item 14 exhibits financial statement schedules reports form 8k executive compensation plans arrangements referenced exhibits 10i ii a1 2 response portion item 14 submitted separate section report following signature page a3 exhibits exhibit 3 articles incorporation bylaws restated articles incorporation amendment thereto dated december 28 1993 ii bylawsincorporated reference exhibit 3ii companys form 10q quarter ended june 30 1988 commission file 09165 exhibit 4 instruments defining rights security holders including indenturesthe company agrees furnish commission upon request copy instrument pursuant longterm debt company subsidiaries exceeding 10 total assets company consolidated subsidiaries authorized exhibit 10material contracts 1988 stock option plan amendedincorporated reference exhibit 10i companys form 10k year ended december 31 1992 commission file 09165 ii description bonus arrangements company certain officers including messrs brown elenbaas laube simpson winkel exhibit 11statement computation per share earnings statement computation net earnings per share exhibit 13annual report security holders portions 1993 annual report incorporated herein reference exhibit 21subsidiaries registrant list subsidiaries compensation arrangement item 14 exhibits financial statement schedules reports form 8kcontinued exhibit 23consents experts counsel consent independent auditors b reports form 8k reports form 8k required filed fourth quarter 1993 c exhibits response portion item 14 submitted separate section report following signature page financial statement schedules response portion item 14 submitted separate section report following signature page signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date march 18 1994 david j simpson david j simpson vice president chief financial officer secretary pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated john w brown 31894 david j simpson 31894 john w brown chairman president david j simpson vice president chief executive officer financial officer secretary principal executive officer principal financial officer howard e cox jr 31894 robert monk 31894 howard e cox jr director robert monk treasurercontroller principal accounting officer donald engelman 31894 ronda e stryker 31894 donald engelman phd director ronda e stryker director jerome h grossman 31894 gerard thomas 31894 jerome h grossman md director gerard thomas director john lillard 31894 william u parfet 31894 john lillard director william u parfet director annual report form 10k item 14a1 2 c list financial statements financial statement schedules certain exhibits financial statement schedules year ended december 31 1993 stryker corporation kalamazoo michigan form 10kitem 14a1 2 stryker corporation subsidiaries index financial statements financial statement schedules following consolidated financial statements stryker corporation subsidiaries report independent auditors included annual stockholders report registrant year ended december 31 1993 incorporated reference item 8 report independent auditors consolidated balance sheetdecember 31 1993 1992 consolidated statement earningsyears ended december 31 1993 1992 1991 consolidated statement stockholders equityyears ended december 31 1993 1992 1991 consolidated statement cash flowsyears ended december 31 1993 1992 1991 notes consolidated financial statementsdecember 31 1993 following consolidated financial statement schedules stryker corporation subsidiaries included item 14d schedule imarketable securitiesother investments schedule viiivaluation qualifying accounts schedule ixshortterm borrowings schedule xsupplementary income statement information schedule xiiiother investments schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted schedule x supplementary income statement information stryker corporation subsidiaries col b item charged costs expenses year ended december 31 1993 1992 1991 advertising costs 8097000 7345000 6038000 amounts maintenance repairs amortization tangible assets preoperating costs similar deferrals taxes payroll income taxes royalties presented amounts less 1 net sales form 10kitem 14c stryker corporation subsidiaries exhibit index exhibit page 3 articles incorporation bylaws restated articles incorporation 22 ii bylaws 11 10 material contracts 1988 stock option plan amended 11 ii description bonus arrangements company certain officers including messrs brown elenbaas laube simpson winkel 27 11 statement computation per share earnings statement computation net earnings per share 28 13 annual report security holders portions 1993 annual report incorporated reference 29 21 subsidiaries registrant list subsidiaries 48 23 consents experts counsel consent independent auditors 49 page number sequential numbering system exhibit found stated exhibit incorporated reference incorporated reference annual report form 10k certificate amendment restated articles incorporation stryker corporation 1 present name corporation stryker corporation registered office corporation 2725 fairfield road kalamazoo michigan 49002 2 former name corporation orthopedic frame company 3 date filing original articles incorporation february 20 1946 4 section article iii articles incorporation amended restated date hereby amended increase authorized common stock 150000000 shares amended shall read entirety follows aggregate number shares classes stock corporation shall authority issue 150500000 divided two classes consisting 500000 shares class designated preferred stock par value one dollar 1 per share 150000000 shares class designated common stock par value ten cents 10 per share 5 amendment duly adopted shareholders corporation 27th day april 1993 accordance provisions subsection 2 section 611 business corporation act michigan dated 28th day december 1993 stryker corporation john w brown john w brown chairman president chief executive officer restated articles incorporation stryker corporation 1 restated articles incorporation executed pursuant provisions section 641643 business corporation act michigan act 284 public acts 1972 amended 2 present name corporation stryker corporation 3 former name corporation orthopedic frame company 4 date filing original articles incorporation february 20 1946 5 following restated articles incorporation supersedes original articles incorporation amended restated date shall articles incorporation corporation article name corporation stryker corporation article ii purpose corporation engage activity within purposes corporations may organized business corporation act michigan without limiting manner scope generality foregoing corporation may manufacture andor sell lease hospital equipment medical surgical supplies instruments allied products may buy sell lease rent real estate erect buildings connection foregoing otherwise article iii aggregate number shares classes stock corporation shall authority issue 50500000 divided two classes consisting 500000 shares class designated preferred stock par value one dollar 1 per share 50000000 shares class designated common stock par value ten cents 10 per share b relative rights preferences limitations shares class follows 1 preferred stock preferred stock may issued time one series distinctive designation title number shares may fixed resolution board directors without action shareholders board directors expressly granted authority prescribe resolution resolutions adopted issuance shares particular series preferred stock relative rights preferences series limitations applicable thereto including limited following voting powers full special limited voting powers series b rate terms conditions dividends shall paid whether dividends cumulative preference dividends shall relation dividends series classes stock c rights terms conditions conversion series preferred stock shares series classes stock right corporation redeem shares series preferred stock price time conditions redemption including provisions sinking fund e rights holders series preferred stock relation rights series classes stock upon liquidation dissolution distribution assets corporation unless board directors otherwise provides resolution establishing series preferred stock upon repurchase corporation redemption conversion shares preferred stock shall revert authorized unissued shares may reissued shares series preferred stock 2 common stock subject prior payment provision therefor dividends preferred stock holders common stock shall entitled receive funds corporation legally available purpose dividends declared board directors b event liquidation dissolution distribution assets corporation satisfaction preferential requirements preferred stock holders common stock shall entitled share ratably distribution remaining assets corporation available distribution c holders common stock shall entitled one vote share held record books corporation article iv shareholders corporation shall preemptive right acquire additional treasury shares corporation preemptive rights existing prior date hereof whether created statute common law abolished article v address current registered office 420 alcott street kalamazoo michigan 49001 name current resident agent david j simpson article vi duration corporation perpetual article vii liability corporation shareholders every person time director corporation acts omissions persons capacity director shall limited eliminated full extent authorized permitted michigan business corporation act exists may hereafter amended amendment alteration repeal article vii shareholders corporation shall adversely affect right protection director corporation respect act omission director occurring prior time amendment alteration repeal 6 restated articles incorporation duly adopted board directors 29th day july 1988 without vote shareholders accordance provisions section 642 business corporation act michigan restated articles incorporation restate integrate amend articles incorporation heretofore amended material discrepancy provisions articles incorporation heretofore amended provisions restated articles incorporation dated 29th day july 1988 stryker corporation john w brown john w brown chairman president chief executive officer exhibit 10ii description bonus arrangements company entered bonus arrangements certain executive officers 1994 including mr brown mr elenbaas mr laube mr simpson mr winkel based specific performance criteria including sales profits asset management aggregate amount bonuses expected exceed 1200000 exhibit 11 statement computation earnings per share common stock year ended december 31 1993 1992 1991 average number shares outstanding 48356000 47716000 47526000 net earnings 60205000 47700000 33075000 earnings per share common stock net earnings 125 100 70 primary average shares outstanding 48356000 47716000 47526000 net effect dilutive stock options based treasury stock method using average market price 536000 1173000 1228000 total primary shares 48892000 48889000 48754000 fully diluted average shares outstanding 48356000 47716000 47526000 net effect dilutive stock options using yearend market price higher average market price 586000 1199000 1447000 total fully diluted shares 48942000 48915000 48973000 note shares subject stock options included earnings per share computation present effect thereof materially dilutive managements discussion analysis financial condition results operations results operations table outlines components consolidated statement earnings percentage net sales percentage net percentage sales increase 1993 1992 1991 199392 199291 net sales 1000 17 31 cost sales 461 465 473 16 29 research development engineering expense 65 68 65 12 36 selling general administrative expense 309 313 321 15 28 operating income 165 154 141 25 43 income 7 5 earnings income taxes 172 161 146 25 44 income taxes 64 61 55 23 44 net earnings 108 100 91 26 44 1993 compared 1992 stryker corporations net sales increased 17 1993 5573 million demand companys products sold hospitals throughout world continued grow increased unit volume accounted entire increase higher selling prices 1993 provided 1 growth essentially offset effect changes foreign currency exchange rates uncertainty impact us health care reform programs generally slowed domestic sales medical devices addition effort reduce costs purchasers companys orthopaedic implants domestically shifted purchasing mix toward companys lowercost implants despite factors companys total domestic sales grew 14 1993 international sales increased 22 1993 led osteonics orthopaedic implant dimso spinal implant sales international sales expanded 32 total sales 1993 compared 31 1992 surgical product sales principally orthopaedic products increased 13 year domestic sales growth surgical products led stryker instruments high vacuum cement injection system new surgilav plus pulsed irrigation system osteonics knee implants stryker endoscopys newly introduced third generation model 782 3chip camera international sales growth surgical products led osteonics orthopaedic implant sales companys pacific division dimso spinal implant system sales companys international divisions sales medical products principally specialty stretchersbeds physical therapy services increased 33 led introduction mps primary acute care bed third quarter increased revenues physical therapy services increased sales patient handling equipment cost reduction programs several companys divisions higher mix international sales lowered cost sales percentage 1993 compared 1992 research development engineering expense increased 12 company spent 362 million product development 1993 compared 323 million 1992 commitment product development resulted several new products 1993 including mps primary acute care bed quadracut aclshaver system arthroscopy surgilav plus pulsed irrigation system series 7000 primary posterially stabilized knee modular tibia system selling general administrative expense increased 15 1993 principally result larger sales forces companys instruments medical divisions however cost increase contained percentage growth sales costs dropped 309 sales 1993 compared 313 1992 effective tax rate decreased 373 1993 compared 380 1992 due lower effective foreign tax rates effective january 1 1993 company adopted fasb statement 109 accounting income taxes cumulative effect change method accounting net earnings material net earnings 1993 602 million 26 increase companys earnings 1992 477 million fourth quarter 1993 net sales reached record level 1452 million net earnings 178 million 122 sales fourth quarter net earnings percent sales higher previous three quarters year manufacturing costs operating expenses increased slower rate sales 1992 compared 1991 stryker corporations net sales increased 31 1992 4771 million compared 3648 million 1992 increased unit volume generated 28 sales increase increased selling prices added 2 1 increase due changes foreign currency exchange rates sales companys surgical products increased 30 year led domestically stryker endoscopys 3chip camera system newly introduced osteonics series 7000 total knee system 2000 heavyduty batterypowered instrument line international sales growth surgical products led introduction osteonics knee line japan sales medical products increased 34 led gains physical therapy revenues nearly entire line patienthandling equipment cost sales increased 29 1992 represented 465 sales compared 473 1991 lower cost sales percentage 1992 resulted cost reduction programs implemented several companys divisions increased unit volume research development engineering expense increased 36 company spent 323 million product development 1992 compared 237 million 1991 commitment product development resulted several new products 1992 including series 7000 total knee system companys third generation 3chip 1chip camera systems high vacuum cement injection system applying bone cement warming stretcher recovery room selling general administrative expense increased 28 1992 principally result increased cost larger sales forces endoscopy instruments medical europe divisions costs dropped 313 sales 1992 compared 321 1991 increase income result modest foreign currency gains 1992 188000 compared 898000 foreign currency losses 1991 addition interest income included income increased 1992 result increased levels cash marketable securities effective tax rate remained constant 380 1992 net earnings 1992 477 million 44 increase companys net earnings 1991 331 million fourth quarter 1992 net sales 1300 million net earnings 146 million 112 sales fourth quarter net earnings percent sales higher previous three quarters year manufacturing costs selling general administrative expenses increased slower rate sales liquidity capital resources strykers financial position continued strengthen 1993 operating activities providing 861 million cash working capital increased 2140 million 1682 million prior year accounts receivable increased 14 compared companys 17 increase sales days sales outstanding accounts receivable end 1993 decreased 47 days 52 days end 1992 inventories actually decreased 4 1993 days sales inventory reflected even greater improvement finishing 1993 114 days compared 130 days end 1992 august 1993 company purchased 20 outstanding shares matsumoto medical instruments inc osaka japan cost investment based net book value approximately 33 million financed fiveyear japanese yen denominated fixedrate bank borrowing investment accounted equity method companys share matsumotos net earnings 1993 immaterial consolidated net earnings companys cash marketable securities 1526 million december 31 1993 well anticipated cash flows operations expected sufficient fund planned future operating capital requirements additional funds required company unsecured lines credit banks totaling 390 million december 31 1993 8 million lines utilized fund operating activities overseas consolidated balance sheet stryker corporation subsidiaries december 31 thousands except per share amounts 1993 1992 assets current assets cash equivalents 49712 43091 marketable securities 102925 48661 accounts receivable less allowance 3800 2900 1992 87896 76899 inventories 76582 79391 deferred income taxes 15829 12772 prepaid expenses current assets 10907 8791 total current assets 343851 269605 property plant equipment land buildings improvements 30790 25220 machinery equipment 94551 82317 125341 107537 less allowance depreciation 57634 47888 67707 59649 assets intangibles less accumulated amortization 9925 6790 1992 7795 9370 investment affiliate 32569 miscellaneous 2282 1648 42646 11018 454204 340272 liabilities stockholders equity current liabilities notes payable 777 accounts payable 43172 38269 accrued compensation 28270 25067 income taxes 21107 9979 accrued expenses liabilities 35678 26901 current maturities longterm debt 882 1192 total current liabilities 129886 101408 longterm debt excluding current maturities 31282 1433 liabilities 4602 5170 stockholders equity common stock 10 par value authorized150000 shares 50000 1992 outstanding48395 shares 48303 1992 4840 4830 additional paidin capital 17111 15732 retained earnings 268367 211550 foreign translation adjustments 1884 149 total stockholders equity 288434 232261 454204 340272 see accompanying notes consolidated financial statements consolidated statement earnings stryker corporation subsidiaries years ended december 31 thousands except per share amounts 1993 1992 1991 net sales 557335 477054 364825 costs expenses cost sales 256748 221650 172477 research development engineering 36199 32313 23703 selling general administrative 172446 149390 117089 465393 403353 313269 operating income 91942 73701 51556 income net 4123 3239 1789 earnings income taxes 96065 76940 53345 income taxes 35860 29240 20270 net earnings 60205 47700 33075 net earnings per share common stock 125 100 70 average number shares outstanding 48356 47716 47526 see accompanying notes consolidated financial statements consolidated statement stockholders equity stryker corporation subsidiaries years ended december 31 additional foreign thousands except per common paidin retained translation share amounts stock capital earnings adjustments balance january 1 1991 4746 4757 136053 2319 net earnings 1991 33075 sales 134 shares common stock option including 799 income tax benefit 14 1256 cash dividend declared 05 per share common stock 2380 translation adjustment 35 balance december 31 1991 4760 6013 166748 2354 net earnings 1992 47700 sales 706 shares common stock option benefit plans including 7469 income tax benefit 70 9719 cash dividend declared 06 per share common stock 2898 translation adjustment 2205 balance december 31 1992 4830 15732 211550 149 net earnings 1993 60205 sales 92 shares common stock option benefit plans including 393 income tax benefit 10 1379 cash dividend declared 07 per share common stock 3388 translation adjustment 2033 balance december 31 1993 4840 17111 268367 1884 see accompanying notes consolidated financial statements consolidated statement cash flows stryker corporation subsidiaries years ended december 31 thousands 1993 1992 1991 operating activities net earnings 60205 47700 33075 adjustments reconcile net earnings net cash provided operating activities depreciation 13048 10214 9890 amortization 3135 1168 1906 provision losses accounts receivable 900 400 1200 deferred income taxes credit 2917 4171 5872 changes operating assets liabilities increase accounts receivable 11305 20563 3682 decrease increase inventories 2271 726 18103 increase accounts payable 4982 7723 8340 increase income taxes 11092 632 2766 4691 6899 8124 net cash provided operating activities 86102 50728 37644 investing activities purchases property plant equipment 20160 31618 16570 purchases marketable securities 54264 21553 11728 business acquisitions 34654 8736 net cash used investing activities 109078 61907 28298 financing activities proceeds borrowings 33563 4401 payments borrowings 2016 7418 400 dividends paid 2898 2380 proceeds exercise stock options 1389 9789 1270 126 376 198 net cash provided used financing activities 29912 385 5073 effect exchange rate changes cash equivalents 315 1734 170 increase decrease cash equivalents 6621 9830 14249 cash equivalents beginning year 43091 52921 38672 cash equivalents end year 49712 43091 52921 see accompanying notes consolidated financial statements notes consolidated financial statements stryker corporation subsidiaries december 31 1993 1 significant accounting policies business stryker corporation develops manufactures markets specialty surgical medical products sold primarily hospitals throughout world principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries elimination significant intercompany accounts transactions companys investment affiliate represents 20 investment accounted equity method revenue recognition revenue recognized sale products related goods shipped services rendered cash equivalents marketable securities cash equivalents highly liquid investments maturity three months less purchased marketable securities valued cost approximates market value inventories stated lower cost market cost approximately 63 68 1992 inventories determined using lower firstin firstout fifo cost market cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost property plant equipment property plant equipment stated cost depreciation computed straightline method estimated useful lives assets intangible assets intangible assets represent excess purchase price fair value tangible net assets acquired businesses intangible assets include patents intangibles specifically identifiable amortized using straightline method periods sixteen years income taxes effective january 1 1993 company adopted fasb statement 109 accounting income taxes requires use liability method accounting deferred income taxes method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates effect years differences expected reverse prior adoption statement 109 income tax expense determined using deferred method deferred tax expense based items income expense reported indifferent years financial statements tax returns measured tax rate effect year difference originated earnings per share earnings per share based upon average number shares common stock outstanding year shares subject option included earnings per share computations present effect thereof materially dilutive 2 inventories follows thousands december 31 1993 1992 finished goods 45338 47068 workinprocess 10586 14968 raw material 28455 24783 fifo cost 84379 86819 less lifo reserve 7797 7428 76582 79391 3 business acquisitions august 1993 company purchased 20 outstanding shares matsumoto medical instruments inc osaka japan matsumoto began distributing stryker products japan 1969 exclusive distributor stryker products country cost investment based net book value approximately 34 billion yen 328 million investment accounted equity method companys share matsumotos net earnings material impact companys net earnings 1993 1992 companys subsidiary physiotherapy associates inc purchased several physical therapy clinic operations aggregate purchase price clinics 1993 1992 approximately 1900000 2900000 respectively generally approximated carrying amounts assets acquired proforma consolidated results including purchased businesses would differ significantly reported results october 1992 companys subsidiary stryker france sa acquired dimso sa subsidiary companies france spain dimso designs manufactures diapason stryker 2s spinal implant systems orthopaedic products acquisition accounted purchase method total cost 13000000 approximately 7000000 paid next three years intangible assets acquired principally patents amortized ten year period proforma consolidated results including purchased business would differ significantly reported results 4 borrowings company subsidiaries unsecured shortterm line credit arrangements banks aggregating 20000000 domestically 19000000 equivalent foreign currencies borrowings lines december 31 1993 777000 foreign funds average interest rate 125 lines generally expire july 31 1994 longterm debt follows thousands december 31 1993 1992 bank loan 30736 1428 2625 32164 2625 less current maturities 882 1192 31282 1433 unsecured bank loan matures august 4 1998 japanese yen denominated bears interest fixed rate 49 per annum maturities debt four years succeeding 1994 1995 44000 1996 48000 1997 52000 1998 30793000 carrying amount companys longterm debt approximates fair value based companys current borrowing rates similar types borrowing agreements total interest expense included income approximates interest paid 1067000 1993 411000 1992 655000 1991 5 capital stock company key employee director stock option plans options granted price less fair market value date grant options granted periods ten years become exercisable varying installments summary stock option activity follows option shares price per share options outstanding january 1 1992 1709750 320 3075 granted 397000 3425 3875 canceled 69800 434 3425 exercised 761025 320 1463 options outstanding december 31 1992 1275925 320 3875 granted 867500 2238 2550 canceled 411300 675 3875 exercised 75600 320 1463 options outstanding december 31 1993 1656525 320 3425 december 31 1993 options 576225 shares exercisable 1113100 shares reserved future grants may 13 1991 company effected twoforone stock split share per share data affected amounts adjusted reflect stock split though occurred beginning periods presented company 500000 authorized shares 1 par value preferred stock none outstanding 6 retirement plans substantially company employees covered profit sharing defined contribution retirement plans retirement plan expense companys profit sharing defined contribution retirement plans totaled 5302000 1993 4715000 1992 3631000 1991 7 income taxes effective january 1 1993 company adopted fasb statement 109 accounting income taxes requires use liability method accounting income taxes see note 1 permitted statement 109 company elected restate financial statements prior years cumulative effect change method accounting net earnings material earnings income taxes consist following thousands 1993 1992 1991 united states operations 88181 66552 45480 foreign operations 7884 10388 7865 96065 76940 53345 components provision income taxes follow thousands 1993 1992 1991 current federal 26114 20827 17985 state including puerto rico 10372 7973 4467 foreign 2291 4611 3690 38777 33411 26142 deferred tax expense credit 2917 4171 5872 35860 29240 20270 reconciliation statutory federal income tax rate companys effective tax rate follows 1993 1992 1991 us statutory income tax rate 350 340 add deduct state taxes less effect federal reduction 63 59 43 foreign income taxes rates different us statutory rate 8 10 13 tax benefit relating operations puerto rico 18 19 24 research development tax credit 14 9 17 earnings foreign sales corporation 14 8 13 14 7 38 373 380 deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes tax effect significant temporary differences comprise companys deferred tax assets liabilities december 31 1993 follows thousands deferred tax assets inventories 4712 accounts receivable assets 2874 accrued expenses 6662 state taxes 1297 920 total deferred tax assets 16465 deferred tax liabilities depreciation 792 895 total deferred tax liabilities 1687 total net deferred tax assets 14778 deferred tax assets liabilities included consolidated balance sheet december 31 1993 follows thousands current deferred income taxes 15829 noncurrent liabilities 1051 net deferred tax assets 14778 provision made us federal state income taxes foreign taxes may result future remittances undistributed earnings 40128000 december 31 1993 foreign subsidiaries expected earnings reinvested overseas indefinitely determination amount unrecognized deferred income tax liability unremitted earnings practicable total income taxes paid 27641000 1993 25133000 1992 22550000 1991 8 geographic data geographic area information follows thousands 1993 1992 1991 net sales united states operations domestic 378255 330782 253479 export 115977 81513 72256 foreign operations europe 63366 58010 47685 45638 43182 24401 eliminations 45901 36433 32996 net sales 557335 477054 364825 operating income loss united states operations 90726 68759 49492 foreign operations europe 6571 6998 7497 3125 4477 717 total foreign operations 9696 11475 8214 corporate expenses 8480 6533 6150 total operating income 91942 73701 51556 assets united states operations 225587 199188 156155 foreign operations europe 39313 42580 24607 16120 15125 15834 corporate 173184 83379 73720 total assets 454204 340272 270316 intercompany sales geographic areas included export foreign operations sales agreed upon prices include profit element year ended december 31 1993 sales matsumoto medical instruments inc 64300000 12 total net sales customer accounted 10 companys sales 1992 1991 gains losses foreign currency transactions included income totaled 256000 188000 898000 1993 1992 1991 respectively corporate assets consist primarily domestic cash equivalents marketable securities investment affiliate 9 leases company leases various manufacturing office facilities equipment operating leases future minimum lease commitments leases follows thousands 1994 7507 1995 5591 1996 4316 1997 3001 1998 2115 thereafter 2152 24682 rent expense totaled 10950000 1993 8792000 1992 6686000 1991 10 contingencies company involved various claims legal actions arising normal course business company anticipate material losses result actions report independent auditors board directors stryker corporation audited accompanying consolidated balance sheet stryker corporation subsidiaries december 31 1993 1992 related consolidated statements earnings stockholders equity cash flows three years period ended december 31 1993 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 1993 1992 consolidated results operations cash flows three years period ended december 31 1993 conformity generally accepted accounting principles ernst young kalamazoo michigan january 31 1994 board directors officers board directors john w brown chairman president chief executive officer stryker corporation howard e cox jr general partner greylock partners co donald engelman phd professor molecular biophysics biochemistry yale university jerome h grossman md chairman chief executive officer new england medical center inc john lillard chairmanfounder jmb institutional realty corp william u parfet president chief executive officer richardallan medical industries inc ronda e stryker granddaughter founder company daughter former president company director comerica bank l lee stryker center trustee kalamazoo college gerard thomas attorney miller canfield paddock stone audit compensation committees corporate officers john w brown chairman president chief executive officer ronald elenbaas vice president stryker surgical group william laube iii vice president stryker pacific robert monk treasurercontroller assistant secretary julia paradinerice assistant treasurer david j simpson vice president chief financial officer secretary thomas r winkel vice president stryker americasmiddle east operating divisions osteonics corp edward b lipes president gary l grenter vice president operations brian k hutchison vice president finance michael manley phd vice president advanced research anthony moutinho vice president sales physiotherapy associates inc jason blackwood president jeffrey chitwood vice president finance g william cole jr vice president marketing development stryker americasmiddle east thomas r winkel president bradford j williams vice president canada stryker biotech samuel yin phd director stryker endoscopy ronald elenbaas president pedro martinez vice president general manager william e chang vice president research development stryker europe jeanpierre boucher president alain guez vice president france maurizio zaccarelli vice president stryker europe stryker instruments ronald elenbaas president stephen si johnson executive vice president general manager matthew alves vice president marketing bradley black vice president human resources james evans vice president research development thomas r gillentine vice president controller john saunders vice president operations stryker medical harry e carmitchel president joseph messer vice president marketing patient care division michael r stringer vice president sales patient care division mark j fletcher vice president sales marketing patient handling division gary morton vice president engineering patient handling division kenneth palmer vice president general manager patient handling division joseph p briggs vice president service division stryker pacific william laube iii president alexander kennedy vice president general manager australia hyungyun lee vice president general