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. 29 Deferred Income Tax Assets and Liabilities Deferred income tax assets: 2017 2016 Inventories $ 480 $ 583 Product-related liabilities 34 115 Other accrued expenses 204 248 State income taxes 46 52 Share-based compensation 46 80 Net operating loss carryforwards 52 74 Other 105 117 Total deferred income tax assets $ 967 $ 1,269 Less valuation allowances (49) (51) Net deferred income tax assets $ 918 $ 1,218 Deferred income tax liabilities: Depreciation and amortization $ (598) $ (871) Undistributed earnings (81) (50) Other (3) (50) Total deferred income tax liabilities $ (682) $ (971) Net deferred income tax assets $ 236 $ 247 Reported as: Noncurrent assets—Other $ 283 $ 302 Noncurrent liabilities—Other liabilities (47) (55) Total $ 236 $ 247 Accrued interest and penalties were $60 and $34 on December 31, 2017 and 2016, which were reported in current and non-current accrued expenses and other liabilities. Net operating loss carryforwards totaling $219 on December 31, 2017 are available to reduce future taxable earnings of certain domestic and foreign subsidiaries. United States loss carryforwards of $106 expire through 2028. International loss carryforwards of $113 began to expire in 2017; however, some have no expiration. Of these carryforwards, $36 are subject to a full valuation allowance. We also have a tax credit carryforward of $43 with $40 being subject to a full valuation allowance. The credits with a full valuation allowance have no expiration; however, we do not anticipate generating income tax in excess of the credits in the foreseeable future. We recorded a transition tax on undistributed foreign earnings as required by the Act. No other provision was made for income taxes that may result from future remittances of the undistributed earnings of foreign subsidiaries that are determined to be indefinitely reinvested, which were $8,484 on December 31, 2017. Determination of the total amount of unrecognized deferred income tax on undistributed earnings of foreign subsidiaries is not practicable. Uncertain Income Tax Positions 2017 2016 Beginning uncertain tax positions $ 287 $ 313 Increases related to current year income tax positions 123 47 Increases related to prior year income tax positions 131 22 Decreases related to prior year income tax positions: Settlements and resolutions of income tax audits (9) (82) Statute of limitations expirations (4) (9) Foreign currency translation 12 (4) Ending uncertain tax positions $ 540 $ 287 Reported as: Noncurrent liabilities—Income taxes 540 287 Total $ 540 $ 287 Our income tax expense would have been reduced by $232 and $209 on December 31, 2017 and 2016 had these uncertain income tax positions been favorably resolved. It is reasonably possible that the amount of unrecognized tax benefits will significantly change due to one or more of the following events in the next twelve months: expiring statutes, audit activity, tax payments, competent authority proceedings related to transfer pricing or final decisions in matters that are the subject of controversy in various taxing jurisdictions in which we operate, including inventory transfer pricing, cost sharing, product royalty and foreign branch arrangements. We are not able to reasonably estimate the amount or the future periods in which changes in unrecognized tax benefits may be resolved. Interest and penalties incurred associated with uncertain tax positions are included in other income (expense), net. In the normal course of business, income tax authorities in various income tax jurisdictions both within the United States and internationally conduct routine audits of our income tax returns filed in prior years. These audits are generally designed to determine if individual income tax authorities are in agreement with our interpretations of complex income tax regulations regarding the allocation of income to the various income tax jurisdictions. Income tax years are open from 2012 through the current year for the United States federal jurisdiction. Income tax years open for our other major jurisdictions range from 2005 through the current year. NOTE 11 - RETIREMENT PLANS Defined Contribution Plans We provide certain employees with defined contribution plans and other types of retirement plans. A portion of our retirement plan expense under the defined contribution plans is funded with Stryker common stock. The use of Stryker common stock represents a non- cash operating activity that is not reflected in our Consolidated Statements of Cash Flows. 2017 2016 2015 Plan expense $ 181 $ 166 $ 148 Expense funded with Stryker common stock 25 22 20 Stryker common stock held by plan: Dollar amount 353 272 203 Shares (in millions) 2.3 2.3 2.2 Value as a percentage of total plan assets 11% 11% 11% Defined Benefit Plans Certain of our subsidiaries have both funded and unfunded defined benefit pension plans covering some or all of their employees. Substantially all of the defined benefit pension plans have projected benefit obligations in excess of plan assets. Discount Rate The discount rates were selected using a hypothetical portfolio of high quality bonds on December 31 that would provide the necessary cash flows to match our projected benefit payments. Effective January 1, 2017, in countries where it was possible, we elected to change the method to calculate the service cost and interest cost components of net periodic benefit costs for our defined benefit plans and will measure these costs by applying the specific spot rates along the yield curve of the projected cash flows for the respective plans. Our defined benefit plans previously utilized the yield curve approach to establish discount rates and we believe the new approach provides a more precise measurement of service and interest costs by improving the correlation between projected cash flows and the corresponding spot yield curve rates. The change does not affect the measurement of our total benefit obligations for those plans and is accounted for as a change in accounting estimate inseparable from a change in accounting principle, which is applied prospectively. The reductions in service and interest costs for 2017 associated with this change in estimate are nominal. Expected Return on Plan Assets The expected return on plan assets is determined by applying the target allocation in each asset category of plan investments to the anticipated return for each asset category based on historical and projected returns.

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