Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Stryker Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Stryker Corporation and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of earnings and comprehensive income, shareholder’s equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 8, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ ERNST & YOUNG LLP

We have served as the Company's auditor since 1974

Grand Rapids, Michigan

February 8, 2018

	16

STRYKER CORPORATION 2017 FORM 10-K

Stryker Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

	2017				2016				2015
Net sales	$	12,444			$	11,325			$	9,946
Cost of sales	4,271				3,830				3,344
Gross profit	$	8,173			$	7,495			$	6,602
Research, development and engineering expenses	787				715				625
Selling, general and administrative expenses	4,552				4,137				3,610
Recall charges, net of insurance proceeds	173				158				296
Amortization of intangible assets	371				319				210
Total operating expenses	$	5,883			$	5,329			$	4,741
Operating income	$	2,290			$	2,166			$	1,861
Other income (expense), net	(227		)		(245		)		(126		)
Earnings before income taxes	$	2,063			$	1,921			$	1,735
Income taxes	1,043				274				296
Net earnings	$	1,020			$	1,647			$	1,439
Net earnings per share of common stock:
Basic net earnings per share of common stock	$	2.73			$	4.40			$	3.82
Diluted net earnings per share of common stock	$	2.68			$	4.35			$	3.78
Weighted-average shares outstanding:
Basic	374.0				374.1				376.6
Effect of dilutive employee stock options	6.1				4.4				4.3
Diluted	380.1				378.5				380.9

Anti-dilutive shares excluded from the calculation of dilutive employee stock options were de minimis in all periods.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	2017				2016				2015
Net earnings	$	1,020			$	1,647			$	1,439
Other comprehensive income (loss), net of tax
Marketable securities	(4		)		—				(3		)
Pension plans	(2		)		(13		)		17
Unrealized gains (losses) on designated hedges	4				20				(9		)
Financial statement translation	210				(129		)		(390		)
Total other comprehensive income (loss), net of tax	$	208			$	(122	)		$	(385	)
Comprehensive income	$	1,228			$	1,525			$	1,054

See accompanying notes to Consolidated Financial Statements.

Dollar amounts in millions except per share amounts or as otherwise specified.	17

STRYKER CORPORATION 2017 FORM 10-K

Stryker Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

	2017				2016
Assets
Current assets
Cash and cash equivalents	$	2,542			$	3,316
Marketable securities	251				68
Accounts receivable, less allowance of $59 ($56 in 2016)	2,198				1,967
Inventories:
Materials and supplies	528				425
Work in process	148				130
Finished goods	1,789				1,475
Total inventories	$	2,465			$	2,030
Prepaid expenses and other current assets	537				480
Total current assets	$	7,993			$	7,861
Property, plant and equipment:
Land, buildings and improvements	936				820
Machinery and equipment	2,864				2,341
Total property, plant and equipment	3,800				3,161
Less allowance for depreciation	1,825				1,592
Property, plant and equipment, net	$	1,975			$	1,569
Goodwill	7,168				6,356
Other intangibles, net	3,477				3,508
Other noncurrent assets	1,584				1,141
Total assets	$	22,197			$	20,435
Liabilities and shareholders' equity
Current liabilities
Accounts payable	$	487			$	437
Accrued compensation	838				767
Income taxes	143				40
Dividend payable	178				159
Accrued recall expenses	196				594
Accrued expenses and other liabilities	1,011				923
Current maturities of debt	632				228
Total current liabilities	$	3,485			$	3,148
Long-term debt, excluding current maturities	6,590				6,686
Income taxes	1,261				287
Other noncurrent liabilities	881				764
Total liabilities	$	12,217			$	10,885
Shareholders' equity
Common stock, $0.10 par value	37				37
Additional paid-in capital	1,496				1,432
Retained earnings	8,986				8,842
Accumulated other comprehensive loss	(553		)		(761		)
Total Stryker shareholders' equity	$	9,966			$	9,550
Noncontrolling interest	14				—
Total shareholders' equity	$	9,980			$	9,550
Total liabilities & shareholders' equity	$	22,197			$	20,435

See accompanying notes to Consolidated Financial Statements.

Dollar amounts in millions except per share amounts or as otherwise specified.	18

STRYKER CORPORATION 2017 FORM 10-K

Stryker Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	2017						2016						2015
	Shares		Amount				Shares		Amount				Shares		Amount
Common stock
Beginning	374.6		$	37			373.0		$	37			378.6		$	38
Issuance of common stock under stock option and benefit plans	1.7		—				1.7		—				1.8		—
Repurchase of common stock	(1.9	)	—				(0.1	)	—				(7.4	)	(1		)
Ending	374.4		$	37			374.6		$	37			373.0		$	37
Additional paid-in capital
Beginning			$	1,432					$	1,321					$	1,252
Issuance of common stock under stock option and benefit plans			(42		)				15						8
Repurchase of common stock			(7		)				(1		)				(25		)
Share-based compensation			113						97						86
Ending			$	1,496					$	1,432					$	1,321
Retained earnings
Beginning			$	8,842					$	7,792					$	7,559
Net earnings			1,020						1,647						1,439
Repurchase of common stock			(223		)				(12		)				(674		)
Cash dividends declared			(653		)				(585		)				(532		)
Ending			$	8,986					$	8,842					$	7,792
Accumulated other comprehensive (loss) income
Beginning			$	(761	)				$	(639	)				$	(254	)
Other comprehensive income (loss)			208						(122		)				(385		)
Ending			$	(553	)				$	(761	)				$	(639	)
Total Stryker shareholders' equity			$	9,966					$	9,550					$	8,511
Non-controlling interest
Beginning			$	—					$	—					$	—
Acquisitions			114						—						—
Interest purchased			(99		)				—						—
Net earnings attributable to noncontrolling interest			—						—						—
Foreign currency exchange translation adjustment			(1		)				—						—
Ending			$	14					—						$	—
Total shareholders' equity			$	9,980					$	9,550					$	8,511

See accompanying notes to Consolidated Financial Statements.

Dollar amounts in millions except per share amounts or as otherwise specified.	19