manager korea john pierson president japan hugo kw hui vice president finance administration exhibit 21 list subsidiaries state country name subsidiary incorporation nippon stryker service kk japan osteonics corp new jersey physiotherapy associates inc michigan stryker australia pty ltd australia stryker bv netherlands stryker barbados foreign sales corporation barbados stryker canada inc canada stryker corporation malaysia sdn bhd malaysia stryker deutschland gmbh germany stryker far east inc delaware stryker foreign sales corporation us virgin islands stryker france sa france stryker india medical equipment private limited india stryker italia srl italy stryker japan kk japan stryker korea ltd korea stryker malaysia sdn bhd malaysia stryker pacific limited hong kong stryker puerto rico inc delaware stryker sa switzerland stryker sales corporation michigan stryker singapore private limited singapore stryker corporation immediate parent owns 100 outstanding voting securities abovenamed subsidiaries exhibit 23consent independent auditors consent incorporation reference annual report form 10k stryker corporation subsidiaries report dated january 31 1994 included 1993 annual report stockholders stryker corporation subsidiaries audits also included financial statement schedules stryker corporation subsidiaries listed item 14a schedules responsibility companys management responsibility express opinion based audits opinion financial statement schedules referred considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also consent incorporation reference registration statement number 3355662 form s8 dated december 11 1992 registration statement number 296467 form s8 dated april 4 1985 registration statement number 3316642 form s3 dated august 20 1987 registration statement number 3332240 form s8 dated november 20 1989 related prospectus registration statements report dated january 31 1994 respect consolidated financial statements incorporated herein reference report included preceding paragraph respect financial statement schedules included annual report form 10k stryker corporation ernst young kalamazoo michigan march 17 1994item 14 exhibits financial statement schedules reports form 8k executive compensation plans arrangements referenced exhibits 10i ii iii a1 2 response portion item 14 submitted separate section report following signature page a3 exhibits exhibit 3 articles incorporation laws restated articles incorporation amendment thereto dated december 28 1993incorporated reference exhibit 3i companys form 10k year ended december 31 1993 commission file 09165 ii bylawsincorporated reference exhibit 3ii companys form 10q quarter ended june 30 1988 commission file 09165 exhibit 4 instruments defining rights security holders including indenturesthe company agrees furnish commission upon request copy instrument pursuant longterm debt company subsidiaries exceeding 10 total assets company consolidated subsidiaries authorized exhibit 10 material contracts 1988 stock option plan amended incorporated reference exhibit 10i companys form 10k year ended december 31 1992 commission file 09165 ii supplemental savings retirement plan amended effective january 1 1995incorporated reference exhibit 10iii companys form 10k year ended december 31 1994 commission file 09165 iii description bonus arrangements company certain officers including messrs brown elenbaas laube lipes simpson winkel item 14 exhibits financial statement schedules reports form 8k continued exhibit 11 statement computation per share earnings statement computation earnings per share common stock exhibit 13 annual report security holders portions 1995 annual report incorporated herein reference exhibit 21 subsidiaries registrant list subsidiaries exhibit 23 consents experts counsel consent independent auditors exhibit 27 financial data schedule financial data schedule included edgar filing b reports form 8k reports form 8k required filed fourth quarter 1995 c exhibits response portion item 14 submitted separate section report following signature page financial statement schedules response portion item 14 submitted separate section report following signature page compensation arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date 32096 david j simpson david j simpson vice president chief financial officer secretary pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated john w brown 32096 david j simpson 32096 john w brown chairman president david j simpson vice president chief executive officer chief financial officer secretary principal executive officer principal financial officer howard e cox jr 32096 dean h bergy 32096 howard e cox jr director dean h bergy controller principal accounting officer donald engelman 32096 ronda e stryker 32096 donald engelman phd director ronda e stryker director jerome h grossman 32096 william u parfet 32096 jerome h grossman md director william u parfet director john lillard 32096 john lillard director annual report form 10k item 14a1 2 c list financial statements financial statement schedule certain exhibits financial statement schedule year ended december 31 1995 stryker corporation kalamazoo michigan form 10kitem 14a1 2 stryker corporation subsidiaries list financial statements financial statement schedule following consolidated financial statements stryker corporation subsidiaries report independent auditors included annual stockholders report registrant year ended december 31 1995 incorporated reference item 8 report independent auditors consolidated balance sheetsdecember 31 1995 1994 consolidated statements earningsyears ended december 31 1995 1994 1993 consolidated statements stockholders equityyears ended december 31 1995 1994 1993 consolidated statements cash flowsyears ended december 31 1995 1994 1993 notes consolidated financial statementsdecember 31 1995 following consolidated financial statement schedule stryker corporation subsidiaries included item 14d schedule iivaluation qualifying accounts schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted form 10kitem 14c stryker corporation subsidiaries exhibit index exhibit page 3 articles incorporation bylaws restated articles incorporation amendment thereto dated december 28 1993 13 ii laws 13 10 material contracts 1988 stock option plan amended 13 ii supplemental savings retirement plan amended effective january 1 1995 13 iii description bonus arrangements company certain officers including messrs brown elenbaas laube lipes simpson winkel 20 11 statement computation per share earnings statement computation earnings per share common stock 21 13 annual report security holders portions 1995 annual report incorporated herein reference 14 21 subsidiaries registrant list subsidiaries 22 23 consents experts counsel consent independent auditors 23 27 financial data schedule financial data schedule included edgar filing page number sequential numbering system exhibit found stated exhibit incorporated reference incorporated reference annual report form 10k exhibit 10iii description bonus arrangements company entered bonus arrangements certain executive officers 1996 including mr brown mr elenbaas mr laube mr lipes mr simpson mr winkel based specific performance criteria including sales profits asset management aggregate amount bonuses expected exceed 1500000 exhibit 11 statement computation earnings per share common stock year ended december 31 1995 1994 1993 average number shares outstanding 48468000 48367000 48356000 net earnings 87010000 72400000 60205000 earnings per share common stock net earnings 180 150 125 primary average shares outstanding 48468000 48367000 48356000 net effect dilutive stock options based treasury stock method using average market price 799000 737000 536000 total primary shares 49267000 49104000 48892000 fully diluted average shares outstanding 48468000 48367000 48356000 net effect dilutive stock options using yearend market price higher average market price 898000 770000 586000 total fully diluted shares 49366000 49137000 48942000 note shares subject stock options included earnings per share computation present effect thereof materially dilutiveitem 14 exhibits financial statement schedules reports form 8k a1 2 response portion item 14 submitted separate section report following signature page a3 exhibits exhibit 3 articles incorporation bylaws restated articles incorporation amendment thereto dated december 28 1993 incorporated reference exhibit 3i companys form 10k year ended december 31 1993 commission file 09165 ii bylaws incorporated reference exhibit 3ii companys form 10q quarter ended june 30 1988 commission file 09165 exhibit 4 instruments defining rights security holders including indenturesthe company agrees furnish commission upon request copy instrument pursuant longterm debt company subsidiaries exceeding 10 total assets company consolidated subsidiaries authorized exhibit 10 material contracts 1988 stock option plan incorporated reference exhibit 10i companys form 10k year ended december 31 1992 commission file 09165 ii supplemental savings retirement plan amended effective january 1 1996 incorporated reference exhibit 10iii companys form 10k year ended december 31 1994 commission file no09165 iii amendment 1988 stock option plan incorporated reference exhibit 10i form 10q period ending march 31 1997 iv description bonus arrangements company certain officers including messrs brown elenbaas laube lipes mainelli simpson winkel exhibit 11 statement computation per share earnings statement computation earnings per share common stock exhibit 13 annual report security holders portions 1997 annual report incorporated herein reference exhibit 21 subsidiaries registrant list subsidiaries exhibit 23 consents experts counsel consent independent auditors exhibit 27 financial data schedule financial data schedule included edgar filing b reports form 8k filed 1997 c exhibits exhibit index appears page 24 report financial statement schedules response portion item 14 submitted separate section report following signature page compensation arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date 32398 david j simpson david j simpson vice president chief financial officer secretary pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated john w brown 32398 david j simpson 32398 john w brown chairman president david j simpson vice president chief executive officer chief financial officer secretary principal executive officer principal financial officer howard e cox jr 32398 jeffrey r winter 32398 howard e cox jr director jeffrey r winter controller principal accounting officer donald engelman 32398 ronda e stryker 32398 donald engelman phd director ronda e stryker director jerome h grossman 32398 william u parfet 32398 jerome h grossman md director william u parfet director john lillard 32398 john lillard director annual report form 10k item 14a1 2 c list financial statements financial statement schedule certain exhibits financial statement schedule year ended december 31 1997 stryker corporation kalamazoo michigan form 10k item 14a1 2 stryker corporation subsidiaries list financial statements financial statement schedule following consolidated financial statements stryker corporation subsidiaries report independent auditors included 1997 annual report incorporated reference item 8 report independent auditors consolidated balance sheets december 31 1997 1996 consolidated statements earnings years ended december 31 1997 1996 1995 consolidated statements stockholders equity years ended december 31 1997 1996 1995 consolidated statements cash flows years ended december 31 1997 1996 1995 notes consolidated financial statements december 31 1997 following consolidated financial statement schedule stryker corporation subsidiaries included item 14d schedule ii valuation qualifying accounts schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted schedule ii valuation qualifying accounts stryker corporation subsidiaries column b column c column e additions deductions balance charged balance beginning costs end description period expenses describea period deducted asset accounts allowance doubtful accounts year ended december 31 1997 9500000 4565000 2365000 11700000 year ended december 31 1996 7800000 3865000 2165000 9500000 year ended december 31 1995 6400000 1934000 534000 7800000 uncollectible amounts written net recoveries form 10k item 14c stryker corporation subsidiaries exhibit index exhibit page 3 articles incorporation bylaws restated articles incorporation amendment thereto dated december 28 1993 16 ii laws 16 10 material contracts 1988 stock option plan 16 ii supplemental savings retirement plan amended effective january 1 1996 16 iii amendment 1988 stock option plan 17 iv description bonus arrangements company certain officers including messrs brown elenbaas laube lipes mainelli simpson winkel 23 11 statement computation per share earnings statement computation earnings per share common stock 23 13 annual report security holders portions 1997 annual report incorporated herein reference 17 21 subsidiaries registrant list subsidiaries 24 23 consents experts counsel consent independent auditors 26 27 financial data schedule financial data schedule included edgar filing page number sequential numbering system exhibit found stated exhibit incorporated reference incorporated reference annual report form 10k exhibit 10iv description bonus arrangements company entered bonus arrangements certain executive officers 1998 including mr brown mr elenbaas mr laube mr lipes mr mainelli mr simpson mr winkel based specific performance criteria including sales profits asset management aggregate amount bonuses expected exceed 2000000 exhibit 11 statement computation earnings per share common stock year ended december 31 1997 1996 1995 basic average number shares outstanding 96254000 96838000 96936000 net earnings 125320000 104460000 87010000 basic net earnings per share common stock 130 108 090 diluted average number shares outstanding 96254000 96838000 96936000 net effect dilutive stock options based treasury stock method using average market price 1878000 1589000 1609000 total diluted shares 98132000 98427000 98545000 diluted net earnings per share common stock 128 106 088 exhibit 21 list subsidiaries state country name subsidiary incorporation comptoir hospitalier orthopedique et chirurgical france diagnostic treatment rehabilitation clinic limited united kingdom dimso iberica sa spain dimso sa france favro bv netherlands nv stryker sa belgium osteo ag switzerland osteo australia pty limited australia osteo france sarl france osteo holding ag switzerland osteonics corp new jersey physiotherapy associates inc michigan physiotherapy associates uk limited united kingdom stryker ab sweden stryker arroyo inc delaware stryker denmark stryker australia pty ltd new south wales stryker barbados foreign sales corporation barbados stryker biotech bv netherlands stryker biotech france sarl france stryker bv netherlands stryker canada inc canada stryker china limited hong kong stryker corporation chile compania limitada chile stryker corporation malaysia sdn bhd malaysia stryker far east inc delaware stryker france sa france stryker ifsc limited ireland stryker ireland limited ireland stryker korea ltd korea stryker medical bv netherlands stryker mexico sa de cv mexico stryker osteonics pty ltd south africa stryker osterreich gmbh austria stryker pacific limited hong kong stryker polska spzoo poland stryker puerto rico inc delaware stryker sa switzerland stryker sales corporation michigan stryker singapore private limited singapore strykerosteo gmbh germany strykerosteonics sa switzerland stryker corporation directly indirectly owns 100 outstanding voting securities abovenamed subsidiaries stryker 75 investor matsumoto medical instruments inc japan stryker effectively controls stryker india medical equipment private limited india exhibit 23 consent independent auditors consent incorporation reference annual report form 10k stryker corporation report dated january 31 1998 included 1997 annual report stockholders stryker corporation audits also included financial statement schedule stryker corporation subsidiaries listed item 14a schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule referred considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also consent incorporation reference registration statement number 3355662 form s8 dated december 11 1992 registration statement number 296467 form s8 dated april 4 1985 registration statement number 3332240 form s8 dated november 20 1989 related prospectus registration statements report dated january 31 1998 respect consolidated financial statements incorporated herein reference report included preceding paragraph respect financial statement schedule included annual report form 10k stryker corporation ernst young llp kalamazoo michigan march 25 1998item 14 exhibits financial statement schedules reports form 8k a1 2 response portion item 14 submitted separate section report following signature page a3 exhibits exhibit 2 plan acquisition reorganization arrangement liquidation succession form stock asset purchase agreement dated august 13 1998 pfizer inc company purchase agreement incorporated reference exhibit 21 companys form 8k dated december 22 1998 commission file 09165 ii form amendment 1 dated october 22 1998 purchase agreement incorporated reference exhibit 22 companys form 8k dated december 22 1998 commission file 0 9165 exhibit 3 articles incorporation bylaws restated articles incorporation amendment thereto dated december 28 1993 incorporated reference exhibit 3i companys form 10k year ended december 31 1993 commission file 09165 ii bylaws incorporated reference exhibit 3ii companys form 10q quarter ended june 30 1988 commission file 09165 exhibit 4 instruments defining rights security holders including indenturesthe company agrees furnish commission upon request copy instrument pursuant longterm debt company subsidiaries exceeding 10 total assets company consolidated subsidiaries authorized form credit guaranty agreement dated december 4 1998 among company certain subsidiaries company guarantors lenders named therein certain parties incorporated reference exhibit 101 companys form 8k dated december 22 1998 commission file 09165 exhibit 10 material contracts 1998 stock option plan incorporated reference exhibit 10i companys form 10 q quarter ended march 31 1998 commission file 09165 ii supplemental savings retirement plan amended effective january 1 1996 incorporated reference exhibit 10iii companys form 10k year ended december 31 1994 commission file no09165 iii description bonus arrangements company certain officers including messrs brown elenbaas laube lipes mainelli omahony simpson winkel exhibit 11 statement computation per share earnings note 9 earnings per share page 53 annual report incorporated herein reference exhibit 13 annual report security holders portions 1998 annual report incorporated herein reference exhibit 21 subsidiaries registrant list subsidiaries exhibit 23 consents experts counsel consent independent auditors exhibit 27 financial data schedule financial data schedule included edgar filing b reports form 8k filed fourth quarter 1998 1999 date report 1 form 8k dated december 22 1998 item 2 acquisition disposition assets acquisition howmedica orthopaedic division pfizer inc item 7 financial statements exhibits purchase agreement credit guaranty agreement related acquisition howmedica 2 form 8k dated january 12 1999 item 9 sales equity securities pursuant regulations issuance 229801 shares 10 par value common stock equivalent number shares matsumoto medical instruments inc 3 form 8ka dated february 22 1999 item 7 financial statements exhibits financial statements howmedica pro forma financial information acquisition howmedica c exhibits exhibit index appears page 26 report financial statement schedules response portion item 14 submitted separate section report following signature page compensation arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date 33199 david j simpson david j simpson vice president chief financial officer secretary principal financial officer dean h bergy dean h bergy vice president finance principal accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated john w brown 33199 david j simpson 33199 john w brown chairman president david j simpson vice president chief executive officer chief financial officer secretary principal executive officer principal financial officer howard e cox jr 33199 dean h bergy 33199 howard e cox jr director dean h bergy vice president finance principal accounting officer donald engelman 33199 ronda e stryker 33199 donald engelman phd director ronda e stryker director jerome h grossman 33199 william u parfet 33199 jerome h grossman md director william u parfet director john lillard 33199 john lillard director annual report form 10k item 14a1 2 c list financial statements financial statement schedule certain exhibits financial statement schedule year ended december 31 1998 stryker corporation kalamazoo michigan form 10k item 14a1 2 stryker corporation subsidiaries list financial statements financial statement schedule following consolidated financial statements stryker corporation subsidiaries report independent auditors included 1998 annual report incorporated reference item 8 report independent auditors consolidated balance sheets december 31 1998 1997 consolidated statements earnings years ended december 31 1998 1997 1996 consolidated statements stockholders equity years ended december 31 1998 1997 1996 consolidated statements cash flows years ended december 31 1998 1997 1996 notes consolidated financial statements december 31 1998 following consolidated financial statement schedule stryker corporation subsidiaries included item 14d schedule ii valuation qualifying accounts schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted schedule ii valuation qualifying accounts stryker corporation subsidiaries column b column c column e additions charged balance charged balance beginning costs accounts deductions end description period expenses describe period b deducted asset accounts allowance doubtful accounts year ended december 31 1998 11700000 2609000 10483000 3192000 21600000 year ended december 31 1997 9500000 4565000 2365000 11700000 year ended december 31 1996 7800000 3865000 2165000 9500000 increase resulting acquisitions b uncollectible amounts written net recoveries form 10k item 14c stryker corporation subsidiaries exhibit index exhibit page 2 plan acquisition reorganization arrangement liquidation succession form stock asset purchase agreement dated august 13 1998 20 ii form amendment no1 purchase agreement dated october 22 1998 20 3 articles incorporation bylaws restated articles incorporation amendment thereto dated december 28 1993 20 ii laws 20 4 instruments defining rights security holders including indentures form credit guaranty agreement dated december 4 1998 20 10 material contracts 1998 stock option plan 20 ii supplemental savings retirement plan amended effective january 1 1996 20 iii description bonus arrangements company certain officers including messrs brown elenbaas laube lipes mainelli omahony simpson winkel 27 11 statement computation per share earnings note 9 earnings per share page 53 annual report incorporated herein reference 21 13 annual report security holders portions 1998 annual report incorporated herein reference 21 subsidiaries registrant list subsidiaries 28 23 consents experts counsel consent independent auditors 30 27 financial data schedule financial data schedule included edgar filing page number sequential numbering system exhibit found stated exhibit incorporated reference incorporated reference annual report form 10k exhibit 10iii description bonus arrangements company entered bonus arrangements certain executive officers 1999 including mr brown mr elenbaas mr laube mr lipes mr mainelli mr omahony mr simpson mr winkel based specific performance criteria including sales profits asset management aggregate amount bonuses expected exceed 3000000 exhibit 21 list subsidiaries march 31 1999 state country name subsidiary incorporation benoist girard cie sca sas france bertec location inc canada bertec medical inc canada comptoir hospitalier orthopedique et chirurgical france diagnostic treatment rehabilitation clinic limited united kingdom dimso iberica sa spain dimso sa france favro bv netherlands groupe bertec inc canada howmedica beteilgungs gmbh germany howmedica gmbh germany howmedica iberia sa spain howmedica international de rl panama howmedica leibinger gmbh co kg germany howmedica leibinger inc delaware howmedica osteonics corp new jersey jaquet orthopedie sa switzerland matsumoto medical instruments inc japan nettrick ltd ireland nippon stryker kk japan nv stryker sa belgium osteo ag switzerland osteo australia pty limited australia osteo france sarl france osteo holding ag switzerland paunion llc maryland pficonprod pty ltd australia physiotherapy associates inc michigan physiotherapy associates uk limited united kingdom rs network inc illinois smd corporation michigan stryker ab sweden stryker denmark stryker australia pty ltd australia stryker barbados foreign sales corporation barbados stryker biotech bv netherlands stryker biotech france sarl france stryker bv netherlands stryker canada inc canada stryker canada lp canada stryker capital bv netherlands stryker china limited hong kong stryker corporation chile compania limitada chile stryker corporation malaysia sdn bhd malaysia stryker deutschland holding gmbh germany stryker brasil lda brazil stryker far east inc delaware stryker finance bv netherlands stryker france sa france stryker hellas epe greece stryker holdings bv netherlands stryker iberia sl spain stryker ifsc limited ireland stryker international inc delaware stryker ireland limited ireland stryker italia srl italy stryker korea ltd korea stryker medical bv netherlands stryker mexico sa de cv mexico stryker netherlands bv netherlands stryker new zealand ltd new zealand stryker osteonics pty ltd south africa stryker osterreich gmbh austria stryker pacific limited hong kong stryker polska spzoo poland stryker portugalprodutos medicos ltd portugal stryker puerto rico inc delaware stryker sa switzerland stryker sales corporation michigan stryker singapore private limited singapore stryker spain holding sl spain stryker technologies corporation michigan stryker uk ltd united kingdom strykerosteo gmbh germany strykerosteonics sa switzerland stryker corporation directly indirectly owns 100 outstanding voting securities abovenamed subsidiaries stryker effectively controls stryker india medical equipment private limited india exhibit 23 consent independent auditors consent incorporation reference annual report form 10k stryker corporation report dated february 9 1999 included 1998 annual report stockholders stryker corporation audits also included financial statement schedule stryker corporation subsidiaries listed item 14a schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule referred considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also consent incorporation reference registration statement number 3355662 form s8 dated december 11 1992 registration statement number 3332240 form s8 dated november 20 1989 related prospectus registration statements report dated february 9 1999 respect consolidated financial statements incorporated herein reference report included preceding paragraph respect financial statement schedule included annual report form 10k stryker corporation ernst young llp kalamazoo michigan march 26 1999item 14 exhibits financial statement schedules reports form 8k compensation arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date 31500 david j simpson david j simpson vice president chief financial officer secretary principal financial officer dean h bergy dean h bergy vice president finance principal accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated annual report form 10k item 14a1 2 c list financial statements financial statement schedule certain exhibits financial statement schedule year ended december 31 1999 stryker corporation kalamazoo michigan form 10k item 14a1 2 stryker corporation subsidiaries list financial statements financial statement schedule following consolidated financial statements stryker corporation subsidiaries report independent auditors included item 8 page number consolidated balance sheets december 31 1999 1998 consolidated statements earnings years ended december 31 1999 1998 1997 consolidated statements stockholders equity years ended december 31 1999 1998 1997 consolidated statements cash flows years ended december 31 1999 1998 1997 notes consolidated financial statements december 31 1999 3049 summary quarterly data quarters ended 1999 1998 report independent auditors following consolidated financial statement schedule stryker corporation subsidiaries included item 14d schedule ii valuation qualifying accounts schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted schedule ii valuation qualifying accounts stryker corporation subsidiaries increase resulting acquisitions b uncollectible amounts written net recoveries c effect changes foreign exchange rates form 10k item 14c stryker corporation subsidiaries exhibit index page number sequential numbering system exhibit found stated exhibit incorporated reference incorporated reference annual report form 10k exhibit 10iii description bonus arrangements company entered bonus arrangements certain executive officers 2000 including mr brown mr johnson mr laube mr lipes mr simpson based specific performance criteria including sales profits asset management aggregate amount bonuses expected exceed 4200000 exhibit 21 stryker corporation list subsidiaries march 15 2000 state country name subsidiary incorporation benoist girard sas france bertec medical inc canada comptoir hospitalier orthopedique et chirurgical france diagnostic treatment rehabilitation clinic limited united kingdom dimso sa france favro bv netherlands howmedica gmbh germany howmedica international de rl panama howmedica leibinger inc delaware howmedica osteonics corp new jersey matsumoto medical instruments inc japan nettrick ltd ireland nippon stryker kk japan nv stryker sa belgium osteo australia pty limited australia osteo france sarl france osteo holding ag switzerland pficonprod pty ltd australia physiotherapy associates inc michigan physiotherapy associates uk limited united kingdom smd corporation michigan stryker ab sweden stryker denmark stryker australia pty ltd australia stryker barbados foreign sales corporation barbados stryker beteiligungs gmbh germany stryker biotech bv netherlands stryker biotech france sarl france stryker bv netherlands stryker canada inc canada state country name subsidiary incorporation stryker canada lp canada stryker capital bv netherlands stryker china limited hong kong stryker communications corporation nevada stryker corporation chile compania limitada chile stryker corporation malaysia sdn bhd malaysia stryker deutschland holding gmbh germany stryker brazil lda brazil stryker far east inc delaware stryker finance bv netherlands stryker france sa france stryker funding corporation michigan stryker hellas epe greece stryker holdings bv netherlands stryker howmedica gmbh germany strykerhowmedica iberica sl spain stryker ifsc limited ireland stryker india private limited india stryker international inc delaware stryker ireland limited ireland stryker italia srl italy stryker korea ltd korea stryker leibinger gmbh co kg germany stryker medical bv netherlands stryker mexico sa de cv mexico stryker netherlands bv netherlands stryker new zealand limited new zealand stryker osteonics pty ltd south africa stryker osteonics romania srl romania strykerosteonics sa switzerland stryker osterreich gmbh austria stryker pacific limited hong kong stryker polska spzoo poland stryker portugal produtos medicos unipessoal lda portugal stryker puerto rico inc delaware stryker sa switzerland stryker sales corporation michigan stryker singapore private limited singapore stryker spain holding sl spain stryker technologies corporation michigan stryker trauma sa switzerland stryker trauma selzach ag switzerland stryker uk limited united kingdom stryker tk japan stryker corporation directly indirectly owns 100 outstanding voting securities abovenamed subsidiaries stryker corporation effectively controls physiotherapy associates union rehab llc maryland rs network inc illinois stryker india medical equipment private limited india exhibit 23 consent independent auditors consent incorporation reference registration statement number 33378201 form s8 dated may 7 1999 registration statement number 3355662 form s8 dated december 11 1992 registration statement number 3332240 form s8 dated november 20 1989 related prospectus registration statements report dated february 4 2000 respect consolidated financial statements financial statement schedule included annual report form ernst young llp kalamazoo michigan march 13 2000item 14 exhibits financial statement schedules reports form 8k compensation arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date 31601 david j simpson david j simpson vice president chief financial officer secretary principal financial officer dean h bergy dean h bergy vice president finance principal accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated annual report form 10k item 14a1 2 c list financial statements financial statement schedule certain exhibits financial statement schedule year ended december 31 2000 stryker corporation kalamazoo michigan form 10k item 14a1 2 stryker corporation subsidiaries list financial statements financial statement schedule following consolidated financial statements stryker corporation subsidiaries report independent auditors included item 8 page number consolidated balance sheets december 31 2000 1999 consolidated statements earnings years ended december 31 2000 1999 1998 consolidated statements stockholders equity years ended december 31 2000 1999 1998 consolidated statements cash flows years ended december 31 2000 1999 1998 notes consolidated financial statements december 31 2000 summary quarterly data quarters ended 2000 1999 report independent auditors following consolidated financial statement schedule stryker corporation subsidiaries included item 14d schedule ii valuation qualifying accounts schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted schedule ii valuation qualifying accounts stryker corporation subsidiaries increase resulting acquisitions b uncollectible amounts written net recoveries c effect changes foreign exchange rates form 10k item 14c stryker corporation