1,622 |  | $ | 1,527 |  | 6.2 | % | 7.0 | % | 6.0 | % | 6.9 | % | 11.1 | %
Neurotechnology and Spine: |  |  |  |  |  |
Neurotechnology | $ | 483 |  | $ | 469 |  | 3.1 | % | 4.0 | % | 0.2 | % | 8.1 | % | 10.8 | %
Spine | 261 |  | 270 |  | (3.5 | ) | (2.8 | ) | (5.6 | ) | 3.3 |  | 6.4 |
| $ | 744 |  | $ | 739 |  | 0.7 | % | 1.5 | % | (2.1 | )% | 6.8 | % | 9.6 | %
Total | $ | 3,588 |  | $ | 3,516 |  | 2.0 | % | 2.9 | % | 2.5 | % | 0.8 | % | 4.2 | %

Consolidated Net Sales
Consolidated net sales were significantly negatively impacted by the global response to the COVID-19 pandemic, resulting in lower than previously expected unit volume growth rates across all segments. Consolidated net sales increased 2.0% in the three months 2020 as reported and 2.9% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.9%. Excluding the 0.5% impact of acquisitions, net sales in constant
currency increased by 2.8% from increased unit volume partially offset by 0.4% due to lower prices. The unit volume increase was primarily due to higher shipments of neurotechnology, medical, instruments and trauma and extremities products. In addition, preliminary estimates indicate consolidated net sales in April 2020 decreased 35% to 40% from 2019 due to the global response to the COVID-19 pandemic.

Dollar amounts are in millions except per share amounts or as otherwise specified. | 10

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

Orthopaedics Net Sales
Orthopaedics net sales decreased 2.1% in the three months 2020 as reported and 1.2% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.9%. Net sales in constant currency decreased by 1.5% due to the deferral of elective medical procedures as part of the global response to the COVID-19 pandemic and lower prices partially offset by 0.3% from higher unit volume. The unit volume increase was primarily due to higher shipments of trauma and extremities products.
MedSurg Net Sales
MedSurg net sales increased 6.2% in the three months 2020 as reported and 7.0% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.8%. Excluding the 0.7% impact of acquisitions, net sales in constant currency increased by 6.0% from increased unit volume and 0.3% due to higher prices. The unit volume increase was primarily due to higher shipments of medical, instruments and sustainability solutions products.
Neurotechnology and Spine Net Sales
Neurotechnology and Spine net sales increased 0.7% in the three months 2020 as reported and 1.5% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.8%. Excluding the 1.2% impact of acquisitions, net sales in constant currency increased by 0.3% from increased unit volume. The unit volume increase was primarily due to higher shipments of neurotechnology products.
Gross Profit
Gross profit was significantly negatively impacted by the global response to the COVID-19 pandemic. Gross profit as a percentage of sales in the three months 2020 increased to 65.0% from 64.9% in 2019. Excluding the impact of the items noted below, gross profit decreased to 65.3% of sales in the three months 2020 from 65.8% in 2019 primarily due to unfavorable product mix due to the deferral of elective medical procedures as part of the global response to the COVID-19 pandemic and lower selling prices, partially offset by increases due to leverage from higher sales volumes.

|  | Percent Net Sales
Three Months | 2020 | 2019 | 2020 | 2019
Reported | $ | 2,331 |  | $ | 2,283 |  | 65.0 | % | 64.9 | %
Inventory stepped-up to fair value | 6 |  | 24 |  | 0.2 |  | 0.7 |
Restructuring-related and other charges | 4 |  | 5 |  | 0.1 |  | 0.2 |
Medical device regulations | 1 |  | — |  | — |  | — |
Adjusted | $ | 2,342 |  | $ | 2,312 |  | 65.3 | % | 65.8 | %

Research, Development and Engineering Expenses
Research, development and engineering expenses increased $29 or 12.9% to 7.1% of sales in the three months 2020 from 6.4% in 2019. Excluding the impact of the items noted below, expenses increased to 6.4% of sales in 2020 from 6.2% in 2019. Projects to develop new products, investments in new technologies and integration of recent acquisitions contributed to the increased spending levels partially offset by operating expense savings actions taken during March 2020 in response to the COVID-19 pandemic that will drive lower spending in the remainder of the year.