STRYKER CORPORATION 2017 FORM 10-K

Stryker Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

	2017				2016				2015
Operating activities
Net earnings	$	1,020			$	1,647			$	1,439
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation	271				227				187
Amortization of intangible assets	371				319				210
Share-based compensation	113				97				86
Recall charges	173				158				349
Sale of inventory stepped up to fair value at acquisition	22				36				7
Deferred income tax benefit (expense)	36				(46		)		87
Changes in operating assets and liabilities:
Accounts receivable	(162		)		(192		)		(151		)
Inventories	(320		)		(299		)		(115		)
Accounts payable	21				(16		)		35
Accrued expenses and other liabilities	90				241				129
Recall-related payments	(526		)		(190		)		(1,206		)
Income taxes	704				(128		)		(238		)
Other, net	(254		)		61				162
Net cash provided by operating activities	$	1,559			$	1,915			$	981
Investing activities
Acquisitions, net of cash acquired	(831		)		(4,332		)		(153		)
Purchases of marketable securities	(270		)		(151		)		(1,715		)
Proceeds from sales of marketable securities	87				785				4,094
Purchases of property, plant and equipment	(598		)		(490		)		(270		)
Other investing, net	(1		)		(3		)		—
Net cash (used in) provided by investing activities	$	(1,613	)		$	(4,191	)		$	1,956
Financing activities
Proceeds from borrowings	733				1,094				1,576
Payments on borrowings	(933		)		(1,635		)		(2,272		)
Proceeds from issuance of long-term debt, net	499				3,453				744
Dividends paid	(636		)		(568		)		(521		)
Repurchase of common stock	(230		)		(13		)		(700		)
Cash paid for taxes from withheld shares	(95		)		(67		)		(56		)
Payments to purchase noncontrolling interest	(99		)		—				—
Other financing, net	(33		)		(6		)		6
Net cash (used in) provided by financing activities	$	(794	)		$	2,258			$	(1,223	)
Effect of exchange rate changes on cash and cash equivalents	74				(45		)		(130		)
Change in cash and cash equivalents	$	(774	)		$	(63	)		$	1,584
Cash and cash equivalents at beginning of year	3,316				3,379				1,795
Cash and cash equivalents at end of year	$	2,542			$	3,316			$	3,379
Supplemental cash flow disclosure:
Cash paid for income taxes, net of refunds	$	312			$	510			$	497
Cash paid for interest on debt	$	264			$	180			$	101

See accompanying notes to Consolidated Financial Statements.

Dollar amounts in millions except per share amounts or as otherwise specified.	20

STRYKER CORPORATION 2017 FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations: Stryker Corporation (the "Company," "we," "us," or "our") is one of the world's leading medical technology companies and, together with its customers, is driven to make healthcare better. The Company offers innovative products and services in Orthopaedics, Medical and Surgical, and Neurotechnology and Spine that improve patient and hospital outcomes. 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.

Basis of Presentation and Consolidation: The Consolidated Financial Statements include the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. We have no material interests in variable interest entities and none that require consolidation. Certain prior year amounts have been reclassified to conform to the presentation of our Consolidated Financial Statements in 2017.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of net sales and expenses in the reporting period. Actual results could differ from those estimates.

Revenue Recognition: Sales are recognized when revenue is realized or realizable and has been earned. Our policy is to recognize revenue when title to the product, ownership and risk of loss transfer to the customer, which can be on the date of shipment, the date of receipt by the customer or, for most Orthopaedics products, when we receive appropriate notification that the product has been used or implanted. A provision for estimated sales returns, discounts, rebates and other sales incentives is recorded as a reduction of net sales in the same period that the revenue is recognized. Shipping and handling costs charged to customers are included in net sales.

Cost of Sales: Cost of sales is primarily comprised of direct materials and supplies consumed in the manufacture of product, as well as manufacturing labor, depreciation expense and direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product. Cost of sales also includes the cost to distribute products to customers, inbound freight costs, warehousing costs and other shipping and handling activity.

Research, Development and Engineering Expenses: Research and development costs are charged to expense as incurred. Costs include research, development and engineering activities relating to the development of new products, improvement of existing products, technical support of products and compliance with governmental regulations for the protection of customers and patients. Costs primarily consist of salaries, wages, consulting and depreciation and maintenance of research facilities and equipment.

Selling, General and Administrative Expenses: Selling, general and administrative expense is primarily comprised of selling expenses, marketing expenses, administrative and other indirect overhead costs, amortization of loaner instrumentation, depreciation and amortization expense of non-manufacturing assets and other miscellaneous operating items.

Currency Translation: Financial statements of subsidiaries outside the United States generally are measured using the local currency as the functional currency. Adjustments to translate those statements into United States Dollars are recorded in other comprehensive income (OCI). Transactional exchange gains and losses are included in earnings.

Cash Equivalents: Highly liquid investments with remaining stated maturities of three months or less when purchased are considered cash equivalents and recorded at cost.

Marketable Securities: Marketable securities consist of marketable debt securities, certificates of deposit and mutual funds. Mutual funds are acquired to offset changes in certain liabilities related to deferred compensation arrangements and are expected to be used to settle these liabilities. Pursuant to our investment policy, all individual marketable security investments must have a minimum credit quality of single A (Standard & Poor’s and Fitch) and A2 (Moody’s Corporation) at the time of acquisition, while the overall portfolio of marketable securities must maintain a minimum average credit quality of double A (Standard & Poor’s and Fitch) or Aa (Moody’s Corporation). In the event of a rating downgrade below the minimum credit quality subsequent to purchase, the marketable security investment is evaluated to determine the appropriate action to take to minimize the overall risk to our marketable security investment portfolio. Our marketable securities are classified as available-for-sale and trading securities. Investments in trading securities represent participant-directed investments of deferred employee compensation.

Accounts Receivable: Accounts receivable consists of trade and other miscellaneous receivables. An allowance is maintained for doubtful accounts for estimated losses in the collection of accounts receivable. Estimates are made regarding the ability of customers to make required payments based on historical credit experience and expected future trends. Accounts receivable are written off when all reasonable collection efforts are exhausted.

Inventories: Inventories are stated at the lower of cost or market, with cost generally determined using the first-in, first-out (FIFO) cost method. For excess and obsolete inventory resulting from the potential inability to sell specific products at prices in excess of current carrying costs, reserves are maintained to reduce current carrying cost to market prices.

Financial Instruments: Our financial instruments consist of cash, cash equivalents, marketable securities, accounts receivable, other investments, accounts payable, debt and foreign currency exchange contracts. The carrying value of our financial instruments, with the exception of our senior unsecured notes, approximates fair value on December 31, 2017 and 2016. Refer to Note 2 and 9 for further details.

All marketable securities are recognized at fair value. Adjustments to the fair value of marketable securities that are classified as available-for-sale are recorded as increases or decreases, net of income taxes, within accumulated other comprehensive income (AOCI) in shareholders’ equity and adjustments to the fair value of marketable securities that are classified as trading are recorded in earnings. The amortized cost of marketable debt securities is adjusted for amortization of premiums and discounts to maturity computed under the effective interest method. Such amortization and interest and realized gains and losses are included in other income (expense), net. The cost of securities sold is determined by the specific identification method.

We review declines in the fair value of our investments classified as available-for-sale to determine whether the decline in fair value is an other-than-temporary impairment. The resulting losses from

Dollar amounts in millions except per share amounts or as otherwise specified.	21

STRYKER CORPORATION 2017 FORM 10-K

other-than-temporary impairments of available-for-sale marketable securities are included in earnings.

Derivatives: All derivatives are recognized at fair value and reported on a gross basis. We enter into forward currency exchange contracts to mitigate the impact of currency fluctuations on transactions denominated in nonfunctional currencies, thereby limiting our risk that would otherwise result from changes in exchange rates. The periods of the forward currency exchange contracts correspond to the periods of the exposed transactions, with realized gains and losses included in the measurement and recording of transactions denominated in the nonfunctional currencies. All forward currency exchange contracts are recorded at their fair value each period.

Forward currency exchange contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted transactions denominated in a foreign currency that will take place in the future. These nonfunctional currency exposures principally relate to forecasted intercompany purchases of manufactured products and generally have maturities up to eighteen months. Changes in value of derivatives designated as cash flow hedges are recorded in AOCI on the Consolidated Balance Sheets until earnings are affected by the variability of the underlying cash flows. At that time, the applicable amount of gain or loss from the derivative instrument that is deferred in shareholders’ equity is reclassified into earnings and is included in other income (expense), net or cost of goods sold in the Consolidated Statements of Earnings, depending on the underlying transaction that is being hedged. Cash flows associated with these hedges are included in cash from operations in the same category as the cash flows from the items being hedged.