subsidiaries exhibit index page number sequential numbering system exhibit found stated exhibit incorporated reference incorporated reference annual report form 10k exhibit 3i composite copy restated articles incorporation stryker corporation amended april 19 2000 1 restated articles incorporation executed pursuant provisions section 641643 business corporation act michigan act 284 public acts 1972 amended 2 present name corporation stryker corporation registered office corporation 2725 fairfield road kalamazoo michigan 49002 3 former name corporation orthopedic frame company 4 date filing original articles incorporation february 20 1946 5 following restated articles incorporation supersedes original articles incorporation amended restated date shall articles incorporation corporation article name corporation stryker corporation article ii purpose corporation engage activity within purposes corporations may organized business corporation act michigan without limiting manner scope generality foregoing corporation may manufacture andor sell lease hospital equipment medical surgical supplies instruments allied products may buy sell lease rent real estate erect buildings connection foregoing otherwise article iii aggregate number shares classes stock corporation shall authority issue 500500000 divided two classes consisting 500000 shares class designated preferred stock par value one dollar 1 per share 500000000 shares class designated common stock par value ten cents 10 per share b relative rights preferences limitations shares class follows 1 preferred stock preferred stock may issued time one series distinctive designation title number shares may fixed resolution board directors without action shareholders board directors expressly granted authority prescribe resolution resolutions adopted issuance shares particular series preferred stock relative rights preferences series limitations applicable thereto including limited following voting powers full special limited voting powers series b rate terms conditions dividends shall paid whether dividends cumulative preference dividends shall relation dividends series classes stock c rights terms conditions conversion series preferred stock shares series classes stock right corporation redeem shares series preferred stock price time conditions redemption including provisions sinking fund e rights holders series preferred stock relation rights series classes stock upon liquidation dissolution distribution assets corporation unless board directors otherwise provides corporation redemption conversion shares preferred stock shall revert authorized unissued shares may reissued shares series preferred stock 2 common stock subject prior payment provision therefor dividends preferred stock holders common stock shall entitled receive funds corporation legally available purpose dividends declared board directors b event liquidation dissolution distribution assets corporation satisfaction preferential requirements preferred stock holders common stock shall entitled share ratably distribution remaining assets corporation available distribution c holders common stock shall entitled one vote share held record books corporation article iv shareholders corporation shall preemptive right acquire additional treasury shares corporation preemptive rights existing prior date hereof whether created statute common law abolished article v address current registered office 2725 fairfield road kalamazoo michigan 49002 name current resident agent david j simpson article vi duration corporation perpetual article vii liability corporation shareholders every person time director corporation acts omissions persons capacity director shall limited eliminated full extent authorized permitted michigan business corporation act exists may hereafter amended amendment alteration repeal article vii shareholders corporation shall adversely affect right protection director corporation respect act omission director occurring prior time amendment alteration repeal exhibit 10iii description bonus arrangements company entered bonus arrangements certain executive officers 2001 including mr brown mr johnson mr lawson mr lipes mr simpson based specific performance criteria including sales profits asset management aggregate amount bonuses expected exceed 5000000 exhibit 21 stryker corporation list subsidiaries march 15 2001 state country name subsidiary incorporation benoist girard sas france colorado biomedical inc colorado comptoir hospitalier orthopedique et chirurgical france diagnostic treatment rehabilitation clinic limited united kingdom favro bv netherlands howmedica international de rl panama howmedica leibinger inc delaware howmedica osteonics corp new jersey image guided technologies inc colorado matsumoto medical instruments inc japan midatlantic outpatient rehab network maryland nettrick ltd ireland nv stryker sa belgium osteo france sarl france osteo holding ag switzerland pficonprod pty ltd australia physiotherapy associates inc michigan state country name subsidiary incorporation physiotherapy associates nrh rehab maryland physiotherapy associates uk limited united kingdom physiotherapy associates union rehab llc maryland rs network inc illinois smd corporation michigan springfield surgical instruments inc massachusetts stryker ab sweden stryker denmark stryker australia pty ltd australia stryker barbados foreign sales corporation barbados stryker bertec medical inc canada stryker beteiligungs gmbh germany stryker biotech bv netherlands stryker biotech france sarl france stryker bv netherlands stryker canada inc canada stryker canada lp canada stryker capital bv netherlands stryker caribbean corporation puerto rico stryker china limited hong kong stryker communications corporation nevada stryker corporation chile compania limitada chile stryker corporation malaysia sdn bhd malaysia stryker brazil ltda brazil stryker far east inc delaware stryker finance bv netherlands stryker france sa france stryker funding corporation michigan stryker hellas epe greece stryker holdings bv netherlands stryker howmedica gmbh germany strykerhowmedica iberica sl spain stryker ifsc limited ireland stryker india medical equipment private limited india stryker india private limited india stryker international inc delaware stryker ireland limited ireland stryker italia srl italy stryker japan kk japan stryker korea ltd korea stryker leibinger gmbh co kg germany stryker medical bv netherlands stryker mexico sa de cv mexico stryker netherlands bv netherlands stryker new zealand limited new zealand stryker osteonics pty ltd south africa stryker osteonics romania srl romania strykerosteonics sa switzerland state country name subsidiary incorporation stryker osterreich gmbh austria stryker pacific limited hong kong stryker polska spzoo poland stryker portugal produtos medicos unipessoal lda portugal stryker puerto rico inc delaware stryker sa switzerland stryker sales corporation michigan stryker singapore private limited singapore stryker spain holding sl spain stryker spine sa france stryker technologies corporation michigan stryker tk japan stryker trauma gmbh germany stryker trauma sa switzerland stryker trauma selzach ag switzerland stryker uk limited united kingdom stryker corporation directly indirectly owns 100 outstanding voting securities abovenamed subsidiaries stryker corporation effectively controls physiotherapy associates union rehab llc maryland rs network inc illinois stryker india medical equipment private limited india exhibit 23 consent independent auditors consent incorporation reference registration statement number 33340334 form s4 dated july 10 2000 registration statement number 33378201 form s8 dated may 7 1999 registration statement number 3355662 form s8 dated december 11 1992 registration statement number 3332240 form s8 dated november 20 1989 related prospectus registration statements report dated january 31 2001 respect consolidated financial statements financial statement schedule included annual report form 10k stryker corporation year ended december 31 2000 ernst young llp grand rapids michigan march 13 2001item 14 exhibits financial statement schedules reports form 8k compensation arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date 31501 david j simpson david j simpson vice president chief financial officer secretary principal financial officer dean h bergy dean h bergy vice president finance principal accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated annual report form 10k item 14a1 2 c list financial statements financial statement schedule certain exhibits financial statement schedule year ended december 31 2001 stryker corporation kalamazoo michigan form 10k item 14a1 2 stryker corporation subsidiaries list financial statements financial statement schedule following consolidated financial statements stryker corporation subsidiaries report independent auditors included item 8 page number consolidated balance sheets december 31 2001 2000 consolidated statements earnings years ended december 31 2001 2000 1999 consolidated statements stockholders equity years ended december 31 2001 2000 1999 consolidated statements cash flows years ended december 31 2001 2000 1999 notes consolidated financial statements december 31 2001 summary quarterly data quarters ended 2001 2000 report independent auditors following consolidated financial statement schedule stryker corporation subsidiaries included item 14d schedule ii valuation qualifying accounts schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted schedule ii valuation qualifying accounts stryker corporation subsidiaries increase resulting acquisitions b uncollectible amounts written net recoveries c effect changes foreign exchange rates form 10k item 14c stryker corporation subsidiaries exhibit index page number sequential numbering system exhibit found stated exhibit incorporated reference incorporated reference annual report form 10k exhibit 4ia amendment 1 credit agreement amendment 1 credit agreement amendment made entered 30th day january 2002 among stryker corporation michigan corporation borrower required lenders defined credit agreement described bank america na administrative agent administrative agent lenders time party credit agreement defined w n e h whereas borrower administrative agent required lenders entered certain multiyear credit agreement dated december 21 2001 credit agreement pursuant lenders made available borrower revolving line credit amount 750000000 whereas borrower requested required lenders administrative agent amend credit agreement required lenders administrative agent agreed subject terms amendment amend credit agreement manner set forth herein therefore consideration mutual covenants fulfillment conditions set forth herein parties hereto hereby agree follows 1 definitions capitalized terms used herein without definition shall meanings set forth credit agreement 2 amendment section 402a credit agreement subject terms conditions set forth herein section 402a hereby deleted entirety replaced following representations warranties borrower contained article v representations warranties sections 501c 501d 506b first sentence section 507 sections 508 509 last sentence section 511 section 512 last sentence section 516 loan documents shall true correct date credit extension conversion continuation except extent representations warranties specifically refer earlier date case shall true correct earlier date 3 amendment section 505 credit agreement subject terms conditions set forth herein section 505 hereby amended following manner heading section 505 hereby deleted entirety replaced financial statements b section 505c hereby deleted entirety 4 amendment section 513 credit agreement subject terms conditions set forth herein section 513 hereby amended word beginning first line thereof replaced closing date 5 amendment section 515 credit agreement subject terms conditions set forth herein section 515 hereby amended word beginning first line thereof replaced closing date 6 amendment exhibit a2 credit agreement subject terms conditions set forth herein exhibit a2 hereby amended deleting subsection entirety replacing following representations warranties borrower contained article v agreement representations warranties sections 501c 501d 506b first sentence section 507 sections 508 509 last sentence section 511 section 512 last sentence section 516 contained certificate document financial statement furnished time connection agreement correct date request alternative rate except extent representations warranties specifically refer earlier date 7 amendment exhibit c credit agreement subject terms conditions set forth herein exhibit c hereby amended deleting 1000000 second parenthetical section 2 replacing 500000 8 entire agreement amendment sets forth entire understanding agreement parties hereto relation subject matter hereof supersedes prior negotiations agreements among parties relative subject matter promise condition representation warranty express implied herein set forth shall bind party hereto one relied promise condition representation warranty parties hereto acknowledges except amendment otherwise expressly stated representations warranties commitments express implied made party none terms conditions amendment may changed modified waived canceled orally otherwise except writing signed parties required terms credit agreement specifying change modification waiver cancellation terms conditions proceeding succeeding breach thereof 9 full force effect agreement except hereby specifically amended modified waived supplemented credit agreement loan documents hereby confirmed ratified respects shall remain full force effect according respective terms 10 representations warranties borrower hereby represents warrants administrative agent required lender representations warranties set forth article v credit agreement loan document including schedules thereto true correct material respects date hereof effect made date hereof except extent representations warranties expressly relate solely earlier date except extent changes abovereferenced schedules adverse condition financial otherwise operations business assets liabilities actual contingent revenues cash flows prospects borrower b borrower compliance terms conditions credit agreement loan documents part observed performed default event default occurred continuing credit agreement c execution delivery performance borrower amendment duly authorized borrower 11 effectiveness amendment shall become effective upon receipt administrative agent duly executed counterparts amendment taken together bear authorized signatures borrower administrative agent required lenders 12 counterparts amendment may executed number counterparts shall deemed original party whose signature appears thereon shall together constitute one instrument 13 governing law amendment shall respects governed laws judicial decisions state new york 14 enforceability one provisions amendment determined illegal unenforceable one parties hereto provisions nevertheless shall remain effective binding parties hereto signature pages follow witness whereof parties hereto caused amendment duly executed duly authorized officers day year first written exhibit 4iia amendment 1 credit agreement amendment 1 credit agreement amendment made entered 30th day january 2002 among stryker corporation michigan corporation borrower required lenders defined credit agreement described bank america na administrative agent administrative agent lenders time party credit agreement defined w n e h whereas borrower administrative agent required lenders entered certain 364day credit agreement dated december 21 2001 credit agreement pursuant lenders made available borrower revolving line credit amount 250000000 whereas borrower requested required lenders administrative agent amend credit agreement required lenders administrative agent agreed subject terms amendment amend credit agreement manner set forth herein therefore consideration mutual covenants fulfillment conditions set forth herein parties hereto hereby agree follows 1 definitions capitalized terms used herein without definition shall meanings set forth credit agreement 2 amendment section 402a credit agreement subject terms conditions set forth herein section 402a hereby deleted entirety replaced following representations warranties borrower contained article v representations warranties sections 501c 501d 506b first sentence section 507 sections 508 509 last sentence section 511 section 512 last sentence section 516 loan documents shall true correct date credit extension conversion continuation except extent representations warranties specifically refer earlier date case shall true correct earlier date 3 amendment section 505 credit agreement subject terms conditions set forth herein section 505 hereby amended following manner heading section 505 hereby deleted entirety replaced financial statements b section 505c hereby deleted entirety 4 amendment section 513 credit agreement subject terms conditions set forth herein section 513 hereby amended word beginning first line thereof replaced closing date 5 amendment section 515 credit agreement subject terms conditions set forth herein section 515 hereby amended word beginning first line thereof replaced closing date 6 amendment exhibit a2 credit agreement subject terms conditions set forth herein exhibit a2 hereby amended deleting subsection entirety replacing following representations warranties borrower contained article v agreement representations warranties sections 501c 501d 506b first sentence section 507 sections 508 509 last sentence section 511 section 512 last sentence section 516 contained certificate document financial statement furnished time connection agreement correct date request alternative rate except extent representations warranties specifically refer earlier date 7 entire agreement amendment sets forth entire understanding agreement parties hereto relation subject matter hereof supersedes prior negotiations agreements among parties relative subject matter promise condition representation warranty express implied herein set forth shall bind party hereto one relied promise condition representation warranty parties hereto acknowledges except amendment otherwise expressly stated representations warranties commitments express implied made party none terms conditions amendment may changed modified waived canceled orally otherwise except writing signed parties required terms credit agreement specifying change modification waiver cancellation terms conditions proceeding succeeding breach thereof 8 full force effect agreement except hereby specifically amended modified waived supplemented credit agreement loan documents hereby confirmed ratified respects shall remain full force effect according respective terms 9 representations warranties borrower hereby represents warrants administrative agent required lender representations warranties set forth article v credit agreement loan document including schedules thereto true correct material respects date hereof effect made date hereof except extent representations warranties expressly relate solely earlier date except extent changes abovereferenced schedules adverse condition financial otherwise operations business assets liabilities actual contingent revenues cash flows prospects borrower b borrower compliance terms conditions credit agreement loan documents part observed performed default event default occurred continuing credit agreement c execution delivery performance borrower amendment duly authorized borrower 10 effectiveness amendment shall become effective upon receipt administrative agent duly executed counterparts amendment taken together bear authorized signatures borrower administrative agent required lenders 11 counterparts amendment may executed number counterparts shall deemed original party whose signature appears thereon shall together constitute one instrument 12 governing law amendment shall respects governed laws judicial decisions state new york 13 enforceability one provisions amendment determined illegal unenforceable one parties hereto provisions nevertheless shall remain effective binding parties hereto signature pages follow witness whereof parties hereto caused amendment duly executed duly authorized officers day year first written exhibit 10iii description bonus arrangements company entered bonus arrangements certain executive officers 2002 including mr brown mr johnson mr lawson mr lipes mr simpson based specific performance criteria including sales profits asset management aggregate amount bonuses expected exceed 5000000 exhibit 21 stryker corporation list subsidiaries march 15 2002 state country name subsidiary incorporation benoist girard sas france bv favro netherlands colorado biomedical inc colorado diagnostic treatment rehabilitation clinic limited united kingdom howmedica international de rl panama howmedica leibinger inc delaware howmedica osteonics corp new jersey image guided technologies inc colorado lifesigns management inc michigan matsumoto medical instruments inc japan mid atlantic outpatient rehab network maryland nettrick ltd ireland nv stryker sa belgium osteo france sarl france pficonprod pty ltd australia physiotherapy associates inc michigan smd corporation michigan ssi divestiture inc massachusetts stryker ab sweden stryker australia pty ltd australia stryker barbados foreign sales corporation barbados stryker bertec medical inc canada stryker beteiligungs gmbh germany stryker biotech bv netherlands stryker biotech france sarl france stryker bv netherlands stryker canada inc canada stryker canada lp canada stryker capital bv netherlands stryker china limited hong kong stryker communications corporation nevada stryker corporation chile compania limitada chile stryker corporation malaysia sdn bhd malaysia stryker brasil ltda brazil stryker far east inc delaware stryker finance bv netherlands stryker france sa france stryker funding corporation michigan stryker hellas epe greece stryker holdings bv netherlands stryker howmedica bv netherlands stryker howmedica gmbh germany strykerhowmedica iberica sl spain stryker ifsc limited ireland stryker india private limited india stryker international inc delaware stryker ireland limited ireland stryker italia srl italy stryker japan holdings bv netherlands stryker japan kk japan stryker korea ltd korea stryker leibinger gmbh co kg germany stryker mexico sa de cv mexico stryker netherlands bv netherlands stryker new zealand limited new zealand stryker osteonics proprietary limited south africa stryker osteonics romania srl romania strykerosteonics sa switzerland stryker osterreich gmbh austria stryker pacific limited hong kong stryker polska spzoo poland stryker portugal produtos medicos unipessoal lda portugal stryker puerto rico limited ireland stryker sa switzerland stryker sales corporation michigan stryker singapore private limited singapore stryker spain holding sl spain stryker spine sa france stryker technologies corporation michigan stryker tk japan stryker trauma gmbh germany stryker trauma sa switzerland stryker trauma selzach ag switzerland stryker uk limited united kingdom stryker corporation directly indirectly owns 100 outstanding voting securities abovenamed subsidiaries stryker corporation effectively controls physiotherapy associates nrh rehab maryland physiotherapy associates union rehab llc maryland rs network inc illinois stryker india medical equipment private limited india exhibit 23 consent independent auditors consent incorporation reference registration statement number 33340334 form s4 dated july 10 2000 registration statement number 33378201 form s8 dated may 7 1999 registration statement number 3355662 form s8 dated december 11 1992 registration statement number 3332240 form s8 dated november 20 1989 related prospectus registration statements report dated january 29 2002 respect consolidated financial statements financial statement schedule included annual report form 10k stryker corporation year ended december 31 2001 ernst young llp grand rapids michigan march 13 2002item 14 controls procedures within 90day period preceding date report evaluation effectiveness design operation companys disclosure controls procedures carried supervision participation companys management including chairman board chief executive officer president vice president chief financial officer secretary certifying officers based evaluation certifying officers concluded companys disclosure controls procedures effective bring attention companys management relevant information necessary permit assessment need disclose material developments risks pertaining companys business periodic filings securities exchange commission significant changes companys internal controls factors could significantly affect controls subsequent date evaluation part iv item 15item 14 principal accounting fees services information caption miscellaneous relationship independent accountants 2004 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information caption miscellaneous relationship independent registered public accounting firm 2005 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information captions information board directors corporate governance matters independent directors proposal 3 ratification appointment independent registered public accounting firm relationship ernst young 2007 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information caption proposal 2 ratification appointment independent registered public accounting firm relationship ernst young llp 2009 proxy statement incorporated herein reference 76 part iv item 15item 14 principal accounting fees services information caption “proposal 2ratification appointment independent registered public accounting firmrelationship ernst young llp” 2010 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information caption “proposal 2ratification appointment independent registered public accounting firmrelationship ernst young llp” 2011 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information caption proposal 2ratification appointment independent registered public accounting firmrelationship ernst young llp 2013 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information caption proposal 2ratification appointment independent registered public accounting firmrelationship ernst young llp 2014 proxy statement incorporated herein reference dollar amounts millions except per share amounts otherwise specified part iv item 15item 14 principal accounting fees services information caption proposal 2ratification appointment independent registered public accounting firm 2015 proxy statement incorporated herein reference stryker corporation 2014 form 10k part iv item 15item 14 principal accounting fees services information caption proposal 2ratification appointment independent registered public accounting firm 2016 proxy statement incorporated herein reference stryker corporation 2015 form 10k part iv item 15item 14 principal accounting fees services information caption proposal 2ratification appointment independent registered public accounting firm 2017 proxy statement incorporated herein reference dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k part iv item 15item 14 principal accounting fees services information caption proposal 2ratification appointment independent registered public accounting firm 2018 proxy statement incorporated herein reference dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k part iv item 15item 14 principal accounting fees services information caption proposal 2ratification appointment independent registered public accounting firm 2019 proxy statement incorporated herein reference dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k part iv item 15item 14 principal accounting fees services information caption proposal 2ratification appointment independent registered public accounting firm 2020 proxy statement incorporated herein reference dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k part iv item 15item 14principal accounting fees services information caption proposal 2ratification appointment independent registered public accounting firm 2021 proxy statement incorporated herein reference dollar amounts millions except per share amounts otherwise specified38 stryker corporation 2020 form 10k part iv item 15item 14 exhibits financial statement schedules reports form 8k executive compensation plans arrangements referenced exhibits 10i ii iii iv a1 2 response portion item 14 submitted separate section report following signature page a3 exhibits exhibit 2 plan acquisition offer purchase shares matsumoto medical instruments inc stryker corporation dated june 6 1994 incorporated reference exhibit 2 companys form 10q quarter ended june 30 1994 commission file 09165 exhibit 3 articles incorporation bylaws restated articles incorporation amendment thereto dated december 28 1993incorporated reference exhibit 3i companys form 10k year ended december 31 1993 commission file 09165 ii bylawsincorporated reference exhibit 3ii companys form 10q quarter ended june 30 1988 commission file 09165 exhibit 4 instruments defining rights security holders including indenturesthe company agrees furnish commission upon request copy instrument pursuant long term debt company subsidiaries exceeding 10 total assets company consolidated subsidiaries authorized exhibit 10 material contracts 1988 stock option plan amended incorporated reference exhibit 10i companys form 10k year ended december 31 1992 commission file 09165 ii supplemental savings retirement plan iii supplemental savings retirement plan amended effective january 1 1995 iv description bonus arrangements company certain officers including messrs brown elenbaas laube lipes simpson winkel exhibit 11 statement computation per share earnings statement computation earnings per share common stock exhibit 13 annual report security holders portions 1994 annual report incorporated herein reference exhibit 21 subsidiaries registrant list subsidiaries exhibit 23 consents experts counsel consent independent auditors exhibit 27 financial data schedule financial data schedule included edgar filing b reports form 8k reports form 8k required filed fourth quarter 1994 c exhibits response portion item 14 submitted separate section report following signature page financial statement schedules response portion item 14 submitted separate section report following signature page compensation arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date 32095 david j simpson david j simpson vice president chief financial officer secretary pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated john w brown 32095 david j simpson 32095 john w brown chairman president david j simpson vice president chief executive officer chief financial officer principal executive officer secretary principal financial officer howard e cox jr 32095 dean h bergy 32095 howard e cox jr director dean h bergy controller principal accounting officer donald engelman 32095 ronda e stryker 32095 donald engelman phd director ronda e stryker director jerome h grossman 32095 william u parfet 32095 jerome h grossman md director william u parfet director john lillard 32095 john lillard director annual report form 10k item 14a1 2 c list financial statements financial statement schedules certain exhibits financial statement schedules year ended december 31 1994 stryker corporation kalamazoo michigan form 10kitem 14a1 2 stryker corporation subsidiaries index financial statements financial statement schedule following consolidated financial statements stryker corporation subsidiaries report independent auditors included annual stockholders report registrant year ended december 31 1994 incorporated reference item 8 report independent auditors consolidated balance sheetdecember 31 1994 1993 consolidated statement earningsyears ended december 31 1994 1993 1992 consolidated statement stockholders equityyears ended december 31 1994 1993 1992 consolidated statement cash flowsyears ended december 31 1994 1993 1992 notes consolidated financial statementsdecember 31 1994 following consolidated financial statement schedule stryker corporation subsidiaries included item 14d schedule iivaluation qualifying accounts schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted form 10kitem 14c stryker corporation subsidiaries exhibit index exhibit page 2 plan acquisition offer purchase shares matsumoto medical instruments inc stryker corporation dated june 6 1994 12 3 articles incorporation bylaws restated articles incorporation amendment thereto dated december 28 1993 12 ii laws 12 10 material contracts 1988 stock option plan amended 12 ii supplemental savings retirement plan 19 iii supplemental savings retirement plan amended effective january 1 1995 26 iv description bonus arrangements company certain officers including messrs brown elenbaas laube lipes simpson winkel 33 11 statement computation per share earnings statement computation earnings per share common stock 34 13 annual report security holders portions 1994 annual report incorporated herein reference 35 21 subsidiaries registrant list subsidiaries 57 23 consents experts counsel consent independent auditors 58 27 financial data schedule financial data schedule included edgar filing 59 page number sequential numbering system exhibit found stated exhibit incorporated reference incorporated reference annual report form 10k exhibit 10ii stryker corporation supplemental savings retirement plan 1 purpose plan purpose stryker corporation supplemental savings retirement plan provide select group companys executives opportunity defer portion annual pay receive benefit company contributions extent benefits unavailable executives savings plan hereinafter defined result limitations imposed internal revenue code 1986 amended limitations imposed terms plan 2 definitions 201 account shall mean bookkeeping account maintained participant record pay deferrals matching contributions company discretionary contributions together earnings thereon credited pursuant section 703 202 administrator shall mean company may periodically delegate duties administrator committee appointed board 203 board shall mean board directors company 204 code shall mean internal revenue code 1986 amended time 205 company shall mean stryker corporation successor thereto context requires company shall also include employer related company whose employees ahve designated eligible participate plan 206 company discretionary contribution shall mean amount credited participants account pursuant article 6 207 compensation shall mean compensation defined savings plan provided however purposes