SYKStryker Corporation

Regarding your discussion and analysis of gross profit, research, development and engineering expenses, selling, general and administrative expenses, operating income, and net earnings, please revise to provide a full discussion and analysis for the US GAAP amounts with any additional necessary discussion and analysis for the non-GAAP measures to avoid giving any undue prominence to your non-GAAP results.

Rest of the question

Refer to Item 10(e)(1)(i)(a) of Regulation S-K and Question 102.10(a) of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations for guidance.

We respectfully acknowledge the Staff’s comment and advise the Staff that in future filings, we will revise our discussion and analysis for (i) gross profit, (ii) research, development and engineering expenses, (iii) selling, general and administrative expenses, (iv) operating income and (v) net earnings to avoid giving undue prominence to the non-GAAP measures. An illustrative example of our future discussion and analysis for gross profit is included in our response to comment 2. below. Read in the reply ↗

Please expand your analyses to quantify the impact of the factors impacting the line items when multiple factors contribute positively and/or negatively to the change or amounts being discussed. Refer to Item 303(b)(2) of Regulation S-K and Section 501.12.b. of the Financial Reporting Codification for guidance.

Rest of the question

One example is your analysis of adjusted gross profit as a percentage of net sales in which you attribute the decline to (a) increased costs from purchases of electronic components at premium process on the spot market; (b) inflationary pressures related to labor, steel and transportation, (c) inefficiencies from supply chain disruptions, and (d) unfavorable product mix that does not quantify each of these factors. Further, ensure that you are quantifying the impact of new products to net sales at the consolidated and segment levels in accordance with Item 303(b)(2)(iii) of Regulation S-K.

We respectfully acknowledge the Staff’s comment and advise the Staff that in future filings, we will expand our discussion and analysis to describe matters that materially affected reported income from continuing operations and, in each case when practicable, indicate the extent to which income was affected. An illustrative example of our future discussion and analysis of gross profit is as follows:

Gross Profit

Gross profit was $X,XXX and $X,XXX in the three months 2023 and 2022.

Rest of the answer

The key components of the change were:

Percent net sales

Three months 2022 XX.X %

Sales pricing X.X

Volume and mix (X.X)

Manufacturing and supply chain costs (X.X)

Inventory stepped up to fair value X.X

Structural optimization and other special charges X.X

Medical device regulations X.X

Three months 2023 XX.X %

Gross profit as a percentage of net sales in the three months 2023 of XX.X% was flat to 2022, driven by the benefit of favorable unit volume and higher prices, offset by unfavorable segment mix and increased manufacturing and supply chain costs primarily due to higher raw material costs. We generally expect segment mix to have an unfavorable impact for the foreseeable future as we anticipate more rapid sales growth in our lower gross margin MedSurg and Neurotechnology segment as compared to our Orthopaedics and Spine segment.

Substantially all net sales from new products relate to acquisitions and the impact of acquisitions on net sales growth is disclosed. We are continuously introducing next-generation versions of our existing products and their impact to net sales is reported as a component of volume. In the future, when discussing product introductions, we will clarify whether such introductions relate to new products or next-generation versions of existing products.

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Please expand your disclosures of the material factors impacting the line items to provide an analysis of the underlying facts and circumstances. Refer to Item 303(b)(2) of Regulation S-K and Section 501.12.b.4. of the Financial Reporting Codification for guidance.

Rest of the question

One example is your reference to a change in product mix negatively impacting adjusted gross profit as a percentage of net sales without a discussion of what the change in product mix was and whether management expects this change in product mix to continue.

We respectfully acknowledge the Staff’s comment and advise the Staff that in future filings, we will expand our discussion and analysis to describe underlying factors, including any known trends, that have had or are reasonably likely to have a material impact on net sales, income from continuing operations or the relationship between costs and net sales. An illustrative example of our future discussion is included in our response to comment 2. above. Read in the reply ↗

Please tell us why you have not provide a discussion and analysis of operating income at the segment level. In this regard, we note that MedSurg and Neurotechnology’s operating income as a percentage of net sales declined to 25.8% for fiscal year 2022 from 29.4% for fiscal year 2021 without an explanation as to why. Refer to Item 303(b) of Regulation S- K for guidance.

We respectfully acknowledge the Staff’s comment. We believed the discussion and analysis of material factors impacting operating income for the Company were largely applicable to both the MedSurg and Neurotechnology and Orthopaedics and Spine segments, and we determined that further discussion of segment operating income was not necessary to understanding the business.

Rest of the answer

Additionally, the decline from 2021 to 2022 in MedSurg and Neurotechnology’s operating income as a percentage of net sales was further addressed in the Macroeconomic Environment section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“Item 7”), of our Form 10-K, which describes the impact of inflationary pressures on our MedSurg businesses as follows: “Our operations have been adversely impacted by the inflationary pressures primarily related to labor, steel and transportation costs as well as the impact of purchasing electronic components at premium prices on the spot market. Sales growth in certain products has been constrained by the continuing supply chain challenges and electronic component shortages, especially impacting the capital products in our MedSurg businesses, although the supply chain constraints eased somewhat in the fourth quarter.”

We have considered the additional disclosures that we will make with respect to the illustrative examples provided in our responses to comments 2. and 3., and advise the Staff that in future filings we will expand our discussion and analysis for operating income to include a discussion of material factors impacting segment operating income, including quantifying material underlying drivers of those factors when practicable. An illustrative example of our future discussion and analysis of operating income is included below:

Operating Income

Operating income as a percentage of net sales in the three months 2023 increased to XX.X% from XX.X% in 2022. As discussed above, the increase was primarily due lower research, development and engineering expenses as well as lower selling, general and administrative expenses reflecting cost discipline and lower other acquisition and integration-related charges.