Derivative forward contracts are used to offset our exposure to the change in value of specific foreign currency denominated assets and liabilities, primarily intercompany payables and receivables. These derivatives are not designated as hedges and, therefore, changes in the value of these forward contracts are recognized in earnings, thereby offsetting the current earnings effect of the related changes in value of foreign currency denominated assets and liabilities. The estimated fair value of our forward currency exchange contracts represents the measurement of the contracts at month-end spot rates as adjusted by current forward points.

We designated certain long-term intercompany loans payable and forward exchange contracts as net investment hedges of our investments in certain international subsidiaries that use the Euro as their functional currency. For derivative instruments that are designated and qualify as a net investment hedge, the effective portion of the derivative's gain or loss is recognized in OCI and reported as a component of AOCI. We use the forward method to measure ineffectiveness. Under this method the change in the carrying value of the Euro-denominated amounts due to remeasurement of the effective portion is reported as a component of AOCI. The remaining change in the carrying value of the ineffective portion, if any, is recognized in other income (expense), net. The gain or loss related to settled net investment hedges will be subsequently reclassified into net earnings when the hedged net investment is either sold or substantially liquidated.

Forward starting interest rate derivative instruments designated as cash flow hedges are used to manage the exposure to interest rate volatility with regard to future issuance and refinancing of debt. The effective portion of the gain or loss on a forward starting interest rate derivative instrument that is designated and qualifies as a cash flow hedge is reported as a component of AOCI. Beginning in the period in which the debt refinancing occurs and the related derivative instruments is terminated, the effective portion of the

gains or losses is then reclassified into interest expense over the term of the related debt.

Interest rate derivative instruments designated as fair value hedges are being used to manage the exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. Under these agreements, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.

Property, Plant and Equipment: Property, plant and equipment is stated at cost. Depreciation is generally computed by the straight-line method over the estimated useful lives of three to 30 years for buildings and improvements and three to 10 years for machinery and equipment.

Goodwill and Other Intangible Assets: Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses at the acquisition date, after amounts allocated to other identifiable intangible assets. Factors that contribute to the recognition of goodwill include synergies that are specific to our business and not available to other market participants and are expected to increase net sales and profits; acquisition of a talented workforce; cost savings opportunities; the strategic benefit of expanding our presence in core and adjacent markets; and diversifying our product portfolio.

The fair values of other identifiable intangible assets are primarily determined using the income approach. Other intangible assets include, but are not limited to, developed technology, customer and distributor relationships (which reflect expected continued customer or distributor patronage) and trademarks and patents. Intangible assets with determinable useful lives are amortized on a straight-line basis over their estimated useful lives of four to 40 years. Certain acquired trade names are considered to have indefinite lives and are not amortized, but are assessed annually for potential impairment as described below.

In some of our acquisitions, we acquire in-process research and development (IPRD), which is an indefinite-lived intangible asset. IPRD where research has been completed becomes a determinable-lived intangible asset and IPRD determined to have no future use becomes impaired.

Goodwill, Intangibles and Long-Lived Asset Impairment Tests: We perform our annual impairment test for goodwill in the fourth quarter of each year. We consider qualitative indicators of the fair value of a reporting unit when it is unlikely that a reporting unit has impaired goodwill. In certain circumstances, we may also utilize a discounted cash flow analysis that requires certain assumptions and estimates be made regarding market conditions and our future profitability. Indefinite-lived intangible assets are also tested at least annually for impairment by comparing the individual carrying values to the fair value.

We review long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows. Undiscounted cash flows expected to be generated by the related assets are estimated over the asset's useful life based on updated projections. If the evaluation indicates that the carrying amount of the asset may not be recoverable, any potential impairment is measured based upon the fair value of the related asset or asset group as determined by an appropriate market appraisal or other valuation technique. Assets classified as held for sale are recorded at the lower of carrying amount or fair value less costs to sell.

Dollar amounts in millions except per share amounts or as otherwise specified.	22

STRYKER CORPORATION 2017 FORM 10-K

Share-Based Compensation: We use share based compensation in the form of stock options, restricted stock units (RSUs) and performance-based restricted stock units (PSUs). Stock options are granted under long-term incentive plans to certain key employees and non-employee directors at an exercise price not less than the fair market value of the underlying common stock, which is the quoted closing price of our common stock on the day prior to the date of grant. The options are granted for periods of up to 10 years and become exercisable in varying installments.

We grant RSUs to key employees and non-employee directors and PSUs to certain key employees under our long-term incentive plans. The fair value of RSUs is determined based on the number of shares granted and the quoted closing price of our common stock on the date of grant, adjusted for the fact that RSUs do not include anticipated dividends. RSUs generally vest in one-third increments over a three-year period and are settled in stock. PSUs are earned over a three-year performance cycle and vest in March of the year following the end of that performance cycle. The number of PSUs that will ultimately be earned is based on our performance relative to pre-established goals in that three-year performance cycle. The fair value of PSUs is determined based on the quoted closing price of our common stock on the day of grant.

Compensation expense is recognized in the Consolidated Statements of Earnings based on the estimated fair value of the awards on the grant date. Compensation expense recognized reflects an estimate of the number of awards expected to vest after taking into consideration an estimate of award forfeitures based on actual experience and is recognized on a straight-line basis over the requisite service period, which is generally the period required to obtain full vesting. Management expectations related to the achievement of performance goals associated with PSU grants is assessed regularly and that assessment is used to determine whether PSU grants are expected to vest. If performance-based milestones related to PSU grants are not met or not expected to be met, any compensation expense recognized associated with such grants will be reversed.

Income Taxes: Deferred income tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted income tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax benefits generally represent the change in net deferred income tax assets and liabilities in the year. Other amounts result from adjustments related to acquisitions and foreign currency as appropriate.

We operate in multiple income tax jurisdictions both within the United States and internationally. Accordingly, management must determine the appropriate allocation of income to each of these jurisdictions based on current interpretations of complex income tax regulations. Income tax authorities in these jurisdictions regularly perform audits of our income tax filings. Income tax audits associated with the allocation of this income and other complex issues, including inventory transfer pricing and cost sharing, product royalty and foreign branch arrangements, may require an extended period of time to resolve and may result in significant income tax adjustments if changes to the income allocation are required between jurisdictions with different income tax rates.

New Accounting Pronouncements Not Yet Adopted

In August 2017 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies hedge accounting guidance, as well as improves presentation and disclosure to align the economic effects of risk management strategies in the financial

statements. The update is effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. Early adoption is permitted. We have performed a preliminary assessment of the impact from this update and do not expect the adoption of this standard to have a material impact on our Consolidated Financial Statements. We are currently evaluating our timing of adopting this standard.

In May 2017 the FASB issued ASU 2017-09, Compensation - Stock Compensation, which revises the guidance related to changes in terms or conditions of a share-based payment award. We plan to adopt this update on January 1, 2018 and do not expect the adoption to have a material impact on our Consolidated Financial Statements.