|  | Percent Net Sales
Three Months | 2020 | 2019 | 2020 | 2019
Reported | $ | 254 |  | $ | 225 |  | 7.1 | % | 6.4 | %
Medical device regulations | (23 | ) | (7 | ) | (0.7 | ) | (0.2 | )
Adjusted | $ | 231 |  | $ | 218 |  | 6.4 | % | 6.2 | %

Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $73 or 5.2% in the three months 2020 and decreased as a percentage of sales to 37.1% from 39.9% in 2019. Excluding the impact of the items noted below, expenses increased to 34.8% of sales in 2020 from 34.4% in 2019, primarily due to unfavorable business mix and foreign exchange partially offset by operating expense savings actions taken during March 2020 in response to the COVID-19 pandemic that will drive lower spending in the remainder of the year.

|  | Percent Net Sales
Three Months | 2020 | 2019 | 2020 | 2019
Reported | $ | 1,330 |  | $ | 1,403 |  | 37.1 | % | 39.9 | %
Other acquisition and integration-related | (31 | ) | (114 | ) | (0.9 | ) | (3.3 | )
Restructuring-related and other charges | (49 | ) | (52 | ) | (1.4 | ) | (1.5 | )
Regulatory and legal matters | — |  | (25 | ) | — |  | (0.7 | )
Adjusted | $ | 1,250 |  | $ | 1,212 |  | 34.8 | % | 34.4 | %

Recall Charges
Recall charges were minimal in the three months 2020 and 2019. Charges were primarily due to the previously disclosed Rejuvenate and ABGII Modular-Neck hip stems and LFIT V40 femoral head voluntary recalls. Refer to Note 6 to our Consolidated Financial Statements for further information.
Amortization of Intangible Assets
Amortization of intangible assets was $118 and $114 in the three months 2020 and 2019. The increase in 2020 was primarily due to our recent acquisitions. Refer to Note 7 to our Consolidated Financial Statements for further information.
Operating Income
Operating income was significantly negatively impacted by the global response to the COVID-19 pandemic. Operating income increased $107 or 20.3% to 17.7% of net sales in the three months 2020 from 15.0% in 2019. Excluding the impact of the items noted below, operating income decreased to 24.0% of sales in 2020 from 25.1% in 2019 primarily due to unfavorable business mix from the deferral of elective medical procedures as part of the global response to the COVID-19 pandemic, partially offset by leverage from higher sales volumes and continued focus on our operating expense savings actions that will drive lower spending in the remainder of the year.

|  | Percent Net Sales
Three Months | 2020 | 2019 | 2020 | 2019
Reported | $ | 635 |  | $ | 528 |  | 17.7 | % | 15.0 | %
Inventory stepped-up to fair value | 6 |  | 24 |  | 0.2 |  | 0.7 |
Other acquisition and integration-related | 31 |  | 114 |  | 0.9 |  | 3.2 |
Amortization of purchased intangible assets | 118 |  | 114 |  | 3.2 |  | 3.2 |
Restructuring-related and other charges | 54 |  | 56 |  | 1.5 |  | 1.6 |
Medical device regulations | 24 |  | 7 |  | 0.7 |  | 0.2 |
Recall-related matters | (6 | ) | 13 |  | (0.2 | ) | 0.4 |
Regulatory and legal matters | — |  | 25 |  | — |  | 0.8 |
Adjusted | $ | 862 |  | $ | 881 |  | 24.0 | % | 25.1 | %

Other Income (Expense), Net
Other income (expense), net was ($45) and ($48) in the three months 2020 and 2019. The improvement in 2020 was primarily due to benefits in investment income partially offset by increased interest expense driven by the additional debt from the Euro bond offering completed in December 2019.

Dollar amounts are in millions except per share amounts or as otherwise specified. | 11

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

Income Taxes
The effective tax rates were 16.4% and 14.2% in the three months 2020 and 2019. The increase in the effective tax rate for the three months was primarily due to a lower tax benefit related to share-based compensation.
In March 2020 the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law in the United States. We do not expect the provisions of the CARES Act to have a material impact on our annual effective tax rate or Consolidated Financial Statements in 2020.
Net Earnings
Earnings were significantly negatively impacted by the global response to the COVID-19 pandemic. Net earnings increased to $493 or $1.30 per diluted share in the three months 2020 from $412 or $1.09 per diluted share in 2019. Adjusted net earnings per diluted share(1) decreased 2.1% to $1.84 in 2020 from $1.88 in 2019. The impact of foreign currency exchange rates reduced net earnings per diluted share by approximately $0.02 in 2020 and $0.06 in 2019.

