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, 2019 and 2018, the related consolidated statements of earnings and comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 6, 2020 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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

	Business Combinations
Description of the Matter	As described in Note 6 to the consolidated financial statements, the Company completed business combinations during 2019 for total consideration, net of cash acquired of $1,096 million. The most significant of these were (1) the acquisition of all outstanding equity of OrthoSpace, Ltd. for total consideration, net of cash acquired of $208 million; and (2) the acquisition of all outstanding equity of Mobius Imaging and Cardan Robotics for total consideration, net of cash acquired of $473 million. The acquisitions were accounted for as business combinations. The recognition, measurement and disclosure of the Company’s business combinations in the 2019 consolidated financial statements was considered especially challenging and required significant auditor judgment due to the complex determination by management of the appropriate assumptions, such as discount rates, revenue growth rates, and projected profit margins, for the valuation of acquired assets and expected probabilities of key outcomes for the valuation of assumed liabilities, including, but not limited to, developed technology and contingent consideration. The Company used a discounted cash flow model to measure the developed technology and a probability weighted discounted cash flow approach to measure the contingent consideration.

Dollar amounts in millions except per share amounts or as otherwise specified.	16

STRYKER CORPORATION 2019 FORM 10-K

How We Addressed the Matter in Our Audit	We tested the effectiveness of controls over the accounting for business combinations, including testing controls over the estimation process supporting the recognition and measurement of consideration transferred, developed technology and contingent consideration. We also tested management’s review of assumptions used in the valuation models. To test the valuation of acquired assets and expected probabilities of key outcomes for the valuation of assumed liabilities, we performed audit procedures that included, among others, evaluating management’s identification of assets acquired and liabilities assumed and assessing the fair value measurements prepared by management and their third-party valuation specialists, including the discount rates, revenue growth rates and projected profit margins as used in valuing the developed technology, as well as the inputs used in valuing contingent consideration, such as expected probabilities of key outcomes. We involved our valuation specialists to assist with the evaluation of methodologies used by the Company and significant assumptions included in the fair value estimates. For example, to evaluate the revenue growth rates and projected profit margins, we compared the amounts to historical results of the Company’s business and current industry and market trends for those in which the Company operates and performed sensitivity analyses on key assumptions. We also evaluated the adequacy of the Company’s disclosures included in Note 6 related to these acquisitions.
	Product Recall Liabilities
Description of the Matter	As described in Note 7 to the consolidated financial statements, the Company recorded $275 million of liabilities at December 31, 2019 for product recall matters relating to Rejuvenate and ABG II Modular-Neck hip stems and LFIT Anatomic CoCr V40 Femoral Heads settlements. The Company establishes liabilities for product recall claims to the extent probable future losses are estimable based on quantitative and qualitative information from various sources. The Company engages, when required, external specialists to perform an actuarial analysis to estimate the outstanding liabilities. Auditing management’s estimate of product recall liabilities was especially challenging due to the significant measurement uncertainty associated with the product recall liabilities estimate that involved management’s significant judgment and actuarial analysis. Further, the product recall liability is sensitive to significant management assumptions, including average costs per claim and the number of future claims, including those resulting in revision surgery.
How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated management’s design and tested the operating effectiveness of the controls over the Company’s product recall liability estimation process, including management's assessment of the assumptions, and the completeness and accuracy of the data underlying the product recall liabilities. To evaluate the liabilities for product recall claims, we performed audit procedures that included, among others, testing the completeness and accuracy of the underlying claims and average cost per claim data provided to management's actuarial specialist and obtaining legal confirmation letters to evaluate the reserves recorded. We involved our actuarial specialists in the evaluation of the methodologies applied by the Company in determining the actuarially calculated range of loss and assessment of significant assumptions, including number of future claims and revision surgeries factored into the resulting estimated product recall liabilities. We also evaluated the adequacy of the Company’s disclosures included in Note 7 related to these liabilities.
	Uncertain Tax Positions
Description of the Matter	As described in Note 11 to the consolidated financial statements, the Company operates in multiple jurisdictions with complex tax policy and regulatory environments and establishes reserves for uncertain tax positions in accordance with the accounting guidance governing uncertainty in income taxes. Uncertainty in a tax position may arise because tax laws are subject to interpretation. The Company uses significant judgment to (1) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (2) measure the amount of tax benefit that qualifies for recognition. At December 31, 2019, the Company had accrued liabilities of $472 million relating to uncertain tax positions. Auditing management’s analysis of the Company’s uncertain tax positions and the related unrecognized tax benefits was especially challenging as the analysis involved significant auditor judgment due to complex interpretations of tax laws, legal rulings and determination of arm’s length pricing for intercompany transactions.
How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting process for uncertain tax positions. For example, we tested controls over management’s identification of uncertain tax positions and its application of the recognition and measurement principles, including management’s review of the inputs and calculations of unrecognized income tax benefits. Our audit procedures included, among others, evaluating the assumptions the Company used to develop its uncertain tax positions and related unrecognized income tax benefit amounts by jurisdiction. We also tested the completeness and accuracy of the underlying data used by the Company to calculate its uncertain tax positions. For example, we compared the estimated liabilities for unrecognized income tax benefits to similar positions in prior periods and assessed management’s consideration of current tax controversy and litigation and trends in similar positions challenged by tax authorities. We also assessed the historical accuracy of management’s estimates of its unrecognized income tax benefits by comparing the estimates with the resolution of those positions. We involved our tax professionals to evaluate tax technical merits, which included, for certain intercompany transactions, assessing the Company’s assumptions and pricing methodology to determine they were arm’s length and complied with local jurisdictional laws and regulations. We also evaluated the adequacy of the Company’s disclosures included in Note 11 related to these tax matters.

/s/ ERNST & YOUNG LLP

We have served as the Company's auditor since 1974

Grand Rapids, Michigan

February 6, 2020

	17

STRYKER CORPORATION 2019 FORM 10-K

Stryker Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

	2019				2018				2017
Net sales	$	14,884			$	13,601			$	12,444
Cost of sales	5,188				4,663				4,264
Gross profit	$	9,696			$	8,938			$	8,180
Research, development and engineering expenses	971				862				787
Selling, general and administrative expenses	5,356				5,099				4,552
Recall charges	192				23				173
Amortization of intangible assets	464				417				371
Total operating expenses	$	6,983			$	6,401			$	5,883
Operating income	$	2,713			$	2,537			$	2,297
Other income (expense), net	(151		)		(181		)		(234		)
Earnings before income taxes	$	2,562			$	2,356			$	2,063
Income taxes	479				(1,197		)		1,043
Net earnings	$	2,083			$	3,553			$	1,020
Net earnings per share of common stock:
Basic	$	5.57			$	9.50			$	2.73
Diluted	$	5.48			$	9.34			$	2.68
Weighted-average shares outstanding (in millions):
Basic	374.0				374.1				374.0
Effect of dilutive employee stock compensation	5.9				6.2				6.1
Diluted	379.9				380.3				380.1