MedSurg and Neurotechnology operating income as a percentage of net sales increased to XX.X% in the three months 2023 from XX.X% in 2022. Orthopaedics and Spine operating income as a percentage of net sales increased to XX.X% in the three months 2023 from XX.X% in 2022. The key components of the change were:

MedSurg and Neurotechnology

Orthopaedics and Spine

Three months 2022 XX.X % XX.X %

Sales pricing X.X (X.X)

Volume X.X X.X

Manufacturing and supply chain costs (X.X) (X.X)

Research, development and engineering expenses X.X X.X

Selling, general and administrative expenses X.X X.X

Three months 2023 XX.X % XX.X %

The increase in MedSurg and Neurotechnology operating income as a percentage of net sales was primarily due to an increase in gross profit as a percentage of net sales as discussed above and lower research, development and engineering expenses and selling, general and administrative expenses.

The increase in Orthopaedics and Spine operating income as a percentage of net sales was primarily due to lower research, development and engineering expenses and selling, general and administrative expenses, partially offset by lower gross profit as a percentage of net sales.

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We note you have included adjustments for “other acquisition and integration-related” charges and also “restructuring-related and other charges” in your reconciliations for the adjusted, non-GAAP measures. Please provide us with an explanation of what specifically each of these adjustments represent and quantify the components of each of these adjustments for each period presented.

Rest of the question

Confirm to us that you will provide a more detailed discussion of these adjustments along with quantifying the components of these adjustments for each period presented and that you will also address this comment in your earnings press releases furnished pursuant to Item 2.02 of Form 8-K.

We respectfully acknowledge the Staff’s comment. Other acquisition and integration-related charges are costs incurred in the first 24 months post-acquisition to integrate recently acquired businesses (e.g., the termination of sales relationships, employee retention and workforce reductions, manufacturing integration costs, deal costs, legal entity rationalization and other integration-related activities), changes in the fair value of contingent consideration and specific costs (e.g., stock compensation payments upon a change in control) related to the consummation of the acquisition process.

Rest of the answer

For the years ended December 31, 2022, 2021 and 2020, the charges consisted of the following expenses/(benefits) (amounts in millions):

2022 2021 2020

Changes in the fair value of contingent consideration $ (135) $ — $ 8

Stock compensation payments upon change in control 132 — 35

Deal costs, legal entity rationalization and other 55 59 66

Employee retention and workforce reductions 33 90 50

Manufacturing integration costs 32 16 21

Termination of sales relationships 21 154 14

Total adjustment to operating income $ 138 $ 319 $ 194

Restructuring-related and other charges refer to costs associated with structural optimization and other special charges, which include a distributor termination, employee retention and workforce reductions, the costs of closing manufacturing facilities after the first 24 months post-acquisition, the closure/transfer of certain other facilities (e.g., site closure costs, contract termination costs and redundant costs during the transfers), product line exits (primarily inventory, long-lived asset and specifically-identified intangible asset write-offs), other certain long-lived and intangible asset write-offs and impairments and other charges. We believe that these charges are neither indicative of nor related to our operations, revenue-generating activities or ongoing business strategy. Additionally, the amounts are difficult to predict. As such, their exclusion provides a baseline for analyzing trends in our underlying businesses. For the years ended December 31, 2022, 2021 and 2020, the charges consisted of the following expenses (amounts in millions):

Certain long-lived and intangible asset write-offs and impairments and associated costs

$ 96 $ 203 $ 184

Closure/transfer of manufacturing and other facilities

83 52 49

Product line exits

80 61 114

Employee retention and workforce reductions

74 39 39

Distributor termination

— — 27

Other special charges

16 31 45

Total adjustment to operating income

$ 349 $ 386 $ 458

We advise the Staff that in future filings and in our earnings press releases furnished pursuant to Item 2.02 of Form 8-K, we will provide additional information about other acquisition and integration-related charges and restructuring-related and other charges. Additionally, the term “restructuring-related and other charges” will be revised to “structural optimization and other special charges.” An illustrative example of our future discussion and analysis is as follows:

Full Year 2023 Gross Profit Selling, General & Administrative Expenses

Research, Development

& Engineering Expenses

Operating Income Other Income (Expense), Net Income Taxes Net Earnings Effective Tax Rate Diluted EPS

Reported

$

$ $ $ $ $ % $

Reported percent net sales % % % % % nm %

Acquisition and integration-related costs (a):

Inventory stepped-up to fair value

Other acquisition and integration-related

Amortization of purchased intangible assets

Structural optimization and other special charges (b)

Goodwill impairment

Medical device regulations (c)

Recall-related matters (d)

Regulatory and legal matters (e)

Tax matters (f)

Adjusted

$ $ $ $ $ $ % $

Adjusted percent net sales % % % % % nm %

(a) Charges represent certain acquisition and integration-related costs associated with acquisitions, including charges for termination of sales relationships ($X), employee retention and workforce reductions ($X), changes in the fair value of contingent consideration ($X), manufacturing integration costs ($X), stock compensation payments upon a change in control ($X) and other integration-related activities such as deal costs and costs associated with legal entity rationalization ($X).

