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STRYKER CORPORATION 2017 FORM 10-K Dollar amounts in millions except per share amounts or as otherwise specified. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview of 2017 Our goal is to achieve sales growth at the high-end of the medical technology (MedTech) industry and maintain our capital allocation strategy that prioritizes: (1) Acquisitions, (2) Dividends and (3) Share repurchases. In 2017 we achieved reported net sales growth of 9.9%. Excluding the impact of acquisitions, net sales grew 7.1% in constant currency, in line with our ongoing goal to grow organic sales at the high-end of MedTech. We reported net earnings of $1,020 and net earnings per diluted share of $2.68. Excluding the impact of certain items, we achieved adjusted net earnings of $2,465 and growth of 11.9% in adjusted net earnings per diluted share (1) . We continued our capital allocation strategy by investing $831 in acquisitions, paying $636 in dividends to our shareholders and using $230 for share repurchases. In December 2017 we announced a definitive merger agreement to acquire Entellus Medical, Inc. (Entellus), a high-growth global medical technology company focused on delivering superior patient and physician experiences through products designed for the minimally invasive treatment of various ear, nose and throat (ENT) disease states, for $24.00 per share, or total consideration of approximately $662. We expect the acquisition to close in February 2018. In September 2017 we acquired NOVADAQ Technologies Inc. (NOVADAQ) for total consideration of approximately $716. NOVADAQ is a leading developer of fluorescence imaging technology that provides surgeons with visualization of blood flow in vessels and related tissue perfusion in cardiac, cardiovascular, gastrointestinal, plastic, microsurgical and reconstructive procedures. Refer to Note 5 to our Consolidated Financial Statements for further information. In August 2017 we initiated a voluntary product recall involving specific lots of our Sage Products (Sage) Oral Care products. We took this action in response to a Warning Letter received from the United States Food and Drug Administration (FDA) dated July 17, 2017, which set forth concerns regarding the potential for cross- contamination of Oral Care solutions manufactured by a third-party supplier on equipment also used to manufacture non- pharmaceutical products. We discontinued business with the third- party supplier and the Oral Care solutions are now being manufactured in-house. We resumed shipping Oral Care products in October and returned to full supply capacity by the end of 2017. We also placed Sage cloth-based products on a temporary ship hold during the third quarter in response to concerns set forth in the FDA Warning Letter regarding testing methods used for all Sage products containing solutions. We resumed shipping products manufactured in-house and tested under the testing method required by FDA in September 2017 and returned to full supply capacity by the end of 2017. In January 2017 we issued $500 of senior unsecured notes. Refer to Note 9 to our Consolidated Financial Statements for further information. (1) Refer to "Non-GAAP Financial Measures" for a discussion of non-GAAP financial measures used in this report and a reconciliation to the most directly comparable GAAP financial measure. CONSOLIDATED RESULTS OF OPERATIONS Percent Net Sales Percentage Change 2017 2016 2015 2017 2016 2015 2017/2016 2016/2015 Net sales $ 12,444 $ 11,325 $ 9,946 100.0% 100.0% 100.0% 9.9 % 13.9% Gross profit 8,173 7,495 6,602 65.7 66.2 66.4 9.0 13.5 Research, development and engineering expenses 787 715 625 6.3 6.3 6.3 10.1 14.4 Selling, general and administrative expenses 4,552 4,137 3,610 36.6 36.5 36.3 10.0 14.6 Recall charges, net of insurance proceeds 173 158 296 1.4 1.4 3.0 9.5 (46.6) Amortization of intangible assets 371 319 210 3.0 2.8 2.1 16.3 51.9 Other income (expense), net (227) (245 ) (126) (1.8) (2.2) (1.3) (7.3 ) 94.4 Income taxes 1,043 274 296 280.7 (7.4) Net earnings $ 1,020 $ 1,647 $ 1,439 8.2% 14.5% 14.5% (38.1)% 14.5% Net earnings per diluted share $ 2.68 $ 4.35 $ 3.78 (38.4)% 15.1% Adjusted net earnings per diluted share (1) $ 6.49 $ 5.80 $ 5.12 11.9 % 13.3% Geographic and Segment Net Sales Percentage Change 2017/2016 2016/2015 2017 2016 2015 As Reported Constant Currency As Reported Constant Currency Geographic: United States $ 9,059 $ 8,230 $ 7,116 10.1% 10.1% 15.7% 15.6% International 3,385 3,095 2,830 9.4 9.0 9.4 10.8 Total $ 12,444 $ 11,325 $ 9,946 9.9% 9.8% 13.9% 14.3% Segment: Orthopaedics $ 4,713 $ 4,422 $ 4,223 6.6% 6.5% 4.7% 5.1% MedSurg 5,557 4,894 3,895 13.6 13.4 25.6 26.3 Neurotechnology and Spine 2,174 2,009 1,828 8.2 8.3 9.9 9.8 Total $ 12,444 $ 11,325 $ 9,946 9.9% 9.8% 13.9% 14.3%