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STRYKER CORPORATION 2016 Form 10-K Dollar amounts in millions except per share amounts or as otherwise specified. 13 FINANCIAL CONDITION AND LIQUIDITY 2016 2015 2014 Net cash provided by operations activities $ 1,812 $ 899 $ 1,782 Net cash (used in) provided by investing activities (4,191) 1,956 (1,878 ) Net cash provided (used in) financing activities 2,361 (1,141) 629 Effect of exchange rate changes (45) (130) (77) Change in cash and cash equivalents $ (63) $ 1,584 $ 456 We believe our financial condition continues to be of high quality, as evidenced by our ability to generate substantial cash from operations and ready access to capital markets at competitive rates. Operating cash flow provides the primary source of cash to fund operating needs and capital expenditures. Excess operating cash is used first to fund acquisitions to complement our portfolio of businesses. Other discretionary uses include dividends and share repurchases. As necessary, we supplement operating cash flow with debt to fund our activities. Our overall cash position reflects our strong business results and a global cash management strategy that takes into account liquidity management, economic factors and tax considerations. Operating Activities Cash provided by operations was $1,812, $899, and $1,782 in 2016, 2015 and 2014. The increase in cash from operations in 2016 was primarily due to lower Rejuvenate and ABG II recall-related payments compared to 2015, which was partially offset by higher levels of inventory in 2016. The net of accounts receivable, inventory and accounts payable resulted in the consumption of $507, $231, and $249 of cash in 2016, 2015 and 2014. Investing Activities Cash (used in) provided by investing activities was ($4,191), $1,956 and ($1,878) in 2016, 2015 and in 2014. Acquisitions: Acquisitions resulted in cash consumption of $4,332, $153 and $916 in 2016, 2015 and 2014. In 2016 we acquired Sage, Physio, Synergetics and certain other businesses and related assets. In 2015 the primary acquisition was CHG. In 2014 the primary acquisitions were Patient Safety Technologies, Inc., Pivot Medical Inc., Berchtold Holding, AG and Small Bone Innovations, Inc. Purchases of Property, Plant and Equipment: Purchases of property, plant and equipment were $490, $270 and $233 in 2016, 2015 and 2014. Capital expenditures in 2016 were primarily due to capital expenditures associated with our global ERP system and the construction of a dedicated additive manufacturing facility. Marketable Securities, Net: Net cash provided by (used in) the sale of marketable securities was $634, $2,379, and ($729) in 2016, 2015 and 2014. Cash provided by the sale of marketable securities in 2016 was used to repay all of our senior unsecured notes that were due in September 2016. Cash provided by sales of marketable securities in 2015 was primarily due to the sale of a portion of our marketable securities in 2015 used to make recall-related payments. Financing Activities Dividends and Share Repurchases: Dividends paid per common share increased 10.1% to $1.52 per share in 2016 compared to $1.38 per share in 2015, an increase of 13.1% from $1.22 in 2014. 2016 2015 2014 Dividends paid per common share $ 1.52 $ 1.38 $ 1.22 Total dividends paid to common shareholders $ 568 $ 521 $ 462 Total amount paid to repurchase common stock $ 13 $ 700 $ 100 Shares of repurchased common stock (in millions) 0.1 7.4 1.3 Borrowings and Repayments of Debt: We maintain debt levels that we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including acquisitions and share repurchase activities) and overall cost of capital. Net proceeds from borrowings were $2,912, $48 and $1,159 in 2016, 2015 and 2014. In 2016 the proceeds were primarily from the issuance of $3,500 of senior unsecured notes in March 2016 partially offset by repayment of $750 of our senior unsecured notes due in September 2016. In 2015 the proceeds were primarily from the public offerings of notes offset by the payment of certain notes due and paid in January 2015. Refer to Note 9 to our Consolidated Financial Statements for further information. Liquidity Cash, cash equivalents and marketable securities were $3,384 and $4,079, and our current assets exceeded current liabilities by $4,713 and $4,441 on December 31, 2016 and 2015. We anticipate being able to support our short-term liquidity and operating needs, including acquisitions and recall-related payments, from a variety of sources, including cash from operations, commercial paper and existing credit lines. We have raised funds in the capital markets and may continue to do so from time to time. As a result of the issuance of senior unsecured notes in March 2016, Moody's downgraded our unsecured note ratings to Baa1 from A3, and Standard & Poor's downgraded our corporate credit and long-term issue-level rating to A from A+ and our short-term rating to A-1 from A-1+. Nevertheless, we continue to have strong investment-grade short-term and long-term debt ratings that we believe should enable us to refinance our debt as needed. We have existing credit facilities should additional funds be required. In August 2016 we increased the borrowing capacity available under our main credit facility by $250 to a maximum of $1,500. In September 2016 we increased the amount of commercial paper issuable under the commercial paper program by $250 to a maximum of $1,500. On December 31, 2016 approximately 84% of our consolidated cash, cash equivalents and marketable securities were held in locations outside the United States compared to 46% on December 31, 2015. The majority of our cash held in locations outside the United States is considered to be indefinitely reinvested. We intend to use this cash to expand operations organically and through acquisitions. In January 2017 we sold $500 of senior unsecured notes with an interest rate of 1.800% due on January 15, 2019. Guarantees and Other Off-Balance Sheet Arrangements We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, of a magnitude that we believe could have a material impact on our financial condition or liquidity. CONTRACTUAL OBLIGATIONS AND FORWARD-LOOKING CASH REQUIREMENTS As further described in Note 6 to our Consolidated Financial Statements, in 2016 we recorded additional charges to earnings totaling $144 related to the Rejuvenate and ABG II recalls. Based on the information received, the actuarially determined range of probable loss to resolve this matter was estimated to be approximately $1,968 to $2,224 ($2,200 to $2,456 before $232 of third-party insurance recoveries). The final outcome of this matter is dependent on many variables that are difficult to predict. The ultimate cost to entirely resolve this matter may be materially different than the amount of the current estimate and could have a material adverse effect on our financial position, results of