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	2019				2018				2017
Net earnings	$	2,083			$	3,553			$	1,020
Other comprehensive income (loss), net of tax
Marketable securities	1				—				(4		)
Pension plans	(42		)		(3		)		(2		)
Unrealized gains (losses) on designated hedges	(3		)		22				4
Financial statement translation	69				(97		)		210
Total other comprehensive income (loss), net of tax	$	25			$	(78	)		$	208
Comprehensive income	$	2,108			$	3,475			$	1,228

See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION 2019 FORM 10-K

Stryker Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

	2019				2018
Assets
Current assets
Cash and cash equivalents	$	4,337			$	3,616
Marketable securities	88				83
Accounts receivable, less allowance of $88 ($64 in 2018)	2,893				2,332
Inventories:
Materials and supplies	677				606
Work in process	178				149
Finished goods	2,427				2,200
Total inventories	$	3,282			$	2,955
Prepaid expenses and other current assets	760				747
Total current assets	$	11,360			$	9,733
Property, plant and equipment:
Land, buildings and improvements	1,263				1,041
Machinery and equipment	3,451				3,236
Total property, plant and equipment	4,714				4,277
Less allowance for depreciation	2,147				1,986
Property, plant and equipment, net	$	2,567			$	2,291
Goodwill	9,069				8,563
Other intangibles, net	4,227				4,163
Noncurrent deferred income tax assets	1,575				1,678
Other noncurrent assets	1,369				801
Total assets	$	30,167			$	27,229
Liabilities and shareholders' equity
Current liabilities
Accounts payable	$	675			$	646
Accrued compensation	955				917
Income taxes	171				158
Dividend payable	213				192
Accrued expenses and other liabilities	1,527				1,521
Current maturities of debt	859				1,373
Total current liabilities	$	4,400			$	4,807
Long-term debt, excluding current maturities	10,231				8,486
Income taxes	1,068				1,228
Other noncurrent liabilities	1,661				978
Total liabilities	$	17,360			$	15,499
Shareholders' equity
Common stock, $0.10 par value	37				37
Additional paid-in capital	1,628				1,559
Retained earnings	11,748				10,765
Accumulated other comprehensive loss	(606		)		(631		)
Total shareholders' equity	$	12,807			$	11,730
Total liabilities & shareholders' equity	$	30,167			$	27,229

See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION 2019 FORM 10-K

Stryker Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	2019						2018						2017
	Shares		Amount				Shares		Amount				Shares		Amount
Common stock
Beginning	374.4		$	37			374.4		$	37			374.6		$	37
Issuance of common stock under stock compensation and benefit plans	2.0		—				1.9		—				1.7		—
Repurchase of common stock	(1.9	)	—				(1.9	)	—				(1.9	)	—
Ending	374.5		$	37			374.4		$	37			374.4		$	37
Additional paid-in capital
Beginning			$	1,559					$	1,496					$	1,432
Issuance of common stock under stock compensation and benefit plans			(50		)				(49		)				(42		)
Repurchase of common stock			(8		)				(7		)				(7		)
Share-based compensation			127						119						113
Ending			$	1,628					$	1,559					$	1,496
Retained earnings
Beginning			$	10,765					$	8,986					$	8,842
Cumulative effect of accounting changes			—						(759		)				—
Net earnings			2,083						3,553						1,020
Repurchase of common stock			(299		)				(293		)				(223		)
Cash dividends declared			(801		)				(722		)				(653		)
Ending			$	11,748					$	10,765					$	8,986
Accumulated other comprehensive (loss) income
Beginning			$	(631	)				$	(553	)				$	(761	)
Other comprehensive income (loss)			25						(78		)				208
Ending			$	(606	)				$	(631	)				$	(553	)
Total Stryker shareholders' equity			$	12,807					$	11,730					$	9,966
Non-controlling interest
Beginning			$	—					$	14					$	—
Acquisitions			—						—						114
Interest purchased			—						(15		)				(99		)
Net earnings attributable to noncontrolling interest			—						—						—
Foreign currency exchange translation adjustment			—						1						(1		)
Ending			$	—					$	—					$	14
Total shareholders' equity			$	12,807					$	11,730					$	9,980

See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION 2019 FORM 10-K

Stryker Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

	2019				2018				2017
Operating activities
Net earnings	$	2,083			$	3,553			$	1,020
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation	314				306				271
Amortization of intangible assets	464				417				371
Share-based compensation	127				119				113
Recall charges	192				23				173
Sale of inventory stepped up to fair value at acquisition	67				16				22
Deferred income tax (benefit) expense	126				(1,582		)		36
Changes in operating assets and liabilities:
Accounts receivable	(563		)		(60		)		(162		)
Inventories	(400		)		(385		)		(320		)
Accounts payable	63				116				21
Accrued expenses and other liabilities	113				289				90
Recall-related payments	(177		)		(90		)		(526		)
Income taxes	(105		)		(156		)		704
Other, net	(113		)		44				(254		)
Net cash provided by operating activities	$	2,191			$	2,610			$	1,559
Investing activities
Acquisitions, net of cash acquired	(802		)		(2,451		)		(831		)
Purchases of marketable securities	(74		)		(226		)		(270		)
Proceeds from sales of marketable securities	69				394				87
Purchases of property, plant and equipment	(649		)		(572		)		(598		)
Other investing, net	1				(2		)		(1		)
Net cash used in investing activities	$	(1,455	)		$	(2,857	)		$	(1,613	)
Financing activities
Proceeds and payments on short-term borrowings, net	(7		)		(1		)		(200		)
Proceeds from issuance of long-term debt	2,642				3,126				499
Payments on long-term debt	(1,342		)		(669		)		—
Dividends paid	(778		)		(703		)		(636		)
Repurchases of common stock	(307		)		(300		)		(230		)
Cash paid for taxes from withheld shares	(136		)		(120		)		(95		)
Payments to purchase noncontrolling interest	—				(14		)		(99		)
Other financing, net	(69		)		10				(33		)
Net cash provided by (used in) financing activities	$	3			$	1,329			$	(794	)
Effect of exchange rate changes on cash and cash equivalents	(18		)		(8		)		74
Change in cash and cash equivalents	$	721			$	1,074			$	(774	)
Cash and cash equivalents at beginning of year	3,616				2,542				3,316
Cash and cash equivalents at end of year	$	4,337			$	3,616			$	2,542
Supplemental cash flow disclosure:
Cash paid for income taxes, net of refunds	$	457			$	539			$	312
Cash paid for interest on debt	$	286			$	248			$	231

See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION 2019 FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations: Stryker (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 with current year presentation in our Consolidated Financial Statements.

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 as the performance obligations to deliver products or services are satisfied and are recorded based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations. Our sales continue to be recognized primarily when we transfer control 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 have received a purchase order and appropriate notification the product has been used or implanted. Products and services are primarily transferred to customers at a point in time, with some transfers of services taking place over time.