(b) Charges represent the costs associated with employee retention and workforce reductions ($X), the closure/transfer of manufacturing and other facilities, including site closure costs, contract termination costs and redundant employee costs during the work transfers ($X), product line exits (primarily inventory, long-lived asset and specifically-identified intangible asset write-offs) ($X), certain long-lived and intangible asset write-offs and impairments ($X) and other charges ($X).

(c) Charges represent the 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 new medical device regulations in the European Union.

(d) Charges represent changes in our best estimate of the minimum end of the range of probable loss to resolve certain recall-related matters.

(e) Charges represent changes in our best estimate of the minimum of the range of probable loss to resolve certain regulatory or other legal matters and the amount of favorable awards from settlements.

(f) Benefits and charges represent the accounting impact of certain significant and discrete tax items, including adjustments related to the transfer of certain intellectual properties between tax jurisdictions ($X) and certain significant tax audit settlements ($X).

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Please revise your reconciliation for adjusted net earnings to present the income tax effect of the other adjustments as a separate adjustment with clear explanations of how the income taxes adjustment was calculated. Further, provide a detailed discussion of the “tax matters” adjustments for adjusted other income (expense), net and adjusted net earnings.

Rest of the question

As part of your response, tell us your consideration of reflecting the reversal of the tax related to repatriation of foreign earnings and United States federal audit settlement that benefited net earnings for fiscal year 2022 as adjustments to arrive at adjusted net earnings. Refer to Questions 100.03 and 102.11 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations for guidance. Please address this comment in your earnings press releases furnished pursuant to Item 2.02 of Form 8-K.

We respectfully acknowledge the Staff’s comment. The Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures section of Item 7 presents operating income, other income (expense), net and net earnings, which allows the income tax effect of each adjustment to be calculated. The income tax effect of each adjustment was determined based on the tax effect of the jurisdiction in which the related pre-tax adjustment was recorded.

Rest of the answer

We advise the Staff that in future filings, we will present the income tax effect of the adjustments as a separate adjustment in the reconciliation. An illustrative example of our future presentation is provided in our response to comment 5. above. We will also include a discussion of how the income tax adjustments were calculated.

Tax matters are benefits and expenses that represent the accounting impact of certain significant and discrete tax items, including adjustments related to the transfer of certain intellectual properties between tax jurisdictions and certain significant tax audit settlements. The tax matters adjustments for the year ended December 31, 2022 primarily consisted of (i) a benefit of $45 million within other income (expense), net, related to the reversal of prior year accrued interest associated with the effective settlement of the United States federal income tax audit for years 2014 through 2018 and (ii) a net expense of $9 million within income taxes, primarily consisting of the following:

a.a benefit of $162 million due to the effective settlement of the United States federal income tax audit for years 2014 through 2018, b.a benefit of $71 million related to the reversal of deferred income tax on undistributed earnings of foreign subsidiaries because our revised capital plan determined that certain cash outside the United States would no longer need to be repatriated during the period previously contemplated (also see our response to comment 9. below), and c.expenses of $182 million related to intra-entity sales associated with the 2018 transfer of certain intellectual properties between tax jurisdictions. In 2018 we adopted Accounting Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (now paragraph 740-10-25-20(i) of Accounting Standards Codification (“ASC”) 740, Income Taxes), which requires purchasers of intra-entity assets to record a deferred tax asset if the tax basis of the asset exceeds the book basis and sellers of intra-entity assets to record the tax expense related to the sale in current tax expense. We established a $1.5 billion deferred tax asset in 2018 associated with the above-mentioned transfer. The benefit of the deferred tax asset was included as an unfavorable adjustment in the Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures section of Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018. Accordingly, the $182 million realization of the deferred tax asset was added back to our calculation of adjusted net earnings in our Form 10-K.

We advise the Staff that in future filings and in our earnings press releases furnished pursuant to Item 2.02 of Form 8-K, we will provide additional explanation of material tax matters adjustments.

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You recognized a $216 million goodwill impairment charge, or 7.6% of fiscal year 2022 operating income, for your Spine reporting unit, resulting in remaining goodwill of $1,002 million. You state the impairment charge was primarily due to slower than anticipated recovery of surgery volumes as you emerge from the pandemic, competitive pressures, and rising interest rates.

Rest of the question

The analysis of Orthopaedics and Spine net sales on page 14 describes unit volume increases in both fiscal years 2022 and 2021 for most and all Orthopaedics and Spine products, respectively. Finally, we note that net sales for Spine was $1,146M for fiscal year 2022; $1,167 for fiscal year 2021; $1,047 for fiscal year 2020; and $1,157 for fiscal year 2019. As such, there is a concern it may not be clear to investors what specific facts and circumstances occurred in your Spine reporting unit subsequent to your 2021 goodwill impairment assessment in which you had concluded that the reporting unit’s fair value substantially exceeded the respective recorded value. Please expand your disclosures to provide Spine reporting unit specifics of the facts and circumstances that led to the quantitative assessment and material impairment charge. In this regard, we also did not note any disclosures in your interim reports regarding a material uncertainty with Spine’s goodwill. Please also address the following: • A discussion of the degree of uncertainty associated with all of the key assumptions in the discounted cash flow analysis along with the potential impact changes in the key assumptions would have on your impairment analysis. For example, you state that a 1% increase in the discount rate would result in an additional impairment charge but do not mention assumptions for future revenue growth, operating margin, and the weighted average cost of capital. • A discussion of the potential events and/or changes in circumstances that could reasonably be expected to occur and negatively affect the key assumptions and result in a material impairment charge. Refer to Item 303(b)(3) of Regulation S-K and Section 501.14 of the Financial Reporting Codification for guidance.