|  | Percent Net Sales
Three Months | 2020 | 2019 | 2020 | 2019
Reported | $ | 493 |  | $ | 412 |  | 13.7 | % | 11.7 | %
Inventory stepped-up to fair value | 5 |  | 19 |  | 0.1 |  | 0.5 |
Other acquisition and integration-related | 24 |  | 88 |  | 0.7 |  | 2.5 |
Amortization of purchased intangible assets | 96 |  | 91 |  | 2.7 |  | 2.6 |
Restructuring-related and other charges | 42 |  | 50 |  | 1.2 |  | 1.5 |
Medical device regulations | 18 |  | 6 |  | 0.5 |  | 0.2 |
Recall-related matters | (4 | ) | 10 |  | (0.1 | ) | 0.3 |
Regulatory and legal matters | — |  | 19 |  | — |  | 0.5 |
Tax matters | 25 |  | 19 |  | 0.7 |  | 0.5 |
Adjusted | $ | 699 |  | $ | 714 |  | 19.5 | % | 20.3 | %

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; and adjusted net earnings per diluted share (Diluted EPS). 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 and acquisitions, which affect the comparability and trend of sales. Percentage organic sales growth is calculated by translating current year results at prior year average foreign currency exchange rates excluding the impact of acquisitions. 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. 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 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, weather-related asset impairments and associated costs and other restructuring-related activities.

4. | Medical Device Regulations. Costs specific to updating our quality system, product labeling, asset write-offs and product remanufacturing to comply with the medical device reporting regulations and other requirements of the European Union and China regulations for medical devices.

5. | Recall-related matters. Our best estimate of the minimum of the range of probable loss to resolve the Rejuvenate, LFIT V40 and other product recalls.

6. | 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.

7. | 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 Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures
Three Months 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 | $ | 2,331 |  | $ | 1,330 |  | $ | 254 |  | $ | 635 |  | $ | (45 | ) | $ | 493 |  | 16.4 | % | $ | 1.30 |
Reported percent net sales | 65.0 | % | 37.1 | % | 7.1 | % | 17.7 | % | (1.3 | )% | 13.7 | % |  |
Acquisition and integration-related charges: |  |  |  |  |  |  |  |
Inventory stepped-up to fair value | 6 |  | — |  | — |  | 6 |  | — |  | 5 |  | 0.1 |  | 0.01 |
Other acquisition and integration-related | — |  | (31 | ) | — |  | 31 |  | — |  | 24 |  | 0.3 |  | 0.06 |
Amortization of purchased intangible assets | — |  | — |  | — |  | 118 |  | — |  | 96 |  | 0.9 |  | 0.25 |
Restructuring-related and other charges | 4 |  | (49 | ) | — |  | 54 |  | — |  | 42 |  | 0.6 |  | 0.11 |
Medical device regulations | 1 |  | — |  | (23 | ) | 24 |  | — |  | 18 |  | 0.3 |  | 0.05 |
Recall-related matters | — |  | — |  | — |  | (6 | ) | — |  | (4 | ) | (0.1 | ) | (0.01 | )
Regulatory and legal matters | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Tax matters | — |  | — |  | — |  | — |  | — |  | 25 |  | (4.2 | ) | 0.07 |
Adjusted | $ | 2,342 |  | $ | 1,250 |  | $ | 231 |  | $ | 862 |  | $ | (45 | ) | $ | 699 |  | 14.3 | % | $ | 1.84 |
Adjusted percent net sales | 65.3 | % | 34.8 | % | 6.4 | % | 24.0 | % | (1.3 | )% | 19.5 | % |  |

Dollar amounts are in millions except per share amounts or as otherwise specified. | 12