Sales represent the amount of consideration we expect to receive from customers in exchange for transferring products and services. Net sales exclude sales, value added and other taxes we collect from customers. Other costs to obtain and fulfill contracts are expensed as incurred due to the short-term nature of most of our sales. We extend terms of payment to our customers based on commercially reasonable terms for the markets of our customers, while also considering their credit quality.

A provision for estimated sales returns, discounts and rebates is recognized as a reduction of sales in the same period that the sales are recognized. Our estimate of the provision for sales returns has been established based on contract terms with our customers and historical business practices and current trends. 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 net realizable value, 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, 2019 and 2018. Refer to Notes 3 and 10 for further details.

All marketable securities are recognized at fair value. Adjustments to the fair value of marketable securities that are classified as

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

STRYKER CORPORATION 2019 FORM 10-K

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 other-than-temporary. The resulting losses from other-than-temporary impairments of available-for-sale marketable debt 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 sales and 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 cost of goods sold in the Consolidated Statements of Earnings. 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.

Forward currency exchange 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.

From time to time, we designate derivative and non-derivative financial instruments as net investment hedges of our investments in certain international subsidiaries. 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 have elected to use the spot method to assess effectiveness for our derivatives designated as net investment hedges. Accordingly, the change in fair value attributable to changes in the spot rate is recorded in AOCI. We exclude the spot-forward difference from the assessment of hedge

effectiveness and amortize this amount separately on a straight-line basis over the term of the forward contracts. This amortization will be recorded in Other income (expense), net in our Consolidated Statements of Earnings.

From time to time, we designate forward starting interest rate derivative instruments as cash flow hedges 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 have been used in the past 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 acquired in a business combination 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) intangible assets. For acquisitions accounted for as business combinations IPRD is considered to be an indefinite-lived intangible asset until the research is completed (then it becomes a determinable-lived intangible asset) or determined to have no future use (then it is impaired). For asset acquisitions IPRD is expensed immediately unless there is an alternative future use.

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

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

STRYKER CORPORATION 2019 FORM 10-K

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.

Share-Based Compensation: We use share based compensation in the form of stock options, restricted stock units (RSUs) and performance 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

We evaluate all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) for consideration of their applicability. ASUs not included in our disclosures were assessed and determined to be either not applicable or are not expected to have a material impact on our Consolidated Financial Statements.

In June 2016 the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard is effective for reporting periods beginning after December 15, 2019. The standard replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses for accounts receivables, loans and other financial instruments. The standard is not expected to have a material impact on our Consolidated Financial Statements.

Accounting Pronouncements Recently Adopted

On January 1, 2019 we adopted ASU 2016-02, Leases, and related amendments (ASC 842), which require lease assets and liabilities to be recorded on the balance sheet for leases with terms greater than twelve months. The adoption of this update did not have a material impact on our Consolidated Financial Statements. Refer to Note 7 for further information.

On January 1, 2019 we adopted 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 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 - REVENUE RECOGNITION

We disaggregate our net sales by product line and geographic location for each of our segments as we believe it best depicts how the nature, amount, timing and certainty of our net sales and cash flows are affected by economic factors.

Products and services are primarily transferred to customers at a point in time, with some transfers of services taking place over time. In 2019 less than 10% of our sales were recognized as services transferred over time. Refer to Note 1 for further discussion on our revenue recognition policies.

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

STRYKER CORPORATION 2019 FORM 10-K

Segment Net Sales
Orthopaedics:	2019				2018				2017
Knees	$	1,815			$	1,701			$	1,595
Hips	1,383				1,336				1,303
Trauma and Extremities	1,639				1,580				1,478
Other	415				374				337
	$	5,252			$	4,991			$	4,713
MedSurg:
Instruments	$	2,041			$	1,822			$	1,678
Endoscopy	1,983				1,846				1,652
Medical	2,264				2,118				1,969
Sustainability	286				259				258
	$	6,574			$	6,045			$	5,557
Neurotechnology and Spine:
Neurotechnology	$	1,973			$	1,737			$	1,423
Spine	1,085				828				751
	$	3,058			$	2,565			$	2,174
Total	$	14,884			$	13,601			$	12,444

United States Net Sales
Orthopaedics:	2019				2018				2017
Knees	$	1,347			$	1,244			$	1,169
Hips	882				838				820
Trauma and Extremities	1,051				1,001				950
Other	334				300				276
	$	3,614			$	3,383			$	3,215
MedSurg:
Instruments	$	1,608			$	1,424			$	1,304
Endoscopy	1,577				1,432				1,290
Medical	1,787				1,630				1,525
Sustainability	283				257				257
	$	5,255			$	4,743			$	4,376
Neurotechnology and Spine:
Neurotechnology	$	1,271			$	1,115			$	900
Spine	817				607				568
	$	2,088			$	1,722			$	1,468
Total	$	10,957			$	9,848			$	9,059

International Net Sales
Orthopaedics:	2019				2018				2017
Knees	$	469			$	457			$	426
Hips	500				498				483
Trauma and Extremities	588				579				528
Other	81				74				61
	$	1,638			$	1,608			$	1,498
MedSurg:
Instruments	$	433			$	398			$	374
Endoscopy	406				414				362
Medical	477				488				444
Sustainability	3				2				1
	$	1,319			$	1,302			$	1,181
Neurotechnology and Spine:
Neurotechnology	$	702			$	622			$	523
Spine	268				221				183
	$	970			$	843			$	706
Total	$	3,927			$	3,753			$	3,385

Orthopaedics

Orthopaedics products consist primarily of implants used in hip and knee joint replacements and trauma and extremity surgeries. Substantially all Orthopaedics sales are recognized when we have received a purchase order and appropriate notification the product has been used or implanted. For certain Orthopaedic products in the "other" category, we recognize sales at a point in time, as well

as over time for performance obligations that may include an obligation to complete installation, provide training and ongoing services. Performance obligations are satisfied within one year.

MedSurg

MedSurg products include surgical equipment and navigation systems (Instruments), endoscopic and communications systems (Endoscopy), patient handling, emergency medical equipment and intensive care disposable products (Medical), reprocessed and remanufactured medical devices (Sustainability) and other medical device products used in a variety of medical specialties. Substantially all MedSurg sales are recognized when a purchase order has been received and control has transferred. For certain Endoscopy, Instruments and Medical services, we may recognize sales over time as we satisfy performance obligations that may include an obligation to complete installation, provide training and perform ongoing services, generally performed within one year.

Neurotechnology and Spine

Neurotechnology and Spine products include neurosurgical, neurovascular, and spinal implant devices. Our neurotechnology offering includes products used for minimally invasive endovascular techniques; a comprehensive line of products for traditional brain and open skull based surgical procedures; orthobiologic and biosurgery products, including synthetic bone grafts and vertebral augmentation products; and minimally invasive products for the treatment of acute ischemic and hemorrhagic stroke. Our spinal implant offering includes cervical, thoracolumbar and interbody systems used in spinal injury, deformity and degenerative therapies. Substantially all Neurotechnology and Spine sales are recognized when a purchase order has been received and control has transferred.