We respectfully acknowledge the Staff’s comment and advise the Staff that in accordance with ASC 350, Intangibles—Goodwill and Other, we evaluated on an interim basis during 2022 whether the occurrence of an event or a change in circumstances would more likely than not reduce the fair value of one of our reporting units below its respective carrying amount.

Rest of the answer

Consistent with ASC 350-20-35-3C, we considered—among other factors—financial performance, specific events, macroeconomic conditions, broader industry and market considerations, cost factors and the trading price performance of the Company’s common stock.

During 2022, revenue, gross profit and operating income margin for the Spine reporting unit (“Spine”) fell short of internal expectations and had declined since the prior year, due in part to slower recovery of surgery volumes and rising supply chain costs. Given that the implied fair value of Spine exceeded its carrying amount by 51% in our 2021 annual goodwill impairment test, we did not believe these operating factors indicated it was more likely than not that Spine’s fair value was below its respective carrying amount. Additionally, during the third quarter of 2022 we elected to shift resources from the development of a surgery application that leveraged foundational imaging technologies acquired in the Mobius Imaging and Cardan Robotics (“Mobius”) acquisition in favor of a new spine surgery application for our Mako robot. We considered this event to be a positive indicator, given the Mako robot’s existing customer base and our expectation that its spine application would reach commercialization earlier than the Mobius application. We further noted that macroeconomic conditions remained uncertain, with inflation and interest rate hikes beginning to slow after acute increases during the first half of 2022. Moreover, while the trading price of the Company’s common stock had declined from 2021 and early 2022, the declines were not Company-specific as both broader market indices and our peer companies’ trading prices had also declined at similar rates over the same period. We then considered external evidence in the form of analyst price targets. Specifically, at September 30, 2022, when the Company’s stock price closed at $202.54, the consensus price target for the Company’s common stock among 25 analysts was $284.24, with the high price target being $311.00 and the low price target being $190.00. This evidence was an indication that analysts expected the future operating results of the Company, including Spine, to improve and elevate the then-current stock price.

As noted in ASC 350-20-35-3G, none of the events and factors listed in ASC 350-20-35-3C are individually determinative and are not intended to represent standalone events or circumstances that necessarily require a company to perform a goodwill impairment test. Our consideration of all of the factors listed in ASC 350-20-35-3C with respect to Spine during 2022 did not lead us to a conclusion that it was more likely than not that the fair value of Spine had been reduced below its carrying amount. Accordingly, no interim goodwill impairment tests were necessary.

ASC 350-20-35-3B provides entities with the unconditional option to bypass a qualitative assessment of goodwill for any reporting unit in any period and proceed directly to the first step of the goodwill impairment test. Given recent central bank-led interest rate hikes and the overall macroeconomic environment, we elected to perform a quantitative impairment test for Spine at our annual testing date of October 31, 2022. The fair value of Spine was determined using a discounted cash flow analysis, for which significant inputs included assumptions for future revenue growth, operating margin and the weighted average cost of capital (i.e., the discount rate).

We advise the Staff that in future filings beginning with the Form 10-Q for the quarter ending March 31, 2023, we will update our disclosure of the 2022 annual impairment assessment of Spine to include further discussion of the degree of uncertainty associated with each of the aforementioned key assumptions used in the discounted cash flow analysis, as well as the potential impact of changes in such assumptions. Additionally, we will also discuss potential events and/or changes in circumstances that could be reasonably expected to occur and negatively affect such assumptions and result in a material impairment charge. Our future disclosure is as follows:

In the fourth quarter of 2022 we determined that our Spine reporting unit’s carrying value was in excess of its estimated fair value and recognized an impairment charge of $216. The fair value of the Spine reporting unit was determined using a discounted cash flow analysis, which is a form of the income approach. Significant inputs to the analysis included assumptions for future revenue growth, operating margin and the rate used to discount the estimated future cash flows to their present value, based on the reporting unit’s estimated weighted average cost of capital. The impairment charge for the Spine reporting unit was significantly affected by the discount rate, which was impacted by central banks raising interest rates during 2022 and increased risk due to macroeconomic conditions. Our assumptions for revenue growth and operating margin also considered the pace of recovery of surgery volumes as we emerge from the COVID-19 pandemic, rising costs and our competitive environment. The assumptions used in the discounted cash flow analysis are subject to inherent uncertainties and subjectivity. The use of different assumptions, estimates or judgments with respect to the estimation of future cash flows and the determination of the discount rate used to reduce such estimated future cash flows to their net present value could materially change any related impairment charge. We believe our estimates are appropriate based upon current and future market conditions and the best information available at the impairment assessment date. However, future impairment charges could be required if we do not achieve our cash flow, revenue and profitability projections or if there is an increase in the weighted average cost of capital. Changes in our estimates of the discount rate, long-term revenue growth and long-term operating margin would result in additional goodwill impairment charges as follows:

Change in selected assumption Amount

100 bps increase in discount rate $ 220

100 bps decrease in long-term revenue growth 130

100 bps decrease in long-term operating margin 40

Future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill and indefinite-lived intangible assets, including discount rates and cash flow projections, could result in significantly different estimates of the fair values. A significant reduction in the estimated fair values could result in impairment charges that could materially affect our results of operations.

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We note that you have recognized restructuring-related and other charges of $349 million for fiscal year 2022, $386 million for fiscal year 2021, and $458 million for fiscal year 2020, representing 12.3%, 14.9% and 20.6% of operating income, respectively.