plan limitation participants compensation plan year shall 200 section 401a17 limitation plan year 208 deferable compensation shall mean participants compensation plan year ineligible deferral savings plan earned participants pay deferrals savings plan attained dollar limitation section 402g1 code lesser limitation pay deferrals may apply participant terms savings plan year 209 discretionary contribution percentage shall mean employers discretionary contribution plan year savings plan expressed percentage participants includible compensation plan year savings plan 210 effective date shall mean january 1 1994 211 employee shall mean employee company 212 entry date shall mean january 1 plan year 213 investment election shall mean participants election article 7 investment fund funds used measure investment performance participants account 214 matching contribution shall mean amount credited participants account pursuant article 5 215 participant shall mean employee satisfies requirements participation plan pursuant section 301 whose account distributed 216 pay deferral election shall mean participants election pursuant section 401 defer portion deferable compensation 217 pay deferrals shall mean amounts credited participants account pursuant section 401 218 plan shall mean stryker corporation supplemental savings retirement plan amended time 219 plan year shall mean calendar year 220 savings plan shall mean stryker corporation savings retirement plan salaried clerical technical employees amended time 221 section 401a17 limitation shall mean dollar limitation section 401a17 code effect plan year 222 select group shall mean respect plan year select group management highly compensated employees designated board directors eligible participate plan 223 unforeseeable emergency shall meaning ascribed thereto section 1103 224 valuation date shall mean last day calendar quarter 3 participation 301 participation employee member select group shall become eligible participate plan entry date coincident next following latest effective date ii date becomes eligible participate savings plan iii date becomes member select group participation plan shall terminate amounts credited participants account distributed 4 pay deferrals 401 pay deferral elections participant may elect defer portion deferable compensation otherwise payable plan year making written election form administrator shall designate election shall specify whole percentage participants deferable compensation participant elects defer percentage may exceed maximum percentage compensation may deferred nonhighly compensated employees terms savings plan election must made prior first day plan year earlier date administrator may specify may modified revoked commencement plan year except provided sections 402 1101 b amount deferred pursuant pay deferral election shall withheld deferable compensation otherwise payable participant shall credited participants account date amount withheld c pay deferral election applies deferable compensation plan year election relates defer portion deferable compensation subsequent plan year participant must make new pay deferral election 402 suspension deferrals notwithstanding anything contrary article 4 event administrator approves participants request suspension deferrals pursuant section 1101 account unforeseeable emergency participants pay deferral election shall suspended participant shall ineligible make new pay deferral election respect compensation otherwise payable period beginning date withdrawal effective date approval ending last day next succeeding plan year 5 matching contributions 501 plan year company shall credit account eligible participant matching contribution equal lesser 100 participants pay deferrals plan year ii 4 participants compensation excess section 401a17 limitation plan year matching contribution shall credited participants account march 15 following end plan year 502 participant shall eligible matching contribution respect plan year eligible matching contribution savings plan year 6 company discretionary contributions 601 plan year company shall credit account eligible participant company discretionary contribution equal participants compensation excess section 401a17 limitation plan year multiplied discretionary contribution percentage plan year company discretionary contribution shall credited participants account march 15 following end plan year 602 participant shall eligible company discretionary contribution respect plan year eligible employer discretionary contribution savings plan year 7 investment performance elections 701 initial election prior commencement participation plan participant shall file initial investment election shall designate among investment funds available selection plan investment fund funds shall used measure investment performance participants account 702 change election participant may change investment election effective first day calendar quarter filing written notice administrator least 30 days advance date 703 crediting investment return valuation date participants account shall procedures administrator shall establish credited income debited loss would realized amounts credited account invested accordance investment election references plan investment elections sole purpose attributing hypothetical investment performance participants account nothing herein shall require company invest earmark set aside general assets specific manner 704 available investment funds investment funds available selection plan shall investment funds employer stock fund available investment savings plan 8 accounts 801 maintenance accounts administrator shall maintain cause maintained records showing individual balances account least per quarter participant shall furnished statement setting forth value account 802 vesting benefit shall payable plan extent vested portion participants account attributable pay deferrals together credited earnings losses thereon shall fully vested times portion participants account attributable matching contributions company discretionary contributions credited earnings losses respect thereto shall vested extent matching contributions employer discretionary contributions credited participants account savings plan vested nonvested portion participants account shall forfeited time conditions nonvested portion account savings plan forfeited 9 distribution benefits 901 benefit payment election prior commencement participation plan participant shall file benefit payment election administrator form administrator shall prescribe specifying whether participants benefit paid lump sum substantially equal annual installments combination thereof ii year lumpsum payment made installments commence iii installments elected number installments except provided section 1102 portion participants benefit may distributed prior separation service lumpsum payments may made later installment payments may extend beyond tenth anniversary date participants separation service 902 change election participants benefit payment election may changed time provided however change shall effective participants separation service company occurs less one year date change made event participants benefit shall paid accordance recent election change election change election made less one year separation service 903 distribution benefits except otherwise provided article 10 section 1102 participants account shall distributed accordance benefit election made accordance section 901 giving effect modifications election pursuant section 902 payment installment lump sum shall accordance participants election made either within 90 days end calendar quarter participant separates service ii within first 90 days calendar year commencing participant separates service 10 death participant 1001 except otherwise provided section 1002 event participants death prior distribution entire account balance remaining balance account shall distributed accordance benefit payment election made pursuant section 901 giving effect modifications election pursuant section 902 distribution shall made beneficiary designated participant savings plan unless participant specifically designated different beneficiary plan writing filed administrator 1002 participant may elect amount remaining account upon death paid beneficiary lump sum within 60 days administrator received notification death rather accordance benefit payment election section 901 lumpsum death benefit election may made revoked time provided however election revocation shall effective made less one year date participants death 11 unforeseeable emergencies 1101 suspension deferrals vent participants unforeseeable emergency participant may request suspension pay deferral accordance section 402 suspension already effect pursuant section request shall subject approval administrator approval shall granted unless need cannot relieved reimbursement compensation insurance otherwise ii liquidation participants assets extent liquidation assets would cause severe financial hardship request granted suspension shall effective date administrator shall prescribe 1102 emergency withdrawal event participants unforeseeable emergency participant may request emergency withdrawal account request shall subject approval administrator approval shall granted unless participants pay deferral election suspended pursuant section 402 b shall granted extent reasonably needed satisfy need created unforeseeable emergency c shall granted extent need may relieved reimbursement compensation insurance otherwise ii liquidation participants assets extent liquidation assets would cause severe financial hardship 1103 unforeseeable emergency unforeseeable emergency means severe financial hardship participant resulting sudden unexpected illness accident participant dependent loss participants property due casualty similar extraordinary unforeseeable circumstances arising result events beyond participants control examples circumstances qualifying unforeseeable emergency include need send participants child college desire purchase home 12 administration plan shall administered administrator shall discretionary authority determine eligibility benefits construe terms plan administrators goodfaith determination respect issue relating interpretation plan shall conclusive final 13 general provisions 1301 contract employment establishment plan shall construed conferring legal rights upon participant continuation employment shall interfere rights company discharge participant treat without regard effect treatment might upon participant plan 1302 withholding condition participants entitlement benefits hereunder company shall right deduct amounts otherwise payable participant whether pursuant plan otherwise collect participant required withholding taxes respect benefits plan 1303 nonassignability benefits subject applicable law benefit plan shall subject manner shall company obligated recognize purported anticipation alienation sale transfer assignment pledge encumbrance charge attempt shall void benefit shall manner liable subject garnishment attachment execution levy liable subject debts contracts liabilities engagements torts participant 1304 successor employers plan shall binding upon successors assigns company shall require successor whether direct indirect whether purchase merger consolidation otherwise substantially business assets company written agreement expressly assume agree perform companys obligations plan manner extent company would required perform succession taken place provisions section 1304 shall continue apply subsequent employer participant hereunder event subsequent merger consolidation transfer assets subsequent employer 1305 governing law laws state michigan shall govern construction plan rights liabilities hereunder parties hereto 1306 pronouns masculine pronoun shall mean feminine wherever appropriate 14 source benefits plan unfunded plan maintained company purpose providing deferred compensation select group management highly compensated employees benefits plan shall payable general assets company except extent paid stryker corporation supplemental savings retirement plan trust grantor trust type commonly known rabbi trust plan shall construed conferring participant right title interest claim specific asset reserve account property kind possessed company extent participant person acquires right receive payments company right shall greater right unsecured general creditor 15 effective date plan shall effective january 1 1994 16 amendment termination board directors company reserves right amend terminate plan time provided however without participants written consent amendment termination plan shall adversely affect right participant receive otherwise result material adverse effect participants rights plan respect accrued vested benefits determined date amendment termination witness company adopted plan 21st day january 1994 stryker corporation thomas r winkel thomas r winkel vice president exhibit 10iii stryker corporation supplemental savings retirement plan amended effective january 1 1995 1 purpose plan purpose stryker corporation supplemental savings retirement plan provide select group companys executives opportunity defer portion annual pay receive benefit company contributions extent benefits unavailable executives savings plan hereinafter defined result limitations imposed internal revenue code 1986 amended limitations imposed terms plan 2 definitions 201 account shall mean bookkeeping account maintained participant record pay deferrals matching contributions company discretionary contributions together earnings thereon credited pursuant section 703 202 administrator shall mean company may periodically delegate duties administrator committee appointed board 203 board shall mean board directors company 204 code shall mean internal revenue code 1986 amended time 205 company shall mean stryker corporation successor thereto context requires company shall also include employer related company whose employees designated eligible participate plan 206 company discretionary contribution shall mean amount credited participants account pursuant article 6 207 compensation shall mean compensation defined savings plan provided however purposes plan limitation participants compensation plan year shall 200 section 401a17 limitation plan year 208 deferable compensation shall mean participants compensation plan year ineligible deferral savings plan earned participants pay deferrals savings plan attained dollar limitation section 402g1 code lesser limitation pay deferrals may apply participant terms savings plan year 209 discretionary contribution percentage shall mean employers discretionary contribution plan year savings plan expressed percentage participants includible compensation plan year savings plan 210 effective date shall mean january 1 1994 211 employee shall mean employee company 212 entry date shall mean january 1 plan year 213 investment election shall mean participants election article 7 investment fund funds used measure investment performance participants account 214 matching contribution shall mean amount credited participants account pursuant article 5 215 participant shall mean employee satisfies requirements participation plan pursuant section 301 whose account distributed 216 pay deferral election shall mean participants election pursuant section 401 defer portion deferable compensation 217 pay deferrals shall mean amounts credited participants account pursuant section 401 218 plan shall mean stryker corporation supplemental savings retirement plan amended time 219 plan year shall mean calendar year 220 savings plan shall mean stryker corporation 401k savings retirement plan amended time 221 section 401a17 limitation shall mean dollar limitation section 401a17 code effect plan year 222 select group shall mean respect plan year select group management highly compensated employees designated board directors eligible participate plan 223 unforeseeable emergency shall meaning ascribed thereto section 1103 224 valuation date shall mean last day calendar quarter 3 participation 301 participation employee member select group shall become eligible participate plan entry date coincident next following latest effective date ii date becomes eligible participate savings plan iii date becomes member select group participation plan shall terminate amounts credited participants account distributed 4 pay deferrals 401 pay deferral elections participant may elect defer portion deferable compensation otherwise payable plan year making written election form administrator shall designate election shall specify whole percentage participants deferable compensation participant elects defer percentage may exceed maximum percentage compensation may deferred nonhighly compensated employees terms savings plan election must made prior first day plan year earlier date administrator may specify may modified revoked commencement plan year except provided sections 402 1101 b amount deferred pursuant pay deferral election shall withheld deferable compensation otherwise payable participant shall credited participants account date amount withheld c pay deferral election applies deferable compensation plan year election relates defer portion deferable compensation subsequent plan year participant must make new pay deferral election 402 suspension deferrals notwithstanding anything contrary article 4 event administrator approves participants request suspension deferrals pursuant section 1101 account unforeseeable emergency participants pay deferral election shall suspended participant shall ineligible make new pay deferral election respect compensation otherwise payable period beginning date withdrawal effective date approval ending last day next succeeding plan year 5 matching contributions 501 plan year company shall credit account eligible participant matching contribution equal lesser 50 participants pay deferrals plan year ii 4 participants compensation excess section 401a17 limitation plan year matching contribution shall credited participants account march 15 following end plan year 502 participant shall eligible matching contribution respect plan year eligible matching contribution savings plan year 6 company discretionary contributions 601 plan year company shall credit account eligible participant company discretionary contribution equal participants compensation excess section 401a17 limitation plan year multiplied discretionary contribution percentage plan year company discretionary contribution shall credited participants account march 15 following end plan year 602 participant shall eligible company discretionary contribution respect plan year eligible employer discretionary contribution savings plan year 7 investment performance elections 701 initial election prior commencement participation plan participant shall file initial investment election shall designate among investment funds available selection plan investment fund funds shall used measure investment performance participants account 702 change election participant may change investment election effective first day calendar quarter filing written notice administrator least 30 days advance date 703 crediting investment return valuation date participants account shall procedures administrator shall establish credited income debited loss would realized amounts credited account invested accordance investment election references plan investment elections sole purpose attributing hypothetical investment performance participants account nothing herein shall require company invest earmark set aside general assets specific manner 704 available investment funds investment funds available selection plan shall investment funds employer stock fund available investment savings plan 8 accounts 801 maintenance accounts administrator shall maintain cause maintained records showing individual balances account least per quarter participant shall furnished statement setting forth value account 802 vesting benefit shall payable plan extent vested portion participants account attributable pay deferrals together credited earnings losses thereon shall fully vested times portion participants account attributable matching contributions company discretionary contributions credited earnings losses respect thereto shall vested extent matching contributions employer discretionary contributions credited participants account savings plan vested nonvested portion participants account shall forfeited time conditions nonvested portion account savings plan forfeited 9 distribution benefits 901 benefit payment election prior commencement participation plan participant shall file benefit payment election administrator form administrator shall prescribe specifying whether participants benefit paid lump sum substantially equal annual installments combination thereof ii year lumpsum payment made installments commence iii installments elected number installments except provided section 1102 portion participants benefit may distributed prior separation service lumpsum payments may made later installment payments may extend beyond tenth anniversary date participants separation service 902 change election participants benefit payment election may changed time provided however change shall effective participants separation service company occurs less one year date change made event participants benefit shall paid accordance recent election change election change election made less one year separation service 903 distribution benefits except otherwise provided article 10 section 1102 participants account shall distributed accordance benefit election made accordance section 901 giving effect modifications election pursuant section 902 payment installment lump sum shall accordance participants election made either within 90 days end calendar quarter participant separates service ii within first 90 days calendar year commencing participant separates service 10 death participant 1001 except otherwise provided section 1002 event participants death prior distribution entire account balance remaining balance account shall distributed accordance benefit payment election made pursuant section 901 giving effect modifications election pursuant section 902 distribution shall made beneficiary designated participant savings plan unless participant specifically designated different beneficiary plan writing filed administrator 1002 participant may elect amount remaining account upon death paid beneficiary lump sum within 60 days administrator received notification death rather accordance benefit payment election section 901 lumpsum death benefit election may made revoked time provided however election revocation shall effective made less one year date participants death 11 unforeseeable emergencies 1101 suspension deferrals vent participants unforeseeable emergency participant may request suspension pay deferral accordance section 402 suspension already effect pursuant section request shall subject approval administrator approval shall granted unless need cannot relieved reimbursement compensation insurance otherwise ii liquidation participants assets extent liquidation assets would cause severe financial hardship request granted suspension shall effective date administrator shall prescribe 1102 emergency withdrawal event participants unforeseeable emergency participant may request emergency withdrawal account request shall subject approval administrator approval shall granted unless participants pay deferral election suspended pursuant section 402 b shall granted extent reasonably needed satisfy need created unforeseeable emergency c shall granted extent need may relived reimbursement compensation insurance otherwise ii liquidation participants assets extent liquidation assets would cause severe financial hardship 1103 unforeseeable emergency unforeseeable emergency means severe financial hardship participant resulting sudden unexpected illness accident participant dependent loss participants property due casualty similar extraordinary unforeseeable circumstances arising result events beyond participants control examples circumstances qualifying unforeseeable emergency include need send participants child college desire purchase home 12 administration plan shall administered administrator shall discretionary authority determine eligibility benefits construe terms plan administrators goodfaith determination respect issue relating interpretation plan shall conclusive final 13 general provisions 1301 contract employment establishment plan shall construed conferring legal rights upon participant continuation employment shall interfere rights company discharge participant treat without regard effect treatment might upon participant plan 1302 withholding condition participants entitlement benefits hereunder company shall right deduct amounts otherwise payable participant whether pursuant plan otherwise collect participant required withholding taxes respect benefits plan 1303 nonassignability benefits subject applicable law benefit plan shall subject manner shall company obligated recognize purported anticipation alienation sale transfer assignment pledge encumbrance charge attempt shall void benefit shall manner liable subject garnishment attachment execution levy liable subject debts contracts liabilities engagements torts participant 1304 successor employers plan shall binding upon successors assigns company shall require successor whether direct indirect whether purchase merger consolidation otherwise substantially business assets company written agreement expressly assume agree perform companys obligations plan manner extent company would required perform succession taken place provisions section 1304 shall continue apply subsequent employer participant hereunder event subsequent merger consolidation transfer assets subsequent employer 1305 governing law laws state michigan shall govern construction plan rights liabilities hereunder parties hereto 1306 pronouns masculine pronoun shall mean feminine wherever appropriate 14 source benefits plan unfunded plan maintained company purpose providing deferred compensation select group management highly compensated employees benefits plan shall payable general assets company except extent paid stryker corporation supplemental savings retirement plan trust grantor trust type commonly known rabbi trust plan shall construed conferring participant right title interest claim specific asset reserve account property kind possessed company extent participant person acquires right receive payments company right shall greater right unsecured general creditor 15 effective date plan amended restated set forth herein shall effective january 1 1995 16 amendment termination board directors company reserves right amend terminate plan time provided however without participants written consent amendment termination plan shall adversely affect right participant receive otherwise result material adverse effect participants rights plan respect accrued vested benefits determined date amendment termination witness company adopted plan 14th day december 1994 stryker corporation thomas r winkel thomas r winkel vice president exhibit 10iv description bonus arrangements company entered bonus arrangements certain executive officers 1995 including mr brown mr elenbaas mr laube mr lipes mr simpson mr winkel based specific performance criteria including sales profits asset management aggregate amount bonuses expected exceed 1225000 exhibit 11 statement computation earnings per share common stock year ended december 31 1994 1993 1992 average number shares outstanding 48367000 48356000 47716000 net earnings 72400000 60205000 47700000 earnings per share common stock net earnings 150 125 100 primary average shares outstanding 48367000 48356000 47716000 net effect dilutive stock options based treasury stock method using average market price 737000 536000 1173000 total primary shares 49104000 48892000 48889000 fully diluted average shares outstanding 48367000 48356000 47716000 net effect dilutive stock options using yearend market price higher average market price 770000 586000 1199000 total fully diluted shares 49137000 48942000 48915000 note shares subject stock options included earnings per share computation present effect thereof materially dilutive consolidated statement cash flows stryker corporation subsidiaries years ended december 31 thousands 1994 1993 1992 operating activities net earnings 72400 60205 47700 adjustments reconcile net earnings net cash provided operating activities depreciation 18717 13048 10214 amortization 2227 3135 1168 minority interest 4405 provision losses accounts receivable 2600 900 400 deferred income taxes credit 3818 2917 4171 changes operating assets liabilities net effects business acquisitions decrease increase accounts receivable 2862 11305 20563 decrease inventories 5798 2271 726 increase decrease accounts payable 8594 4982 7723 increase decrease income taxes 3898 11092 632 4994 4691 6899 net cash provided operating activities 97693 86102 50728 investing activities purchases property plant equipment 29239 20160 31618 sales purchases marketable securities 17661 54264 21553 business acquisitions net cash acquired 42557 34654 8736 net cash used investing activities 54135 109078 61907 financing activities proceeds borrowings 59919 33563 payments borrowings 31771 2016 7418 dividends paid 3388 2898 2380 proceeds exercise stock options 1791 1389 9789 repurchases common stock 3109 1307 126 376 net cash provided used financing activities 22135 29912 385 effect exchange rate changes cash equivalents 1376 315 1734 increase decrease cash equivalents 67069 6621 9830 cash equivalents beginning year 49712 43091 52921 cash equivalents end year 116781 49712 43091 see accompanying notes consolidated financial statements notes consolidated financial statements stryker corporation subsidiaries december 31 1994 1 significant accounting policies business stryker corporation develops manufactures markets specialty surgical medical products sold primarily hospitals throughout world principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries effective august 1994 see note 4 51 owned subsidiary matsumoto medical instruments inc elimination significant intercompany accounts transactions minority interest represents minority stockholders equity matsumotos net earnings since august 1994 equity matsumotos net assets december 31 1994 companys 20 investment matsumoto period august 1993 july 1994 accounted equity method revenue recognition revenue recognized sale products related goods shipped services rendered cash equivalents investments cash equivalents highly liquid investments maturity three months less purchased investments include marketable equity debt securities classified current assets certain noncurrent investments included assets companys investments marketable equity debt securities classified availableforsale carried fair value unrealized gains losses net income taxes reported separate component stockholders equity interest dividends securities included income inventories stated lower cost market cost approximately 75 63 1993 inventories determined using lower firstin firstout fifo cost market cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost property plant equipment property plant equipment stated cost depreciation computed straightline declining balance methods estimated useful lives assets intangible assets intangible assets represent excess purchase price fair value tangible net assets acquired businesses intangible assets include patents intangibles specifically identifiable amortized using straightline method periods sixteen years income taxes effective january 1 1993 company adopted financial accounting standards board fasb statement 109 accounting income taxes requires use liability method accounting deferred income taxes method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates effect years differences expected reverse prior adoption statement 109 income tax expense determined using deferred method deferred tax expense based items income expense reported different years financial statements tax returns measured tax rate effect year difference originated earnings per share earnings per share based upon average number shares common stock outstanding year shares subject option included earnings per share computations present effect thereof materially dilutive 2 investments effective january 1 1994 company adopted fasb statement 115 accounting certain investments debt equity securities investments held acquired date accordance statement prior period financial statements restated reflect change accounting principle beginning balance stockholders equity increased 1180000 net 751000 deferred income taxes reflect net unrealized holding gains securities classified availableforsale previously carried cost following summary companys investments marketable equity debt securities december 31 1994 thousands gross unrealized estimated cost gainslosses fair value debt securities 87490 2081 85409 equity securities 7700 119 7581 95190 2200 92990 3 inventories follows thousands december 31 1994 1993 finished goods 86719 45338 workinprocess 7552 10586 raw material 28784 28455 fifo cost 123055 84379 less lifo reserve 7298 7797 115757 76582 4 business acquisitions august 1994 company purchased 31 outstanding common stock matsumoto medical instruments inc osaka japan thereby increasing direct ownership interest matsumoto 51 matsumoto one largest distributors medical devices japan exclusive distributor stryker products country cost 31 investment based net book value approximately 60 billion yen 607 million payment approximately 847 million yen 85 million purchase price deferred april 1995 acquisition accounted purchase method results operations matsumoto consolidated stryker beginning august 1994 acquisition occurred january 1 1993 pro forma net sales company would 762341000 1994 694923000 1993 pro forma net earnings would differed significantly reported results august 1993 company purchased 20 outstanding common stock matsumoto cost investment based net book value approximately 34 billion yen 328 million initial investment accounted equity method august 1994 additional 31 interest acquired companys share matsumotos net earnings material impact companys net earnings 1993 june 1994 company purchased sterishield product line personal protection system operating room personnel acquisition accounted purchase method total cost 6500000 5500000 royalties paid next seven years intangible assets acquired principally patents amortized seven ten years pro forma consolidated results including purchased business would differ significantly reported results 1994 1993 1992 