Contract Assets and Liabilities

The nature of our products and services do not generally give rise to contract assets as we typically do not incur costs to fulfill a contract before a product or service is provided to a customer. Our costs to obtain contracts are typically in the form of sales commissions paid to employees of Stryker or third-party agents. We have elected to expense sales commissions associated with obtaining a contract as incurred as the amortization period is generally less than one year. These costs have been presented within selling, general and administrative expenses. On December 31, 2019 there were no contract assets recorded in our Consolidated Balance Sheets.

Our contract liabilities arise as a result of consideration received from customers at inception of contracts for certain businesses or where the timing of billing for services precedes satisfaction of our performance obligations. We generally satisfy performance obligations within one year from the contract inception date. Our contract liabilities were $313 and $327 on December 31, 2019 and December 31, 2018.

NOTE 3 - 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.

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

STRYKER CORPORATION 2019 FORM 10-K

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. 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 the 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
	2019			2018
Cash and cash equivalents	$	4,337		$	3,616
Trading marketable securities	149			118
Level 1 - Assets	$	4,486		$	3,734
Available-for-sale marketable securities:
Corporate and asset-backed debt securities	$	32		$	38
United States agency debt securities	2			11
United States treasury debt securities	49			23
Certificates of deposit	5			11
Total available-for-sale marketable securities	$	88		$	83
Foreign currency exchange forward contracts	226			77
Interest rate swap asset	17			—
Level 2 - Assets	$	331		$	160
Total assets measured at fair value	$	4,817		$	3,894

Liabilities Measured at Fair Value
	2019			2018
Deferred compensation arrangements	$	149		$	118
Level 1 - Liabilities	$	149		$	118
Foreign currency exchange forward contracts	$	23		$	20
Level 2 - Liabilities	$	23		$	20
Contingent consideration:
Beginning	$	117		$	32
Additions	298			77
Change in estimate	(10		)	15
Settlements	(99		)	(7		)
Ending	$	306		$	117
Level 3 - Liabilities	$	306		$	117
Total liabilities measured at fair value	$	478		$	255

Fair Value of Available for Sale Securities by Maturity
	2019			2018
Due in one year or less	$	50		$	51
Due after one year through three years	$	38		$	32

On December 31, 2019 the aggregate difference between the cost and fair value of available-for-sale marketable securities was nominal. Interest and marketable securities income was $155, $119 and $60 in 2019, 2018 and 2017, 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, 2019. On December 31, 2019 the majority of 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 not material.

Securities in a Continuous Unrealized Loss Position
	Number of Investments	Fair Value
Corporate and Asset-Backed	2	$	1
United States Treasury	6	13
Certificate of Deposit	4	1
Total	12	$	15

NOTE 4 - DERIVATIVE INSTRUMENTS

Foreign Currency Hedges

We use operational and economic hedges, foreign currency exchange forward contracts, net investment hedges (both derivative and non-derivative financial instruments) and interest rate derivative instruments to manage the impact of currency exchange and interest rate fluctuations on earnings, cash flow and equity. We do not enter into derivative instruments for speculative purposes. We are exposed to potential 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.

2019	Cash Flow			Net Investment			Non-Designated			Total
Gross notional amount	$	801		$	1,113		$	6,174		$	8,088
Maximum term in days										1646
Fair value:
Other current assets	$	5		$	—		$	180		$	185
Other noncurrent assets	1			40			—			41
Other current liabilities	(10		)	—			(11		)	(21		)
Other noncurrent liabilities	(2		)	—			—			(2		)
Total fair value	$	(6	)	$	40		$	169		$	203
2018
Gross notional amount	$	870		$	—		$	5,466		$	6,336
Maximum term in days										586
Fair value:
Other current assets	$	15		$	—		$	28		$	43
Other noncurrent assets	1			—			33			34
Other current liabilities	(5		)	—			(15		)	(20		)
Other noncurrent liabilities	—			—			—			—
Total fair value	$	11		$	—		$	46		$	57

In December 2019 and November 2018 we designated the issuance of €2,400 and €2,250 of senior unsecured notes as a net investment hedge to selectively hedge portions of our investment in certain international subsidiaries. The currency effects of our euro-denominated senior unsecured notes are reflected in AOCI within shareholders' equity where they offset gains and losses recorded on our net investment in international subsidiaries.

On December 31, 2019 the total after-tax gain in AOCI related to these designated net investment hedges was $17. We evaluate the effectiveness of our net investment hedges quarterly. We have not recognized any ineffectiveness in 2019.

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

STRYKER CORPORATION 2019 FORM 10-K

In July 2019 we entered into €1.0 billion in certain forward currency contracts and designated these as net investment hedges to hedge a portion of our investments in certain of our entities with functional currencies denominated in Euros. We evaluate the effectiveness of our net investment hedges quarterly.

Net Currency Exchange Rate Gains (Losses)
Derivative Instrument	Recorded in:	2019			2018			2017
Cash Flow	Cost of sales	$	2		$	7		$	(6	)
Net Investment	Other income (expense), net	14			—			—
Non-Designated	Other income (expense), net	$	(7	)	$	(6	)	$	(9	)
	Total	$	9		$	1		$	(15	)

Pretax gains (losses) on derivatives designated as cash flow of ($6) and net investment hedges of $27 recorded in AOCI are expected to be reclassified to cost of sales and other income (expense) in earnings within 12 months as of December 31, 2019. This cash flow hedge reclassification is primarily due to the sale of inventory that includes previously hedged purchases. A component of the AOCI amounts related to net investment hedges is reclassified over the life of the hedge instruments as we elected to exclude the initial value of the component related to the spot-forward difference from the effectiveness assessment.

Interest Rate Hedges

In conjunction with our offering of senior unsecured notes in November 2019 we terminated cash flow hedges with gross notional amounts of €600 designated as forward starting interest rate swaps of our interest rates, the impact of which will be recognized over time as a benefit within interest expense. Pretax gains recorded in AOCI related to closed interest rate hedges of $6 are expected to be reclassified to other income (expense) in earnings within 12 months of December 31, 2019.

On December 31, 2019 we had interest rate swap agreements with notional amounts of $750 designated as forward starting interest rate swaps in anticipation of future debt issuances. Pretax gains of $17 were recorded in AOCI as of December 31, 2019. 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 these hedges is recorded in cash flow from operations.

NOTE 5 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (AOCI)

	Marketable Securities			Pension Plans			Hedges			Financial Statement Translation			Total
2017	$	(4	)	$	(134	)	$	28		$	(443	)	$	(553	)
OCI	2			(16		)	36			(115		)	(93		)
Income taxes	—			1			(9		)	18			10
Reclassifications to:
Cost of Sales	—			—			(7		)	—			(7		)
Other (income) expense	(2		)	10			—			—			8
Income taxes	—			2			2			—			4
Net OCI	—			(3		)	22			(97		)	(78		)
2018	$	(4	)	$	(137	)	$	50		$	(540	)	$	(631	)
OCI	—			(74		)	3			101			30
Income taxes	—			26			—			(21		)	5
Reclassifications to:
Cost of Sales	—			—			(2		)	—			(2		)
Other (income) expense	1			8			(5		)	(14		)	(10		)
Income taxes	—			(2		)	1			3			2
Net OCI	1			(42		)	(3		)	69			25
2019	$	(3	)	$	(179	)	$	47		$	(471	)	$	(606	)

NOTE 6 - ACQUISITIONS

The aggregate purchase price of our acquisitions, net of cash acquired was $1,096 and $2,451 in 2019 and 2018. We acquired stock in companies and various assets that continue to support our capital deployment and product development strategies.