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

Three Months 2019 | Gross Profit | Selling, General & Administrative Expenses | Research, Development & Engineering Expenses | Operating Income | Other income (expense), net | Net Earnings | Effective Tax Rate | Diluted EPS
Reported | $ | 2,283 |  | $ | 1,403 |  | $ | 225 |  | $ | 528 |  | $ | (48 | ) | $ | 412 |  | 14.2 | % | $ | 1.09 |
Reported percent net sales | 64.9 | % | 39.9 | % | 6.4 | % | 15.0 | % | (1.4 | )% | 11.7 | % |  |
Acquisition and integration-related charges: |  |  |  |  |  |  |  |
Inventory stepped-up to fair value | 24 |  | — |  | — |  | 24 |  | — |  | 19 |  | 0.3 |  | 0.05 |
Other acquisition and integration-related | — |  | (114 | ) | — |  | 114 |  | — |  | 88 |  | 2.0 |  | 0.23 |
Amortization of purchased intangible assets | — |  | — |  | — |  | 114 |  | — |  | 91 |  | 1.3 |  | 0.24 |
Restructuring-related and other charges | 5 |  | (52 | ) | — |  | 56 |  | — |  | 50 |  | (0.3 | ) | 0.13 |
Medical device regulations | — |  | — |  | (7 | ) | 7 |  | — |  | 6 |  | 0.1 |  | 0.01 |
Recall-related matters | — |  | — |  | — |  | 13 |  | — |  | 10 |  | 0.3 |  | 0.03 |
Regulatory and legal matters | — |  | (25 | ) | — |  | 25 |  | — |  | 19 |  | 0.4 |  | 0.05 |
Tax matters | — |  | — |  | — |  | — |  | — |  | 19 |  | (3.9 | ) | 0.05 |
Adjusted | $ | 2,312 |  | $ | 1,212 |  | $ | 218 |  | $ | 881 |  | $ | (48 | ) | $ | 714 |  | 14.4 | % | $ | 1.88 |
Adjusted percent net sales | 65.8 | % | 34.4 | % | 6.2 | % | 25.1 | % | (1.4 | )% | 20.3 | % |  |

FINANCIAL CONDITION AND LIQUIDITY

Three Months | 2020 | 2019
Net cash provided by operating activities | $ | 591 |  | $ | 313 |
Net cash used in investing activities | (163 | ) | (303 | )
Net cash provided by (used in) financing activities | (768 | ) | (1,947 | )
Effect of exchange rate changes on cash and cash equivalents | (33 | ) | (5 | )
Change in cash and cash equivalents | $ | (373 | ) | $ | (1,942 | )

Operating Activities
Cash provided by operating activities was $591 and $313 in the three months 2020 and 2019. The increase was primarily due to increases in cash provided by working capital, primarily accounts receivable collections, accounts payable due to timing of payments and higher net earnings.
Investing Activities
Cash used in investing activities was $163 and $303 in the three months 2020 and 2019. The decrease in cash used was primarily due to decreased payments for acquisitions in 2020.
Financing Activities
Cash used in financing activities was $768 and $1,947 in the three months 2020 and 2019. The decrease in cash used was primarily driven by the repayment of $500 of debt upon maturity in January 2020 compared to repayments of $1,341 of debt in the first quarter of 2019, along with the suspension of share repurchases.

Three Months | 2020 | 2019
Total dividends paid to common shareholders | $ | 215 |  | $ | 195 |
Total amount paid to repurchase common stock | $ | — |  | $ | 307 |
Shares of repurchased common stock (in millions) | — |  | 1.9 |

Liquidity
Cash, cash equivalents and marketable securities were $4,048 and $4,425 on March 31, 2020 and December 31, 2019. Current assets exceeded current liabilities by $6,574 and $6,960 on March 31, 2020 and December 31, 2019. Despite the impact from the COVID-19 pandemic, we anticipate being able to support our short-term liquidity and operating needs from a variety of sources including cash from operations, commercial paper, existing credit lines and capital expenditure and operating expense reductions. We maintain a revolving credit facility with $1.5 billion of committed capital which expires in August 2023 and a $1.5 billion unsecured revolving credit facility that matures on April 29, 2021.
We have a well-positioned balance sheet and liquidity profile to manage these disruptions for the foreseeable future. We raised funds in the capital markets in 2019 and 2018 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 23% on March 31, 2020 compared to 25% on December 31, 2019. We intend to use this cash to sustain operations during our response to the COVID-19 pandemic.
Critical Accounting Policies
There were no changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for 2019.
New Accounting Pronouncements Not Yet Adopted
Refer to Note 1 to our Consolidated Financial Statements for information.
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.
OTHER MATTERS
Legal and Regulatory Matters
We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of our business, including proceedings related to product, labor, intellectual property and other matters. Refer to Note 6 to our Consolidated Financial Statements for further information.
FORWARD-LOOKING STATEMENTS
This report contains statements referring to us that are not historical facts and are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which are intended to take advantage of the "safe harbor" provisions of the Reform Act, are based on current projections about operations, industry conditions, financial condition and liquidity. Words that identify forward-looking statements include words such as "may," "could," "will," "should," "possible," "plan," "predict," "forecast," "potential," "anticipate," "estimate," "expect," "project," "intend," "believe," "may impact," "on track," "goal," "strategy" and words and terms of similar substance used in connection with any discussion of future operating or financial performance, an acquisition or our businesses. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Those statements are not guarantees and are subject to risks, uncertainties and assumptions that are difficult to predict, including uncertainties related to the impact of the COVID-19 pandemic on our operations and financial results. Therefore, actual results could differ materially and adversely from these forward-looking