companys subsidiary physiotherapy associates inc purchased several physical therapy clinic operations aggregate purchase price clinics 1994 1993 1992 approximately 7600000 1900000 2900000 respectively intangible assets acquired principally employment contracts goodwill amortized periods ranging one fifteen years pro forma consolidated results including purchased businesses would differ significantly reported results october 1992 companys subsidiary stryker france sa acquired dimso sa subsidiary companies france spain dimso designs manufactures diapason stryker 2s spinal implant systems orthopaedic products acquisition accounted purchase method total cost 13000000 approximately 7000000 paid following three years intangible assets acquired principally patents amortized ten year period pro forma consolidated results including purchased business would differ significantly reported results 5 borrowings company subsidiaries unsecured shortterm line credit arrangements banks aggregating 20000000 domestically 25700000 equivalent foreign currencies borrowings lines december 31 1994 208000 777000 december 31 1993 foreign funds average interest rate 128 125 1993 lines generally expire july 31 1995 longterm debt follows thousands december 31 1994 1993 bank loans 86616 30736 14029 1428 100645 32164 less current maturities 5369 882 95276 31282 bank loans represent two separate borrowings made finance acquisition companys 51 interest matsumoto medical instruments inc see note 4 loans japanese yen denominated unsecured mature august 1998 first loan chicago branch sanwa bank limited principal balance 34442000 30736000 december 31 1993 bears interest fixed annual rate 476 second loan floating rate loan chicago branches bank tokyo ltd mitsubishi bank limited sanwa bank limited principal balance 52174000 company fixed effective annual interest rate debt 417 using interest rate swap notional amount term equal related loan maturities debt four years succeeding 1995 1996 3152000 1997 52000 1998 86673000 1999 5070000 carrying amounts companys longterm debt interest rate swap approximate fair values based companys current borrowing rates similar types borrowing agreements quoted market rates respectively total interest expense included income approximates interest paid 3677000 1994 1067000 1993 411000 1992 6 capital stock company key employee director stock option plans options granted price less fair market value date grant options granted periods ten years become exercisable varying installments summary stock option activity follows option shares price per share options outstanding january 1 1993 1275925 320 3875 granted 867500 2238 2550 canceled 411300 675 3875 exercised 75600 320 1463 options outstanding december 31 1993 1656525 320 3425 granted 37500 2588 2800 canceled 58000 675 3425 exercised 88040 320 2550 options outstanding december 31 1994 1547985 320 3425 december 31 1994 options 750085 shares exercisable 1133600 shares reserved future grants company 500000 authorized shares 1 par value preferred stock none outstanding 7 retirement plans substantially employees company covered retirement plans majority employees covered profit sharing defined contribution retirement plans companys 51 owned subsidiary matsumoto medical instruments inc noncontributory defined benefit plan covering employees generally entitled upon termination lumpsum annuity payments amounts determined reference current level salary length service conditions termination occurs matsumotos funding policy plan contribute actuarially determined amounts monthly basis addition certain officers matsumoto customarily entitled lumpsum payments unfunded retirement plan accrual provided expected cost benefits earned date although payments subject approval matsumotos stockholders amounts accrued matsumoto retirement plans provide substantially unfunded obligations plans totaled 16235000 december 31 1994 recorded noncurrent liabilities consolidated balance sheet retirement plan expense companys retirement plans totaled 6753000 1994 5302000 1993 4715000 1992 8 income taxes effective january 1 1993 company adopted fasb statement 109 accounting income taxes requires use liability method accounting income taxes see note 1 permitted statement 109 company elected restate financial statements prior years cumulative effect change method accounting net earnings material earnings income taxes minority interest consist following thousands 1994 1993 1992 united states operations 100996 88181 66552 foreign operations 26579 7884 10388 127575 96065 76940 components provision income taxes follow thousands 1994 1993 1992 current federal 31932 26114 20827 state including puerto rico 5133 10372 7973 foreign 17523 2291 4611 54588 38777 33411 deferred tax expense credit 3818 2917 4171 50770 35860 29240 reconciliation statutory federal income tax rate companys effective tax rate follows 1994 1993 1992 us statutory income tax rate 350 340 add deduct state taxes less effect federal deduction 23 63 59 foreign income taxes rates different us statutory rate 54 8 10 tax benefit relating operations puerto rico 20 18 19 us research development tax credit 6 14 9 earnings foreign sales corporation 14 8 11 14 7 398 373 380 deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes tax effect significant temporary differences comprise companys deferred tax assets liabilities follows thousands december 31 1994 1993 deferred tax assets inventories 34475 4712 accounts receivable assets 2048 2874 accrued expenses 18165 6662 state taxes 3127 1297 2226 920 total deferred tax assets 60041 16465 deferred tax liabilities depreciation 1681 792 2244 895 total deferred tax liabilities 3925 1687 total net deferred tax assets 56116 14778 deferred tax assets liabilities included consolidated balance sheet follows thousands december 31 1994 1993 current assets deferred income taxes 54333 15829 noncurrent assets 4438 noncurrent liabilities 2655 1051 net deferred tax assets 56116 14778 provision made us federal state income taxes foreign taxes may result future remittances undistributed earnings 152619000 december 31 1994 foreign subsidiaries expected earnings reinvested overseas indefinitely determination amount unrecognized deferred income tax liability unremitted earnings practicable total income taxes paid 51898000 1994 27641000 1993 25133000 1992 9 geographic data geographic area information follows thousands 1994 1993 1992 net sales united states operations domestic 405549 378255 330782 export 117669 115977 81513 foreign operations pacific 130223 33651 33660 europe 70366 63366 58010 12094 11987 9522 eliminations 53981 45901 36433 net sales 681920 557335 477054 operating income united states operations 109429 90726 68759 foreign operations pacific 12560 1465 4264 europe 6554 6571 6998 1686 1660 213 total foreign operations 20800 9696 11475 corporate expenses 9753 8480 6533 total operating income 120476 91942 73701 1994 1993 1992 assets united states operations 248883 225587 199188 foreign operations pacific 281259 12053 12384 europe 50111 39313 42580 9801 4067 2741 corporate 177917 173184 83379 total assets 767971 454204 340272 intercompany sales geographic areas included export foreign operations sales agreed upon prices include profit element year ended december 31 1993 sales matsumoto medical instruments inc 64300000 12 total net sales customer accounted 10 companys sales 1994 1992 gains losses foreign currency transactions included income totaled 586000 256000 188000 1994 1993 1992 respectively corporate assets consist primarily domestic cash equivalents marketable securities 1993 investment affiliate 10 leases company leases various manufacturing office facilities equipment operating leases future minimum lease commitments leases follows thousands 1995 10076 1996 8320 1997 5625 1998 3605 1999 1823 thereafter 1766 31215 rent expense totaled 14644000 1994 10950000 1993 8792000 1992 11 contingencies company involved various claims legal actions arising normal course business company anticipate material losses result actions sales analysis quarterly data dollars thousands except per share data product line sales unaudited 1994 1993 1992 surgical orthopaedic implants endoscopic systems powered surgical instruments operating room devices 544049 80 447042 80 394111 83 medical patient care patient handling equipment physical therapy services 137871 20 110293 20 82943 17 681920 100 557335 100 477054 100 domesticinternational sales unaudited 1994 1993 1992 domestic 405549 59 378255 68 330782 69 international 276371 41 179080 32 146272 31 681920 100 557335 100 477054 100 report independent auditors board directors stryker corporation audited accompanying consolidated balance sheet stryker corporation subsidiaries december 31 1994 1993 related consolidated statements earnings stockholders equity cash flows three years period ended december 31 1994 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 1994 1993 consolidated results operations cash flows three years period ended december 31 1994 conformity generally accepted accounting principles ernst young llp ernst young llp kalamazoo michigan january 31 1995 exhibit 21 list subsidiaries state country name subsidiary incorporation dimso iberica sa france dimso sa france osteonics corp new jersey physiotherapy associates inc michigan stryker australia pty ltd australia stryker bv netherlands stryker barbados foreign sales corporation barbados stryker canada inc canada stryker china limited hong kong stryker corporation malaysia sdn bhd malaysia stryker deutschland gmbh germany stryker far east inc delaware stryker foreign sales corporation us virgin islands stryker france sa france stryker italia srl italy stryker korea ltd korea stryker mexico sa de cv mexico stryker pacific limited hong kong stryker puerto rico inc delaware stryker sa switzerland stryker sales corporation michigan stryker singapore private limited singapore stryker corporation immediate parent owns 100 outstanding voting securities abovenamed subsidiaries stryker 51 investor matsumoto medical instruments inc japan stryker effectively controls stryker india medical equipment private limited india exhibit 23consent independent auditors consent incorporation reference annual report form 10k stryker corporation subsidiaries report dated january 31 1995 included 1994 annual report stockholders stryker corporation subsidiaries audits also included financial statement schedule stryker corporation subsidiaries listed item 14a schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule referred considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also consent incorporation reference registration statement number 3355662 form s8 dated december 11 1992 registration statement number 296467 form s8 dated april 4 1985 registration statement number 3332240 form s8 dated november 20 1989 related prospectus registration statements report dated january 31 1995 respect consolidated financial statements incorporated herein reference report included preceding paragraph respect financial statement schedule included annual report form 10k stryker corporation ernst young llp kalamazoo michigan march 17 1995 article 5nanitem 14 principal accounting fees services information caption ratification independent auditors relationship ey 2006 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information caption proposal 2 ratification appointment independent registered public accounting firm relationship ernst young llp 2008 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information caption “proposal 2ratification appointment independent registered public accounting firmrelationship ernst young llp” 2012 proxy statement incorporated herein reference part iv item 15 item 7 managements discussion analysis financial condition results operations information caption managements discussion analysis financial condition results operations pages 30 32 pages 34 36 1993 annual report incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations information caption managements discussion analysis financial condition results operations pages 20 23 1995 annual report incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations information caption managements discussion analysis financial condition results operations pages 26 30 1997 annual report incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations information caption managements discussion analysis financial condition results operations pages 34 39 1998 annual report incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations results operations table outlines components consolidated statements earnings percentage net sales table sets forth domesticinternational product line sales information pro forma sales information includes howmedicas sales comparable period necessarily reflect consolidated sales would occurred stryker howmedica operated combined entity period 1999 compared 1998 stryker corporations net sales increased 91 1999 21037 million 11032 million 1998 net sales increased 8545 million 77 result howmedica acquisition net sales also grew 9 result increased unit volume 3 related higher selling prices conversion distributors direct sales 2 result acquired businesses 1 due changes foreign currency exchange rates increases partially offset 1 net sales pro forma basis increased 10 1999 compared 1998 increased unit volume generated 7 sales increase net sales also increased 2 related conversion certain portions companys distribution networks direct sales 1 changes foreign currency exchange rates companys domestic sales increased 69 12 pro forma basis 1999 compared 1998 domestic sales gain result howmedica acquisition higher shipments orthopaedic implants powered surgical instruments endoscopic equipment increased revenue physical therapy services us sales howmedica products 1999 4139 million representing increase 6 sales prior year excluding 171 million sales credit prior year inv worldwide sales orthopaedic implants 12482 million 1999 representing increase 205 12 pro forma basis result howmedica acquisition higher shipments reconstructive trauma spinal implants excluding 171 million sales credit prior year pro forma sales orthopaedic implants increased 11 year worldwide sales medsurg equipment 7335 million 1999 representing increase 27 8 pro forma basis based h cost sales represented 470 sales compared 428 1998 higher cost sales percentage 1999 resulted 1982 million additional nonrecurring cost sales inventory sold 1999 steppedup fair value connection acquisition howmedica compared 78 million inventory stepup included 1998 cost sales excluding nonrecurring cost sales charges inventory stepup cost sales would declined 376 1999 compar research development engineering expenses increased 72 1999 represented 50 sales 1999 compared 55 1998 increase research development engineering spending 1999 results acquisition howmedica 1998 purchase manufacturing rights facilities op1 new product introductions 1999 included crossfire highly crosslinked polyethylene hip implants securefit plus hip restoration system duracon total stabilizer selling general administrative expenses increased 116 1999 represented 384 sales 1999 compared 339 1998 increase selling general administrative expenses result acquisition howmedica increase percent sales reflects higher mix orthopaedic implant sales cost sell companys products company recognized nonrecurring acquisitionrelated charges continuing operations 189 million 1999 1163 million 1998 1999 charged included 142 million reorganize strykers japanese distribution operation order accommodate integration howmedica discontinue distribution ophthalmology products japan 142 million charge included 116 million severancerelated costs 26 million cover costs associated discontinuanc completion dates two significant acquired inprocess research projects development howmedica time acquisition progressing according plan projects relate development new spinal technology used treatment spinal disorders development improved polyethylene used hip knee implants estimated future revenues associated spinal project changed timing estimated futu interest expense increased 1226 million 1999 122 million 1998 due borrowing approximately 15000 million fund howmedica acquisition increase intangibles amortization 339 million 1999 76 million 1998 relates primarily howmedica acquisition income declined 48 million 1999 165 million prior year due lower interest income effective tax rate 1999 349 compared 34 effective tax rate 1998 increase rate 1998 1999 attributable mix operating results among tax jurisdictions net earnings 194 million basic diluted net earnings per share 20 compared 600 million basic net earnings per share 62 diluted net earnings per share 61 1998 decrease 68 excluding nonrecurring charges years net earnings 1999 incr 1998 compared 1997 stryker corporations net sales increased 13 1998 11032 million 9801 million 1997 increased unit volume generated 10 sales increase net sales also increased 428 million 4 result acquisition howmedica acquired december 4 1998 3 result acquired businesses 1 related higher selling prices conversion osteonics domestic distributors direct sales increases partially offset b companys domestic sales increased 15 1998 compared 1997 leading domestic sales gains came strong shipments endoscopic equipment powered surgical instruments orthopaedic implants hospital beds stretchers increased revenue physical therapy services increased domestic sales acquisition howmedica largely offset fourth quarter sales credits inventory returns relating conversion remaining osteonics independent distributors sales orthopaedic implants increased 9 year sales gains year resulted incremental sales acquisition howmedica higher shipments hips united states spinal trauma knee products worldwide orthopaedic implants sales increases partially offset sales credits 171 million inventory returns connection conversion osteonics domestic distributors unfavorable impact foreign currency translation cost sales represented 428 sales compared 406 1997 higher cost sales percentage 1998 resulted changes sales mix general weakness foreign currencies increased cost usdollarbased inventory purchases companys international operations cost sales percentage also increased due inventory returns associated sales credits related osteonics distributor conversions result 78 million addit research development engineering expenses increased 7 company spent 610 million product development 1998 compared 569 million 1997 research development engineering expenses declined percentage sales partially result acquisition howmedica addition company spent less continuing development op1 bone growth device stryker biotech decrease offset greater spending new product development remain ducts 1998 included securfit plus hip stem scorpioä cr knee implant interpulse system 4 next generation battery powered instrument system quantum 5000 lightsource hermes video control system ezpro ambulance cot selling general administrative expenses increased 12 1998 result incremental expenses associated acquisition howmedica increase selling expenses although expenses grew slower rate increase sales selling general administrative expenses declined 339 sales 1998 341 1997 several significant nonrecurring acquisitionrelated items included continuing operations 1998 company charged 833 million operations fourth quarter purchased research development 784 million related valuation inprocess research development projects acquired howmedica purchase 49 million related purchase tangible research development assets alternative future use connection acquisition th purchased research development 784 million howmedica acquisition determined based independent valuation howmedicas research development projects using information assumptions provided management among inprocess projects included valuation two considered significant projects relate development new spinal technology used treatment spinal disorders development improved polyethylene used fourth quarter 1998 company reduced effective tax rate year 34 35 thereby reducing income tax expense 06 million reduction effective tax rate year 358 rate used 1997 result increased participation us employmentrelated tax incentive program reduction tax assessed funds repatriated puerto rico favorable mix operating results among tax jurisdictions offset part liquidity capital resources companys working capital december 31 1999 decreased 2254 million 4408 million 6662 million december 31 1998 working capital decrease primarily due chargeoff 1982 million inventory stepup associated howmedica acquisition cost sales 1999 working capital decrease also results use cash sale 970 million certain domestic accounts receivable oneyear securitization facility established nov company generated cash 2840 million operations 1999 compared 1545 million 1998 generation cash 1999 result strong cash earnings net earnings plus noncash adjustments plus 1127 million proceeds accounts receivable securitization program increases partially offset increase accounts receivable deferred charges payments 1025 million attributable acquisitionrelated restructuring charges acquis november 1999 company established oneyear securitization facility certain domestic accounts receivables sold ongoing basis specialpurpose subsidiary turn may sell 1300 million interest receivables third party accounts receivable securitization facility established reduce companys overall cost borrowing company initially received 1127 million proceeds securitization program used procee june 4 1999 companys 16500 million credit facility amended lower net borrowing cost average 50 basis points approximately 70 million per year current borrowings company 835 million cash marketable debt securities december 31 1999 company also outstanding borrowings totaling 12874 million date current maturities longterm debt december 31 1999 1063 million increase 1222 million 2001 1587 million 2002 company believes cash hand well anticipated cash flows operations sufficient fund future operating capital requirements payment working matters company finalized plan integrate howmedica stryker 1999 integration plan evolved implemented 1999 company made certain adjustments purchase liabilities recorded preliminary purchase price allocation adjustments resulted net increases 131 million goodwill recorded connection acquisition additional purchase liabilities recorded connection acquisition howmedica totaled 1265 million dec year 2000 information provided constitutes year 2000 readiness disclosure purposes year 2000 information readiness disclosure act company completed year 2000 y2k project fourth quarter 1999 company experienced significant y2k problems information technology systems noninformation technology systems key third parties products total incremental cost y2k project approximately 88 million 67 million incurred 1999 costs expensed incurred funded operating cash flows item 7aitem 7 managements discussion analysis financial condition results operations results operations table outlines components consolidated statements earnings percentage net sales yeartoyear percentage change dollar amounts table sets forth domesticinternational product line sales information 2000 compared 1999 stryker corporations net sales increased 9 2000 22894 million 21037 million 1999 net sales grew 9 result increased unit volume 1 related higher selling prices 1 result acquired businesses increases partially offset 2 decline due changes foreign currency exchange rates companys domestic sales increased 15 2000 compared 1999 domestic sales gain result higher shipments orthopaedic implants powered surgical instruments endoscopic equipment hospital beds stretchers together higher revenue physical therapy services international sales increased 1 year result higher shipments orthopaedic implants medsurg equipment impact foreign currency comparisons dollar value international sales unfavorable 430 million year sales discontinued products 1999 77 million excluding impact foreign currency discontinued products international sales increased 7 2000 worldwide sales orthopaedic implants 13130 million 2000 representing increase 5 result higher shipments reconstructive hip knee shoulder trauma spinal implants excluding impact foreign currency sales orthopaedic implants increased 8 2000 worldwide sales medsurg equipment 8291 million 2000 representing increase 13 based higher shipments powered surgical instruments endoscopic systems hospital beds stretchers leibinger craniomaxillofacial implants imageguided surgical systems excluding impact foreign currency discontinued products sales medsurg equipment increased 14 2000 physical therapy services revenues 1473 million 2000 representing increase 21 result new physical therapy centers higher revenues existing centers cost sales represented 356 sales compared 470 1999 higher cost sales percentage 1999 resulted 1982 million additional nonrecurring cost sales inventory sold 1999 steppedup fair value connection acquisition howmedica compared inventory stepup included 2000 cost sales excluding nonrecurring cost sales charges inventory stepup cost sales would declined 376 sales 1999 356 2000 decline primarily result realization cost savings cost reduction plans implemented former howmedica manufacturing plants slightly higher selling prices 2000 research development engineering expenses increased 16 2000 represented 53 sales 2000 compared 50 1999 increase research development engineering spending 2000 resulted continued companywide focus new product development new product introductions 2000 included crossfire highly crosslinked polyethylene howmedica implants scorpio ts revision knee system stryker instruments tps u2 drill sterishield t4 personal protection system stryker navigation system antigraderetrograde intramedullary nail opus spinal system resorbable craniomaxillofacial plates screws certain international markets simplex p bone cement tobramycin selling general administrative expenses increased 10 2000 represented 387 sales compared 384 1999 selling general administrative expenses percentage sales comparable years considering inclusion 71 million 2000 06 million 1999 discount expense related accounts receivable securitization program established november 1999 company recognized nonrecurring credits 10 million continuing operations relating various acquisitionrelated restructuring events fourth quarter 2000 recognized nonrecurring acquisitionrelated charges 189 million 1999 2000 acquisitionrelated restructuring credits include reversal prior year restructuring accruals totaling 70 million offset charges totaling 60 million 70 million credits includes 12 million related reorganization strykers distribution channels associated acquisition howmedica 27 million reverse reserves distributor reorganization charged operations 1996 credits also include 27 million related reduction expected costs complete headcount reductions japan 04 million reverse portion loss reserves established discontinued ophthalmology inventories sold contingent basis credits represent reversal charges originally taken connection 1999 reorganization companys japanese distribution operation discontinuance distribution ophthalmology products japan 60 million 2000 restructuring charges includes 40 million charge cover severance costs 95 employees primarily europe approximately 10 planned workforce reductions completed december 2000 remaining reductions expected completed 2001 2000 restructuring charges also include 14 million asset writeoffs primarily goodwill inventory lease commitments associated certain operations principally europe closed fourth quarter 2000 restructuring charges also include 06 million terminate two small european distributors 1999 company recognized nonrecurring acquisitionrelated charges 189 million consisting 142 million reorganize strykers japanese distribution operation discontinue distribution ophthalmology products japan 47 million complete reorganization strykers distribution channels accommodate howmedica integration interest expense declined 966 million 2000 1226 million 1999 primarily result lower outstanding debt balances increase intangibles amortization 347 million 2000 339 million 1999 relates primarily business acquisitions 2000 income declined 48 million 1999 expense 12 million 2000 primarily result foreign currency transaction losses effective tax rate 2000 340 compared 349 effective tax rate 1999 decrease rate 1999 2000 attributable mix operating results among tax jurisdictions net earnings 2210 million basic diluted net earnings per share 113 110 respectively compared 194 million basic diluted net earnings per share 10 1999 excluding nonrecurring items years net earnings 2000 increased 37 2203 million 1605 million 1999 basic net earnings per share increased 36 113 2000 83 1999 diluted net earnings per share increased 36 110 2000 81 1999 compared 1998 stryker corporations net sales increased 91 1999 21037 million 11032 million 1998 net sales increased 8545 million 77 result howmedica acquisition net sales also grew 9 result increased unit volume 3 related higher selling prices conversion distributors direct sales 2 result acquired businesses 1 due changes foreign currency exchange rates increases partially offset 1 decline selling prices net sales pro forma basis increased 10 1999 compared 1998 increased unit volume generated 7 sales increase net sales also increased 2 related conversion certain portions companys distribution networks direct sales 1 changes foreign currency exchange rates companys domestic sales increased 69 12 pro forma basis 1999 compared 1998 domestic sales gain result howmedica acquisition higher shipments orthopaedic implants powered surgical instruments endoscopic equipment increased revenue physical therapy services us sales howmedica products 1999 4139 million representing increase 6 sales 1998 excluding 171 million sales credit 1998 inventory repurchased distributors pro forma domestic sales increased 10 year international sales increased 134 8 pro forma basis year result howmedica acquisition higher shipments stryker products international sales howmedica products 4885 million 1999 representing increase 7 sales prior year foreign currency comparisons favorable 1999 adding 131 million 129 million pro forma basis 3 2 pro forma basis dollar value international sales worldwide sales orthopaedic implants 12482 million 1999 representing increase 205 12 pro forma basis result howmedica acquisition higher shipments reconstructive trauma spinal implants excluding 171 million sales credit prior year pro forma sales orthopaedic implants increased 11 year worldwide sales medsurg equipment 7335 million 1999 representing increase 27 8 pro forma basis based higher shipments powered surgical instruments endoscopic systems along leibinger craniomaxillofacial product line acquired howmedica revenues physical therapy services increased 5 year result startup rehabilitative clinics acquisition certain clinics samestore revenue growth 2 cost sales represented 470 sales compared 428 1998 higher cost sales percentage 1999 resulted 1982 million additional nonrecurring cost sales inventory sold 1999 steppedup fair value connection acquisition howmedica compared 78 million inventory stepup included 1998 cost sales excluding nonrecurring cost sales charges inventory stepup cost sales would declined 376 sales 1999 compared 421 1998 decline primarily result higher mix orthopaedic implant sales result acquisition howmedica research development engineering expenses increased 72 1999 represented 50 sales 1999 compared 55 1998 increase research development engineering spending 1999 resulted acquisition howmedica 1998 purchase manufacturing rights facilities op1 new product introductions 1999 included crossfire highly crosslinked polyethylene hip implants securfit plus hip restoration system duracon total stabilizer revision knee system xia spinal system stryker instruments painpump 12k shaver system 888 3chip digital camera big wheel stretcher zoom drive selling general administrative expenses increased 116 1999 represented 384 sales 1999 compared 339 1998 increase selling general administrative expenses result acquisition howmedica increase percent sales reflected higher mix orthopaedic implant sales cost sell companys products company recognized nonrecurring acquisitionrelated charges continuing operations 189 million 1999 1163 million 1998 1999 charges included 142 million reorganize strykers japanese distribution operation order accommodate integration howmedica discontinue distribution ophthalmology products japan 142 million charge included 116 million severancerelated costs 26 million cover costs associated discontinuance ophthalmology product line 1999 charges also included 47 million complete reorganization strykers distribution channels accommodate howmedica integration cost conversions based contractual terms 1998 company recognized charge 833 million operations purchased research development 784 million related howmedica acquisition 49 million related acquisition op1 manufacturing rights facilities company also recorded 1998 charges 218 million reorganize stryker distribution channels order accommodate integration howmedica 112 million expensed transaction costs associated acquisition howmedica manufacturing rights facilities op1 completion dates two significant acquired inprocess research projects development howmedica time acquisition generally progressed according plan projects relate development new spinal technology used treatment spinal disorders development improved polyethylene used hip knee implants spinal project development expected completed 2002 planned timing estimated future revenues expected delayed due clinical trial regulatory approval requirements timing estimated future revenues associated polyethylene project slightly delayed due leveraging technology acquired howmedica technology previously existing company integration two technologies completed second half 2000 introduction crossfire highly crosslinked polyethylene howmedica implants interest expense increased 1226 million 1999 122 million 1998 due borrowing approximately 15000 million fund howmedica acquisition increase intangibles amortization 339 million 1999 76 million 1998 relates primarily howmedica acquisition income declined 48 million 1999 165 million prior year due lower interest income effective tax rate 1999 349 compared 340 effective tax rate 1998 increase rate 1998 1999 attributable mix operating results among tax jurisdictions net earnings 194 million basic diluted net earnings per share 10 compared 600 million basic diluted net earnings per share 31 1998 decrease 68 excluding nonrecurring charges years net earnings 1999 increased 