Rest of the question

Please tell us why you have not provided your accounting policy for recognizing restructuring charges and the disclosures required by ASC 420-10-50-1 and also SAB Topic 5:P.4 in your footnote and MD&A disclosures.

We respectfully acknowledge the Staff’s comment. These structural optimization and other special charges do not meet the definition of restructuring activities in ASC 420, Exit or Disposal Cost Obligations, as the programs to which these costs relate did not materially change the scope of the business undertaken by the Company or the manner in which the Company’s business is conducted. As discussed in our response to comment 5. above, we believe that these charges are neither indicative of nor related to our operations, revenue-generating activities or ongoing business.

Rest of the answer

The accounting for such charges was subject to other GAAP, including, but not limited to, ASC 330, Inventory, ASC 360, Property, Plant and Equipment and ASC 712, Compensation – Nonretirement Postretirement Benefits.

Further, restructuring-related and other charges disclosed in Item 7 include certain long-lived and intangible asset write-offs and impairments associated with structural optimization activities and are covered by our accounting policies titled Goodwill and Other Intangible Assets and Goodwill, Intangibles and Long-Lived Asset Impairment Tests. Impairment charges and write-offs included in restructuring-related and other charges were $96 million, $203 million, and $184 million for 2022, 2021 and 2020. To the extent they are material, impairment charges are disclosed in Note 8 (Goodwill and Other Intangible Assets) and Note 15 (Asset Impairments) to our consolidated financial statements included in our Form 10-K.

Per ASC 235, Notes to Financial Statements, disclosure of accounting policies shall include principles that materially affect the determination of financial position, cash flows, or results of operations and shall encompass those accounting principles and methods that involve a selection from existing acceptable alternatives, principles and methods peculiar to the industry even if such principles and methods are predominately followed in the industry and unusual or innovative applications of GAAP. The remaining structural optimization and other special charges and our accounting policy for recognizing such charges are not complex or judgmental, nor do they represent an unusual or innovative application of GAAP. Further, the remaining other charges were $253 million, $183 million and $274 million for 2022, 2021 and 2020. In consideration of the guidance in ASC 235-10-50-3 and the facts and circumstances discussed above, we do not believe disclosure of a separate accounting policy or footnote is necessary. Additionally, as noted in our response to comment 5., the term “restructuring-related and other charges” will be revised to “structural optimization and other special charges” in future filings.

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Please expand your disclosures to explain why you reversed a portion of your deferred tax liabilities for undistributed earnings during fiscal year 2022, providing the specific facts and circumstances that led you to conclude that those earnings are now indefinitely reinvested; and to include the aggregate amount of undistributed earnings from your foreign subsidiaries that you have concluded are indefinitely

Rest of the question

reinvested in accordance with ASC 740-30-50-2.b.

We respectfully acknowledge the Staff’s comment. In the three months ended June 30, 2022, it was determined that, based on our revised capital plan, certain cash outside the United States would no longer need to be repatriated during the period previously contemplated. As a result, deferred taxes of $71 million that were recorded on the associated earnings were reversed.

We advise the Staff that in future filings, we will disclose the aggregate amount of undistributed earnings from our foreign subsidiaries that we have concluded are indefinitely reinvested, which totaled $10.6 billion at

Rest of the answer

December 31, 2022.

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Please revise the title of the measure you refer to as free cash flow, as the measure is not calculated in the typical manner. Refer to Question 102.07 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations for guidance.

Rest of the question

Also provide an explanation to investors why management believes that excluding recall payments provides useful information regarding your liquidity and how management uses this liquidity measure. Refer to Items 10(e)(1)(i)(c) and 10(e)(1)(i)(d) of Regulation S-K for guidance.

We respectfully acknowledge the Staff’s comment. We have disclosed in our previous filings the voluntary recalls of our Rejuvenate and ABG II Modular-Neck hip stems in June 2012 as well as certain versions of our LFIT Anatomic CoCr V40 Femoral Heads in August 2016 and May 2018. We have further disclosed that, in connection with these recalls, we have been party to various product liability lawsuits. The final outcomes of these lawsuits are dependent on many variables and are difficult to predict. Furthermore, we no longer market or sell the associated products.

Rest of the answer

Because our calculation of free cash flow is used as one measure of performance against target metrics in our management bonus plan, we have excluded recall-related payments because the payments are related to items that have not been a part of our product portfolio for several years and are not indicative of our current operations. This measure is intended to assist investors and users of the financial statements in understanding cash utilization related to our current operations and in identifying trends that would otherwise be masked or distorted by the payments. The timing of such payments is difficult to forecast and could be of a magnitude that has a substantial impact on our reported results for a given period.

Our disclosure of free cash flow includes a reconciliation that begins with net cash provided by operating activities, which is the most directly comparable GAAP measure. We periodically assess the calculation of our non-GAAP measures and will make appropriate disclosures if any changes are made to our calculation of free cash flow. In our proxy statement filed with the Commission on March 28, 2023 and in future filings, the title of the measure will be revised to “free cash flow excluding recall payments” to reflect that it is not calculated in the typical manner of cash flows provided by or used in operating activities, less net capital expenditures. Additionally, we will revise our discussion of the use of this metric to explain to investors and users of the financial statements why management believes that excluding recall payments provides useful information as follows:

To measure free cash flow excluding recall payments, we adjust cash provided by operating activities by the amount of purchases of property, plant and equipment and proceeds from long-lived asset disposals and remove the impact of recall payments. Among other metrics, free cash flow excluding recall payments is used to assess operational performance and in our management bonus plan. As recall payments are not reflective of our current product portfolio or ongoing operations, their exclusion in measuring free cash flow excluding recall payments allows for meaningful period-over-period comparisons of our ongoing business and for identifying operational trends. Free cash flow is a measure of liquidity; however, we utilize free cash flow excluding recall payments as a measure of performance to evaluate our executives, as disclosed in the Compensation Discussion and Analysis section of our 2023 proxy statement. It should be considered in addition to, rather than as a substitute for, net income as a measure of our performance. It should not be considered as a substitute for net cash provided by operating activities as a measure of our liquidity.