Dollar amounts are in millions except per share amounts or as otherwise specified. | 13

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

statements. Some important factors that could cause our actual results to differ from our expectations in any forward-looking statements include those risks discussed in Item 1A. "Risk Factors" of our Annual Report on Form 10-K for 2019 and in Part II, Item 1. "Risk Factors" on this Form 10-Q. This Form 10-Q should be read in conjunction with our Consolidated Financial Statements and accompanying notes to our Consolidated Financial Statements in our Annual Report on Form 10-K for 2019. We disclaim any intention or obligation to publicly update or revise any forward-looking statement to reflect any change in our expectations or in events, conditions or circumstances on which those expectations may be based, or that affect the likelihood that actual results will differ from those contained in the forward-looking statements.

ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We consider our greatest potential areas of market risk exposure to be exchange rate risk and the impacts of the COVID-19 pandemic on our operations and financial results. Quantitative and qualitative disclosures about exchange rate risk are included in Item 7A "Quantitative and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10-K for 2019. There were no material changes from the information provided therein. We are not able to quantify the impacts of the COVID-19 pandemic on our financial results. Qualitative disclosures about the COVID-19 pandemic are included in Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A "Risk Factors" of this Form 10-Q.

ITEM 4. | CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer (the Certifying Officers), evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) on March 31, 2020. Based on that evaluation, the Certifying Officers concluded the Company's disclosure controls and procedures were effective as of March 31, 2020.
Changes in Internal Control Over Financial Reporting
There was no change to our internal control over financial reporting during the three months 2020 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION

ITEM 1A. | RISK FACTORS

Except with respect to the new and/or updated risk factors set forth below, we are not aware of any material changes to the risk factors included in Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019.
New Risk Factors
The COVID-19 pandemic has materially adversely affected, and is expected to continue to materially adversely affect, our operations, supply chain, manufacturing, product distribution and other business activities: The COVID-19 outbreak, which has been declared a global pandemic, has led to severe disruptions in the market and the global and United States economies that may continue for a prolonged duration and trigger a recession or a period of economic slowdown. In response, various governmental authorities and private enterprises have implemented numerous
measures to contain the pandemic, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns. A significant number of our global suppliers, vendors, distributors and manufacturing facilities are located in regions that have been affected by the pandemic, such as, among others, the United States, China, France, Germany, Switzerland and the United Kingdom. Those operations have been, and will continue to be, materially affected by restrictive government measures implemented in response to the pandemic. For example, some of our distributors and indirect channels in Asia are currently unable to distribute our products or provide required services due to direct governmental action or indirect consequences of the pandemic. Any delay or shortage in the supply of components or materials or delay in delivering our products may result in our inability to satisfy consumer demand for our products in a timely manner or at all, which could harm our reputation, future sales and profitability.
In addition, the pandemic could adversely impact our ability to retain key employees and the continued service and availability of skilled personnel necessary to run our complex productions, as well as our executive officers and other members of our management team, third-party suppliers, manufacturers, distributors and vendors. To the extent our management or other personnel are impacted in significant numbers by the pandemic and are not available to perform their job duties, we could experience delays in, or the suspension of, our manufacturing operations, research and product development activities, regulatory work streams, clinical development programs and other important commercial functions. Moreover, the actions we take to mitigate the effect of the pandemic on our workforce could reduce the efficiency of our operations or prove insufficient. The extent of the pandemic’s effect on our business will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict. We are not able at this time to estimate with certainty the effect of these and other unforeseen factors on our business, but the adverse impact on our business, cash flows, financial condition and results of operations could be material. A prolonged impact of COVID-19 also could heighten many of the other risks described in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019.
The COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital, which could negatively affect our liquidity: The COVID-19 pandemic’s significant disruption on global financial markets may limit our ability to access capital, and the terms on which we are able to access capital may be substantially less favorable than those existing prior to the pandemic. In 2020 we will require additional debt financing to finance our pending acquisition of Wright Medical, fund our operations and refinance existing debt. If we are not able to access capital at a time and on terms acceptable to us, we may encounter difficulty funding our business requirements including debt repayments when they become due. Changes in our credit ratings issued by nationally recognized credit rating agencies could also adversely affect our access to and cost of financing. In addition, we could experience loss of sales and profits due to delayed payments or insolvency of healthcare professionals, hospitals and other customers and suppliers facing liquidity issues. As a result, we may be compelled to take additional measures to preserve our cash flow, including through the reduction of operating expenses or suspension of dividend payments, at least until the consequences of the pandemic subside.
We have experienced, and may continue to experience, a significant and unpredictable need to adjust our operations as market demand for certain of our products has shifted and

