STRYKER

2017 FORM 10-K

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STRYKER CORPORATION 2017 FORM 10-K Dollar amounts in millions except per share amounts or as otherwise specified. 10 Percent Net Sales 2017 2016 2015 2017 2016 2015 Reported $ 8,173 $ 7,495 $ 6,602 65.7% 66.2% 66.4% Inventory stepped up to fair value 22 36 7 0.2 0.3 0.1 Restructuring- related and other charges 57 15 7 0.4 0.1 — Adjusted $ 8,252 $ 7,546 $ 6,616 66.3% 66.6% 66.5% Research, Development and Engineering Expenses Research, development and engineering expenses represented 6.3% of net sales in 2017, 2016 and 2015. Projects to develop new products, investments in new technologies and recent acquisitions contributed to the spending levels, reflecting our continued commitment to innovation. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of net sales in 2017 increased to 36.6% from 36.5% in 2016. Excluding the impact of certain items in the table below, expenses as a percentage of net sales were 34.8% in 2017 and 2016. This reflects favorable leverage from higher sales volumes and continued focus on operating expense improvement initiatives, including leverage from our recent acquisitions, partially offset by the unfavorable impact of foreign currency exchange. 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 noted below, selling, general and administrative expenses as a percentage of sales decreased in 2016 due to favorable leverage from the continued focus on operating expense improvement initiatives, cost containment efforts and business mix, including leverage from our recent acquisitions. Percent Net Sales 2017 2016 2015 2017 2016 2015 Reported $ 4,552 $ 4,137 $ 3,610 36.6% 36.5% 36.3% Other acquisition and integration- related (42) (95) (28) (0.4) (0.8) (0.3) Restructuring- related and other charges (137) (110) (125) (1.1) (1.0) (1.2) Regulatory and legal matters (39) 12 53 (0.3) 0.1 0.5 Adjusted $ 4,334 $ 3,944 $ 3,510 34.8% 34.8% 35.3% Recall Charges, Net of Insurance Proceeds Recall charges, net of insurance proceeds, were $173, $158 and $296 in 2017, 2016 and 2015. 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 $371, $319 and $210 in 2017, 2016 and 2015. The increase in 2017 and 2016 was due to acquisitions. Refer to Note 7 to our Consolidated Financial Statements for further information. Other Income (Expense), Net Other income (expense), net was ($227), ($245) and ($126) in 2017, 2016 and 2015. The decrease in 2017 was primarily driven by higher interest income and decreased foreign currency transaction losses, partially offset by higher interest expense due to higher debt levels as a result of our January 2017 debt offering. Refer to Note 9 to our Consolidated Financial Statements for further information. Income Taxes The effective income tax rate on earnings was 50.6%, 14.3% and 17.1% for 2017, 2016 and 2015. The effective income tax rate for 2017 includes the impact of complying with the Tax Cuts and Jobs Act of 2017 signed into law in December 2017, partially offset by the benefits from the adoption of ASU 2016-09 Compensation- Stock Compensation: Improvements to Employee Share-Based Payment Accounting on January 1, 2017 and continued lower effective income tax rates as a result of the European regional headquarters. The establishment of the European regional headquarters contributed to the lower effective income tax rates in 2016 and 2015. Net Earnings Net earnings in 2017 decreased to $1,020 or $2.68 per diluted share from $1,647 or $4.35 per diluted share in 2016 and $1,439 or $3.78 per diluted share in 2015. The impact of foreign currency exchange rates reduced net earnings per diluted share by approximately $0.07, $0.11 and $0.26 in 2017, 2016 and 2015. Percent Net Sales 2017 2016 2015 2017 2016 2015 Reported $ 1,020 $ 1,647 $ 1,439 8.2% 14.5% 14.5% Inventory stepped up to fair value 20 23 4 0.2 0.2 — Other acquisition and integration- related 31 77 20 0.2 0.7 0.2 Amortization of intangible assets 250 221 147 2.0 2.0 1.5 Restructuring- related and other charges 155 98 97 1.2 0.9 1.0 Rejuvenate and other recall matters 131 127 210 1.1 1.1 2.1 Regulatory and legal matters 25 (7) (46) 0.2 (0.1) (0.5) Tax matters 833 8 78 6.7 0.1 0.8 Adjusted $ 2,465 $ 2,194 $ 1,949 19.8% 19.4% 19.6% 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; 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 and prior year results at the same foreign currency exchange rate. To measure percentage organic sales growth, we remove the impact of changes in foreign currency exchange rates and acquisitions that

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