* * *

In connection with our response to the Staff’s comments, we acknowledge that the Company and its management are responsible for the accuracy and adequacy of our disclosures, notwithstanding any review, comments, action or absence of action by the Staff.

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Your response to comment 7 indicates that given recent central bank-led interest rate hikes and the overall macroeconomic environment, you elected to perform a quantitative impairment test for Spine at your annual testing date of October 31, 2022. Please tell us why these two factors did not result in you performing quantitative assessments for any of your other reporting units as of October 31, 2022.

Rest of the question

Address the need to expand your disclosures to address this apparent inconsistency.

We respectfully acknowledge the Staff’s comment. Our 2021 annual goodwill impairment tests were performed using the optional qualitative assessment available under ASC 350-20-35-3A. While not required under the authoritative guidance, we also elected to obtain a corroborative quantitative analysis to support our qualitative assertions regarding the fair values of our reporting units.

Rest of the answer

Accordingly, we engaged a third-party valuation specialist to perform the corroborative quantitative analysis, for which the procedures included estimating the fair value of each of our reporting units under the market approach and then reconciling the aggregate of their fair values to the Company’s overall market capitalization. The valuation technique utilized by the specialist was the guideline public company method, which is a commonly used form of the market approach that estimates the value of a business using trading multiples derived from a peer set of similar companies. The corroborative quantitative analysis indicated that, for all of our other reporting units, the excess of implied fair value over carrying amount (“cushion”) was substantially greater than Spine’s cushion.

In our 2022 annual goodwill impairment tests, our evaluation of whether it was more likely than not that the fair values of our reporting units other than Spine had been reduced below their carrying amounts was performed in accordance with ASC 350-20-35-3. Our considerations included the results of the 2021 annual goodwill impairment tests, as well as assessments of those reporting units’ financial performance, broader industry and market considerations, cost factors, the trading price performance of the Company’s common stock, the impact of central bank-led interest rate hikes and the overall macroeconomic environment. Our qualitative assessments resulted in a conclusion that it was more likely than not that the fair values for our reporting units other than Spine exceeded their respective carrying amounts at October 31, 2022. Accordingly, we were not required to perform quantitative impairment tests for those reporting units.

We advise the Staff that in future filings beginning with the Form 10-Q for the quarter ended March 31, 2023, we will revise our discussion and analysis of the 2022 annual impairment tests to state that we did not identify any factors that would lead us to believe that any of our other reporting units were at risk of a goodwill impairment. Our revised future disclosure is included in our response to comment 2. below.

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Your draft disclosure provided as part of your response to comment 7 states that the impairment charge was “significantly affected by the discount rate." Please expand this disclosure to clarify the extent to which revenue, gross profit and operating income margin falling short of internal expectations impacted the impairment test and the resulting material impairment charge.

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To the extent that operational issues and trends impacted the impairment test, provide a discussion of the previous expectations, the degree to which your historical results fell short of the 2021 expectations, and the degree to which your historical results impact the 2022 impairment test. Finally, we note that with the 2021 impairment test, the Spine reporting unit had an implied fair value that exceeded the carrying amount by 51%. Please include this information in your draft disclosure to allow investors to better understand the discussion of the factors that materially impacted the fair value of the Spine reporting unit subsequent to the 2021 impairment test.

We respectfully acknowledge the Staff’s comment and advise the Staff that our revised future disclosure to be included in future filings beginning with the Form 10-Q for the quarter ended March 31, 2023 has been expanded as follows:

We test goodwill annually for impairment at October 31 or whenever events or circumstances indicate that goodwill may be impaired. When it is unlikely that goodwill of a reporting unit is impaired, we perform a qualitative assessment that may be periodically supplemented with a corroborative quantitative analysis.

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The supplemental analysis supporting our 2021 annual goodwill impairment tests was performed using a market approach that utilizes trading multiples derived from a peer set of similar companies. The results of that supplemental analysis indicated that, at October 31, 2021, the implied fair values of our reporting units exceeded their respective carrying amounts by approximately 50% for our Spine reporting unit and at least 100% for all other reporting units.

When necessary, we perform a quantitative impairment test and determine the fair value of a reporting unit using an income approach and we corroborate our concluded value under the income approach using a market approach that utilizes trading multiples derived from a peer set of similar companies. The income approach calculates the present value of estimated future cash flows and requires certain assumptions and estimates to be made regarding market conditions and our future profitability. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows used to measure fair value. Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal business plans. We believe such assumptions and estimates are also comparable to those that would be used by other marketplace participants.

