STRYKER

Stryker 2014 Annual Report

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average interest rate, excluding required fees, for all borrowings was 2.9% at December 31, 2014. At December 31, 2014, the total unamortized debt issuance costs incurred in connection with our outstanding notes were $21. The fair value of long-term debt (including current maturities and excluding the interest rate hedge) at December 31, 2014 and December 31, 2013 was $3,811 and $2,790, respectively. Substantially all of our long-term debt is classified within Level 1 of the fair value hierarchy because the fair value of the debt is estimated based on rates currently offered to us with identical terms and maturities, using quoted active market prices and yields, taking into account the underlying terms of the debt instruments. Interest expense, including required fees incurred on outstanding debt and credit facilities, which is included in other income (expense), totaled $113, $83, and $63 in 2014, 2013 and 2012, respectively. Cash interest paid on debt, including required fees, was $102, $88, and $55 in 2014, 2013 and 2012, respectively. STRYKER CORPORATION 2014 Form 10-K 30 Dollar amounts in millions except per share amounts or as otherwise specified. NOTE 9 - CAPITAL STOCK In December 2013 we declared a quarterly dividend of $0.305 per share, payable January 31, 2014 to shareholders of record at the close of business on December 31, 2013. In February 2014 we declared a quarterly dividend of $0.305 per share, payable April 30, 2014 to shareholders of record at the close of business on March 28, 2014. In April 2014 we declared a quarterly dividend of $0.305 per share, payable July 31, 2014 to shareholders of record at the close of business on June 28, 2014. In July 2014 we declared a quarterly dividend of $0.305 per share, payable October 31, 2014 to shareholders of record at the close of business on September 30, 2013. In December 2014 we declared a quarterly dividend of $0.345 per share, payable January 31, 2015 to shareholders of record at the close of business on December 31, 2014. In December of 2012 and 2011, we announced that our Board of Directors had authorized us to purchase up to $405 and $500, respectively, of our common stock (the 2012 and 2011 Repurchase Programs, respectively). The manner, timing and amount of purchases is determined by management based on an evaluation of market conditions, stock price and other factors and is subject to regulatory considerations. Purchases are to be made from time to time in the open market, in privately negotiated transactions or otherwise. During 2014 we repurchased 1.3 million shares at a cost of $100 under the 2011 Repurchase Program. We had made no repurchases pursuant to the 2012 Repurchase Program at December 31, 2014. Shares repurchased under the share repurchase programs are available for general corporate purposes, including offsetting dilution associated with stock option and other equity-based employee benefit plans. At December 31, 2014, the maximum dollar value of shares that may be purchased under the authorized Repurchase Programs was $583. Shares reserved for future compensation grants of Stryker common stock were 19 million and 23 million at December 31, 2014 and 2013. We have 0.5 million authorized shares of $1 par value preferred stock, none of which is outstanding. Stock Options We have long-term incentive plans from which we grant stock options to certain key employees and non-employee directors at an exercise price not less than the fair market value of the underlying common stock, which is the closing quoted price of our common stock on the day prior to the date of grant. The options are granted for periods of up to 10 years and become exercisable in varying installments. We measure the cost of employee stock options based on the grant- date fair value and recognize that cost using the straight-line method over the period during which a recipient is required to provide services in exchange for the options, typically the vesting period. The weighted-average fair value per share of options granted during 2014, 2013 and 2012, estimated on the date of grant using the Black-Scholes option pricing model, was $15.80, $15.24, and $13.36, respectively. The fair value of options granted was estimated using the following weighted-average assumptions: 2014 2013 2012 Risk-free interest rate 2.1% 1.3% 1.3% Expected dividend yield 1.8% 1.9% 1.5% Expected stock price volatility 20.2% 27.9% 27.6% Expected option life 7.1 years 7.1 years 7.1 years The risk-free interest rate for periods within the expected life of options granted is based on the United States Treasury yield curve in effect at the time of grant. Expected stock price volatility is based on the historical volatility of our stock. The expected option life, representing the period of time that options granted are expected to be outstanding, is based on historical option exercise and employee termination data. A summary of 2014 stock option activity is as follows: Shares (in millions) Weighted Average Exercise Price Weighted- Average Remaining Term (in years) Aggregate Intrinsic Value Outstanding January 1 17.0 $ 55.35 Granted 2.5 81.13 Exercised (3.7) 52.20 Canceled (0.6) 65.23 Outstanding December 31 15.2 $ 59.97 5.6 $ 524.2 Exercisable December 31 8.7 $ 54.34 3.8 $ 349.7 Options expected to vest 6.0 $ 67.17 8.0 $ 163.2 The aggregate intrinsic value, which represents the cumulative difference between the fair market value of the underlying common stock and the option exercise prices, of options exercised during the years ended December 31, 2014, 2013 and 2012 was $113, $97, and $52, respectively. Exercise prices for options outstanding at December 31, 2014 ranged from $38.71 to $81.14. At December 31, 2014, there was $64 of unrecognized compensation cost related to nonvested stock options granted under the long-term incentive plans; that cost is expected to be recognized over the weighted-average period of 1.5 years. Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) We grant RSUs to key employees and non-employee directors and PSUs to certain key employees under our long-term incentive plans. The fair value of RSUs is determined based on the number of shares granted and the closing quoted price of our common stock on the day prior to the date of grant, adjusted for the fact that RSUs do not include anticipated dividends. RSUs generally vest in one-third increments over a three-year period and are settled in stock. PSUs are earned over a three-year performance cycle and vest in March of the year following the end of that performance cycle. The number of PSUs that will ultimately be earned is based on our performance relative to pre-established goals during that three-year performance cycle. The fair value of PSUs is determined based on the closing quoted price of our common stock on the day prior to the date of grant. A summary of 2014 RSU and PSU activity is as follows:

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