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STRYKER CORPORATION 2016 Form 10-K Dollar amounts in millions except per share amounts or as otherwise specified. 1 PART I ITEM 1. BUSINESS. Making healthcare better is at the heart of what Stryker does. We do this by collaborating with our customers to develop innovative products and services that ultimately improve patients' lives. Our core values guide our behaviors and actions and are fundamental to how Stryker executes its mission. We are a global leader in medical technology with 2016 net sales of $11,325 and net earnings of $1,647. Our products include implants used in joint replacement and trauma surgeries; surgical equipment and surgical navigation systems; endoscopic and communications systems; patient handling, emergency medical equipment and intensive care disposable products; neurosurgical, neurovascular and spinal devices; as well as other products used in a variety of medical specialties. Stryker was incorporated in Michigan in 1946 as the successor company to a business founded in 1941 by Dr. Homer H. Stryker, a prominent orthopaedic surgeon and the inventor of several orthopaedic products. In the United States most of our products are marketed directly to doctors, hospitals and other healthcare facilities. Our products are sold in over 100 countries through company-owned sales subsidiaries and branches as well as third- party dealers and distributors. As used herein, and except where the context otherwise requires, "Stryker," "we," "us," and "our" refer to Stryker Corporation and its consolidated subsidiaries. Business Segments and Geographic Information We segregate our operations into three reportable business segments: Orthopaedics, MedSurg and Neurotechnology and Spine. Financial information regarding our reportable business segments and certain geographic information is included under "Results of Operations" in Item 7 of this report and Notes 10 and 13 to our Consolidated Financial Statements. Net Sales by Reportable Segment 2016 2015 2014 Orthopaedics $ 4,422 39% $ 4,223 43% $ 4,153 43% MedSurg 4,894 43 3,895 39 3,781 39 Neurotechnology and Spine 2,009 18 1,828 18 1,741 18 Total $ 11,325 100% $ 9,946 100% $ 9,675 100% Orthopaedics Orthopaedics products consist primarily of implants used in hip and knee joint replacements and trauma and extremity surgeries. We bring patients and physicians advanced implant designs and specialized instrumentation that make orthopaedic surgery and recovery simpler, faster and more effective. We support surgeons with the technology and services they need as they develop new surgical techniques. In 2015 we received clearance by the Food and Drug Administration (FDA) for our Mako total knee application. This expands our Mako product offerings of partial knee and total hip applications to provide a comprehensive solution in the robotic arm-assisted reconstructive surgery line. We anticipate the full commercial launch of our Mako total knee application in 2017. Stryker is one of four leading global competitors for joint replacement and trauma products; the other three being Zimmer Biomet Holdings, Inc. (Zimmer), DePuy Synthes (a Johnson & Johnson company) and Smith & Nephew plc (Smith & Nephew). Composition of Orthopaedics Net Sales 2016 2015 2014 Knees $ 1,490 34% $ 1,403 33% $ 1,396 34% Hips 1,283 29 1,263 30 1,291 31 Trauma and Extremities 1,364 31 1,291 31 1,230 30 Other 285 6 266 6 236 5 Total $ 4,422 100% $ 4,223 100% $ 4,153 100% In 2012 we voluntarily recalled our Rejuvenate and ABG II Modular- Neck hip stems and terminated global distribution of these hip products. In November 2014 we entered into a settlement agreement to compensate eligible United States patients who had surgery to replace their Rejuvenate and ABG II Modular-Neck hip stems prior to November 3, 2014, and in December 2016 the settlement program was extended to patients who had revision surgery prior to December 19, 2016. To date we have recorded charges to earnings totaling $1,968 ($2,200 before $232 of insurance recoveries) representing the actuarially determined low end of the range of probable loss to resolve this entire matter globally. Refer to Note 6 to our Consolidated Financial Statements. MedSurg MedSurg products include surgical equipment and surgical navigation systems (Instruments), endoscopic and communications systems (Endoscopy), patient handling, emergency medical equipment and intensive care disposable products (Medical), reprocessed and remanufactured medical devices (Sustainability) and other medical device products used in a variety of medical specialties. Stryker is one of five leading global competitors in Instruments; the other four being Zimmer, Medtronic plc., Johnson & Johnson and ConMed Linvatec, Inc. (a subsidiary of CONMED Corporation). In Endoscopy we compete with Smith & Nephew, ConMed Linvatec, Arthrex, Inc., Karl Storz GmbH & Co., Olympus Optical Co. Ltd. and STERIS plc. and our primary competitors in Medical are Hill-Rom Holdings, Inc., Zoll Medical Corporation and Koninklijke Philips N.V. Composition of Medsurg Net Sales 2016 2015 2014 Instruments $ 1,553 32% $ 1,466 38% $ 1,424 38% Endoscopy 1,470 30 1,390 36 1,382 37 Medical 1,633 33 823 21 766 20 Sustainability 238 5 216 5 209 5 Total $ 4,894 100% $ 3,895 100% $ 3,781 100% In 2016 we completed the acquisition of Sage Products, LLC (Sage) for total consideration of approximately $2,875. Sage develops, manufactures and distributes intensive care disposable products. In 2016 we completed the acquisition of Physio-Control International, Inc. (Physio) for total net consideration of approximately $1,299. Physio develops, manufactures and markets monitors/defibrillators, AEDs and CPR-assist devices, along with data management and support services.