In October 2019 we completed the acquisition of Mobius Imaging and Cardan Robotics for net cash consideration of $360 and future regulatory and commercial milestone payments of up to $130. Mobius Imaging is a leader in point-of-care imaging technology focused on integrating advanced imaging technologies into medical workflow. Cardan Robotics is working to develop innovative robotics and navigation technology systems for surgical and interventional radiology procedures. Mobius Imaging and Cardan Robotics (Mobius) are part of our Spine business within Neurotechnology and Spine. For income tax purposes the acquisition is treated as an asset purchase. Goodwill attributable to the acquisition is deductible for tax purposes.

In March 2019 we completed the acquisition of OrthoSpace, Ltd. (OrthoSpace) for net cash consideration of $110 and future regulatory milestone payments of up to $110. OrthoSpace is a medical device company specializing in orthopaedic biodegradable technology for the treatment of irreparable rotator cuff tears. OrthoSpace is part of our Endoscopy business within MedSurg. Goodwill attributable to the acquisition is not deductible for tax purposes.

In November 2018 we completed the acquisition of K2M Group Holdings, Inc. (K2M) for $27.50 per share, or an aggregate purchase price of $1,380, net of cash acquired. K2M is a global leader of complex spine and minimally invasive solutions focused on achieving three-dimensional Total Body Balance. K2M is part of our Spine business within Neurotechnology and Spine. Goodwill attributable to the acquisition is not deductible for tax purposes.

In February 2018 we completed the acquisition of Entellus Medical, Inc. (Entellus) for $24.00 per share, or an aggregate purchase price of $697, net of cash acquired. Entellus is 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. Entellus is part of our Neurotechnology business within Neurotechnology and Spine. Goodwill attributable to the acquisition is not deductible for tax purposes.

In November 2019 we announced a definitive agreement to acquire all of the issued and outstanding ordinary shares of Wright Medical Group N.V. (Wright) for $30.75 per share, or an aggregate purchase price of approximately $5.4 billion (including convertible notes). Pursuant to the agreement, on December 13, 2019 our wholly owned subsidiary, Stryker B.V., commenced a tender offer to purchase all of the outstanding ordinary shares, par value €0.03 per share, of Wright at a price of $30.75 per share, without interest, but subject to any applicable withholding of taxes. We expect the acquisition to close in the second half of 2020, subject to the expiration of the waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of other required approvals and clearances under applicable antitrust laws, the adoption of certain resolutions by Wright’s shareholders at an extraordinary general meeting of Wright’s shareholders and other customary conditions. Wright is a global medical device company focused on extremities and biologics. Following closing, we plan to integrate Wright into our Trauma and Extremities business within Orthopaedics.

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

STRYKER CORPORATION 2019 FORM 10-K

Purchase price allocations for our significant acquisitions are presented below:

Purchase Price Allocation of Acquired Net Assets
2019		Mobius			OrthoSpace
Tangible assets acquired:
Accounts receivable		$	3		$	1
Inventory		7			1
Other assets		2			1
Contingent consideration		(4		)	—
Liabilities		(10		)	(29		)
Intangible assets:
Customer relationship		7			—
Developed technology and patents		60			120
In-process research and development		98			—
Non-compete agreements		9			—
Goodwill		301			114
Purchase price, net of cash acquired		$	473		$	208
Weighted average life of intangible assets		12			18

2018		K2M			Entellus
Tangible assets acquired:
Accounts receivable		$	58		$	17
Inventory		131			14
Other assets		160			62
Contingent consideration		—			(79		)
Liabilities		(257		)	(76		)
Intangible assets:
Customer relationship		34			33
Distributor relationship		1			—
Trade name		10			—
Developed technology and patents		475			261
Internally developed software		2			—
Goodwill		766			465
Purchase price, net of cash acquired		$	1,380		$	697
Weighted average life of intangible assets		15			16

Purchase price allocations for Mobius, OrthoSpace and other 2019 acquisitions were based on preliminary valuations, primarily related to intangible assets and inventory. Our estimates and assumptions are subject to change within the measurement period. The purchase price allocations for K2M, Entellus and other 2018 acquisitions were finalized in 2019.

NOTE 7 - 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 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. Zimmer appealed, and on December 10, 2018 the Federal Circuit affirmed the decision. Zimmer filed a petition on January 23, 2019 to seek a rehearing of this ruling by the entire Federal Circuit. On March 19, 2019 the Federal Circuit denied Zimmer’s petition for a rehearing. Zimmer conditionally paid us $167 while it pursued a review of the decision by the Supreme Court. On October 7, 2019 the Supreme Court denied Zimmer’s petition for review. This decision concluded the case. Accordingly, in November 2019 we recorded a $100 gain, net of legal costs, which was recorded within selling, general and administrative expenses.

Recall Matters

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. In November 2014 we entered into a settlement agreement to compensate eligible United States patients who had revision surgery prior to November 3, 2014 and in December 2016 the settlement program was extended to patients who had revision surgery prior to December 19, 2016. 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, there are remaining lawsuits that we will continue to defend against.

In August 2016 and May 2018 we voluntarily recalled certain lot-specific sizes and offsets of LFIT Anatomic CoCr V40 Femoral Heads. Product liability lawsuits and claims relating to this voluntary recall have been filed against us. In November 2018 we entered into a settlement agreement to resolve a significant number of claims and lawsuits related to the recalls. The specific terms of the settlement agreement, including the financial terms, are confidential.

We have incurred, and expect to incur in the future, costs associated with the defense and settlement of these matters. Based on the information that has been received, we have estimated the remaining range of probable loss related to these matters globally to be approximately $275 to $520. We have recorded charges to earnings representing the minimum of the range of probable loss. The final outcomes of these matters are dependent on many factors that are difficult to predict. Accordingly, the ultimate cost related to

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

STRYKER CORPORATION 2019 FORM 10-K

these matters globally may be materially different than the amount of our current estimate and accruals and could have a material adverse effect on our results of operations and cash flows.

Leases

We lease various manufacturing, warehousing and distribution facilities, administrative and sales offices as well as equipment under operating leases. We evaluate our contracts to identify leases, which is generally if there is an identified asset and we have the right to direct the use of and obtain substantially all of the economic benefit from the use of the identified asset. Certain of our lease agreements contain rent escalation clauses (including index-based escalations), rent holidays, capital improvement funding or other lease concessions. We recognize our minimum rental expense on a straight-line basis over the term of the lease beginning with the date of initial control of the asset. With the adoption of ASC 842 we recognized all leases with terms greater than twelve months in duration on our Consolidated Balance Sheets as right-of-use assets and lease liabilities of approximately $350 as of January 1, 2019. We adopted the standard using the prospective approach and did not retrospectively apply to prior periods. Right-of-use assets are recorded in Other noncurrent assets on our Consolidated Balance Sheets. Current and non-current lease liabilities are recorded in Accrued expenses and other liabilities and Other noncurrent liabilities, respectively, on our Consolidated Balance Sheets.