Dollar amounts are in millions except per share amounts or as otherwise specified. | 14

continues to shift or as may be mandated by governmental authorities in response to the COVID-19 pandemic: Some of our products are particularly sensitive to reductions in elective medical procedures. Elective medical procedures were suspended in the first quarter of 2020 in many of the markets where our products are marketed and sold, which negatively affected our business, cash flows, financial condition and results of operations. It is not possible to predict the exact timing of a broad resumption of elective medical procedures and, to the extent individuals are required to continue to de-prioritize, delay or cancel elective procedures as a result of the COVID-19 pandemic or otherwise, our business, cash flows, financial condition and results of operations could be negatively affected.
In addition, our products in certain divisions, such as Medical, have experienced, and could continue to experience, higher demand as our customers focus on treating COVID-19 patients. Unpredictable increases in demand for certain of our products could exceed our capacity to meet such demand timely, which could adversely affect our customer relationships and result in negative publicity. In this regard, the accelerated development and production of products and services in an effort to address medical and other requirements as a result of the pandemic could increase the risk of regulatory enforcement actions, product defects or related claims.
Further, in an effort to increase the wider availability of needed medical and other supplies and products in response to the pandemic, governments may require us (such as under the United States Defense Production Act) to allocate manufacturing capacity in a way that adversely affects our regular operations, results in differential treatment of customers and/or adversely affects our reputation and customer relationships. It is also possible that certain of our operations are deemed non-essential and thus subject to suspension or other restrictions by government orders. We cannot predict how these changes in operations, if implemented, would affect our future operations and commercial activities as the impact of the pandemic begins to subside.
Updated Risk Factors
We may be adversely affected by product liability claims, unfavorable court decisions or legal settlements: We are exposed to potential product liability risks inherent in the design, manufacture and marketing of medical devices, many of which are implanted in the human body for long periods of time or indefinitely. We may be exposed to additional potential product liability risks related to products designed, manufactured and marketed in response to the COVID-19 pandemic, including discretionary products and products permitted under the Emergency Use Authorization granted by the FDA. We are currently defendants in a number of product liability matters, including those relating to our Rejuvenate and ABGII Modular-Neck hip stems and LFIT Anatomic CoCr V40 Femoral Heads discussed in Note 7 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2019. These matters are subject to many uncertainties and outcomes are not predictable. In addition, we may incur significant legal expenses regardless of whether we are found to be liable. We are self-insured for product liability-related claims and expenses.
We may be unable to maintain adequate working relationships with healthcare professionals: We seek to maintain close working relationships with respected physicians and medical personnel in healthcare organizations such as hospitals and universities who assist in product research and development. We rely on these professionals to assist us in the development and improvement of proprietary products. As a result of the COVID-19 pandemic, our access to these professionals has been limited as hospitals have
restricted access for non-patients, including our research and development specialists and other employees, and governmental authorities have imposed travel restrictions, shutdowns or similar measures, which has adversely affected our ability to develop, market and sell products. If we are unable to maintain these relationships, our ability to develop, market and sell new and improved products could be further adversely affected.
We rely on indirect distribution channels and major distributors that are independent of Stryker: In many markets, we rely on indirect distribution channels to market, distribute, and sell our products. These indirect channels often are the main point of contact for the healthcare professional and healthcare organization customers who buy and use our products. Our ability to market, distribute, and sell our products through indirect channels has been adversely affected as a result of precautionary responses to the COVID-19 pandemic, including travel restrictions, suspension and shutdown orders and other measures intended to limit person-to-person contact. Our ability to continue to market, distribute, and sell our products may be at risk if the indirect channels become insolvent, choose to sell competitive products, choose to stop selling medical technology, or are subject to new or additional government regulation, whether related to the COVID-19 pandemic or for unrelated reasons.
We are subject to additional risks associated with our extensive global operations: We develop, manufacture and distribute our products globally. Our global operations are subject to risks and potential costs, including changes in reimbursement, changes in regulatory requirements, differing local product preferences and product requirements, diminished protection of intellectual property in some countries, tariffs and other trade protection measures, international trade disputes and import or export requirements, difficulty in staffing and managing foreign operations, introduction of new internal business structures and programs, political and economic instability (such as the United Kingdom's exit from the European Union, commonly referred to as "Brexit"), and disruptions of transportation due to a global pandemic of contagious diseases like COVID-19 or otherwise, such as reduced availability of air transport, port closures, increased border controls or closures, increased transportation costs and increased security threats to our supply chain. Our business could be adversely impacted if we are unable to successfully manage these and other risks of global operations in an increasingly volatile environment.
We may incur goodwill impairment charges related to one or more of our business units: We perform our annual impairment test for goodwill in the fourth quarter of each year, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. In evaluating the potential for impairment we make assumptions regarding revenue projections, growth rates, cash flows, tax rates and discount rates. These assumptions are uncertain and by nature may vary from actual results. A significant reduction in the estimated fair values could result in impairment charges. We believe that the impact of the COVID-19 pandemic will negatively affect certain key assumptions used in our analysis; however, we will need to assess the extent and nature of the long-term impacts to determine if we may be required to record charges for impairments in the future. At this time, it remains uncertain whether and to what extent we will need to record charges for impairments as a result of the ongoing pandemic.
We could experience a failure of a key information technology system, process or site or a breach of information security, including a cybersecurity breach or failure of one or more key information technology systems, networks, processes, associated sites or service providers: We rely extensively on