In March 2017 the FASB issued ASU 2017-07, Compensation - Retirement Benefits, which revises the recognition and presentation of the elements of net pension benefit costs. We plan to adopt this update on January 1, 2018 and do not expect the adoption to have a material impact on our Consolidated Financial Statements.

In February 2016 the FASB issued ASU 2016-02, Leases. This update requires an entity to recognize assets and liabilities on the balance sheet for leases with terms greater than 12 months. We are in the process of evaluating the impact on our Consolidated Financial Statements and anticipate most of our current operating leases, as well as some service contracts, will result in the recognition of right to use assets and corresponding lease liabilities in our Consolidated Balance Sheets. We also anticipate changes in classification between financial statement line items in our Consolidated Statements of Earnings and Consolidated Statements of Cash Flows, but do not anticipate adoption of the update will have a material impact on net earnings and cash flows. We plan to adopt this update on January 1, 2019.

In October 2016 the FASB issued ASU 2016-16, Income Taxes, Intra-Entity Transfers of Assets Other Than Inventory, which requires companies to account for the income tax effect of intercompany sales and transfers of assets other than inventory when the transfer occurs. Under current guidance, we defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized. We will adopt this update on January 1, 2018. We have finalized our assessment of the impact from this update and have recorded a cumulative-effect adjustment to decrease retained earnings in the amount of approximately $696 as of January 1, 2018.

In May 2014 the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This update outlines a single, comprehensive model for accounting for revenue from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We plan to adopt this update on January 1, 2018 using the modified retrospective approach by recognizing the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings for 2018. We have finalized our assessment of the impact from this update and have recorded a cumulative-effect adjustment to decrease retained earnings in the amount of $55 as of January 1, 2018. We expect the impact from adoption of this standard will be recognized in our Consolidated Statements of Earnings in 2018.

Accounting Pronouncements Recently Adopted

On January 1, 2017 we adopted ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The impact on our Consolidated Statements of Earnings in 2017 was a tax benefit of $57. In our prior year

Dollar amounts in millions except per share amounts or as otherwise specified.	23

STRYKER CORPORATION 2017 FORM 10-K

Consolidated Statements of Cash Flow we reclassified $36 from other financing to income taxes within operating activities to conform to current year presentation.

On January 1, 2017 we adopted ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The adoption of this update did not have a material impact on our Consolidated Financial Statements.

No other new accounting pronouncements were issued or became effective in the period that had, or are expected to have, a material impact on our Consolidated Financial Statements.

NOTE 2 - FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified in their entirety based on the lowest level of input and disclosed in one of the following three categories:

Level 1	Quoted market prices in active markets for identical assets or liabilities.
Level 2	Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3	Unobservable inputs reflecting our assumptions or external inputs from active markets.

Use of observable market data, when available, is required in making fair value measurements. When inputs used fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. We determine fair value for Level 1 instruments using exchange-traded prices for identical instruments. We determine fair value of Level 2 instruments using exchange-traded prices of similar instruments, where available, or utilizing other observable inputs that take into account our credit risk and that of our counterparties. Foreign currency exchange contracts and interest rate hedges are included in Level 2 and we use inputs other than quoted prices that are observable for the asset or liability. The Level 2 derivative instruments are primarily valued using standard calculations and models that use readily observable market data as their basis. Our Level 3 liabilities are comprised of contingent consideration arising from recently completed acquisitions. We determine fair value of these Level 3 liabilities using a discounted cash flow technique or the Black-Scholes option pricing model. Significant unobservable inputs were used in our assessment of fair value, including assumptions regarding future business results, discount rates, discount periods and probability assessments based on likelihood of reaching various targets. We remeasure the fair value of our assets and liabilities each reporting period. We record the changes in fair value within selling, general and administrative expense and the changes in the time value of money within other income (expense), net.

Assets Measured at Fair Value
	2017			2016
Cash and cash equivalents	$	2,542		$	3,316
Trading marketable securities	121			94
Level 1 - Assets	$	2,663		$	3,410
Available-for-sale marketable securities:
Corporate and asset-backed debt securities	$	125		$	25
Foreign government debt securities	2			—
United States agency debt securities	27			9
United States treasury debt securities	70			16
Certificates of deposit	27			18
Total available-for-sale marketable securities	$	251		$	68
Foreign currency exchange forward contracts	15			45
Interest rate swap asset	49			57
Level 2 - Assets	$	315		$	170
Total assets measured at fair value	$	2,978		$	3,580

Liabilities Measured at Fair Value
	2017			2016
Deferred compensation arrangements	$	121		$	94
Level 1 - Liabilities	$	121		$	94
Foreign currency exchange forward contracts	$	37		$	18
Level 2 - Liabilities	$	37		$	18
Contingent consideration:
Beginning	$	86		$	56
Additions	3			49
Change in estimate	2			(7		)
Settlements	(59		)	(12		)
Ending	$	32		$	86
Level 3 - Liabilities	$	32		$	86
Total liabilities measured at fair value	$	190		$	198

Fair Value of Available for Sale Securities by Maturity
	2017			2016
Due in one year or less	$	107		$	36
Due after one year through three years	$	144		$	32

On December 31, 2017 the aggregate difference between the cost and fair value of available-for-sale marketable securities was nominal. Interest receivable was $1 and less than $1 in 2017 and 2016 related to our marketable security portfolio. Interest and marketable securities income was $60, $29, and $14 in 2017, 2016, and 2015, which was recorded in other income (expense), net.

Our investments in available-for-sale marketable securities had a minimum credit quality rating of A2 (Moody's), A (Standard & Poor's) and A (Fitch). We do not plan to sell the investments, and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. We do not consider these investments to be other-than-temporarily impaired on December 31, 2017. On December 31, 2017 substantially all our investments with unrealized losses that were not deemed to be other-than-temporarily impaired were in a continuous unrealized loss position for less than twelve months, and the losses were nominal.

Securities in a Continuous Unrealized Loss Position
	Number of Investments	Fair Value
Corporate and Asset-Backed	118	$	108
Foreign government	1	2
United States Agency	15	20
United States Treasury	20	70
Certificate of Deposit	28	23
Total	182	$	223

NOTE 3 - DERIVATIVE INSTRUMENTS

Foreign Currency Hedges

We use operational and economic hedges, foreign currency exchange forward contracts, net investment hedges (both long-term

Dollar amounts in millions except per share amounts or as otherwise specified.	24

STRYKER CORPORATION 2017 FORM 10-K

intercompany loans payable and forward exchange contracts) and interest rate derivative instruments to manage the impact of currency exchange and interest rate fluctuations on earnings and cash flow. We do not enter into derivative instruments for speculative purposes. We are exposed to credit loss in the event of nonperformance by counterparties on our outstanding derivative instruments but do not anticipate nonperformance by any of our counterparties. Should a counterparty default, our maximum exposure to loss is the asset balance of the instrument.