During 2022 our Spine reporting unit’s operating performance was affected by several factors, including a slower than anticipated recovery of surgery volumes as we emerged from the COVID-19 pandemic, rising costs and our competitive environment. Consequently, for the year ended December 31, 2022 revenues, gross margin and operating income were 3%, 4% and 33% below budgeted amounts. For the annual impairment test of our Spine reporting unit at October 31, 2022, we performed a quantitative impairment test and recognized a goodwill impairment charge of $216. The fair value of our Spine reporting unit was determined using a discounted cash flow analysis, which is a form of the income approach. Significant inputs to the analysis included assumptions for future revenue growth, operating margin and the rate used to discount the estimated future cash flows to their present value, based on the reporting unit’s estimated weighted average cost of capital. The impairment charge for our Spine reporting unit was also significantly affected by the discount rate, which was impacted by central banks raising interest rates during 2022 and increased risk due to macroeconomic conditions. Our assumptions for revenue growth and operating margin considered the operating factors described above, including surgery volumes, increased costs and our competitive environment.

The assumptions used in the discounted cash flow analysis are subject to inherent uncertainties and subjectivity. The use of different assumptions, estimates or judgments with respect to the estimation of future cash flows and the determination of the discount rate used to reduce such estimated future cash flows to their net present value could materially change any related impairment charge. We believe our estimates are appropriate based upon current and future market conditions and the best information available at the impairment assessment date. However, future impairment charges could be required if we do not achieve our cash flow, revenue and profitability projections or if there is an increase in the weighted average cost of capital. Changes in our estimates of the discount rate, long-term revenue growth and long-term operating margin would result in additional goodwill impairment charges as follows:

Change in selected assumption Amount

100 bps increase in discount rate $ 220

100 bps decrease in long-term revenue growth 130

100 bps decrease in long-term operating margin 40

For our other reporting units we performed qualitative assessments and concluded it was more likely than not that the fair values of those reporting units exceeded their respective carrying amounts. No impairment was identified for those reporting units in 2022 and we did not identify any factors at October 31, 2022 that would lead us to believe that those reporting units are at risk of a goodwill impairment. Future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill and indefinite-lived intangible assets, including discount rates and cash flow projections, could result in significantly different estimates of the fair values. A significant reduction in the estimated fair values could result in impairment charges that could materially affect our results of operations.

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We note your response to comment 8 regarding the costs you have referred to as restructuring activities, specifically your conclusion that these costs are not within the scope of ASC 420 as the costs do not meet the FASB Codification definition of restructuring.

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Please provide us with a more comprehensive explanation of the activities generating these costs for the last three fiscal years and an analysis of the guidance in ASC 420-10-15-3 and 15-4. In this regard, we note that ASC 420-10-15-4 states, in part, “[a]n exit activity includes but is not limited to a restructuring”. Also address liabilities and costs related to exit activities associated with business combinations in accordance with ASC 420-10-15-3.e. In this regard, we note that you also recognized workforce reduction and termination of sales relationships in your other acquisition and integrationrelated charges adjustment.

We respectfully acknowledge the Staff’s comment. For the ease of the Staff’s review of our response, we have reproduced the table in our response to comment 5. in the March 30, 2023 letter that summarizes costs associated with structural optimization and other special charges (amounts in millions):

2022 2021 2020

Certain long-lived and intangible asset write-offs and impairments and associated costs

$ 96 $ 203 $ 184

Closure/transfer of manufacturing and other facilities

83 52 49

Product line exits

80 61 114

Employee retention and workforce reductions

74 39 39

Distributor

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termination

— — 27

Other special charges

16 31 45

Total adjustment to operating income

$ 349 $ 386 $ 458

Charges categorized within certain long-lived and intangible asset write-offs consisted primarily of the write-off of assets that were accounted for under ASC 360 and ASC 350. For example, we disclosed in Note 15 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”) that the suspension of our investment in a new global enterprise resource planning system resulted in corresponding impairment charges. As an additional example, 2021 charges included the write-off of previously acquired in-process research and development assets as a result of our decision to no longer utilize the underlying intellectual property.

Charges categorized within product line exits consisted primarily of the write-off of inventories as a result of our decision to no longer distribute or market certain product lines. Such charges were accounted for under ASC 330. Additionally, to the extent that we wrote off long-lived and intangible assets associated with the exit of a specific product line, such charges were also categorized therein and accounted for under ASC 360 and ASC 350.

Charges categorized within employee retention and workforce reductions consisted primarily of retention bonuses and/or severance pay for affected employees (in response to the Staff’s note that we also included charges for workforce reductions in our acquisition and integration-related charges adjustment, we include such charges in that adjustment when they are related to the integration of recently acquired businesses and occur within the first 24 months post-acquisition). Management decisions regarding workforce reductions are made in response to changes in our business environment as they occur and are therefore difficult to predict. We have a past history, however, of providing the same types of benefits (e.g., outplacement services, lump-sum severance payments calculated using a consistent formula and/or statutorily required minimum payments) to affected employees and therefore have an ongoing benefit arrangement that is accounted for under ASC 712.

In the table above, charges categorized within other special charges for 2020 include $11 million of non-impairment charges related to the aforementioned suspension of our global enterprise resource planning system that is not subject to ASC 420 and $12 million of COVID-19 pandemic-related inventory write-offs accounted for under ASC 330. The remaining charges—categorized within closure/transfer of manufacturing and other facilities, distributor termination and other special charges—aggregate to $99 million, $83 million and $98 million for 2022, 2021 and 2020. These charges are related to actions that, individually and in the aggregate, did not materially change the scope of the business undertaken by the Company or the manner in which the Company’s business is conducted. While they do not qualify as a restructuring as defined by ASC 420, most of these charges were subject to the guidance in ASC 420-10-15-3(b) and (c). In our consideration of the disclosure of an accounting policy as well as the disclosure requirements of ASC 420-10-50-1, we concluded that the determination of these costs was neither complex nor judgmental, and that they were not material to the financial statements taken as a whole. Our assessment of their materiality included both quantitative and qualitative considerations, including that such charges were neither indicative of nor related to our ongoing business strategy. Accordingly, we believe neither inclusion of an accounting policy nor disclosure was necessary in the notes to the consolidated financial statements included in our 2022 Form 10-K.

