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STRYKER CORPORATION 2016 Form 10-K Dollar amounts in millions except per share amounts or as otherwise specified. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ABOUT STRYKER Stryker Corporation is a global leader in medical technology and offers a diverse array of innovative medical technologies including orthopaedic, medical and surgical, and neurotechnology and spine products to help people lead more active and satisfying lives. Our goal is to achieve sales growth at the high-end of the medical technology (MedTech) industry and maintain our capital allocation strategy that prioritizes: (1) Acquisitions, (2) Dividends and (3) Share repurchases. Overview of 2016 In 2016 we achieved reported sales growth of 13.9%. Excluding the impact of acquisitions, sales grew 6.4% in constant currency, in line with our ongoing goal to grow organic sales at the high-end of MedTech. We reported net earnings of $1,647 in 2016 and achieved 15.1% growth in net earnings per diluted share (1) . Excluding the impact of certain items, we achieved adjusted net earnings of $2,194 and growth of 13.3% in adjusted net earnings per diluted share (1) . We continued our capital allocation strategy by investing $4,332 in acquisitions, paying $568 in dividends to our shareholders and using $13 for share repurchases. In 2016 we completed the acquisitions of Sage Products, LLC (Sage) for total consideration of approximately $2,875, Physio- Control International, Inc. (Physio) for total net consideration of approximately $1,299 and the Synergetics neuro portfolio (Synergetics). Sage develops, manufactures and distributes intensive care disposable products. Physio develops, manufactures and markets monitors/defibrillators, AEDs and CPR-assist devices along with data management and support services. The acquired Synergetics products include the Malis generator, Spetzler Malis disposable forceps and our existing Sonopet tips and RF generator. Refer to Note 5 to our Consolidated Financial Statements for further information. In January 2017 we sold $500 of senior unsecured notes, and in 2016 we sold $3,500 of senior unsecured notes and repaid all $750 of our senior unsecured notes that were due in September 2016. Refer to Note 9 to our Consolidated Financial Statements for further information. RESULTS OF OPERATIONS Percent Net Sales Percentage Change 2016 2015 2014 2016 2015 2014 2016/2015 2015/2014 Net sales $ 11,325 $ 9,946 $ 9,675 100.0% 100.0% 100.0% 13.9% 2.8% Gross profit 7,495 6,602 6,356 66.2 66.4 65.7 13.5 3.9 Research, development and engineering expenses 715 625 614 6.3 6.3 6.3 14.4 1.8 Selling, general and administrative expenses 4,137 3,610 3,547 36.5 36.3 36.7 14.6 1.8 Recall charges, net of insurance proceeds 158 296 761 1.4 3.0 7.9 (46.6) (61.1) Amortization of intangible assets 319 210 188 2.8 2.1 1.9 51.9 11.7 Other income (expense), net (245) (126 ) (86) (2.2) (1.3) (0.9) 94.4 46.5 Income taxes 274 296 645 (7.4) (54.1) Net earnings $ 1,647 $ 1,439 $ 515 14.5% 14.5% 5.3% 14.5% 179.4% Net earnings per diluted share $ 4.35 $ 3.78 $ 1.34 15.1% 182.1% Adjusted net earnings per diluted share (1) $ 5.80 $ 5.12 $ 4.73 13.3% 8.2% (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. Geographic and Segment Net Sales Percentage Change 2016/2015 2015/2014 2016 2015 2014 As Reported Constant Currency As Reported Constant Currency Geographic: United States $ 8,247 $ 7,116 $ 6,558 15.9% 15.9% 8.5% 8.5% International 3,078 2,830 3,117 8.8 10.2 (9.2) 3.7 Total $ 11,325 $ 9,946 $ 9,675 13.9% 14.3% 2.8% 7.0% Segment: Orthopaedics $ 4,422 $ 4,223 $ 4,153 4.7% 5.1% 1.7% 6.7% MedSurg 4,894 3,895 3,781 25.6 26.3 3.0 6.2 Neurotechnology and Spine 2,009 1,828 1,741 9.9 9.8 5.0 9.5 Total $ 11,325 $ 9,946 $ 9,675 13.9% 14.3% 2.8% 7.0%