We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:

•	We elected the package of practical expedients available for transition which allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.

•	We did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.

•	For all asset classes, we elected to not recognize a right-of-use asset and lease liability for short-term leases.

•	For all asset classes, we elected to not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component.

•	The determination of the discount rate used in a lease is our incremental borrowing rate which is based on what we would normally pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments.

Leases	December
2019
Right-of-use assets	$	384
Lease liabilities, current	$	86
Lease liabilities, non-current	$	301
Other information
Weighted-average remaining lease term	6.2 years
Weighted-average discount rate	3.34		%

Lease expense totaled $133, $138, and $125 in 2019, 2018 and 2017.

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. Refer to Note 10 for more information on the debt obligations.

Future Obligations
	2020			2021			2022			2023			2024			Thereafter
Debt repayments	$	860		$	750		$	—		$	612		$	1,546		$	7,433
Purchase obligations	$	1,373		$	19		$	9		$	6		$	6		$	6
Minimum lease payments	$	94		$	74		$	62		$	38		$	32		$	95

NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS

We completed our annual impairment tests of goodwill in 2019 and 2018 and concluded in each year that no impairments exist.

Summary of Other Intangible Assets
	Weighted Average Amortization Period (Years)	Gross Carrying Amount			Less Accumulated Amortization			Net Carrying Amount
Developed technologies
2019	14	$	3,731		$	1,271		$	2,460
2018	13	3,426			1,115			2,311
Customer relationships
2019	16	$	2,160		$	848		$	1,312
2018	15	2,155			703			1,452
Patents
2019	11	$	348		$	265		$	83
2018	12	332			231			101
Trademarks
2019	18	$	362		$	136		$	226
2018	18	349			108			241
In-process research and development
2019	N/A	$	110		—			$	110
2018	N/A	6			—			6
Other
2019	8	$	125		$	89		$	36
2018	11	128			76			52
Total
2019	14	$	6,836		$	2,609		$	4,227
2018	14	$	6,396		$	2,233		$	4,163

Changes in the Net Carrying Value of Goodwill by Segment
	Orthopaedics			MedSurg			Neurotechnology and Spine			Total
2017	$	2,426		$	3,509		$	1,233		$	7,168
Additions and adjustments	4			100			1,366			1,470
Foreign exchange	(31		)	(28		)	(16		)	(75		)
2018	$	2,399		$	3,581		$	2,583		$	8,563
Additions and adjustments	—			229			318			547
Foreign exchange	(13		)	(11		)	(17		)	(41		)
2019	$	2,386		$	3,799		$	2,884		$	9,069

Estimated Amortization Expense
2020			2021			2022			2023			2024
$	457		$	440		$	435		$	414		$	384

NOTE 9 - 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, 2019.

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

STRYKER CORPORATION 2019 FORM 10-K

In 2019 we repurchased 1.9 million shares at a cost of $307. 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, 2019 the total dollar value of shares that could be purchased under our authorized repurchase program was $1,033.

Shares reserved for future compensation grants of our common stock were 31 million and 33 million on December 31, 2019 and 2018.

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
	2019				2018				2017
Weighted-average fair value per share	$	36.30			$	28.52			$	22.43
Assumptions:
Risk-free interest rate	2.6		%		2.7		%		2.0		%
Expected dividend yield	1.1		%		1.2		%		1.5		%
Expected stock price volatility	18.3		%		16.8		%		19.4		%
Expected option life (years)	5.9				6.0				6.0

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.

2019 Stock Option Activity
	Shares (in millions)			Weighted Average Exercise Price				Weighted-Average Remaining Term (in years)		Aggregate Intrinsic Value
Outstanding January 1	14.1			$	97.69
Granted	2.1			179.41
Exercised	(2.6	)		75.74
Canceled	(0.8	)		134.73
Outstanding December 31	12.8			$	113.10			6.0		$	1,242.8
Exercisable December 31	6.8			$	85.62			4.4		$	853.2
Options expected to vest	5.4			$	143.38			7.7		$	360.8

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 $294, $247, and $184 in 2019, 2018 and 2017. Exercise prices for options outstanding ranged from $51.82 to $209.78 on December 31, 2019. On December 31, 2019 there was $101 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 1.5 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	0.9			0.3			$	129.90			$	122.39
Granted	0.4			—			175.96				180.70
Vested	(0.4	)		(0.1	)		120.56				98.10
Canceled or forfeited	(0.1	)		—			146.37				136.56
Nonvested on December 31	0.8			0.2			$	158.80			$	152.44

On December 31, 2019 there was $67 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 $175.96 and $150.23 in 2019 and 2018. The fair value of RSUs and PSUs vested in 2019 was $52 and $10. On December 31, 2019 there was $15 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.

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 166,758 and 168,626 shares under the ESPP in 2019 and 2018.

NOTE 10 - DEBT AND CREDIT FACILITIES

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, 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, 2019 there were no amounts outstanding under our commercial paper program.

Summary of Total Debt
					2019				2018
Senior unsecured notes:
	Rate		Due
	1.800%		January 15, 2019		$	—			$	500
	2.000%		March 8, 2019		—				750
	4.375%		January 15, 2020		500				499
	Variable		November 30, 2020		333				343
	2.625%		March 15, 2021		749				747
	1.125%		November 30, 2023		609				627
	3.375%		May 15, 2024		587				584
	0.250%		December 3, 2024		938				—
	3.375%		November 1, 2025		746				746
	3.500%		March 15, 2026		991				990
	2.125%		November 30, 2027		829				853
	3.650%		March 7, 2028		596				595
	0.750%		March 1, 2029		884				—
	2.625%		November 30, 2030		712				733
	1.000%		December 3, 2031		823				—
	4.100%		April 1, 2043		391				391
	4.375%		May 15, 2044		395				395
	4.625%		March 15, 2046		981				980
Other					26				126
Total debt					$	11,090			$	9,859
Less current maturities					859				1,373
Total long-term debt					$	10,231			$	8,486

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

STRYKER CORPORATION 2019 FORM 10-K

						2019				2018
Unamortized debt issuance costs					$	58			$	50
Borrowing capacity on existing facilities					$	1,546			$	1,548
Fair value of senior unsecured notes					$	11,910			$	9,746

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.

In January 2019 we repaid $500 of senior unsecured notes with a coupon of 1.800% that were due on January 15, 2019. In March 2019 we repaid $750 of senior unsecured notes with a coupon of 2.000% that were due on March 8, 2019.