13 1605 million 1419 million 1998 basic net earnings per share increased 12 83 1999 74 1998 diluted net earnings per share increased 13 81 1999 72 1998 liquidity capital resources companys working capital december 31 2000 decreased 612 million 3796 million 4408 million december 31 1999 working capital decrease primarily due use cash sale additional 303 million domestic accounts receivable securitization facility established november 1999 along cash earnings reduce total debt 2749 million accounts receivable days sales outstanding excluding effect securitization program decreased seven days 69 days end 2000 76 days december 31 1999 lower days sales outstanding december 31 2000 result decrease aging certain us accounts receivable days sales inventory decreased 166 days december 31 2000 174 days december 31 1999 company generated cash 3318 million operations 2000 compared 2840 million 1999 generation cash 2000 result strong cash earnings net earnings plus noncash adjustments plus 303 million proceeds accounts receivable securitization program increase accrued expenses increases partially offset increases accounts receivable inventories deferred charges payments 374 million attributable acquisitionrelated restructuring charges acquisition purchase liabilities decrease accounts payable 2000 company used cash 807 million capital expenditures 245 million business acquisitions 127 million payment dividends company also borrowed additional 2099 million existing credit facilities fund cash flow needs various times 2000 made repayments 4633 million credit facilities 2000 total debt declined 2749 million 2000 november 1999 company established securitization facility certain domestic accounts receivable sold ongoing basis specialpurpose subsidiary turn may sell 1300 million undivided percentage ownership interest receivables third party accounts receivable securitization facility established reduce companys overall cost borrowing accounts receivable securitization facility provided 303 million proceeds 2000 programtodate proceeds totaling 1273 million december 31 2000 proceeds used reduce companys longterm debt company 540 million cash equivalents december 31 2000 company also outstanding borrowings totaling 10125 million date current maturities longterm debt december 31 2000 1360 million increase 1569 million 2002 1953 million 2003 company believes cash hand well anticipated cash flows operations sufficient fund future operating capital requirements payment working capital adjustment purchase price howmedica acquisition required debt repayments additional funds required company 2941 million additional borrowing capacity available existing credit facilities december 31 2000 matters company finalized plan integrate howmedica stryker 1999 integration plan evolved implemented 1999 company made certain adjustments purchase liabilities recorded preliminary purchase price allocation adjustments resulted net increases 131 million goodwill recorded connection acquisition additional purchase liabilities recorded connection acquisition howmedica totaled 1265 million december 31 2000 120 million additional purchase liabilities remaining paid company anticipates approximately onehalf obligations paid 2001 certain obligations related lease commitments facility closures result payments extending late 2008 item 7aitem 7 managements discussion analysis financial condition results operations results operations table outlines components consolidated statements earnings percentage net sales yeartoyear percentage change dollar amounts table sets forth domesticinternational product line sales information 2001 compared 2000 stryker corporations net sales increased 14 2001 26023 million 22894 million 2000 net sales grew 12 result increased unit volume changes product mix 3 related higher selling prices 1 result acquired businesses 1 related inclusion freight revenue net sales 2001 freight revenue recorded offset cost sales 2000 increases partially offset 3 decline due changes foreign currency exchange rates companys domestic sales increased 20 2001 16884 million 14082 million 2000 domestic sales gain result higher shipments orthopaedic implants medsurg equipment higher revenue physical therapy services international sales increased 4 year 9139 million 8812 million 2000 result higher shipments orthopaedic implants medsurg equipment impact foreign currency comparisons dollar value international sales unfavorable 621 million year excluding impact foreign currency international sales increased 11 2001 worldwide sales orthopaedic implants 14425 million 2001 representing increase 10 result higher shipments reconstructive hip knee shoulder trauma spinal implants excluding impact foreign currency sales orthopaedic implants increased 13 2001 worldwide sales medsurg equipment 9789 million 2001 representing increase 18 based higher shipments powered surgical instruments endoscopic systems hospital beds stretchers leibinger craniomaxillofacial implants imageguided surgical systems excluding impact foreign currency sales medsurg equipment increased 20 2001 physical therapy services revenues 1809 million 2001 representing increase 23 result new physical therapy centers higher revenue existing centers cost sales represented 370 sales compared 356 2000 higher cost sales percentage 2001 resulted primarily change recording freight revenue described classification certain shipping costs cost sales 2001 reported selling general administrative expenses prior year cost sales percentage increased approximately 10 2001 result change classification freight revenue shipping costs cost sales 2001 also higher approximately 04 due increase unabsorbed manufacturing costs caused slowing production certain companys manufacturing plants reduce overall inventory levels company continually assesses overall capacity provided manufacturing plants relative cost inventory management expected sales growth slight increase orthopaedic implant margins offset higher sales revenues lowermargin medsurg equipment products physical therapy services research development engineering expenses increased 16 2001 represented 55 sales compared 53 2000 increase research development engineering spending 2001 resulted continued companywide focus new product development new product introductions 2001 included accolade cemented hip stem eius knee t2 intramedullary nail system reflex anterior cervical plate percutaneous cement delivery system elite attachments tps cordless driver ii stryker knee navigation system sdc pro ii surgical documentation system 988 digital camera go bed trio mobile surgery platform enhanced secure ii bed second quarter 2001 company received marketing approval op1 implant product australia european union approved indication australia treatment nonunion long bone fractures secondary trauma purposes initiating repair new bone formation approved indication europe tibial nonunions ninemonth duration secondary trauma skeletally mature patients cases previous treatment autograft failed use autograft unfeasible fourth quarter 2001 company granted humanitarian device exemption hde status op1 implant us food drug administration fda approved indication us use alternative autograft recalcitrant long bone nonunions use autograft unfeasible alternative treatments failed hde op1 implant made available humanitarian device defined fda one intended benefit patients treating diagnosing disease condition affects fewer 4000 individuals per year us first commercial sales op1 australia began midmay commercial launch op1 select markets european union began august first sales op1 us hde began november commercial launch op1 significant impact sales 2001 company cannot predict impact sales future years selling general administrative expenses increased 11 2001 represented 379 sales compared 387 2000 classification certain shipping costs cost sales 2001 reduced selling general administrative expenses percent sales approximately 04 2001 addition discount expense related accounts receivable securitization program included selling general administrative expenses declined 58 million 2001 71 million 2000 result lower discount rates company recognized nonrecurring charges 06 million continuing operations relating various acquisitionrelated restructuring events fourth quarter 2001 recognized nonrecurring acquisitionrelated restructuring credits 10 million 2000 2001 acquisitionrelated restructuring charges include 24 million charges partially offset reversal prior year restructuring accruals totaling 18 million 24 million 2001 charges includes 09 million acquisitionrelated charge severance related costs associated reorganization companys sales structure italy accommodate integration business acquired companys independent italian distributor reorganization established direct sales force italy distribute companys full product portfolio 09 million charge covers severance costs three employees italy costs cancel contracts discontinued agents reorganization sales structure italy expected completed first quarter 2002 2001 charge also includes 07 million charge related reorganization companys distribution channels latin america 08 million severance costs 10 employees europe 07 million charge reflects cost terminate distributor based contractual terms planned european workforce reductions expected completed first quarter 2002 18 million credits includes 14 million related reduction expected costs complete headcount reductions associated 2000 1999 reorganizations companys european japanese distribution operations 2001 credits also include 04 million reverse remaining loss reserves established japan discontinued ophthalmology inventories sold contingent basis 1999 2000 company recognized nonrecurring credits 10 million consisting reversal prior year restructuring accruals totaling 70 million partially offset charges totaling 60 million 70 million credits included 12 million related reorganization strykers distribution channels associated acquisition howmedica 27 million reverse reserves distributor reorganization charged operations 1996 credits also included 27 million related reduction expected costs complete headcount reductions japan 04 million reverse portion loss reserves established japan discontinued ophthalmology inventories sold contingent basis 1999 60 million 2000 restructuring charges included 40 million charge cover severance costs 95 employees primarily europe 14 million asset writeoffs primarily goodwill inventory lease commitments associated certain operations principally europe closed fourth quarter 2000 planned workforce reductions completed 2001 remaining amount reserve reversed 2001 2000 restructuring charges also included 06 million terminate two small european distributors interest expense declined 679 million 2001 966 million 2000 primarily result lower outstanding debt balances increase intangibles amortization 384 million 2001 347 million 2000 relates primarily business acquisitions 2001 last half 2000 income increased 16 million 2001 expense 12 million 2000 primarily result foreign currency transaction gains 2001 versus foreign currency transaction losses 2000 partially offset lower interest income effective income tax rate 2001 330 compared 340 effective income tax rate 2000 decrease rate 2000 2001 attributable mix operating results among tax jurisdictions earnings extraordinary item increased 23 2718 million 2210 million 2000 basic earnings per share extraordinary item increased 22 138 2001 113 2000 diluted earnings per share extraordinary item increased 22 134 2001 110 2000 december 2001 company refinanced prepaid remaining 6427 million outstanding 16500 million senior secured credit facilities established 1998 connection howmedica acquisition prepayment 1998 facilities resulted writeoff related unamortized deferred loan costs 71 million reflected extraordinary loss 48 million net income taxes 23 million 02 per basic diluted share net earnings 2670 million basic diluted net earnings per share 136 132 respectively compared 2210 million basic diluted net earnings per share 113 110 respectively 2000 compared 1999 stryker corporations net sales increased 9 2000 22894 million 21037 million 1999 net sales grew 9 result increased unit volume changes product mix 1 related higher selling prices 1 result acquired businesses increases partially offset 2 decline due changes foreign currency exchange rates companys domestic sales increased 15 2000 compared 1999 domestic sales gain result higher shipments orthopaedic implants medsurg equipment higher revenue physical therapy services international sales increased 1 year result higher shipments orthopaedic implants medsurg equipment impact foreign currency comparisons dollar value international sales unfavorable 430 million year sales discontinued products 1999 77 million excluding impact foreign currency discontinued products international sales increased 7 2000 worldwide sales orthopaedic implants 13130 million 2000 representing increase 5 result higher shipments reconstructive hip knee shoulder trauma spinal implants excluding impact foreign currency sales orthopaedic implants increased 8 2000 worldwide sales medsurg equipment 8291 million 2000 representing increase 13 based higher shipments powered surgical instruments endoscopic systems hospital beds stretchers leibinger craniomaxillofacial implants imageguided surgical systems excluding impact foreign currency discontinued products sales medsurg equipment increased 14 2000 physical therapy services revenues 1473 million 2000 representing increase 21 result new physical therapy centers higher revenues existing centers cost sales represented 356 sales compared 470 1999 higher cost sales percentage 1999 resulted 1982 million additional nonrecurring cost sales inventory sold 1999 steppedup fair value connection acquisition howmedica compared inventory stepup included 2000 cost sales excluding nonrecurring cost sales charges inventory stepup cost sales would declined 376 sales 1999 356 2000 decline primarily result realization cost savings cost reduction plans implemented former howmedica manufacturing plants slightly higher selling prices 2000 research development engineering expenses increased 16 2000 represented 53 sales compared 50 1999 increase research development engineering spending 2000 resulted continued companywide focus new product development new product introductions 2000 included crossfire highly crosslinked polyethylene howmedica implants scorpio ts revision knee system stryker instruments tps u2 drill sterishield t4 personal protection system stryker navigation system antigraderetrograde intramedullary nail opus spinal system resorbable craniomaxillofacial plates screws certain international markets simplex p bone cement tobramycin selling general administrative expenses increased 10 2000 represented 387 sales compared 384 1999 selling general administrative expenses percentage sales comparable years considering inclusion 71 million 2000 06 million 1999 discount expense related accounts receivable securitization program established november 1999 company recognized nonrecurring credits 10 million continuing operations relating various acquisitionrelated restructuring events fourth quarter 2000 recognized nonrecurring acquisitionrelated charges 189 million 1999 2000 acquisitionrelated restructuring credits include reversal prior year restructuring accruals totaling 70 million partially offset charges totaling 60 million 70 million credits includes 12 million related reorganization strykers distribution channels associated acquisition howmedica 27 million reverse reserves distributor reorganization charged operations 1996 credits also include 27 million related reduction expected costs complete headcount reductions japan 04 million reverse portion loss reserves established discontinued ophthalmology inventories sold contingent basis credits represent reversal charges originally taken connection 1999 reorganization companys japanese distribution operation discontinuance distribution ophthalmology products japan 60 million 2000 restructuring charges includes 40 million charge cover severance costs 95 employees primarily europe approximately 10 planned workforce reductions completed december 2000 remaining reductions substantially completed 2001 2000 restructuring charges also include 14 million asset writeoffs primarily goodwill inventory lease commitments associated certain operations principally europe closed fourth quarter 2000 restructuring charges also include 06 million terminate two small european distributors 1999 company recognized nonrecurring acquisitionrelated charges 189 million consisting 142 million reorganize strykers japanese distribution operation discontinue distribution ophthalmology products japan 47 million complete reorganization strykers distribution channels accommodate howmedica integration interest expense declined 966 million 2000 1226 million 1999 primarily result lower outstanding debt balances increase intangibles amortization 347 million 2000 339 million 1999 relates primarily business acquisitions 2000 income declined 48 million 1999 expense 12 million 2000 primarily result foreign currency transaction losses effective income tax rate 2000 340 compared 349 effective income tax rate 1999 decrease rate 1999 2000 attributable mix operating results among tax jurisdictions net earnings 2210 million basic diluted net earnings per share 113 110 respectively compared 194 million basic diluted net earnings per share 10 1999 excluding nonrecurring items years net earnings 2000 increased 37 2203 million 1605 million 1999 basic net earnings per share increased 36 113 2000 83 1999 diluted net earnings per share increased 36 110 2000 81 1999 liquidity capital resources companys working capital december 31 2001 increased 801 million 4597 million 3796 million december 31 2000 working capital increase due primarily reduction current maturities longterm debt 1343 million partially offset increases income tax liabilities accrued expenses reduction current maturities longterm debt due establishment new revolving credit facility described detail december 2001 require principal repayments 2002 accounts receivable days sales outstanding excluding effect securitization program decreased 10 days 59 days end 2001 69 days december 31 2000 lower days sales outstanding december 31 2001 result improved collection efforts well increase allowance bad debts provide potential exposures latin america europe days sales inventory decreased 138 days december 31 2001 166 days december 31 2000 lower days sales inventory december 31 2001 primarily result improved inventory management company generated cash 4683 million operations 2001 compared 3318 million 2000 generation cash 2001 result strong cash earnings net earnings plus noncash adjustments increases accrued expenses income tax liabilities accounts payable increases partially offset increases accounts receivable inventories deferred charges payments 112 million attributable acquisitionrelated restructuring charges acquisition purchase liabilities 2001 company used cash 1619 million capital expenditures 430 million business acquisitions 157 million payment dividends capital expenditures included 878 million terminate synthetic lease purchase companys mahwah new jersey manufacturing distribution facility business acquisitions include 272 million paid pfizer inc final settlement working capital adjustment relating howmedica purchase price december 2001 company established 10000 million unsecured credit facilities replaced 16500 million senior secured credit facilities established 1998 conjunction acquisition howmedica unsecured credit facilities include 2500 million 364day revolving credit agreement 7500 million fiveyear nonamortizing revolving credit agreement total 7305 million drawn new credit facilities 6427 million prepaid debt outstanding 1998 facilities 878 million used terminate companys synthetic lease purchase mahwah new jersey manufacturing distribution facility addition refinancing company borrowed 2053 million credit facilities fund cash flow needs various times 2001 made repayments 5687 million credit facilities 2001 total debt declined 2899 million 2001 november 1999 company established securitization facility certain domestic accounts receivable sold ongoing basis specialpurpose subsidiary turn may sell 1300 million interest receivables third party accounts receivable securitization facility established reduce companys overall cost borrowing accounts receivable securitization facility provided 27 million proceeds 2001 programtodate proceeds totaling 1300 million december 31 2001 proceeds used reduce companys longterm debt company 501 million cash equivalents december 31 2001 company also outstanding borrowings totaling 7226 million date current maturities longterm debt december 31 2001 17 million decrease 02 million 2003 01 million 2004 companys 2500 million 364day revolving credit agreement expires december 2002 renewable companys lenders discretion companys 7500 million fiveyear nonamortizing revolving credit agreement expires december 2006 company believes cash hand well anticipated cash flows operations sufficient fund future operating capital requirements required debt repayments additional funds required company 3462 million additional borrowing capacity available existing credit facilities december 31 2001 matters company finalized plan integrate howmedica stryker 1999 integration plan evolved implemented 1999 company made certain adjustments purchase liabilities recorded preliminary purchase price allocation additional purchase liabilities recorded connection acquisition howmedica totaled 1265 million december 31 2001 41 million additional purchase liabilities remaining paid certain obligations related lease commitments facility closures result payments extending 2008 company distributes products throughout world result companys financial results could significantly affected factors changes foreign currency exchange rates weak economic conditions foreign markets companys operating results exposed changes exchange rates us dollar japanese yen european currencies particular euro british pound us dollar strengthens foreign currencies dollar value foreign currency sales declines us dollar weakens opposite situation occurs company manufactures products united states france germany ireland switzerland canada puerto rico incurs costs manufacture applicable local currencies worldwide deployment factories serves partially mitigate impact currency exchange rate changes companys cost sales company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies december 31 2001 company outstanding forward currency exchange contracts purchase 974 million sell 721 million various currencies principally us dollars euros maturities principally ranging 30 180 days december 31 2000 company outstanding forward currency exchange contracts purchase 827 million sell 338 million various currencies principally us dollars euros maturities ranging 30 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted amortized forward points hypothetical 10 change exchange rates currencies would change 2001 fair value approximately 14 million would changed 2000 fair value approximately 16 million companys exposure market risk changes interest rates relates borrowings accounts receivable securitization facility company manages interest rate risk borrowings interest rate swap agreements fixed base rate 5500 million notional amount 7172 million variablerate borrowings outstanding december 31 2001 market interest rates similar borrowings averaged 1 2001 companys 2001 interest expense considering effects interest rate swaps would increased earnings income taxes extraordinary item would decreased 28 million comparison market interest rates averaged 1 less 2001 companys 2001 interest expense considering effects interest rate swaps would decreased earnings income taxes extraordinary item would increased 28 million market interest rates accounts receivable securitization facility averaged 1 2001 companys discount expense would increased earnings income taxes extraordinary item would decreased 13 million comparison market interest rates averaged 1 less 2001 companys discount expense would decreased earnings income taxes extraordinary item would increased 13 million amounts determined considering impact hypothetical interest rates companys borrowing cost interest rate swap agreements accounts receivable securitization facility without actions management mitigate exposure changes company exposed credit loss event nonperformance counterparties instruments anticipate nonperformance counterparties january 1 2001 company adopted financial accounting standards board fasb statement 133 accounting derivative instruments hedging activities amended statements 137 138 statements require company recognize derivatives balance sheet fair value derivatives hedges must adjusted fair value earnings derivative hedge depending nature hedge changes fair value derivatives either offset change fair value hedged assets liabilities firm commitments earnings recognized accumulated comprehensive gain loss hedged item recognized earnings companys interest rate swap agreements effectively convert portion variablerate borrowings fixedrate basis 2003 thus reducing impact changes interest rates future interest expense approximately 77 companys outstanding variablerate borrowings december 31 2001 hedged designation interest rate swap agreements classified cash flow hedges upon adoption statements january 1 2001 company recognized gain cumulative effect accounting change 35 million accumulated comprehensive gain loss related interest rate swap agreements loss 220 million attributable decrease fair value interest rate swap agreements recorded component accumulated comprehensive gain loss 2001 future interest rate swap agreements determined ineffective terminated contractual termination dates became probable hedged variable cash flows associated variablerate borrowings would stop company would required reclassify earnings portion unrealized gains losses cash flow hedges included accumulated comprehensive gain loss interest rate differentials paid received result interest rate swaps recognized adjustment interest expense related designated borrowings based maturities companys interest rate swap agreements interest expense year ending december 31 2002 expected increase 82 million recognition amounts included unrealized losses cash flow hedges december 31 2001 company uses yendenominated floatingrate borrowings protect portion value investment subsidiary japan realized unrealized gains losses hedge included consolidated statements earnings recorded foreign currency translation adjustments within accumulated comprehensive gain loss stockholders equity net gains losses 58 million 77 million 74 million attributable yendenominated floatingrate borrowings hedge recorded foreign currency translation adjustments 2001 2000 1999 respectively june 2001 fasb issued statement 141 business combinations statement 142 goodwill intangible assets statement 141 requires purchase method accounting used business combinations initiated june 30 2001 statement 142 prohibits amortization goodwill intangible assets indefinite useful lives requires company evaluate intangibles impairment annual basis effective business combinations completed june 30 2001 company began applying provisions statement 142 acquisitions completed subsequent june 30 2001 goodwill recorded result acquisitions amortized goodwill intangible assets arising business combinations completed july 1 2001 company required apply provisions statement 142 beginning january 1 2002 accordance statement provisions assembled workforce intangible asset unamortized balance 55 million reclassified intangibles goodwill date application nonamortization provisions statement year ending december 31 2002 expected reduce intangibles amortization approximately 16 million increase net earnings approximately 11 million 05 per diluted share first quarter 2002 company perform initial impairment tests goodwill indefinitelived intangible assets january 1 2002 company test impairment using twostep process prescribed statement 142 first step screen potential impairment second step necessary measures amount impairment charge resulting initial impairment tests reflected cumulative effect change accounting principle first quarter 2002 company yet determined effect tests consolidated results operations financial position company perform subsequent impairment test fourth quarter 2002 least annually thereafter discussed liquidity capital resources company established 10000 million unsecured credit facilities december 2001 facilities replaced 16500 million secured senior credit facilities established 1998 conjunction acquisition howmedica interest expense 2002 expected reduced approximately 9 million result refinancing result changed conditions insurance industry including less favorable experience factors within orthopaedic industry companys cost insurance coverage increase substantially 2002 increase insurance premiums offset 9 million interest expense savings december 2001 debt refinancing item 7aitem 7 managements discussion analysis financial condition results operations results operations table outlines components consolidated statements earnings percentage net sales yeartoyear percentage change dollar amounts table sets forth domesticinternational product line sales information 2002 compared 2001 stryker corporations net sales increased 16 2002 30116 million 26023 million 2001 net sales grew 11 result increased unit volume changes product mix 3 related higher selling prices 2 result acquired businesses domestic sales 19737 million 2002 representing increase 17 result strong shipments orthopaedic implants medsurg equipment higher revenue physical therapy services july 1 2002 acquisition surgical dynamics inc spinal implant business sdi tyco international ltd added 228 million domestic sales 2002 international sales 10379 million 2002 representing increase 14 result higher shipments orthopaedic implants medsurg equipment acquisition sdi added 25 million international sales 2002 impact foreign currency comparisons dollar value international sales favorable 137 million 2002 excluding impact foreign currency international sales increased 12 2002 worldwide sales orthopaedic implants 17048 million 2002 representing increase 18 result higher shipments reconstructive hip knee shoulder trauma spinal implants excluding impact foreign currency sales orthopaedic implants increased 17 2002 worldwide sales medsurg equipment 11053 million 2002 representing increase 13 result higher shipments powered surgical instruments endoscopic systems hospital beds stretchers leibinger craniomaxillofacial implants imageguided surgical systems excluding impact foreign currency sales medsurg equipment increased 13 2002 physical therapy services revenues 2015 million 2002 representing increase 11 result new physical therapy centers higher revenue existing centers cost sales represented 369 sales compared 370 2001 slightly lower cost sales percentage 2002 due increase absorption fixed manufacturing costs caused increased production certain companys manufacturing plants meet current demand higher sales growth higher margin orthopaedic implant products offset partially higher product obsolescence resulting product launches research development engineering expenses 2002 consistent prior year amounts decreased 47 sales 55 2001 research development engineering spending affected 2002 commercial launch osteogenic protein1 op1 product occurred various markets second fourth quarters 2001 following launch 2002 stryker biotech recorded greater proportion expenses cost sales selling general administrative expenses compared 2001 division classified substantially costs research development engineering increased spending companys continued focus new product development partially offset decreased research development engineering expenses related stryker biotech new product introductions 2002 included scorpioflex knee united states market super securfit plus hip japanese market trident ceramic acetabular hip system canada xia ii spinal system 5 heavyduty batterypowered system tps saber drill sdc pro 2 surgical dvd documentation system painpump2 precision system percutaneous cement delivery fluoroscopic software module stryker navigation system go bed selling general administrative expenses increased 18 2002 represented 387 sales compared 379 2001 increase selling general administrative expense partially due increase sales commission expense result 16 increase net sales 2002 addition company incurred 89 million increase insurance costs 2002 change classification certain stryker biotech expenses discussed also contributed increase selling general administrative expenses discount expense related accounts receivable securitization program included selling general administrative expenses declined 27 million 2002 58 million 2001 result lower discount rates company recognized charges 172 million continuing operations 115 million net income taxes relating restructuring acquisitionrelated items third quarter 2002 restructuring acquisitionrelated charges 06 million fourth quarter 2001 2002 restructuring acquisitionrelated items include charge 210 million 141 million net income taxes employmentrelated costs close companys rutherford new jersey manufacturing facility partially offset credit 38 million 26 million net income taxes reverse certain howmedica restructuring acquisitionrelated costs reflect actual final payments required 210 million restructuring charge relates shutdown agreement reached company employee bargaining unit close howmedica osteonics implant manufacturing facility rutherford new jersey ratified members iuecwa local 485 august 23 2002 agreement laidoff employees receive significantly benefits would collective bargaining agreement set expire august 31 2002 addition least 80 qualified employees rutherford facility offered employment new howmedica osteonics facility mahwah new jersey charge covers employmentrelated severance costs approximately 400 employees company expects rutherford facility closed next 12 months final severance payments made 2004 howmedica osteonics prepares permanently cease manufacturing rutherford transition production facilities mahwah new jersey well cork limerick ireland fourth quarter 2001 company recognized charges 06 million continuing operations related various restructuring acquisitionrelated events 2001 restructuring acquisitionrelated charges included 24 million charges partially offset reversal prior year restructuring accruals totaling 18 million see following comparison 2001 results 2000 