Dollar amounts are in millions except per share amounts or as otherwise specified. | 15

information technology (IT) systems to conduct business. In addition, we rely on networks and services, including internet sites, cloud and SaaS solutions, data hosting and processing facilities and tools and other hardware, software and technical applications and platforms, some of which are managed, hosted, provided and/or used by third-parties or their vendors, to assist in conducting our business. Numerous and evolving cybersecurity threats pose potential risks to the security of our IT systems, networks and product offerings, as well as the confidentiality, availability and integrity of our data. A security breach, whether of our products, of our customers’ network security and systems or of third-party hosting services, could impact the use of such products and the security of information stored therein. While we have made investments seeking to address these threats, including monitoring of networks and systems, hiring of experts, employee training and security policies for employees and third-party providers, the techniques used in these attacks change frequently and may be difficult to detect for periods of time and we may face difficulties in anticipating and implementing adequate preventative measures. In addition, a greater number of our employees working remotely during the COVID-19 pandemic may expose us to greater risks related to cybersecurity and cyber-liability. If our IT systems are damaged or cease to function properly, the networks or service providers we rely upon fail to function properly, or we or one of our third-party providers suffer a loss or disclosure of our business or stakeholder information due to any number of causes ranging from catastrophic events or power outages to improper data handling or security breaches and our business continuity plans do not effectively address these failures on a timely basis, we may be exposed to reputational, competitive and business harm as well as litigation and regulatory action.

ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We issued 7,578 shares of our common stock in the three months 2020 as performance incentive awards to employees. These shares are not registered under the Securities Act of 1933 based on the conclusion that the awards would not be events of sale within the meaning of Section 2(a)(3) of the Act.
In March 2015 we announced that our Board of Directors had authorized us to purchase up to $2,000 of our common stock. The manner, timing and amount of repurchases are determined by management based on an evaluation of market conditions, stock price, and other factors and are subject to regulatory considerations. Purchases are made from time to time in the open market, in privately negotiated transactions or otherwise.
In the three months 2020 we did not repurchase any shares of our common stock under our authorized repurchase program. The total dollar value of shares of our common stock that could be acquired under our authorized repurchase program was $1,033 as of March 31, 2020.