2017	Designated			Non-Designated			Total
Gross notional amount	$	1,104		$	4,767		$	5,871
Maximum term in days							548
Fair value:
Other current assets	$	11		$	4		$	15
Other noncurrent assets	1			—			1
Other current liabilities	(7		)	(29		)	(36		)
Other noncurrent liabilities	(1		)	—			(1		)
Total fair value	$	4		$	(25	)	$	(21	)
2016
Gross notional amount	$	1,058		$	2,841		$	3,899
Maximum term in days							548
Fair value:
Other current assets	$	24		$	17		$	41
Other noncurrent assets	4			—			4
Other current liabilities	(9		)	(7		)	(16		)
Other noncurrent liabilities	(2		)	—			(2		)
Total fair value	$	17		$	10		$	27

On December 31, 2017 the total after-tax amount in AOCI related to our designated net investment hedges was $30. We evaluate the effectiveness of our net investment hedges quarterly. We have not recognized any ineffectiveness in 2017.

Net Currency Exchange Rate Gains (Losses)
Recorded in:	2017			2016			2015
Cost of sales	$	(6	)	$	—		$	19
Other income (expense), net	(9		)	(19		)	(22		)
Total	$	(15	)	$	(19	)	$	(3	)

On December 31, 2017 pretax gains recorded in AOCI on derivatives designated as hedges that are expected to be reclassified to earnings within 12 months of the balance sheet date were $7 compared with less than $1 on December 31, 2016. This reclassification is primarily due to the sale of inventory that includes previously hedged purchases. There were de minimis ineffective portions of derivatives, which are included in the table above.

Interest Rate Hedges

On December 31, 2017 we had interest rate swaps with notional amounts of $600 designated as forward starting interest rate swaps in anticipation of future debt issuances. The market value of outstanding interest rate swap agreements on December 31, 2017 was $44, which was recorded in other current assets with an offsetting amount recorded in AOCI. Upon the probable issuance of the debt, these amounts will be released to interest expense over the term of the debt. The cash flow effect of this hedge is recorded in cash flow from operations.

On December 31, 2017 we had interest rate swaps with gross notional amounts of $500 designated as fair value hedges of underlying fixed rate obligations representing a portion of our $600 senior unsecured notes due in 2024. There was no hedge ineffectiveness recorded as a result of these fair value hedges in 2017.

Fair Value Interest Rate Hedge Instruments
	2017				2016
Gross notional amount	$	500			$	500
Fair value:
Other noncurrent assets	5				9
Long-term debt	(5		)		(9		)
Total	$	—			$	—

NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (AOCI)

	Marketable Securities			Pension Plans			Hedges			Financial Statement Translation			Total
2015	$	—		$	(119	)	$	4		$	(524	)	$	(639	)
OCI	3			(20		)	35			(112		)	(94		)
Income taxes	(1		)	3			(15		)	(17		)	(30		)
Reclassifications to:
Cost of Sales	—			6			—			—			6
Other income	(3		)	—			—			—			(3		)
Income taxes	1			(2		)	—			—			(1		)
Net OCI	—			(13		)	20			(129		)	(122		)
2016	$	—		$	(132	)	$	24		$	(653	)	$	(761	)
OCI	(7		)	(27		)	(4		)	163			125
Income taxes	1			19			4			47			71
Reclassifications to:
Cost of Sales	—			8			6			—			14
Other Income	2			—			—			—			2
Income taxes	—			(2		)	(2		)	—			(4		)
Net OCI	(4		)	(2		)	4			210			208
2017	$	(4	)	$	(134	)	$	28		$	(443	)	$	(553	)

NOTE 5 - ACQUISITIONS

In 2017 and 2016 total cash paid for acquisitions was $831 and $4,332. We acquired stock in companies and various assets that continue to support our capital deployment and product development strategies.

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. Entellus, which had net sales of approximately $75 in 2016, will be integrated into the Instruments business within MedSurg. We expect the acquisition to close in February 2018.

In September 2017 we completed the acquisition of 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. This acquisition enhances product offerings within our MedSurg segment. Goodwill related to the NOVADAQ acquisition is not deductible for tax purposes.

Dollar amounts in millions except per share amounts or as otherwise specified.	25

STRYKER CORPORATION 2017 FORM 10-K

Purchase Price Allocation of Acquired Net Assets
	2017				2016
	NOVADAQ				Sage			Physio
Purchase price paid	$	716			$	2,870		$	1,299
Contingent consideration	—				5			—
Total consideration	$	716			$	2,875		$	1,299
Tangible assets acquired:
Cash	42				91			32
Accounts receivable	11				29			107
Inventory	39				63			61
Other assets	9				80			103
Liabilities	(58		)		(83		)	(364		)
Intangible assets:
Customer relationship	18				930			344
Trade name	1				70			160
Developed technology and patents	133				173			226
IPRD	—				—			7
Goodwill	521				1,522			623
	$	716			$	2,875		$	1,299
Weighted average life of intangible assets	14				15			14

Purchase price allocations for NOVADAQ and other acquisitions in 2017 and 2016 were based on preliminary valuations. Our estimates and assumptions are subject to change within the measurement period. The purchase price allocation for the acquisitions of Sage Products, LLC (Sage) and Physio-Control International, Inc. (Physio) was finalized in 2017. Goodwill related to the Sage acquisition is deductible for tax purposes.

NOTE 6 - CONTINGENCIES AND COMMITMENTS

We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor, intellectual property and other matters that are more fully described below. The outcomes of these matters will generally not be known for prolonged periods of time. In certain of the legal proceedings, the claimants seek damages as well as other compensatory and equitable relief that could result in the payment of significant claims and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which management had sufficient information to reasonably estimate our future obligations, a liability representing management's best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within the range is not known, is recorded. The estimates are based on consultation with legal counsel, previous settlement experience and settlement strategies. If actual outcomes are less favorable than those estimated by management, additional expense may be incurred, which could unfavorably affect future operating results. We are self-insured for product liability claims and expenses. The ultimate cost to us with respect to product liability claims could be materially different than the amount of the current estimates and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.

In June 2012 we voluntarily recalled our Rejuvenate and ABG II Modular-Neck hip stems and terminated global distribution of these hip products. Product liability lawsuits relating to this voluntary recall have been filed against us. On November 3, 2014 we announced that we had entered into a settlement agreement to compensate eligible United States patients who had revision surgery to replace their Rejuvenate and/or ABG II Modular-Neck hip stem prior to that date and in December 2016 the settlement program was extended to patients who had revision surgery prior to December 19, 2016. We continue to offer support for recall-related care and reimburse patients who are not eligible to enroll in the settlement program for testing and treatment services, including any necessary revision surgeries. In addition, some lawsuits will remain and we will continue

to defend against them. Based on the information that has been received, the actuarially determined range of probable loss to resolve this matter globally is currently estimated to be approximately $2,072 to $2,307 ($2,304 to $2,539 before $232 of third-party insurance recoveries). We recorded additional charges to earnings of $104 in 2017, representing the excess of the minimum of the range over the previously recorded reserves. The final outcome of this matter is dependent on many factors that are difficult to predict including the number of enrollees in the settlement program and the total awards to them, the number and costs of patients not eligible for the settlement program who seek testing and treatment services and require revision surgery and the number and actual costs to resolve the remaining lawsuits. Accordingly, the ultimate cost to resolve this entire matter globally may be materially different than the amount of the current estimate and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.