In December 2019 we issued €850 of senior unsecured notes with a fixed interest rate of 0.250% due on December 3, 2024, €800 of senior unsecured notes with a fixed interest rate of 0.750% due on March 1, 2029 and €750 of senior unsecured notes with a fixed interest rate of 1.000% due on December 3, 2031. Our annual interest expense arising from the issuance of the 2029 notes will be reduced by the benefit from the cash flow hedges that were terminated in conjunction with the issuance. Refer to Note 4 for further information. The 2024 and 2031 notes are subject to a Special Mandatory Redemption in which we will be required to redeem the notes in whole at a price equal to 101% of the aggregate principal amount plus accrued and unpaid interest if we do not consummate the Wright tender offer on or before February 4, 2021.

In January 2020 we repaid $500 of senior unsecured notes with a coupon of 4.375% that were due on January 15, 2020.

Interest expense, including required fees incurred on outstanding debt and credit facilities that were included in other expense, totaled $287, $264, and $247 in 2019, 2018 and 2017.

NOTE 11 - INCOME TAXES

Our effective tax rate was 18.7%, (50.8)% and 50.6% for 2019, 2018 and 2017. The effective income tax rate for 2019 reflects the tax related to the transfer of intellectual properties between tax jurisdictions and the continued lower effective income tax rates as a result of our European operations. The effective income tax rate for 2018 reflects the tax effect related to the transfer of intellectual properties between tax jurisdictions, the continuing impact of complying with the Tax Cuts and Jobs Act of 2017 (the Tax Act) and continued lower effective income tax rates as a result of our European operations. The effective income tax rate for 2017 reflects compliance with the Tax Act offset by lower effective income tax rates as a result of our European operations.

Effective Income Tax Rate Reconciliation
	2019			2018			2017
United States federal statutory rate	21.0	%		21.0	%		35.0	%
United States state and local income taxes, less federal deduction	1.7			0.4			1.2
Foreign income tax at rates other than 21%	(4.6	)		(6.5	)		(21.0	)
Tax Cuts and Jobs Act of 2017 transition tax	—			2.2			38.0
Tax Cuts and Jobs Act of 2017 deferred tax changes	—			(0.6	)		2.3
Tax related to repatriation of foreign earnings	(0.5	)		0.5			—
Intellectual property transfer	3.5			(63.8	)		—
Other	(2.4	)		(4.0	)		(4.9	)
Effective income tax rate	18.7	%		(50.8	)%		50.6	%

In December 2017 the Tax 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 Tax Act requires taxpayers to calculate a one-time transition tax based on undistributed earnings of foreign subsidiaries.

The Tax Act subjects a United States shareholder to tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries. We have elected to account for GILTI tax in the year the tax is incurred.

Earnings Before Income Taxes
	2019				2018				2017
United States	$	366			$	509			$	499
International	2,196				1,847				1,564
Total	$	2,562			$	2,356			$	2,063

Components of Income Tax Expense (Benefit)
Current income tax expense:	2019				2018				2017
United States federal	$	(17	)		$	178			$	836
United States state and local	46				30				38
International	324				177				133
Total current income tax expense	$	353			$	385			$	1,007
Deferred income tax (benefit) expense:
United States federal	$	10			$	(44	)		$	84
United States state and local	(1		)		(20		)		(9		)
International	117				(1,518		)		(39		)
Total deferred income tax (benefit) expense	$	126			$	(1,582	)		$	36
Total income tax (benefit) expense	$	479			$	(1,197	)		$	1,043

Interest and penalties included in other income (expense), net were expense of ($9), ($9) and ($28) in 2019, 2018 and 2017. The United States federal deferred income tax benefit (expense) includes the utilization of net operating loss carryforwards of $50, $31 and $32 in 2019, 2018 and 2017.

Deferred Income Tax Assets and Liabilities
Deferred income tax assets:	2019				2018
Inventories	$	415			$	390
Product-related liabilities	57				60
Other accrued expenses	221				222
Depreciation and amortization	1,363				1,504
State income taxes	65				70
Share-based compensation	49				47
Net operating loss carryforwards	95				134
Other	207				177
Total deferred income tax assets	$	2,472			$	2,604
Less valuation allowances	(75		)		(66		)
Net deferred income tax assets	$	2,397			$	2,538
Deferred income tax liabilities:
Depreciation and amortization	$	(893	)		$	(865	)
Undistributed earnings	(37		)		(46		)
Other	—				(3		)
Total deferred income tax liabilities	$	(930	)		$	(914	)
Net deferred income tax assets	$	1,467			$	1,624
Reported as:
Noncurrent deferred income tax assets	$	1,575			$	1,678
Noncurrent liabilities—Other liabilities	(108		)		(54		)
Total	$	1,467			$	1,624

Accrued interest and penalties were $94 and $85 on December 31, 2019 and 2018 which were reported in current and noncurrent accrued expenses and other liabilities.

Net operating loss carryforwards totaling $378 on December 31, 2019 are available to reduce future taxable earnings of certain domestic and foreign subsidiaries. United States loss carryforwards of $358 expire through 2045. International loss carryforwards of $20 begin to expire in 2037; however, some have no expiration. We also have a tax credit carryforward of $65 with $63 being subject to a full valuation allowance. The credits with a full valuation allowance

Dollar amounts in millions except per share amounts or as otherwise specified.	31

STRYKER CORPORATION 2019 FORM 10-K

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 Tax Act. No other provision was made for United States income taxes that may result from future remittances of the undistributed earnings of foreign subsidiaries that are determined to be indefinitely reinvested. Determination of the total amount of unrecognized deferred income tax on undistributed earnings of foreign subsidiaries is not practicable.

Uncertain Income Tax Positions
	2019				2018
Beginning uncertain tax positions	$	528			$	540
Increases related to current year income tax positions	62				22
Increases related to prior year income tax positions	5				25
Decreases related to prior year income tax positions:
Settlements and resolutions of income tax audits	(78		)		(37		)
Statute of limitations expirations	(40		)		(14		)
Foreign currency translation	(5		)		(8		)
Ending uncertain tax positions	$	472			$	528
Reported as:
Noncurrent liabilities—Income taxes	$	472			$	528

Our income tax expense would have been reduced by $468 and $521 on December 31, 2019 and 2018 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 12 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 2014 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 12 - 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.

	2019				2018				2017
Plan expense	$	205			$	180			$	181
Expense funded with Stryker common stock	31				29				25
Stryker common stock held by plan:
Dollar amount	470				358				353
Shares (in millions)	2.2				2.3				2.3
Value as a percentage of total plan assets	12		%		12		%		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.