results additional information interest expense declined 403 million 2002 679 million 2001 primarily result lower outstanding debt balances decrease intangibles amortization 289 million 2002 384 million 2001 primarily result companys adoption financial accounting standards board fasb statement 142 goodwill intangible assets prohibits amortization goodwill nonamortization provisions statement 142 applied prior year amortization expense 2001 would reduced 181 million net earnings would increased 121 million 06 per diluted share expense 05 million 2002 compared 16 million income 2001 due foreign currency transaction losses current year versus gains prior year partially offset higher interest income effective income tax rate 318 2002 compared 330 2001 companys effective income tax rate year reduced 330 318 fourth quarter 2002 thereby reducing income tax expense 61 million primarily result increased manufacturing lower tax jurisdictions ireland puerto rico earnings extraordinary item increased 27 3456 million 2718 million 2001 basic earnings per share extraordinary item increased 27 175 2002 138 2001 diluted earnings per share extraordinary item increased 27 170 2002 134 2001 december 2001 company refinanced prepaid remaining 6427 million outstanding 16500 million senior secured credit facilities established 1998 connection howmedica acquisition prepayment 1998 facilities resulted writeoff 2001 related unamortized deferred loan costs 71 million reflected extraordinary loss 48 million net income taxes 23 million 02 per basic diluted share net earnings 3456 million basic diluted net earnings per share 175 170 respectively compared 2670 million basic diluted net earnings per share 136 132 respectively 2001 excluding nonrecurring items include impact restructuring acquisitionrelated items 2002 2001 impact change goodwill amortization extraordinary loss 2001 net earnings 2002 3571 million representing 26 increase net earnings 2843 million 2001 diluted net earnings per share increased 25 175 compared 140 2001 reconciliations including related earnings per share amounts reported net earnings adjusted net earnings nonrecurring items follows 2001 compared 2000 stryker corporations net sales increased 14 2001 26023 million 22894 million 2000 net sales grew 12 result increased unit volume changes product mix 3 related higher selling prices 1 result acquired businesses 1 related inclusion freight revenue net sales 2001 freight revenue recorded offset cost sales 2000 increases partially offset 3 decline due changes foreign currency exchange rates companys domestic sales increased 20 2001 16884 million 14082 million 2000 domestic sales gain result higher shipments orthopaedic implants medsurg equipment higher revenue physical therapy services international sales increased 4 year 9139 million 8812 million 2000 result higher shipments orthopaedic implants medsurg equipment impact foreign currency comparisons dollar value international sales unfavorable 621 million year excluding impact foreign currency international sales increased 11 2001 worldwide sales orthopaedic implants 14472 million 2001 representing increase 10 result higher shipments reconstructive hip knee shoulder trauma spinal implants excluding impact foreign currency sales orthopaedic implants increased 13 2001 worldwide sales medsurg equipment 9742 million 2001 representing increase 18 based higher shipments powered surgical instruments endoscopic systems hospital beds stretchers leibinger craniomaxillofacial implants imageguided surgical systems excluding impact foreign currency sales medsurg equipment increased 20 2001 physical therapy services revenues 1809 million 2001 representing increase 23 result new physical therapy centers higher revenue existing centers cost sales represented 370 sales compared 356 2000 higher cost sales percentage 2001 resulted primarily change recording freight revenue described classification certain shipping costs cost sales 2001 reported selling general administrative expenses prior year cost sales percentage increased approximately 10 2001 result change classification freight revenue shipping costs cost sales 2001 also higher approximately 04 due increase unabsorbed manufacturing costs caused slowing production certain companys manufacturing plants reduce overall inventory levels company continually assesses overall capacity provided manufacturing plants relative cost inventory management expected sales growth slight increase orthopaedic implant margins offset higher sales revenues lowermargin medsurg equipment products physical therapy services research development engineering expenses increased 16 2001 represented 55 sales compared 53 2000 increase research development engineering spending 2001 resulted continued companywide focus new product development new product introductions 2001 included accolade cemented hip stem eius knee t2 intramedullary nail system reflex anterior cervical plate percutaneous cement delivery system elite attachments tps cordless driver ii stryker knee navigation system sdc pro 2 surgical documentation system 988 digital camera go bed trio mobile surgery platform enhanced secure ii bed second quarter 2001 company received marketing approval op1 product australia european union approved indication australia treatment nonunion long bone fractures secondary trauma purposes initiating repair new bone formation approved indication europe tibial nonunions ninemonth duration secondary trauma skeletally mature patients cases previous treatment autograft failed use autograft unfeasible fourth quarter 2001 company granted humanitarian device exemption hde status op1 united states food drug administration fda approved indication united states use alternative autograft recalcitrant long bone nonunions use autograft unfeasible alternative treatments failed hde op1 made available humanitarian device defined fda one intended benefit patients treating diagnosing disease condition affects fewer 4000 individuals per year united states first commercial sales op1 australia began midmay 2001 commercial launch op1 select markets european union began august first sales op1 united states hde began november commercial launch op1 significant impact sales 2001 selling general administrative expenses increased 11 2001 represented 379 sales compared 387 2000 classification certain shipping costs cost sales 2001 reduced selling general administrative expenses percent sales approximately 04 2001 addition discount expense related accounts receivable securitization program included selling general administrative expenses declined 58 million 2001 71 million 2000 result lower discount rates company recognized charges 06 million continuing operations relating various restructuring acquisitionrelated events fourth quarter 2001 recognized restructuring acquisitionrelated credits 10 million 2000 2001 restructuring acquisitionrelated charges include 24 million charges partially offset reversal prior year restructuring accruals totaling 18 million 24 million 2001 charges included 09 million acquisitionrelated charge severance related costs associated reorganization companys sales structure italy accommodate integration business acquired companys independent italian distributor reorganization established direct sales force italy distributes companys full product portfolio 09 million charge covered severance costs three employees italy costs cancel contracts discontinued agents reorganization sales structure italy completed first quarter 2002 2001 charge also included 07 million charge related reorganization companys distribution channels latin america 08 million severance costs 10 employees europe 07 million charge reflected cost terminate distributor based contractual terms planned european workforce reductions completed first quarter 2002 18 million credits included 14 million related reduction expected costs complete headcount reductions associated 2000 1999 reorganizations companys european japanese distribution operations 2001 credits also included 04 million reverse remaining loss reserves established japan discontinued ophthalmology inventories sold contingent basis 1999 2000 company recognized credits 10 million consisting reversal prior year restructuring accruals totaling 70 million partially offset charges totaling 60 million 70 million credits included 12 million related reorganization strykers distribution channels associated acquisition howmedica 27 million reverse reserves distributor reorganization charged operations 1996 credits also included 27 million related reduction expected costs complete headcount reductions japan 04 million reverse portion loss reserves established japan discontinued ophthalmology inventories sold contingent basis 1999 60 million 2000 restructuring charges included 40 million charge cover severance costs 95 employees primarily europe 14 million asset writeoffs primarily goodwill inventory lease commitments associated certain operations principally europe closed fourth quarter 2000 planned workforce reductions completed 2001 remaining amount reserve reversed 2001 2000 restructuring charges also included 06 million terminate two small european distributors interest expense declined 679 million 2001 966 million 2000 primarily result lower outstanding debt balances increase intangibles amortization 384 million 2001 347 million 2000 related primarily business acquisitions 2001 second half 2000 income increased 16 million 2001 expense 12 million 2000 primarily result foreign currency transaction gains 2001 versus foreign currency transaction losses 2000 partially offset lower interest income effective income tax rate 2001 330 compared 340 effective income tax rate 2000 decrease rate 2000 2001 attributable mix operating results among tax jurisdictions earnings extraordinary item increased 23 2718 million 2001 2210 million 2000 basic earnings per share extraordinary item increased 22 138 2001 113 2000 diluted earnings per share extraordinary item increased 22 134 2001 110 2000 december 2001 company refinanced prepaid remaining 6427 million outstanding 16500 million senior secured credit facilities established 1998 connection howmedica acquisition prepayment 1998 facilities resulted writeoff related unamortized deferred loan costs 71 million reflected extraordinary loss 48 million net income taxes 23 million 02 per basic diluted share net earnings 2670 million basic diluted net earnings per share 136 132 respectively compared 2210 million basic diluted net earnings per share 113 110 respectively 2000 liquidity capital resources companys working capital december 31 2002 decreased 159 million 4438 million 4597 million december 31 2001 working capital decrease due primarily lower cash balances additional liabilities resulting restructuring acquisitionrelated items recorded 2002 increases accrued liabilities partially offset increases accounts receivable inventories additional liabilities restructuring acquisitionrelated items result aforementioned pending closure companys rutherford new jersey manufacturing facility accrued liabilities increased 2002 result higher obligations thirdparty sales agent commissions thirdparty royalties nonincome based taxes general increases accrued liabilities accounts receivable days sales outstanding excluding effect companys 1300 million accounts receivable securitization program decreased 1 day 58 days december 31 2002 59 days december 31 2001 lower days sales outstanding december 31 2002 result improved collection efforts well increase allowance bad debts provide potential exposures europe latin america days sales inventory decreased 12 days 126 days december 31 2002 138 days december 31 2001 lower days sales inventory primarily result improved inventory management higher provisions product obsolescence result product launches company generated cash 5039 million operations 2002 compared 4683 million 2001 generation cash 2002 result strong cash earnings net earnings plus noncash adjustments increases accrued expenses income tax liabilities decreases accounts receivable inventory days mentioned previously items partially offset increases deferred charges accounts receivable increased sales payments 84 million attributable restructuring acquisitionrelated liabilities acquisition purchase liabilities 2002 company used cash 1736 million business product line acquisitions 1390 million capital expenditures 197 million payment dividends business product line acquisitions include 1350 million paid tyco international ltd third quarter acquire sdi 140 million paid curis inc eliminate royalties payable future sales op1 100 million paid pain concepts inc acquire dekompressor product line discussed matters addition borrowings used fund business product line acquisitions company borrowed additional 4380 million existing credit facilities fund cash flow needs 2002 made repayments 8366 million credit facilities total borrowings declined 2209 million adjusting effect foreign currency translation 2002 company used cash 1390 million capital expenditures including 179 million related construction phase ii companys mahwah new jersey manufacturing distribution facility addition company spent 143 million expansion companys cork ireland manufacturing facility 88 million improvements companys newly leased endoscopy manufacturing facility san jose california company 378 million cash equivalents december 31 2002 company also outstanding borrowings totaling 5017 million date current maturities longterm debt december 31 2002 107 million decrease 02 million 2004 02 million 2005 companys 2500 million 364day revolving credit agreement expires december 2003 renewable companys lenders discretion companys 7500 million fiveyear nonamortizing revolving credit agreement expires december 2006 company believes cash hand well anticipated cash flows operations sufficient fund future operating capital requirements required debt repayments additional funds required company 5898 million additional borrowing capacity available existing credit facilities december 31 2002 companys future contractual obligations agreements initial terms greater one year summarized follows companys additional borrowing capacity along expected expiration period commitments summarized follows critical accounting policies preparation companys consolidated financial statements requires management make estimates assumptions affect amounts reported financial statements accompanying notes ongoing basis management evaluates estimates based historical experience available various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions management believes understanding following critical accounting policies important obtaining overall understanding consolidated financial statements inventory reserves company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory writedowns may required could unfavorably affect future operating results income taxes company operates multiple tax jurisdictions inside outside united states accordingly management must determine appropriate allocation income accordance local law jurisdictions tax audits associated allocation income complex issues may arise require extended period time resolve may result income tax adjustments changes income allocation required jurisdictions different tax rates company believes income tax accruals adequate cover exposures related potential changes income allocation tax jurisdictions extent additional information becomes available accruals adjusted reflect revised probable outcomes impairment goodwill indefinitelived intangibles company follows provisions fasb statement 142 goodwill intangible assets determining amount companys goodwill may impaired value company uses twostep process prescribed statement 142 first step screen potential impairment second step necessary measures amount impairment inherent twostep process certain assumptions estimates necessary determine fair values reportable units defined statement 142 actual results changes future expectations differ projected management goodwill impairment charges may required could unfavorably affect future operating results see matters discussion regarding adoption statement 142 matters company distributes products throughout world result companys financial results could significantly affected factors changes foreign currency exchange rates weak economic conditions foreign markets companys operating results primarily exposed changes exchange rates among united states dollar japanese yen european currencies particularly euro british pound united states dollar strengthens foreign currencies dollar value foreign currency sales declines united states dollar weakens opposite situation occurs company manufactures products united states france germany ireland switzerland canada puerto rico incurs costs manufacture applicable local currencies worldwide deployment factories serves partially mitigate impact currency exchange rate changes companys cost sales company certain investments net assets international locations hedged subject translation gains losses due changes foreign currencies year ended december 31 2002 strengthening foreign currencies increased value investments net assets 794 million gain reduced previously recorded cumulative loss weakening foreign currencies deferred recorded separate component stockholders equity january 1 2001 company adopted fasb statement 133 accounting derivative instruments hedging activities amended statements 137 138 statements require company recognize derivatives balance sheet fair value derivatives hedges must adjusted fair value earnings derivative hedge depending nature hedge changes fair value derivatives either offset change fair value hedged assets liabilities firm commitments earnings recognized accumulated comprehensive gain loss hedged item recognized earnings company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies december 31 2002 company outstanding forward currency exchange contracts purchase 820 million sell 977 million various currencies principally united states dollars euros maturities ranging principally 30 180 days december 31 2001 company outstanding forward currency exchange contracts purchase 974 million sell 721 million various currencies principally united states dollars euros maturities ranging principally 30 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted amortized forward points hypothetical 10 change exchange rates currencies would change 2002 fair value approximately 05 million would changed 2001 fair value approximately 14 million companys exposure market risk changes interest rates relates borrowings accounts receivable securitization facility company manages interest rate risk borrowings interest rate swap agreements fixed base rate 2500 million notional amount 4869 million variablerate borrowings outstanding december 31 2002 market interest rates similar borrowings averaged 1 2002 companys 2002 interest expense considering effects interest rate swaps would increased earnings income taxes would decreased 11 million comparison market interest rates averaged 1 less 2002 companys 2002 interest expense considering effects interest rate swaps would decreased earnings income taxes would increased 11 million market interest rates accounts receivable securitization facility averaged 1 2002 companys discount expense would increased earnings income taxes would decreased 13 million comparison market interest rates averaged 1 less 2002 companys discount expense would decreased earnings income taxes would increased 13 million amounts determined considering impact hypothetical interest rates companys borrowing cost interest rate swap agreements accounts receivable securitization facility without actions management mitigate exposure changes company exposed credit loss event nonperformance counterparties instruments anticipate nonperformance counterparties companys interest rate swap agreements effectively convert portion variablerate borrowings fixedrate basis 2003 thus reducing impact changes interest rates future interest expense approximately 51 companys outstanding variablerate borrowings december 31 2002 hedged designation interest rate swap agreements classified cash flow hedges gain 93 million attributable changes fair value interest rate swap agreements recorded component accumulated comprehensive gain loss 2002 future interest rate swap agreements determined ineffective terminated contractual termination dates became probable hedged variable cash flows associated variablerate borrowings would stop company would required reclassify earnings portion unrealized losses cash flow hedges included accumulated comprehensive gain loss interest rate differentials paid received result interest rate swaps recognized adjustment interest expense related designated borrowings based maturities companys interest rate swap agreements interest expense year ending december 31 2003 expected 92 million higher interest cost variablerate borrowings recognition amounts included unrealized losses cash flow hedges december 31 2002 company uses yendenominated floatingrate borrowings protect portion value investment subsidiary japan realized unrealized gains losses hedge included consolidated statements earnings recorded foreign currency translation adjustments within accumulated comprehensive gain loss stockholders equity net gains losses 16 million 58 million 77 million attributable yendenominated floatingrate borrowings hedge recorded foreign currency translation adjustments 2002 2001 2000 respectively january 1 2002 company adopted provisions fasb statement 142 goodwill intangible assets related acquisitions completed july 1 2001 statement 142 prohibits amortization goodwill intangible assets indefinite lives requires company evaluate intangibles impairment annual basis accordance statements provisions assembled workforce intangible asset unamortized balance 55 million january 1 2002 reclassified intangibles goodwill first quarter 2002 company completed initial impairment test goodwill fourth quarter 2002 completed required annual impairment test goodwill prescribed statement 142 determined recorded goodwill impaired goodwill writedown necessary october 2002 company purchased dekompressor product line pain concepts inc total cost 100 million giving company access intellectual property commercial rights relating design manufacture certain medical devices intangible assets acquired principally patents amortized 17 years company contingently liable potential future milestone payments 425 million primarily based future sales growth next five years october 1 2002 company entered agreement curis inc eliminated royalties payable curis relating future stryker sales op1 terms agreement company made onetime cash payment 140 million curis payment allocated existing patents amortized 15 years july 1 2002 company acquired sdi tyco international ltd 1350 million cash acquisition expands companys spinal product line adding interbody spinal cages united states market well thoracolumbar cervical spinal fixation devices acquisition funded using existing credit facilities acquisition sdi accounted using purchase method accounting results operations acquired business included companys consolidated financial statements beginning july 1 2002 acquisition sdi added 253 million companys sales second half 2002 sdi sales 556 million year ended december 31 2001 sales 331 million six months ended june 30 2002 purchase price 1350 million cash liabilities assumed preliminarily allocated assets acquired liabilities assumed based estimated fair value date acquisition based preliminary purchase price allocation 871 million purchase price allocated patent licensing agreements amortized remaining life 8 years 124 million inventory 380 million deferred tax assets related future tax deductions 51 million tangible assets 76 million liabilities assumed immediately acquisition consummated management company began implement integration plan combine stryker sdi conjunction integration plan company recorded additional purchase liabilities 36 million included preliminary purchase price allocation additional purchase liabilities include 31 million severance related costs 05 million contractual obligations severance related costs provided workforce reductions covering 37 sdi employees workforce reductions completed fourth quarter 2002 severance payments made third quarter 2003 companys pro forma consolidated financial results differ significantly result sdi acquisition july 2002 fasb issued statement 146 accounting costs associated exit disposal activities statement addresses timing recognition related measurement costs onetime termination benefits associated closing rutherford facility provisions statement 146 employmentrelated closing costs rutherford would recognized 12month closing period statement 146 effective exit activities initiated december 31 2002 early application allowed company initiated actions related rutherford june 2002 adopt provisions statement 146 recording costs rutherford closing accordingly actual employmentrelated costs closing expensed upon union approval shutdown agreement third quarter 2002 november 2002 fasb issued interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation 45 changes current practice accounting disclosure guarantees interpretation 45 require certain guarantees recorded liabilities fair value companys balance sheet current practice requires liabilities related guarantees recorded loss probable reasonably estimable terms defined fasb statement 5 accounting contingencies interpretation 45 also requires guarantor make significant new disclosures even likelihood making payments guarantee remote another change current practice disclosure requirements interpretation 45 effective immediately included note 14 contingencies consolidated financial statements initial recognition measurement provisions applicable prospective basis guarantees issued modified december 31 2002 company yet determined effect new recognition measurement provisions companys future financial results december 2002 fasb issued statement 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 statement 148 amends statement 123 accounting stockbased compensation provide alternative methods transition voluntary change fairvalue based method accounting stockbased employee compensation addition statement 148 amends disclosure requirements statement 123 require disclosure interim financial statements regarding method accounting stockbased employee compensation effect method used reported results company intend adopt fairvalue based method accounting stockbased employee compensation final standard issued fasb addresses concerns related applicability current option pricing models nonexchange traded employee stock option plans item 7aitem 7 managements discussion analysis financial condition results operations executive level overview stryker corporation company stryker leader worldwide orthopaedic market one worlds largest medical device companies stryker delivers results wide range capabilities including joint replacements trauma spine micro implant systems orthobiologics powered surgical instruments surgical navigation systems endoscopic products well patient handling emergency medical equipment stryker also provides outpatient physical therapy services united states company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma spinal implants bone cement bone growth factor osteogenic protein1 op1 medsurg equipment segment sells powered surgical instruments endoscopic products hospital beds stretchers micro implant surgical navigation systems includes physical therapy services corporate administration interest expense interest income domestic sales accounted 64 total revenues 2003 companys products marketed directly 6000 hospitals doctors healthcare facilities approximately 2100 sales marketing personnel united states stryker primarily maintains separate dedicated sales forces principal product lines provide focus high level expertise medical specialty served international sales accounted 36 total revenues 2003 companys products sold 100 countries 1900 local dealers direct sales efforts local dealer support direct sales coordinated approximately 1900 sales marketing personnel stryker distributes products sales subsidiaries branches offices located argentina australia austria belgium brazil canada chile denmark finland france germany greece hong kong india italy japan korea mexico netherlands new zealand norway poland portugal romania singapore south africa spain sweden switzerland taiwan united kingdom stryker exports products dealers customers africa bangladesh china cis former soviet union cyprus india indonesia ireland korea latin america malaysia middle east philippines taiwan thailand turkey vietnam yugoslavia companys business generally seasonal nature however number orthopaedic implant surgeries lower summer months 18 outlook 2004 companys outlook 2004 continues optimistic regarding markets participates underlying growth rates orthopaedic procedures company expects diluted net earnings per share 2004 approximate 268 financial expectations 2004 include net sales growth approximately 16 result strong growth shipments orthopaedic implants medsurg equipment favorable foreign currency exchange rate movements higher revenue physical therapy services foreign currency exchange rates hold january 27 2004 levels company anticipates favorable impact net sales first quarter full year 2004 approximately 45 million 145 million respectively company pays outstanding borrowings unsecured credit facilities reduces 1500 million outstanding accounts receivable securitization facility company expects generate cash earnings excess needs fund future working capital requirements company anticipates investing future business growth including business product line acquisitions supplement current product offerings instrumentation support new product launches future building expansions including manufacturing facility expansions certain divisions within medsurg segment results operations table outlines components consolidated statements earnings percentage net sales yeartoyear percentage change dollar amounts 19 table sets forth domesticinternational product line sales information 2003 compared 2002 stryker corporations net sales increased 20 2003 36253 million 30116 million 2002 net sales grew 12 result increased unit volume changes product mix 2 related higher selling prices 5 due changes foreign currency exchange rates 1 result acquired businesses domestic sales 23334 million 2003 representing increase 18 result strong shipments orthopaedic implants medsurg equipment higher revenue physical therapy services international sales 12919 million 2003 representing increase 24 result higher shipments orthopaedic implants medsurg equipment impact foreign currency comparisons dollar value international sales favorable 1459 million 2003 excluding impact foreign currency international sales increased 10 2003 worldwide sales orthopaedic implants 20930 million 2003 representing increase 23 result higher shipments reconstructive trauma spinal implants excluding impact foreign currency sales orthopaedic implants increased 16 year worldwide sales medsurg equipment 13093 million 2003 representing increase 18 result higher shipments powered surgical instruments endoscopic products hospital beds stretchers micro implant surgical navigation systems excluding impact foreign currency sales medsurg equipment increased 15 year physical therapy services revenues 2230 million 2003 representing increase 11 result new physical therapy centers higher revenues existing centers cost sales represented 362 sales compared 369 2002 lower cost sales percentage 2003 due faster sales growth higher margin orthopaedic implants business increase absorption fixed manufacturing costs caused increased production certain companys manufacturing plants meet current demand research development engineering expenses represented 50 sales 2003 compared 47 2002 higher spending level result final development spending advance companys product launches 2003 continued focus new product development anticipated future product launches new product introductions 2003 included trident ceramic acetabular system simplex p tobramycin bone cement core platform micro powered surgical instruments united states market system 5 heavyduty batterypowered surgical instruments europe selling general administrative expenses increased 22 2003 represented 391 sales compared 387 2002 22 increase selling general administrative expenses partially due increase sales commission expense result 20 increase net sales 2003 addition company incurred 140 million increase insurance costs 2003 resulting increased premiums 20 charged thirdparty insurers wholly owned captive insurance company established 2003 fully described matters increase selling general administrative expenses percentage sales 2003 primarily due higher distribution costs associated increased sales mix orthopaedic implants increased amortization loaner instrument sets increase insurance costs higher advertising costs associated companys previously announced patient education campaign company recognized charges 172 million 115 million net income taxes related restructuring acquisitionrelated items third quarter 2002 restructuring acquisitionrelated items included charge 210 million 141 million net income taxes employmentrelated costs close companys rutherford new jersey manufacturing facility partially offset credit 38 million 26 million net income taxes reverse certain howmedica acquisitionrelated costs reflect actual final payments required see following comparison 2002 results 2001 results additional information interest expense declined 226 million 2003 403 million 2002 primarily result lower outstanding debt balances increase intangibles amortization 454 million 2003 289 million 2002 primarily result increased intangible assets recorded result july 1 2002 acquisition surgical dynamics inc spinal implant business sdi tyco international ltd fully described matters addition company recorded 65 million charge related trademark impairment resulting branding initiative adopted company fourth quarter 2003 branding initiative intended improve companys customers stakeholders overall awareness strykers capabilities charge included intangibles amortization consolidated statements earnings income 38 million 2003 compared 05 million expense 2002 due foreign currency transaction gains current year compared losses prior year higher interest income effective income tax rate 305 2003 compared 318 2002 companys effective income tax rate 2003 reduced primarily result increased manufacturing lower tax jurisdictions ireland puerto rico net earnings increased 31 4535 