In 2010 we filed a lawsuit in federal court against Zimmer Biomet Holdings, Inc. (Zimmer), alleging that a Zimmer product infringed on three of our patents. In 2013 following a jury trial favorable to us, the trial judge entered a final judgment that, among other things, awarded us damages of $76 and ordered Zimmer to pay us enhanced damages. Zimmer appealed this ruling. In December 2014 the Federal Circuit affirmed the damages awarded to us, reversed the order for enhanced damages and remanded the issue of attorney fees to the trial court. In May 2015 the trial court entered a stipulated judgment that, among other things, required Zimmer to pay us the base amount of damages and interest, while the issues of enhanced damages and attorney fees continue to be pursued. In June 2015 we recorded a $54 gain, net of legal costs, which was recorded within selling, general and administrative expenses. On June 13, 2016 the United States Supreme Court vacated the decision of the Federal Circuit that reversed our judgment for enhanced damages and remanded the case to the Federal Circuit to reconsider the issue. On September 12, 2016 the Federal Circuit issued an opinion that, among other things, remanded the issue of enhanced damages to the trial court. On July 12, 2017 the trial court reaffirmed its award of enhanced damages and entered a judgment of $164 in our favor. On July 24, 2017 Zimmer filed a notice of appeal of this decision.

Future Obligations

We have purchase commitments for materials, supplies, services and property, plant and equipment as part of the normal course of business. In addition, we lease various manufacturing, warehousing and distribution facilities, administrative and sales offices as well as equipment under operating leases. Rent expense totaled $125, $112, and $101 in 2017, 2016 and 2015. Refer to Note 9 for more information on the debt obligations.

Future Obligations
	2018			2019			2020			2021			2022			Thereafter
Debt repayments	$	600		$	1,250		$	500		$	750		$	—		$	4,150
Purchase obligations	$	1,046		$	95		$	2		$	1		$	—		$	—
Minimum lease payments	$	106		$	63		$	45		$	31		$	21		$	60

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS

We completed our annual impairment tests of goodwill in 2017 and 2016 and concluded in each year that no impairments exist.

Dollar amounts in millions except per share amounts or as otherwise specified.	26

STRYKER CORPORATION 2017 FORM 10-K

Summary of Other Intangible Assets
	Weighted Average Amortization Period (Years)	Gross Carrying Amount			Less Accumulated Amortization			Net Carrying Amount
Developed technologies
2017	12	$	2,416		$	917		$	1,499
2016	14	2,091			706			1,385
Customer relationships
2017	15	$	2,088		$	561		$	1,527
2016	15	2,049			407			1,642
Patents
2017	10	$	340		$	227		$	113
2016	11	317			206			111
Trademarks
2017	18	$	352		$	84		$	268
2016	18	348			59			289
In-process research and development
2017	N/A	$	25		—			$	25
2016	N/A	30			—			30
Other
2017	9	$	93		$	48		$	45
2016	12	115			64			51
Total
2017	14	$	5,314		$	1,837		$	3,477
2016	15	$	4,950		$	1,442		$	3,508

Changes in the Net Carrying Value of Goodwill by Segment
	Orthopaedics			MedSurg			Neurotechnology and Spine			Total
2015	$	2,344		$	782		$	1,010		$	4,136
Additions and adjustments	72			2,196			62			2,330
Foreign exchange	(44		)	(44		)	(22		)	(110		)
2016	$	2,372		$	2,934		$	1,050		$	6,356
Additions and adjustments	2			553			109			664
Foreign exchange	52			22			74			148
2017	$	2,426		$	3,509		$	1,233		$	7,168

Estimated Amortization Expense
2018			2019			2020			2021			2022
$	368		$	355		$	330		$	318		$	311

NOTE 8 - CAPITAL STOCK

The aggregate number of shares of all classes of stock with which we are authorized to issue is up to 1,000,500,000, divided into two classes consisting of 500,000 shares of $1 par value preferred stock and 1,000,000,000 shares of common stock with a par value of $0.10. No shares of preferred stock were outstanding on December 31, 2017.

In 2017 we repurchased 1.9 million shares at a cost of $230. The manner, timing and amount of repurchases are determined by management based on an evaluation of market conditions, stock price and other factors and are subject to regulatory considerations. Purchases are made from time-to-time in the open market, in privately negotiated transactions or otherwise. On December 31, 2017 the total dollar value of shares that could be purchased under our authorized repurchase program was $1,640.

Shares reserved for future compensation grants of our common stock were 37 million and 11 million on December 31, 2017 and 2016.

Stock Options

We measure the cost of employee stock options based on the grant-date fair value and recognize that cost using the straight-line method over the period in which a recipient is required to provide services in exchange for the options, typically the vesting period. The

weighted-average fair value per share of options is estimated on the date of grant using the Black-Scholes option pricing model.

Option Value and Assumptions
	2017				2016				2015
Weighted-average fair value per share	$	22.43			$	17.73			$	22.55
Assumptions:
Risk-free interest rate	2.0		%		1.3		%		1.8		%
Expected dividend yield	1.5		%		1.6		%		1.6		%
Expected stock price volatility	19.4		%		20.5		%		25.5		%
Expected option life (years)	6.0				6.1				7.3

The risk-free interest rate for periods within the expected life of options granted is based on the United States Treasury yield curve in effect at the time of grant. Expected stock price volatility is based on the historical volatility of our stock. The expected option life, representing the period of time that options granted are expected to be outstanding, is based on historical option exercise and employee termination data.

2017 Stock Option Activity
	Shares (in millions)			Weighted Average Exercise Price				Weighted-Average Remaining Term (in years)		Aggregate Intrinsic Value
Outstanding January 1	14.9			$	73.14
Granted	2.9			122.66
Exercised	(2.5	)		62.66
Canceled	(0.6	)		97.87
Outstanding December 31	14.7			$	83.71			5.4		$	956.5
Exercisable December 31	7.5			$	65.47			4.2		$	666.8
Options expected to vest	6.6			$	101.83			7.9		$	347.9

The aggregate intrinsic value of options, which represents the cumulative difference between the fair market value of the underlying common stock and the option exercise prices, exercised was $184, $128, and $98 in 2017, 2016 and 2015. Exercise prices for options outstanding ranged from $38.71 to $154.87 on December 31, 2017. On December 31, 2017 there was $90 of unrecognized compensation cost related to nonvested stock options granted under the long-term incentive plans; that cost is expected to be recognized over the weighted-average period of approximately 1.6 years.

Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) Activity
	Shares (in millions)						Weighted Average Grant Date Fair Value
	RSUs			PSUs			RSUs				PSUs
Nonvested on January 1	1.1			0.3			$	90.10			$	91.19
Granted	0.5			0.1			117.44				122.41
Vested	(0.5	)		(0.1	)		87.08				81.14
Canceled or forfeited	(0.1	)		—			102.01				92.18
Nonvested on December 31	1.0			0.3			$	104.85			$	104.51

On December 31, 2017 there was $56 of unrecognized compensation cost related to nonvested RSUs. That cost is expected to be recognized as expense over the weighted-average period of approximately one year. The weighted-average grant date fair value per share of RSUs granted was $117.44 and $94.70 in 2017 and 2016. The fair value of RSUs and PSUs vested in 2017 was $44 and $7. On December 31, 2017 there was $13 of unrecognized compensation cost related to nonvested PSUs; the cost is expected to be recognized as expense over the weighted-average period of approximately one year.