Components of Net Periodic Pension Cost
Net periodic benefit cost:	2019				2018				2017
Service cost	$	(41	)		$	(44	)		$	(42	)
Interest cost	(12		)		(11		)		(10		)
Expected return on plan assets	12				12				11
Amortization of prior service credit	1				1				1
Recognized actuarial loss	(9		)		(11		)		(9		)
Net periodic benefit cost	$	(49	)		$	(53	)		$	(49	)
Changes in assets and benefit obligations recognized in OCI:
Net actuarial gain (loss)	$	(74	)		$	11			$	(25	)
Recognized net actuarial loss	9				10				9
Prior service (credit) cost and transition amount	(1		)		(1		)		(1		)
Total recognized in other comprehensive income (loss)	$	(66	)		$	20			$	(17	)
Total recognized in net periodic benefit cost and OCI	$	(115	)		$	(33	)		$	(66	)
Weighted-average rates used to determine net periodic benefit cost:
Discount rate	1.9		%		1.8		%		1.8		%
Expected return on plan assets	3.5		%		3.3		%		3.3		%
Rate of compensation increase	2.9		%		2.8		%		2.8		%
Weighted-average discount rate used to determine projected benefit obligations	1.0		%		1.9		%		1.8		%

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.

Dollar amounts in millions except per share amounts or as otherwise specified.	32

STRYKER CORPORATION 2019 FORM 10-K

	2019				2018
Fair value of plan assets	$	428			$	376
Benefit obligations	(869		)		(735		)
Funded status	$	(441	)		$	(359	)
Reported as:
Current liabilities—accrued compensation	$	(2	)		$	(2	)
Noncurrent liabilities—other liabilities	(439		)		(357		)
Pre-tax amounts recognized in AOCI:
Unrecognized net actuarial loss	(250		)		(168		)
Unrecognized prior service credit	9				11
Total	$	(241	)		$	(157	)

The estimated net actuarial loss for the defined benefit pension plans to be reclassified from AOCI into net periodic benefit cost is $12 in 2020. 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 2020.

Change in Benefit Obligations
	2019				2018
Beginning projected benefit obligations	$	735			$	708
Service cost	41				44
Interest cost	12				11
Foreign exchange impact	(12		)		(16		)
Employee contributions	6				6
Actuarial (gains) losses	116				(1		)
Acquisition	—				—
Benefits paid	(29		)		(17		)
Ending projected benefit obligations	$	869			$	735
Ending accumulated benefit obligations	$	830			$	702

Change in Plan Assets
	2019				2018
Beginning fair value of plan assets	$	376			$	370
Actual return	52				(2		)
Employer contributions	25				22
Employee contributions	6				6
Foreign exchange impact	(5		)		(6		)
Acquisition	—				—
Benefits paid	(26		)		(14		)
Ending fair value of plan assets	$	428			$	376

Allocation of Plan Assets
	2020 Target			2019 Actual			2018 Actual
Equity securities	23	%		22	%		26	%
Debt securities	44			44			46
Other	33			34			28
Total	100	%		100	%		100	%

Valuation of Plan Assets
2019	Level 1			Level 2			Level 3			Total
Cash and cash equivalents	$	7		$	—		$	—		$	7
Equity securities	23			86			—			109
Corporate debt securities	3			173			—			176
Other	4			52			80			136
Total	$	37		$	311		$	80		$	428
2018
Cash and cash equivalents	$	10		$	—		$	—		$	10
Equity securities	20			85			—			105
Corporate debt securities	2			153			—			155
Other	7			43			56			106
Total	$	39		$	281		$	56		$	376

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 $24 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 2020.

Estimated Future Benefit Payments
2020			2021			2022			2023			2024			2025-2029
$	19		$	18		$	18		$	19		$	19		$	115

NOTE 13 - SUMMARY OF QUARTERLY DATA (UNAUDITED)

2019 Quarters	Mar 31			Jun 30			Sep 30			Dec 31
Net sales	$	3,516		$	3,650		$	3,587		$	4,131
Gross profit	2,283			2,380			2,330			2,703
Earnings before income taxes	480			565			581			936
Net earnings	412			480			466			725
Net earnings per share of common stock:
Basic	$	1.10		$	1.29		$	1.24		$	1.94
Diluted	$	1.09		$	1.26		$	1.23		$	1.90
Dividends declared per share of common stock	$	0.52		$	0.52		$	0.52		$	0.575
2018 Quarters	Mar 31			Jun 30			Sep 30			Dec 31
Net sales	$	3,241		$	3,322		$	3,242		$	3,796
Gross profit	2,137			2,190			2,155			2,456
Earnings before income taxes	542			623			534			657
Net earnings	443			452			590			2,068
Net earnings per share of common stock:
Basic	$	1.18		$	1.21		$	1.58		$	5.52
Diluted	$	1.16		$	1.19		$	1.55		$	5.44
Dividends declared per share of common stock	$	0.47		$	0.47		$	0.47		$	0.52

NOTE 14 - 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
	2019			2018			2017
Orthopaedics	$	5,252		$	4,991		$	4,713
MedSurg	$	6,574		6,045			5,557
Neurotechnology & Spine	3,058			2,565			2,174
Net sales	$	14,884		$	13,601		$	12,444
Orthopaedics	$	348		$	350		$	337
MedSurg	379			285			315
Neurotechnology & Spine	218			176			142
Segment depreciation and amortization	$	945		$	811		$	794
Corporate and Other	99			155			65
Total depreciation and amortization	$	1,044		$	966		$	859
Orthopaedics	$	1,907		$	1,804		$	1,681
MedSurg	1,635			1,444			1,228
Neurotechnology & Spine	846			700			631
Segment operating income	$	4,388		$	3,948		$	3,540
Items not allocated to segments:
Corporate and Other	$	(480	)	$	(431	)	$	(402	)
Acquisition and integration-related charges	(275		)	(123		)	(64		)
Amortization of intangible assets	(464		)	(417		)	(371		)
Restructuring related and other charges	(226		)	(220		)	(194		)
Medical device regulations	(62		)	(12		)	—
Recall-related matters	(192		)	(23		)	(173		)
Regulatory and legal matters	24			(185		)	(39		)
Consolidated operating income	$	2,713		$	2,537		$	2,297

Dollar amounts in millions except per share amounts or as otherwise specified.	33

STRYKER CORPORATION 2019 FORM 10-K

Segment Assets and Capital Spending
Assets:	2019			2018			2017
Orthopaedics	$	9,085		$	8,873		$	7,486
MedSurg	12,066			10,417			9,759
Neurotechnology & Spine	7,646			7,260			4,105
Total segment assets	$	28,797		$	26,550		$	21,350
Corporate and Other	1,370			679			847
Total assets	$	30,167		$	27,229		$	22,197
Capital spending:
Orthopaedics	$	125		$	134		$	138
MedSurg	265			217			194
Neurotechnology & Spine	29			31			50
Total segment capital spending	$	419		$	382		$	382
Corporate and Other	230			190			216
Total capital spending	$	649		$	572		$	598

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 and reserves for certain legal and regulatory matters. 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
	2019			2018			2017				2019			2018
United States	$	10,957		$	9,848		$	9,059			$	1,561		$	1,348
Europe, Middle East, Africa	1,888			1,793			1,567				838			669
Asia Pacific	1,617			1,532			1,413				95			96
Other countries	422			428			405				73			178
Total	$	14,884		$	13,601		$	12,444			$	2,567		$	2,291

Dollar amounts in millions except per share amounts or as otherwise specified.	34

STRYKER CORPORATION 2019 FORM 10-K