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MedSurg Net Sales MedSurg net sales in 2014 increased 10.8%, primarily due to a 9.5% increase in unit volume and changes in product mix and 3.0% due to acquisitions, and were negatively impacted by 0.8% due to changes in price and 0.9% due to the unfavorable impact of foreign currency exchange rates. In constant currency, net sales in 2014 increased 11.7%, led by higher shipments of instruments products and medical products and the impact of acquisitions; these higher shipments were partially offset by lower shipments of sustainability products. Net sales in 2013 increased 4.6%, primarily due to a 3.8% increase in unit volume and changes in product mix and were negatively impacted by 0.9% due to the unfavorable impact of foreign currency exchange rates. The effect of pricing was not significant. In constant currency, net sales in 2013 increased 5.5%, led by higher shipments of endoscopy products. Neurotechnology and Spine Net Sales Neurotechnology and Spine net sales in 2014 increased 5.0%, primarily due to an 8.1% increase in unit volume and changes in product mix and 0.5% due to acquisitions, and were negatively impacted by 2.4% due to changes in price and 1.2% due to the unfavorable impact of foreign currency exchange rates. In constant currency net sales in 2014 increased 6.2% led by higher shipments of neurotechnology products. Net sales in 2013 increased 5.6%, primarily due to an 8.8% increase in unit volume and changes in product mix and 0.9% due to acquisitions, and were negatively impacted by 2.0% due to changes in price and 2.1% due to the unfavorable impact of foreign currency exchange rates. Excluding the impact of acquisitions, net sales in 2013 increased 6.8% in constant currency, due to higher shipments of neurotechnology products. Consolidated Cost of Sales Cost of sales increased 10.5% in 2014 to 34.0% of sales compared to 33.0% in 2013. Cost of sales as a percentage of sales was adversely impacted by changes in selling prices for our products, unfavorable product mix and by the unfavorable effect of foreign currency exchange rates. Our product mix was unfavorable due to the impact of recent acquisitions and strong MedSurg sales. Cost of sales in 2014 and 2013 includes an additional cost of $27 and $28, respectively, related to inventory that was "stepped up" to fair value following acquisitions; $1 and $11, respectively in restructuring related charges; and $7 in 2013 for disgorgement of profits associated with a legal settlement. Cost of sales increased 7.0% in 2013 to 33.0% of sales compared to 32.1% in 2012. Cost of sales in 2012 includes an additional cost of $18 related to inventory that was "stepped up" to fair value following acquisitions and $5 in restructuring related costs. Research, Development and Engineering Expenses Research, development and engineering expenses represented 6.3% of sales in 2014 compared to 5.9% in 2013 and 5.4% in 2012. The increased spending levels in 2014 and 2013 were driven by the impact of acquisitions and by the timing of projects and our continued investment in new technologies. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 5.4% in 2014 and represented 44.9% of sales compared to 45.6% in 2013 and 40.9% in 2012, driven by strong sales growth and cost improvement efforts. These expenses included $75 and $70 in 2014 and 2013, respectively, of acquisition and integration related charges; $116 and $52, respectively, of restructuring related charges, $761 and $622, respectively, related to the Rejuvenate, ABG II and Neptune recalls; $62 in 2013 related to regulatory and legal matters; $25 in 2013 representing a donation to an educational institution. Excluding the impact of these charges, selling, general and administrative expenses were 35.0% of sales in 2014 compared to 36.4% in 2013. Other Income (Expense) Other expense increased by $42 in 2014 after increasing by $8 in 2013. Net expense in 2014 increased primarily due to higher interest expense from the $1,000 senior unsecured notes issued in May 2014, partially offset by lower interest expense due to favorable tax audit resolutions. Net expense in 2013 increased due to lower income from interest and marketable securities, offset by hedge gains and lower interest expense. The decrease in interest expense was due to favorable tax audit resolutions in multiple jurisdictions, partially offset by higher interest expense on borrowings. Income Taxes Our effective income tax rate on earnings was 55.6%, 17.0% and 23.9% in 2014, 2013 and 2012, respectively. The effective income tax rate for 2014 includes the tax impacts of the establishment of a European regional headquarters and a cash repatriation to the United States planned for 2015. The effective income tax rate for 2013 includes income tax benefits relating to favorable audit resolutions in multiple jurisdictions. The effective income tax rate for 2012 includes the net impact of effective settlement of all tax matters through 2004 relating to two German subsidiaries, and adjustment of the estimate of foreign tax credits to the amount shown on the tax return as filed. The American Taxpayer Relief Act of 2012 (the Act) was signed on January 2, 2013. The Act provided numerous tax provisions for corporations including an extension of the research tax credit and an extension of certain provisions for companies with significant international operations. The provisions originally expired at December 31, 2011 but were retroactively extended through December 31, 2013. In 2013 we recorded tax benefits of $13 related to the 2012 research tax credit and other provision of the Act. Net Earnings Net earnings in 2014 decreased 48.8% to $515 compared to 2013. Basic net earnings per share in 2014 decreased 48.9% to $1.36, and diluted net earnings per share in 2014 decreased 49.0% to $1.34 compared to 2013, respectively. Foreign currency had a negative impact on our diluted net earnings per share in 2014 of approximately $0.14. Net earnings in 2013 decreased 22.5% to $1,006 compared to 2012. Basic net earnings per share in 2013 decreased 22.0% to $2.66, and diluted net earnings per share in 2013 decreased 22.4% to $2.63 compared to 2012, respectively. Reported net earnings in 2014 includes charges for the Rejuvenate, ABG II and Neptune recalls, acquisition and integration related charges, and additional cost of sales for inventory sold that was "stepped up" to fair value related to acquisitions, restructuring related charges and benefits associated with the resolution of certain tax matters. Excluding the impact of these items, adjusted net earnings (1) in 2014 increased 5.6% to $1,810 after increasing 4.0% in 2013. Adjusted diluted net earnings per share (1) in 2014 increased 5.3% to $4.73 after increasing 4.4% in 2013. STRYKER CORPORATION 2014 Form 10-K 12 Dollar amounts in millions except per share amounts or as otherwise specified. (1) 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; cost of sales excluding specified items; adjusted selling, general and administrative expenses; adjusted amortization of intangible assets; adjusted operating income; adjusted effective income tax rate; adjusted net earnings;