Dollar amounts in millions except per share amounts or as otherwise specified.	27

STRYKER CORPORATION 2017 FORM 10-K

Employee Stock Purchase Plans (ESPP)

Full- and part-time employees may participate in our ESPP provided they meet certain eligibility requirements. The purchase price for our common stock under the terms of the ESPP is defined as 95% of the closing stock price on the last trading day of a purchase period. We issued 163,415 and 159,329 shares under the ESPP in 2017 and 2016.

NOTE 9 - DEBT AND CREDIT FACILITIES

In January 2017 we issued $500 of senior unsecured notes with a fixed interest rate of 1.800% due on January 15, 2019. Our commercial paper program allows us to have a maximum of $1,500 in commercial paper outstanding with maturities up to 397 days from the date of issuance. On December 31, 2017 there were no amounts outstanding under our commercial paper program.

We have lines of credit issued by various financial institutions that are available to fund our day-to-day operating needs. Certain of our credit facilities require us to comply with financial and other covenants. We were in compliance with all covenants on December 31, 2017.

Summary of Total Debt
					2017				2016
Senior unsecured notes:
	Rate		Due
	1.300%		April 1, 2018		$	600			$	598
	1.800%		January 15, 2019		499				—
	2.000%		March 8, 2019		748				746
	4.375%		January 15, 2020		498				497
	2.625%		March 15, 2021		746				745
	3.375%		May 15, 2024		598				602
	3.375%		November 1, 2025		745				744
	3.500%		March 15, 2026		988				987
	4.100%		April 1, 2043		391				391
	4.375%		May 15, 2044		394				395
	4.625%		March 15, 2046		980				979
Commercial paper					—				200
Other					35				30
Total debt					$	7,222			$	6,914
Less current maturities					632				228
Total long-term debt					$	6,590			$	6,686
Unamortized debt issuance costs					$	39			$	45
Borrowing capacity on existing facilities					$	1,547			$	1,551
Fair value of senior unsecured notes					$	7,521			$	6,762

The fair value of the senior unsecured notes was estimated using quoted interest rates, maturities and amounts of borrowings based on quoted active market prices and yields that took into account the underlying terms of the debt instruments. Substantially all of our debt is classified within Level 2 of the fair value hierarchy.

Interest expense, including required fees incurred on outstanding debt and credit facilities that were included in other expense, totaled $247, $228, and $108 in 2017, 2016 and 2015.

NOTE 10 - INCOME TAXES

Our effective tax rate was 50.6%, 14.3% and 17.1% for 2017, 2016 and 2015. The effective income tax rate for 2017 reflects 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 headquarters. The establishment of the European regional headquarters contributed to the lower effective income tax rates in 2016 and 2015.

Effective Income Tax Rate Reconciliation
	2017			2016			2015
United States federal statutory rate	35.0	%		35.0	%		35.0	%
United States state and local income taxes, less federal deduction	1.2			1.7			2.1
Foreign income tax at rates other than 35%	(21.0	)		(22.2	)		(17.6	)
Tax Cuts and Jobs Act of 2017 transition tax	38.0			—			—
Tax Cuts and Jobs Act of 2017 deferred tax changes	2.3			—			—
Tax related to repatriation of foreign earnings	—			(0.3	)		(3.9	)
Other	(4.9	)		0.1			1.5
Effective income tax rate	50.6	%		14.3	%		17.1	%

In December 2017 the Tax Cuts and Jobs Act of 2017 (the Act) was signed into law in the United States. The law includes significant changes to the United States corporate income tax system, including a federal corporate rate reduction, limitations on the deductibility of certain expenses, and the transition of United States international taxation from a worldwide tax system to a territorial tax system. As part of the transition to a territorial tax system, the Act requires taxpayers to calculate a one-time transition tax based on undistributed earnings of foreign subsidiaries. We recorded the transition tax in our current year results which significantly impacted our effective tax rate. Additionally, we recorded additional tax expense to adjust certain deferred tax accounts to the new corporate tax rate.

These amounts are our best estimate based on the current information and guidance available at this time and represent provisional estimates of the transition tax related charge and change in deferred tax accounts charge associated with the Act and will be finalized in 2018.

Earnings Before Income Taxes
	2017				2016				2015
United States	$	499			$	542			$	475
International	1,564				1,379				1,260
Total	$	2,063			$	1,921			$	1,735

Components of Income Tax Expense
Current income tax expense:	2017				2016				2015
United States federal	$	836			$	94			$	78
United States state and local	38				50				23
International	133				176				108
Total current income tax expense	$	1,007			$	320			$	209
Deferred income tax expense (benefit):
United States federal	$	84			$	(17	)		$	2
United States state and local	(9		)		(12		)		8
International	(39		)		(17		)		77
Total deferred income tax expense (benefit)	$	36			$	(46	)		$	87
Total income tax expense	$	1,043			$	274			$	296

Interest and penalties included in other income (expense), net were expense of ($28), ($1) and ($4) in 2017, 2016 and 2015. The United States federal deferred income tax expense (benefit) includes the utilization of net operating loss carryforwards of $32, $28 and $79 in 2017, 2016 and 2015.

Dollar amounts in millions except per share amounts or as otherwise specified.	28

STRYKER CORPORATION 2017 FORM 10-K

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.

Dollar amounts in millions except per share amounts or as otherwise specified.	29

STRYKER CORPORATION 2017 FORM 10-K

Components of Net Periodic Pension Cost
Net periodic benefit cost:	2017				2016				2015
Service cost	$	(42	)		$	(33	)		$	(36	)
Interest cost	(10		)		(11		)		(10		)
Expected return on plan assets	11				10				11
Amortization of prior service credit	1				1				1
Recognized actuarial loss	(9		)		(9		)		(13		)
Net periodic benefit cost	$	(49	)		$	(42	)		$	(47	)
Changes in assets and benefit obligations recognized in OCI:
Net actuarial gain (loss)	$	(25	)		$	(26	)		$	26
Recognized net actuarial loss	9				9				13
Prior service (credit) cost and transition amount	(1		)		(1		)		(1		)
Total recognized in other comprehensive income (loss)	$	(17	)		$	(18	)		$	38
Total recognized in net periodic benefit cost and OCI	$	(66	)		$	(60	)		$	(9	)
Weighted-average rates used to determine net periodic benefit cost:
Discount rate	1.8		%		2.1		%		2.0		%
Expected return on plan assets	3.3		%		3.6		%		4.0		%
Rate of compensation increase	2.8		%		2.3		%		2.9		%
Weighted-average discount rate used to determine projected benefit obligations	1.8		%		1.8		%		2.1		%

Investment Strategy

The investment strategy for our defined benefit pension plans is to meet the liabilities of the plans as they fall due and to maximize the return on invested assets within appropriate risk tolerances.

	2017				2016
Fair value of plan assets	$	370			$	308
Benefit obligations	(708		)		(588		)
Funded status	$	(338	)		$	(280	)
Reported as:
Current liabilities—accrued compensation	$	(2	)		$	(1	)
Noncurrent liabilities—other liabilities	(336		)		(279		)
Pre-tax amounts recognized in AOCI:
Unrecognized net actuarial loss	(189		)		(171		)
Unrecognized prior service credit	12				11
Total	$	(177	)		$	(160	)

The estimated net actuarial loss for the defined benefit pension plans to be reclassified from AOCI into net periodic benefit cost is $9 in 2018.The total estimated amortization of prior service credit and transition asset for the defined benefit pension plans to be reclassified from AOCI into net periodic benefit credit is $1 in 2018.