Although the charges referenced in the preceding paragraph are not material to the periods presented in the consolidated financial statements included in our 2022 Form 10-K, we acknowledge that similar charges may be material in the future. We therefore advise the Staff that in future filings, we will disclose our accounting policy for recognizing restructuring charges and any disclosures required by ASC 420-10-50-1 for material charges.

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Your response to comment 8 indicates that you recognized long-lived asset write-offs and impairment charges of $96 million, $203 million, and $184 million for 2022, 2021, and 2020, respectively. However, your cash flow statement reflects impairment charges of $54 million, $264 million, and $215 million for these same periods and the discussion in Note 15 only addresses impairments of $47 million in 2022 and $105

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million in 2021. Please address the apparent discrepancies related to your 2021 impairment charges and tell us why Note 15 does not discuss the entire $264 million impairment referenced in your cash flows or the asset impairments recognized for 2020. Also, address the need to provide the disclosures required by ASC 820-10-50-2 for your nonrecurring fair value measurements.

We respectfully acknowledge the Staff’s comment. The following table reconciles the 2021 impairment charges disclosed in our 2022 Form 10-K and the amounts included in the response to comment 8. in the March 30, 2023 letter (amounts in millions):

Impairments included in structural optimization and other special charges

2021

$ 203

Impairments associated with product line exits

Other

Asset impairments included in Consolidated Statements of Cash Flows

$ 264

In Note 15 to the consolidated financial statements included in our Form 10-K for the year ended December 31, 2021 (the “2021 Form

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10-K”), we disclosed, “As a result of the outcome of certain regional programs for our trauma products and the national VBP program for hips and knees we recorded charges of $105 to impair certain long-lived and intangible assets in 2021.” Additionally, we disclosed that “aside from the impairments from the VBP programs, we recorded asset impairments of $159 in 2021 consisting primarily of in-process research and development, other intangible assets and property, plant and equipment as a result of COVID-19-related demand impacts on in-process product development and certain other divestiture and restructuring activities.” In Note 15 to the consolidated financial statements included in our 2022 Form 10-K, we did not repeat our disclosure of the 2021 asset impairments of $159 million. We advise the Staff that in the notes to the consolidated financial statements that will be included in our Annual Report on Form 10-K for the year ended December 31, 2023, we will include disclosure of all 2021 impairments as they were disclosed in the 2021 Form 10-K to assist users in understanding the financial results for all periods presented in the consolidated financial statements.

With respect to the asset impairments recognized in 2020 and disclosed in Note 15 to the consolidated financial statements included in our 2020 Form 10-K, we advise the Staff that we did not repeat such disclosures in Note 15 to the consolidated financial statements included in our 2022 Form 10-K, and that our future filings will not require the presentation of a statement of comprehensive income for the year ended December 31, 2020.

We advise the Staff that the nature of the material impairments relate to the abandonment of certain in-process research and development and the exit of certain product lines as further discussed in our response to comment 3. above. The nature of the impairments was disclosed in our 2022 Form 10-K and in our 2021 Form 10-K. For these impairments, the related nonrecurring fair value measurements resulted in these assets having no value, resulting in impairment of the full carrying value of the assets. Based on our judgment and the circumstances of these write-offs, there would be no scenario under which the affected assets could potentially have value if a quantitative analysis of fair value had been performed. As such, we determined the disclosures required by ASC 820-10-50-2 were not necessary.

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We note your response to comment 10, including the draft disclosure you intend to provide when presenting free cash flow excluding recall payments. Please help us understand how you determined that free cash flow excluding recall payments is a performance measure rather than a liquidity measure.

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In this regard, we note the measure is reconciled from cash provided by operating activities; includes cash in the title; the adjustments are cash-based rather than accrual-based; and your non-GAAP conversion rate uses this measure as the numerator.

We respectfully acknowledge the Staff’s comment and agree that free cash flow excluding recall payments is a measure of liquidity. However, our calculation of free cash flow excluding recall payments is used as one measure of performance against target metrics in our management bonus plan. To calculate this metric, we have excluded recall-related payments because the payments are related to items that have not been a part of our product portfolio for several years and are not indicative of our current operations.

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This metric is intended to measure performance of cash utilization versus targets in the management bonus plan rather than liquidity. We advise the Staff that in future filings we will no longer include disclosure of free cash flow excluding recall payments.

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We note your presentation of free cash flow excluding recall payments. Please tell us how you determined that this presentation, which is outside of your compensation discussion and analysis section, is consistent with the requirements in Item 10(e)(1)(ii)(a) of Regulation S-K. See our related comment above.

We respectfully acknowledge the Staff’s comment and advise the Staff that in future filings, we will revise the Reconciliation of the Most Directly Comparable GAAP Measure to Non-GAAP Financial Measure section of our proxy statement to no longer include a presentation of free cash flow excluding recall payments.

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In connection with our response to the Staff’s comments, we acknowledge that the Company and its management are responsible for the accuracy and adequacy of our disclosures, notwithstanding any review, comments, action or absence of action by the Staff. Read in the reply ↗