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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. STRYKER CORPORATION 2014 Form 10-K 10 Dollar amounts in millions except per share amounts or as otherwise specified. ABOUT STRYKER Stryker is one of the world's leading medical technology companies, with 2014 revenues of $9,675 and net earnings of $515. We offer a diverse array of innovative medical technologies, including reconstructive, medical and surgical, and neurotechnology and spine products to help people lead more active and more satisfying lives. In the United States, most of our products are marketed directly to doctors, hospitals and other healthcare facilities. In general, we maintain separate dedicated sales forces for each of our principal product lines to provide focus and a high level of expertise to each medical specialty served. Internationally our products are sold in over 100 countries through company-owned sales subsidiaries and branches as well as third-party dealers and distributors. Our business is generally not seasonal in nature; however, the number of Orthopaedics implant surgeries is generally lower during the summer months and sales of capital equipment are generally higher in the fourth quarter. At the heart of what we do and believe is making healthcare better. We do this by collaborating with our customers to develop innovative products and services that ultimately improve the lives of our patients. We express this through our mission statement: "Together with our customers, we are driven to make healthcare better." We believe our success in the highly competitive product categories in which we operate depends to a large degree on our ability to develop new products and make improvements to existing products. We are committed to internal innovation to develop products and services that improve outcomes and deliver greater cost savings and efficiencies and to augment our efforts with focused acquisitions. Our success further depends on the ability of our people to execute effectively, every day. Our goal is to drive sales growth at the high-end of the MedTech industry and maintain our capital allocation strategy that prioritizes: 1. Acquisitions 2. Dividends 3. Share repurchases Overview of 2014 In 2014 we achieved sales growth of 7.3% in line with our ongoing goal to grow organic sales at the high-end of the MedTech industry. Excluding the impact of acquisitions, sales grew 5.8% in constant currency. We converted our sales growth into a 5.3% growth in adjusted net earnings per diluted share (See page 12 for a reconciliation of reported net earnings per diluted share to adjusted net earnings per diluted share). We continued our capital allocation strategy by investing $916 in acquisitions, paying $462 in dividends to our shareholders and using $100 for share repurchases. In November 2014 we entered into a Settlement Agreement to compensate eligible United States patients who had "revision surgery" to replace their Rejuvenate Modular-Neck hip stem and/ or ABG II Modular-Neck hip stem. In September 2014 we acquired the assets of Small Bone Innovations, Inc. (SBi) for an aggregate purchase price of approximately $358. SBi products are designed and promoted for upper and lower extremity small bone indications, with a focus on small joint replacement. In July 2014 we established a European regional headquarters in the Netherlands. We believe that this increased presence will strengthen our brand in Europe, support the growth of our global business, provide operational efficiencies and simplify our customers' experience. In April 2014 we acquired Berchtold Holding, AG (Berchtold), a privately-held business with operations in Germany and the United States, for an aggregate purchase price of approximately $184. Berchtold sells surgical tables, equipment booms and surgical lighting systems. In March 2014 we acquired Patient Safety Technologies, Inc. (PST), for an aggregate purchase price of $120. PST conducts its business through its wholly owned subsidiary, SurgiCount Medical, Inc. PST's proprietary Safety-Sponge ® System and SurgiCount 360™ compliance software help prevent retained foreign objects in the operating room. Other business acquisitions in 2014 include the acquisition of Pivot Medical, Inc, which develops and sells innovative products for hip arthroscopy. RESULTS OF OPERATIONS Consolidated results of operations: Years Ended December 31, Percentage Change 2014 2013 2012 2014/2013 2013/2012 Net Sales $9,675 $9,021 $8,657 7.3 4.2 Gross Profit 6,384 6,044 5,876 5.6 2.9 Research, development and engineering expenses 614 536 471 14.6 13.8 Selling, general and administrative expenses 4,336 4,114 3,541 5.4 16.2 Intangibles amortization 188 138 123 36.2 12.2 Other income (expense) (86) (44) (36) 95.5 22.2 Income taxes 645 206 407 213.1 (49.4) Net Earnings $515 $1,006 $1,298 (48.8) (22.5) Diluted Net Earnings per share $1.34 $2.63 $3.39 (49.0) (22.4) Adjusted Net Earnings per share (1) $4.73 $4.49 $4.30 5.3 4.4