Change in Benefit Obligations
	2017				2016
Beginning projected benefit obligations	$	588			$	529
Service cost	42				33
Interest cost	10				11
Foreign exchange impact	60				(18		)
Employee contributions	6				6
Actuarial losses	19				40
Acquisition	—				7
Benefits paid	(17		)		(20		)
Ending projected benefit obligations	$	708			$	588
Ending accumulated benefit obligations	$	675			$	560

Change in Plan Assets
	2017				2016
Beginning fair value of plan assets	$	308			$	289
Actual return	21				20
Employer contributions	23				18
Employee contributions	6				6
Foreign exchange impact	26				(9		)
Acquisition	—				2
Benefits paid	(14		)		(18		)
Ending fair value of plan assets	$	370			$	308

Allocation of Plan Assets
	2017 Target		2017 Actual			2016 Actual
Equity securities	26	%	28	%		28	%
Debt securities	45		45			50
Other	29		27			22
Total	100	%	100	%		100	%

Valuation of Plan Assets
2017	Level 1			Level 2			Level 3			Total
Cash and cash equivalents	$	4		$	—		$	—		$	4
Equity securities	104			17			—			121
Corporate debt securities	33			1			—			34
Other	148			14			49			211
Total	$	289		$	32		$	49		$	370
2016
Cash and cash equivalents	$	7		$	—		$	—		$	7
Equity securities	83			17			—			100
Corporate debt securities	127			—			—			127
Other	23			13			38			74
Total	$	240		$	30		$	38		$	308

Our Level 3 pension plan assets consist primarily of guaranteed investment contracts with insurance companies. The insurance contracts guarantee us principal repayment and a fixed rate of return. The $11 increase in Level 3 pension plan assets is primarily related to actual returns and acquired assets. We expect to contribute $24 to our defined benefit pension plans in 2018.

Estimated Future Benefit Payments
2018			2019			2020			2021			2022			2023-2027
$	18		$	17		$	17		$	17		$	17		$	101

Dollar amounts in millions except per share amounts or as otherwise specified.	30

STRYKER CORPORATION 2017 FORM 10-K

NOTE 12 - SUMMARY OF QUARTERLY DATA (UNAUDITED)

2017 Quarter	Mar 31			Jun 30			Sep 30			Dec 31
Net sales	$	2,955		$	3,012		$	3,006		$	3,471
Gross profit	1,962			1,990			1,982			2,239
Earnings before income taxes	499			444			471			649
Net earnings	444			391			434			(249		)
Net earnings per share of common stock:
Basic	$	1.19		$	1.04		$	1.16		$	(0.66	)
Diluted	$	1.17		$	1.03		$	1.14		$	(0.66	)
Market price of common stock:
High	$	133.59		$	145.62		$	148.84		$	160.62
Low	$	116.50		$	129.82		$	137.70		$	141.68
Dividends declared per share of common stock	$	0.425		$	0.425		$	0.425		$	0.47
2016 Quarter	Mar 31			Jun 30			Sep 30			Dec 31
Net sales	$	2,495		$	2,840		$	2,833		$	3,157
Gross profit	1,694			1,842			1,873			2,086
Earnings before income taxes	481			433			419			588
Net earnings	402			380			355			510
Net earnings per share of common stock:
Basic	$	1.08		$	1.02		$	0.95		$	1.36
Diluted	$	1.07		$	1.00		$	0.94		$	1.34
Market price of common stock:
High	$	107.95		$	119.83		$	123.55		$	121.84
Low	$	86.68		$	106.26		$	109.75		$	106.48
Dividends declared per share of common stock	$	0.38		$	0.38		$	0.38		$	0.425

NOTE 13 - SEGMENT AND GEOGRAPHIC DATA

We segregate our operations into three reportable business segments: Orthopaedics, MedSurg, and Neurotechnology and Spine.

The Corporate and Other category shown in the table below includes corporate and administration, corporate initiatives and share-based compensation, which includes compensation related to employee stock options, restricted stock units and performance stock unit grants and director stock options and restricted stock unit grants.

Segment Results
	2017			2016			2015
Orthopaedics	$	4,713		$	4,422		$	4,223
MedSurg	5,557			4,894			3,895
Neurotechnology & Spine	2,174			2,009			1,828
Net sales	$	12,444		$	11,325		$	9,946
Orthopaedics	$	337		$	317		$	290
MedSurg	315			249			117
Neurotechnology & Spine	142			140			132
Segment depreciation and amortization	$	794		$	706		$	539
Corporate and Other	65			46			51
Total depreciation and amortization	$	859		$	752		$	590
Orthopaedics	$	1,669		$	1,597		$	1,487
MedSurg	1,225			1,085			822
Neurotechnology & Spine	639			557			474
Segment operating income	$	3,533		$	3,239		$	2,783
Items not allocated to segments:
Corporate and Other	$	(402	)	$	(352	)	$	(302	)
Acquisition & integration-related charges	(64		)	(131		)	(35		)
Amortization of intangible assets	(371		)	(319		)	(210		)
Restructuring related-charges	(194		)	(125		)	(132		)
Rejuvenate and related-charges	(173		)	(158		)	(296		)
Regulatory and legal matters	(39		)	12			53
Consolidated operating income	$	2,290		$	2,166		$	1,861

Segment Assets and Capital Spending
Assets:	2017			2016			2015
Orthopaedics	$	7,486		$	7,048		$	6,149
MedSurg	9,759			8,553			5,341
Neurotechnology & Spine	4,105			4,129			3,904
Total segment assets	$	21,350		$	19,730		$	15,394
Corporate and Other	847			705			829
Total assets	$	22,197		$	20,435		$	16,223
Capital spending:
Orthopaedics	$	138		$	153		$	95
MedSurg	194			129			89
Neurotechnology & Spine	50			25			28
Total segment capital spending	$	382		$	307		$	212
Corporate and Other	216			183			58
Total capital spending	$	598		$	490		$	270

We measure the financial results of our reportable segments using an internal performance measure that excludes acquisition and integration-related charges, restructuring-related charges, reserves for certain product recall matters, reserves for certain legal and regulatory matters and a donation to an educational institution. Identifiable assets are those assets used exclusively in the operations of each business segment or allocated when used jointly. Corporate assets are principally cash and cash equivalents, marketable securities and property, plant and equipment.

The countries in which we have local revenue generating operations have been combined into the following geographic areas: the United States (including Puerto Rico); Europe, Middle East, Africa; Asia Pacific; and other foreign countries, which include Canada and countries in the Latin American region. Net sales are reported based off the geographic area of the Stryker location where the sales to the customer originated.

Geographic Information
	Net Sales										Net Property, Plant and Equipment
	2017			2016			2015				2017			2016
United States	$	9,059		$	8,230		$	7,116			$	1,102		$	941
Europe, Middle East, Africa	1,567			1,437			1,267				718			493
Asia Pacific	1,413			1,325			1,251				107			105
Other countries	405			333			312				48			30
Total	$	12,444		$	11,325		$	9,946			$	1,975		$	1,569