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STRYKER CORPORATION 2016 Form 10-K Dollar amounts in millions except per share amounts or as otherwise specified. 11 Research, Development and Engineering Expenses Research, development and engineering expenses represented 6.3% of net sales in each of 2016, 2015 and 2014. Recent acquisitions, and spending on projects and investments in new technologies contributed to the spending levels reflecting our continued investment in internal innovation. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of net sales in 2016 increased to 36.5% from 36.3% in 2015. Excluding the impact of certain items in the table below, expenses as a percentage of net sales decreased to 34.8% in 2016 from 35.3% in 2015. This improvement reflects favorable leverage from the continued focus on operating expense improvement initiatives, cost containment efforts and business mix, including leverage from our recent acquisitions. Selling, general and administrative expenses as a percentage of net sales in 2015 decreased to 36.3% from 36.7% in 2014. Excluding the impact of certain items noted below, selling, general and administrative expenses increased in 2015 due to increased expenses related to our European regional headquarters, higher compensation costs, due in part to sales performance-related commissions, partially offset by disciplined expense management. Percent Net Sales 2016 2015 2014 2016 2015 2014 Reported $ 4,137 $ 3,610 $ 3,547 36.5% 36.3% 36.7% Other acquisition and integration- related (95) (28) (75) (0.8) (0.3) (0.8) Restructuring- related charges (110) (125) (116) (1.0) (1.2) (1.2) Regulatory and legal matters 12 53 — 0.1 0.5 — Adjusted $ 3,944 $ 3,510 $ 3,356 34.8% 35.3% 34.7% Recall Charges, Net of Insurance Proceeds Recall charges, net of insurance proceeds, were $158, $296 and $761 in 2016, 2015 and 2014. Charges were primarily due to the previously disclosed Rejuvenate and ABGII Modular-Neck hip stems voluntary recalls. Refer to Note 6 to our Consolidated Financial Statements for further information. Amortization of Intangible Assets Amortization of intangible assets was $319, $210 and $188 in 2016, 2015 and 2014. The increases were primarily due to acquisitions. Refer to Note 7 to our Consolidated Financial Statements for further information. Other Income (Expense), Net Other income (expense), net was ($245), ($126) and ($86) in 2016, 2015 and 2014. The increase in 2016 was primarily driven by higher interest expense due to higher debt levels as a result of our March 2016 debt offering. Refer to Note 9 to our Consolidated Financial Statements for further information. Income Taxes The effective income tax rate on earnings was 14.3%, 17.1% and 55.6% for 2016, 2015 and 2014. The effective income tax rate for 2014 includes the tax impacts of the establishment of a European regional headquarters and the cash repatriation that affected 2014 but was executed in 2015. The establishment of the European regional headquarters contributed to the lower effective income tax rates in 2015 and 2016. We adopted ASU 2016-09 Compensation- Stock Compensation: Improvements to Employee Share-Based Payment Accounting on January 1, 2017 which will impact our effective tax rate in 2017. Net Earnings Net earnings in 2016 increased to $1,647 or $4.35 per diluted share from $1,439 or $3.78 per diluted share in 2015 and $515 or $1.34 per diluted share in 2014. The impact of foreign currency exchange rates reduced net earnings per diluted share by approximately $0.11, $0.26 and $0.14 in 2016, 2015 and 2014. Percent Net Sales 2016 2015 2014 2016 2015 2014 Reported $ 1,647 $ 1,439 $ 515 14.5% 14.5% 5.3% Inventory stepped up to fair value 23 4 15 0.2 — 0.2 Other acquisition and integration- related 77 20 50 0.7 0.2 0.5 Amortization of intangible assets 221 147 133 2.0 1.5 1.4 Restructuring- related charges 98 97 78 0.9 1.0 0.8 Rejuvenate and other recall matters 127 210 628 1.1 2.1 6.5 Regulatory and legal matters (7) (46) — (0.1) (0.5) — Tax matters 8 78 391 0.1 0.8 4.0 Adjusted $ 2,194 $ 1,949 $ 1,810 19.4% 19.6% 18.7% 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; and adjusted net earnings per diluted share (Diluted EPS). We believe that these non-GAAP measures provide meaningful information to assist investors and shareholders in understanding our financial results and assessing our prospects for future performance. Management believes percentage sales growth in constant currency and the other adjusted measures described above are important indicators of our operations because they exclude items that may not be indicative of or are unrelated to our core operating results and provide a baseline for analyzing trends in our underlying businesses. Management uses these non-GAAP financial measures for reviewing the operating results of reportable business segments and analyzing potential future business trends in connection with our budget process and bases certain management incentive compensation on these non-GAAP financial measures. To measure percentage sales growth in constant currency, we remove the impact of changes in foreign currency exchange rates that affect the comparability and trend of sales. Percentage sales growth in constant currency is calculated by translating current year results at prior year average foreign currency exchange rates. To measure percentage organic sales growth, we remove the impact of changes in foreign currency exchange rates and acquisitions that affect the comparability and trend of sales. Percentage organic sales growth is calculated by translating current year results at prior year average foreign currency exchange rates excluding the impact of acquisitions. To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect the comparability of operating results and the trend of earnings. These adjustments are irregular in timing, may not be indicative of our past and future performance and are therefore excluded to allow investors to better understand underlying operating trends. The following are