ITEM 5. | OTHER INFORMATION

Amendment to 2016 Credit Agreement
On April 30, 2020 Stryker Corporation, and certain of its subsidiaries as designated borrowers, amended its Credit Agreement, dated as of August 19, 2016, with various lenders and Bank of America, N.A., as administrative agent (the "2016 Credit Agreement"). The principal changes were to (1) increase the maximum permitted leverage ratio under the leverage ratio financial covenant from 3.5:1 to 4.5:1 at the end of any fiscal quarter of the Company ending after March 31, 2020 but on or prior to June 30, 2021, (2) allow the Company to increase the maximum permitted leverage ratio by 0.5 to 1.0 during an acquisition holiday, which the Company is permitted to elect under the 2016 Credit Agreement no more than twice during
the term of the 2016 Credit Agreement for a period of four consecutive fiscal quarters in connection with the consummation of certain material acquisitions and (3) make certain amendments to the 2016 Credit Agreement to address recent developments in applicable law and regulations governing financial institutions. The foregoing summary is qualified in its entirety by the terms of Amendment No. 1, dated as of April 30, 2020, to the 2016 Credit Agreement, a copy of which is filed as Exhibit 10(i) hereto and is incorporated herein by reference.
364-Day Credit Agreement
On April 30, 2020 Stryker Corporation entered into a Credit Agreement with various lenders and Bank of America, N.A., as administrative agent (the "364-Day Credit Agreement"). The principal terms of the 364-Day Credit Agreement are: (1) an aggregate principal amount of commitments of $1.5 billion, (2) a maturity date of April 29, 2021 and (3) a leverage ratio financial covenant that provides for a maximum permitted leverage ratio of 4.5:1 at the end of any fiscal quarter, with an acquisition holiday no more than twice during the term of the 364-Day Credit Agreement that permits the Company to elect to increase the maximum permitted leverage ratio by 0.5 to 1.0 for a period of four consecutive fiscal quarters in connection with the consummation of certain material acquisitions. The representations and warranties, covenants and events of default contained in the 364-Day Credit Agreement are substantially the same as those contained in the 2016 Credit Agreement, as amended. The 364‑Day Credit Agreement has an annual facility fee ranging from 20 to 40 basis points and bears interest at the LIBOR Rate, as defined in the 364-Day Credit Agreement, plus an applicable margin ranging from 105 to 135 basis points, with a 0.75% LIBOR floor. Both the facility fee and the applicable margin are dependent on the Company’s credit ratings. The foregoing summary is qualified in its entirety by the terms of the 364-Day Credit Agreement, a copy of which is filed as Exhibit 10(ii) hereto and is incorporated herein by reference.

ITEM 6. | EXHIBITS

10(i) † | Amendment No. 1, dated as of April 30, 2020, to Credit Agreement, dated as of August 19, 2016, among Stryker Corporation and certain of its subsidiaries, as designated borrowers; the lenders party thereto; and Bank of America, N.A., as administrative agent.
10(ii) † | Credit Agreement, dated as of April 30, 2020, among Stryker Corporation as borrower; the lenders party thereto; and Bank of America, N.A., as administrative agent.
31(i)* | Certification of Principal Executive Officer of Stryker Corporation pursuant to Rule 13a-14(a)
31(ii)* | Certification of Principal Financial Officer of Stryker Corporation pursuant to Rule 13a-14(a)
32(i)* | Certification by Principal Executive Officer of Stryker Corporation pursuant to 18 U.S.C. Section 1350
32(ii)* | Certification by Principal Financial Officer of Stryker Corporation pursuant to 18 U.S.C. Section 1350
101.INS | iXBRL Instance Document
101.SCH | iXBRL Schema Document
101.CAL | iXBRL Calculation Linkbase Document
101.DEF | iXBRL Definition Linkbase Document
101.LAB | iXBRL Label Linkbase Document
101.PRE | iXBRL Presentation Linkbase Document
104 | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document)
| † Filed with this Form 10-Q
| * Furnished with this Form 10-Q

Dollar amounts are in millions except per share amounts or as otherwise specified. | 16

STRYKER CORPORATION |  | 2020 First Quarter Form 10-Q

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|  |  | STRYKER CORPORATION
|  |  | (Registrant)
Date: | May 1, 2020 |  | /s/ KEVIN A. LOBO
|  |  | Kevin A. Lobo
|  |  | Chairman and Chief Executive Officer
Date: | May 1, 2020 |  | /s/ GLENN S. BOEHNLEIN
|  |  | Glenn S. Boehnlein
|  |  | Vice President, Chief Financial Officer

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