million 3456 million 2002 basic net earnings per share increased 30 228 2003 175 2002 diluted net earnings per share increased 31 223 2003 170 2002 excluding impact restructuring acquisitionrelated items year ended december 31 2002 adjusted net earnings increased 27 3571 million 2002 4535 million 2003 adjusted basic net earnings per share increased 26 181 2002 228 2003 adjusted diluted net earnings per share increased 27 175 2002 223 2003 adjusted nongaap financial measures replace presentation companys gaap financial results company provided supplemental nongaap information provides meaningful information regarding companys results consistent comparable basis periods presented management uses nongaap financial information reviewing operating results business segments analyzing potential future business trends connection budget process addition company believes investors utilize information evaluate periodtoperiod results understand potential future operating results company believes economic nature restructuring charge acquisitionrelated credit sufficiently unique similar items recorded prior two fiscal years reasonably likely recur within two years addition company reasonably believes probable financial impact individual items become insignificant end 2004 company encourages investors users financial statements review consolidated financial statements publicly filed reports entirety rely solely single financial measure reconciliations nongaap financial measures follows millions 21 2002 compared 2001 stryker corporations net sales increased 16 2002 30116 million 26023 million 2001 net sales grew 11 result increased unit volume changes product mix 3 related higher selling prices 2 result acquired businesses domestic sales 19737 million 2002 representing increase 17 result strong shipments orthopaedic implants medsurg equipment higher revenue physical therapy services july 1 2002 acquisition sdi added 228 million domestic sales 2002 international sales 10379 million 2002 representing increase 14 result higher shipments orthopaedic implants medsurg equipment acquisition sdi added 25 million international sales 2002 impact foreign currency comparisons dollar value international sales favorable 137 million 2002 excluding impact foreign currency international sales increased 12 2002 worldwide sales orthopaedic implants 17048 million 2002 representing increase 18 result higher shipments reconstructive trauma spinal implants excluding impact foreign currency sales orthopaedic implants increased 17 year worldwide sales medsurg equipment 11053 million 2002 representing increase 13 result higher shipments powered surgical instruments endoscopic products hospital beds stretchers micro implant surgical navigation systems excluding impact foreign currency sales medsurg equipment increased 13 year physical therapy services revenues 2015 million 2002 representing increase 11 result new physical therapy centers higher revenues existing centers cost sales represented 369 sales compared 370 2001 slightly lower cost sales percentage 2002 due increase absorption fixed manufacturing costs caused increased production certain companys manufacturing plants meet current demand higher sales growth higher margin orthopaedic implant products offset partially higher product obsolescence resulting product launches research development engineering expenses 2002 consistent prior year amounts decreased 47 sales 55 2001 research development engineering spending affected 2002 commercial launch op1 occurred various markets second fourth quarters 2001 following launch 2002 stryker biotech recorded portion expenses cost sales selling general administrative expenses compared 2001 division classified substantially costs research development engineering increased spending companys continued focus new product development partially offset decreased research development engineering expenses related stryker biotech new product introductions 2002 included scorpioflex knee 22 united states market super securfit plus hip japanese market trident ceramic acetabular system canada xia ii spinal system 5 heavyduty batterypowered surgical instruments tps saber drill sdc pro 2 surgical dvd documentation system painpump2 precision system percutaneous cement delivery fluoroscopic software module stryker navigation system go bed selling general administrative expenses increased 18 2002 represented 387 sales compared 379 2001 increase selling general administrative expenses partially due increase sales commission expense result 16 increase net sales 2002 addition company incurred 89 million increase insurance costs 2002 change classification certain stryker biotech expenses discussed also contributed increase selling general administrative expenses discount expense related accounts receivable securitization facility included selling general administrative expenses declined 27 million 2002 58 million 2001 result lower discount rates company recognized charges 172 million 115 million net income taxes related restructuring acquisitionrelated items third quarter 2002 restructuring acquisitionrelated items included charge 210 million 141 million net income taxes employmentrelated costs close companys rutherford new jersey manufacturing facility partially offset credit 38 million 26 million net income taxes reverse certain howmedica acquisitionrelated costs reflect actual final payments required 210 million restructuring charge related primarily shutdown agreement reached company employee bargaining unit close orthopaedics division implant manufacturing facility rutherford new jersey ratified members iuecwa local 485 august 23 2002 charge covered employmentrelated severance costs 353 employees rutherford facility closed 2003 final severance payments made end 2005 orthopaedics division completed transition production facilities mahwah new jersey well cork limerick ireland fourth quarter 2001 company recognized charges 06 million related various restructuring acquisitionrelated events 2001 restructuring acquisitionrelated charges included 24 million charges partially offset reversal prior year restructuring accruals totaling 18 million interest expense declined 403 million 2002 679 million 2001 primarily result lower outstanding debt balances decrease intangibles amortization 289 million 2002 384 million 2001 primarily result companys adoption financial accounting standards board fasb statement 142 goodwill intangible assets prohibits amortization goodwill nonamortization provisions statement 142 applied prior year amortization expense 2001 would reduced 181 million net earnings would increased 121 million 06 per diluted share expense 05 million 2002 compared 16 million income 2001 due foreign currency transaction losses current year versus gains prior year partially offset higher interest income effective income tax rate 318 2002 compared 330 2001 companys effective income tax rate 2002 reduced 330 318 fourth quarter 2002 thereby reducing income tax expense 61 million primarily result increased manufacturing lower tax jurisdictions ireland puerto rico earnings extraordinary item increased 27 3456 million 2718 million 2001 basic earnings per share extraordinary item increased 27 175 2002 138 2001 diluted earnings per share extraordinary item increased 27 170 2002 134 2001 december 2001 company refinanced prepaid remaining 6427 million outstanding 16500 million senior secured credit facilities established 1998 connection howmedica acquisition prepayment 1998 facilities resulted writeoff 2001 related unamortized deferred loan costs 71 million reflected extraordinary loss 48 million net income taxes 23 million 02 per basic diluted share net earnings 3456 million basic diluted net earnings per share 175 170 respectively compared 2670 million basic diluted net earnings per share 136 132 respectively 2001 23 excluding impact restructuring acquisitionrelated items 2002 2001 impact change goodwill amortization extraordinary item 2001 adjusted net earnings 2002 3571 million representing 26 increase adjusted net earnings 2843 million 2001 adjusted basic net earnings per share increased 25 181 compared 145 2001 adjusted diluted net earnings per share increased 25 175 compared 140 2001 adjusted nongaap financial measures replace presentation companys gaap financial results company provided supplemental nongaap information provides meaningful information regarding companys results consistent comparable basis periods presented management uses nongaap financial information reviewing operating results business segments analyzing potential future business trends connection budget process addition company believes investors utilize information evaluate periodtoperiod results understand potential future operating results company believes economic nature restructuring charge acquisitionrelated items extraordinary loss sufficiently unique similar items recorded prior two fiscal years reasonably likely recur within two years addition company reasonably believes probable financial impact individual items become insignificant end 2004 company encourages investors users financial statements review consolidated financial statements publicly filed reports entirety rely solely single financial measure reconciliations nongaap financial measures follows millions liquidity capital resources companys working capital december 31 2003 increased 1033 million 5471 million 4438 million december 31 2002 including effect proceeds sale additional 200 million accounts receivable pursuant accounts receivable securitization facility used reduce outstanding borrowings companys unsecured credit facilities increase working capital resulted growth companys overall business use strong earnings fund increases accounts receivable inventory prepaid expenses pay current liabilities due 2003 primarily 24 income taxes restructuring acquisitionrelated liabilities trade accounts payable accrued liabilities increased 2003 result growth business higher obligations thirdparty sales agent commissions thirdparty royalties nonincome based taxes increased reserves legal claims assessments increases accrued liabilities accounts receivable days sales outstanding excluding effect 1500 million outstanding companys 2000 million accounts receivable securitization facility 58 days unchanged december 31 2003 compared december 31 2002 days sales inventory decreased 6 days 120 days december 31 2003 126 days december 31 2002 lower days sales inventory primarily result improved inventory management higher provisions product obsolescence result product launches company generated cash 6485 million operations 2003 compared 5162 million 2002 generation cash 2003 result strong cash earnings net earnings plus noncash adjustments increases accounts payable accrued expenses items partially offset increases deferred charges accounts receivable increased sales payments 155 million attributable restructuring acquisitionrelated liabilities acquisition purchase liabilities 2003 company used cash 108 million business product line acquisitions 1445 million capital expenditures 237 million payment dividends addition borrowings used fund business product line acquisitions company borrowed additional 6645 million existing credit facilities fund cash flow needs 2003 made repayments 11446 million credit facilities total borrowings declined 4756 million adjusting effect foreign currency translation 2003 company used cash 1445 million capital expenditures including 277 million related construction phase ii companys mahwah new jersey manufacturing distribution facility addition company spent 46 million expansion companys manufacturing facility west lebanon new hampshire 38 million expansion companys cork ireland manufacturing facility company 659 million cash equivalents december 31 2003 company also outstanding borrowings totaling 261 million date current maturities longterm debt december 31 2003 73 million increase 156 million 2006 companys 7500 million fiveyear nonamortizing revolving credit agreement expires december 2006 result current cash outstanding debt balances company decided renew previously existing 2500 million 364day revolving credit agreement expired december 2003 company believes cash hand well anticipated cash flows operations sufficient fund future operating capital requirements future manufacturing facility construction capital expenditures future business product line acquisitions required debt repayments additional funds required company 8021 million additional borrowing capacity available existing credit facilities additional 500 million eligible accounts receivable could sold accounts receivable securitization facility december 31 2003 companys future contractual obligations agreements initial terms greater one year including agreements purchase materials normal course business summarized follows millions 25 companys additional borrowing capacity along expected expiration period commitment summarized follows millions critical accounting policies preparation companys consolidated financial statements requires management make estimates assumptions affect amounts reported financial statements accompanying notes ongoing basis management evaluates estimates based historical experience available various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions management believes understanding following critical accounting policies important obtaining overall understanding consolidated financial statements allowance doubtful accounts company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends actual customer financial conditions less favorable projected management additional accounts receivable writeoffs may necessary could unfavorably affect future operating results inventory reserves company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory writedowns may required could unfavorably affect future operating results income taxes company operates multiple tax jurisdictions inside outside united states accordingly management must determine appropriate allocation income jurisdictions tax audits associated allocation income complex issues may require extended period time resolve may result income tax adjustments changes income allocation required jurisdictions different tax rates tax adjustments certain jurisdictions significant 26 company records accruals representing managements best estimate probable resolution matters extent additional information becomes available accruals adjusted reflect revised estimated probable outcome matters company distributes products throughout world result companys financial results could significantly affected factors changes foreign currency exchange rates weak economic conditions foreign markets companys operating results primarily exposed changes exchange rates among united states dollar japanese yen european currencies particular euro british pound united states dollar weakens foreign currencies dollar value sales denominated foreign currencies increases united states dollar strengthens opposite situation occurs company manufactures products united states france germany ireland switzerland canada puerto rico incurs costs manufacture applicable local currencies worldwide deployment factories serves partially mitigate impact currency exchange rate changes companys cost sales company follows provisions fasb statement 133 accounting derivative instruments hedging activities amended statements 137 138 accounting derivative financial instruments statements require company recognize derivatives balance sheet fair value derivatives documented accounted hedges must adjusted fair value earnings derivative hedge depending nature hedge changes fair value derivative either offset change fair value hedged assets liabilities firm commitments earnings recognized accumulated comprehensive gain loss hedged item recognized earnings company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies december 31 2003 company outstanding forward currency exchange contracts purchase 1239 million sell 1549 million various currencies principally united states dollars euros maturities ranging principally 30 180 days december 31 2002 company outstanding forward currency exchange contracts purchase 820 million sell 977 million various currencies principally united states dollars euros maturities ranging principally 30 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points hypothetical 10 change exchange rates currencies would change 2003 fair value approximately 21 million would changed 2002 fair value approximately 05 million december 31 2003 company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties company exposed market risk changes interest rates result borrowings accounts receivable securitization facility company managed portion interest rate risk borrowings interest rate swap agreements fixed base rate 2500 million notional amount variablerate borrowings 2003 interest rate swap agreements expired 2003 market interest rates similar borrowings averaged 1 2003 companys 2003 27 interest expense considering effects interest rate swaps would increased earnings income taxes would decreased 07 million comparison market interest rates averaged 1 less 2003 companys 2003 interest expense considering effects interest rate swaps would decreased earnings income taxes would increased 07 million market interest rates accounts receivable securitization facility averaged 1 2003 companys discount expense would increased earnings income taxes would decreased 17 million comparison market interest rates averaged 1 less 2003 companys discount expense would decreased earnings income taxes would increased 17 million amounts determined considering impact hypothetical interest rates companys borrowing cost interest rate swap agreements accounts receivable securitization facility without actions management mitigate exposure changes companys interest rate swap agreements matured various terms ranging september 2003 december 2003 effectively converted portion variablerate borrowings fixedrate basis thus reducing impact changes interest rates interest expense company designated interest rate swap agreements cash flow hedges gains 92 million 93 million loss 220 million attributable changes fair value interest rate swap agreements recorded components accumulated comprehensive gain loss 2003 2002 2001 respectively interest rate differentials paid received result interest rate swaps recognized adjustment interest expense related designated borrowings company used yendenominated floatingrate borrowings protect portion value investment subsidiary japan realized unrealized gains losses hedge included consolidated statements earnings recorded foreign currency translation adjustments within accumulated comprehensive gain loss stockholders equity net gains losses 21 million 16 million 58 million attributable yendenominated floatingrate borrowings hedge recorded foreign currency translation adjustments 2003 2002 2001 respectively company certain investments net assets international locations hedged investments subject translation gains losses due changes foreign currencies year ended december 31 2003 strengthening foreign currencies relative us dollar increased value investments net assets 1763 million gain eliminated previously recorded cumulative loss 686 million deferred recorded separate component stockholders equity december 31 2002 july 1 2002 company acquired sdi tyco international ltd 1350 million cash acquisition expanded companys spinal product line adding interbody spinal cages united states market well thoracolumbar cervical spinal fixation devices acquisition funded using existing credit facilities acquisition sdi accounted using purchase method accounting results operations acquired business included companys consolidated financial statements beginning july 1 2002 companys pro forma consolidated financial results 2002 differ significantly result sdi acquisition company partially selfinsured product liability claims 2003 company established wholly owned captive insurance company us manage selfinsured retention limits captive insurance company provides insurance reserves estimated liabilities product claims incurred reported based actuarially determined liabilities actuarial valuations based historical information along certain assumptions future events second quarter 2003 company issued 50000 shares restricted stock newly appointed president chief operating officer stock vests ratably first five anniversary dates grant provided recipient still employed company aggregate market value restricted stock date issuance 34 million measured quoted price companys common stock recorded deferred stockbased compensation separate component stockholders equity amortized fiveyear vesting period 28 december 2003 company announced subsidiary physiotherapy associates inc stryker received subpoena united states attorneys office boston massachusetts connection department justice investigation physiotherapy associates billing coding practices physiotherapy associates provides physical occupational speech therapy services patients 374 outpatient centers united states represented 6 7 strykers net sales years ended december 31 2003 2002 respectively revenues derived billings us federal healthcare programs approximated 14 physiotherapy associates revenues periods company fully cooperating department justice regarding matter december 2003 fasb issued revision statement 132 employers disclosures pensions postretirement benefits revision requires additional disclosures company regarding plan assets investment strategies plan obligations cash flows company adopted new disclosure requirements defined benefit plans item 7aitem 7 managements discussion analysis financial condition results operations executive level overview stryker corporation company stryker leader worldwide orthopaedic market one worlds largest medical device companies stryker delivers results wide range capabilities including joint replacements trauma spine micro implant systems orthobiologics powered surgical instruments surgical navigation systems endoscopic products well patient handling emergency medical equipment stryker also provides outpatient physical therapy services united states company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma spine micro implant systems bone cement bone growth factor osteogenic protein1 op1 medsurg equipment segment sells powered surgical instruments surgical navigation systems endoscopic products medical video imaging equipment hospital beds stretchers category includes physical therapy services corporate administration interest expense interest income domestic sales accounted 65 total revenues 2004 companys products marketed directly 6000 hospitals doctors healthcare facilities approximately 2350 sales marketing personnel united states stryker primarily maintains separate dedicated sales forces principal product lines provide focus high level expertise medical specialty served international sales accounted 35 total revenues 2004 companys products sold 100 countries 1750 local dealers direct sales forces local dealer support direct sales coordinated approximately 1900 local regional sales marketing personnel stryker distributes products sales subsidiaries branches offices located argentina australia austria belgium brazil canada chile denmark finland france germany greece hong kong india italy japan korea mexico netherlands new zealand norway poland portugal romania singapore south africa spain sweden switzerland taiwan united kingdom stryker exports products dealers customers africa bangladesh china cis former soviet union cyprus india indonesia ireland korea latin america malaysia middle east philippines taiwan thailand turkey vietnam yugoslavia companys business generally seasonal nature however number orthopaedic implant surgeries lower summer months third quarter 2004 company completed acquisition merger outstanding stock spinecore inc spinecore upfront payment 1200 million cash plus certain transaction costs spinecore developer artificial lumbar cervical discs terms transaction also include milestone royalty payments additional 2400 million upon achievement commercialization spinecores products united states expected occur 2008 acquisition expected enhance companys presence spinal implant market important growth area within orthopaedic implants segment additional details including financial statement impact resulting acquisition included results operations outlook 2005 companys outlook 2005 continues optimistic regarding markets participates underlying growth rates orthopaedic procedures company expects diluted net earnings per share 2005 approximate 174 excluding anticipated impact recognition cost employee stock options fully described matters financial expectations 2005 include net sales increase approximately 15 result strong growth shipments orthopaedic implants medsurg equipment favorable foreign currency exchange rate movements higher revenue physical therapy services foreign currency exchange rates hold current levels company anticipates favorable impact net sales first quarter full year 2005 approximately 15 million 75 million respectively excluding effect foreign currency exchange rates company expects sales growth approximately 13 2005 comparable 14 sales growth excluding effect foreign currency exchange rates reported full year 2004 company paid substantially previously outstanding borrowings existing credit facilities eliminated amounts previously outstanding accounts receivable securitization facility expects generate cash earnings net earnings plus noncash adjustments excess needs fund future working capital requirements company anticipates investing future business growth including business product line acquisitions supplement current product offerings loaner instrumentation surgical implants support new product launches future building expansions including manufacturing facility expansions certain divisions results operations table outlines components consolidated statements earnings percentage net sales yeartoyear percentage change dollar amounts table sets forth domesticinternational product line sales information table sets forth additional sales growth information significant products within companys orthopaedic implants medsurg equipment product lines reported basis excluding impact changes foreign currency exchange rates 2004 compared 2003 stryker corporations net sales increased 18 2004 42623 million 36253 million 2003 net sales grew 13 result increased unit volume changes product mix 3 due changes foreign currency exchange rates 2 related higher selling prices domestic sales 27530 million 2004 representing increase 18 result strong shipments orthopaedic implants medsurg equipment higher revenue physical therapy services international sales 15093 million 2004 representing increase 17 result higher shipments orthopaedic implants medsurg equipment impact foreign currency comparisons dollar value international sales favorable 1208 million 2004 excluding impact foreign currency international sales increased 7 2004 worldwide sales orthopaedic implants 25625 million 2004 representing increase 17 result higher shipments reconstructive trauma spine micro implant systems bone cement bone growth factor op1 excluding impact foreign currency sales orthopaedic implants increased 13 year sales hip implant systems increased 14 year 9 excluding changes foreign currency exchange rates sales growth hip products slowed 2004 primarily due tougher comparables resulting launch trident ceramiconceramic hip system united states second quarter 2003 sales knee implant systems increased 18 year 14 excluding changes foreign currency exchange rates due strong growth scorpio duracon knee systems united states sales trauma implant systems increased 17 year 11 excluding changes foreign currency exchange rates result fullscale launch gamma3 hip fracture system united states japan europe 2004 strong growth companys t2 nailing system united states internationally also drove trauma sales growth 2004 sales spinal implant systems increased 18 year 15 excluding changes foreign currency exchange rates primarily due strong sales growth cervical interbody products united states sales micro implant systems increased 16 year 12 excluding changes foreign currency exchange rates result solid worldwide sales craniomaxillofacial products worldwide sales medsurg equipment 14549 million 2004 representing increase 20 result higher shipments powered surgical instruments surgical navigation systems endoscopic products patient handling emergency medical equipment excluding impact foreign currency sales medsurg equipment increased 18 year sales powered surgical instruments surgical navigation systems increased 17 year 15 excluding changes foreign currency exchange rates due strong sales growth heavyduty powered instruments interventional pain products surgical navigation systems domestically europe sales endoscopic products increased 21 year 20 excluding changes foreign currency exchange rates result solid growth medical video imaging equipment sports medicine products united states sales patient handling emergency medical equipment increased 25 year 23 excluding changes foreign currency exchange rates due strong growth hospital beds emergency medical equipment domestically international markets physical therapy services revenues 2449 million 2004 representing increase 10 6 growth resulting new physical therapy centers 4 increase coming higher revenues existing centers cost sales represented 354 sales 2004 compared 362 2003 lower cost sales percentage 2004 partially due increased average selling prices companys products improved manufacturing efficiencies several companys manufacturing distribution facilities including recently completed mahwah new jersey manufacturing distribution facility lower purchase prices raw materials including cobalt chromium titanium alloys research development engineering expenses represented 50 sales 2004 2003 expenses increased 17 2004 2110 million higher spending level result final development spending advance companys product launches 2004 continued focus new product development anticipated future product launches together beginning third quarter 2004 spending associated continued development products acquired spinecore new product introductions 2004 orthopaedic implants segment included restoration modular hip system united states europe triathlon knee system united states europe scorpio nrg knee centpillar hip systems japanese market worldwide launch oasys posterior cervical fixation system fullscale launch gamma3 hip fracture system united states japan europe triathlon system represents companys evolutionary design developed closely reproduce natural knee motion provide mobility stability 150 degrees flexion within medsurg equipment segment new product introductions 2004 included new video platform 1088 high definition camera first fully digital highdefinition progressivescan medical video camera new mseries stretcher designed fit needs acute care specialty surgical care facilities selling general administrative expenses increased 17 2004 represented 388 sales compared 391 2003 17 increase selling general administrative expenses partially due increase sales commission expense result 18 increase net sales 2004 increased meeting costs higher amortization expense associated loaner instrument sets addition company incurred 121 million increase insurance costs 2004 resulting increased premiums charged thirdparty insurers wholly owned captive insurance company established 2003 fully described matters purchased inprocess research development charge 1208 million recorded third quarter 2004 relates acquisition spinecore development stage company date acquisition artificial lumbar cervical spinal disc implant technologies acquired preliminary stages clinical studies united states yet reached technological feasibility upfront payment 1200 million plus certain transaction costs allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair value date acquisition interest expense declined 68 million 2004 226 million 2003 primarily result lower outstanding debt balances effective income tax rate 350 2004 reported effective income tax rate 2004 reflects nondeductibility us income tax purposes purchased inprocess research development charge recognized pursuant aforementioned acquisition spinecore excluding nondeductible charge companys effective income tax rate reduced 300 2004 compared 305 2003 primarily result increased manufacturing lower tax jurisdictions ireland puerto rico net earnings increased 3 4657 million 4535 million 2003 basic net earnings per share increased 2 116 2004 114 2003 diluted net earnings per share increased 3 114 2004 111 2003 excluding impact 1208 million purchased inprocess research development charge recorded third quarter 2004 adjusted net earnings increased 29 4535 million 2003 5865 million 2004 adjusted basic net earnings per share increased 28 114 2003 146 2004 adjusted diluted net earnings per share increased 29 111 2003 143 2004 adjusted financial measure replace presentation companys reported financial results stated generally accepted accounting principles gaap company provided supplemental nongaap financial measure provides meaningful information regarding companys results consistent comparable basis periods presented management uses nongaap financial measure reviewing operating results business segments analyzing potential future business trends connection budget process addition company believes investors utilize information evaluate periodtoperiod results better understand potential future operating results company encourages investors users financial statements review consolidated financial statements publicly filed reports entirety rely solely single financial measure reconciliation nongaap financial measure follows millions 2003 compared 2002 stryker corporations net sales increased 20 2003 36253 million 30116 million 2002 net sales grew 12 result increased unit volume changes product mix 5 due changes foreign currency exchange rates 2 related higher selling prices 1 result acquired businesses domestic sales 23334 million 2003 representing increase 18 result strong shipments orthopaedic implants medsurg equipment higher revenue physical therapy services international sales 12919 million 2003 representing increase 24 result higher shipments orthopaedic implants medsurg equipment impact foreign currency comparisons dollar value international sales favorable 1459 million 2003 excluding impact foreign currency international sales increased 10 2003 worldwide sales orthopaedic implants 21925 million 2003 representing increase 22 result higher shipments reconstructive trauma spine micro implant systems bone cement bone growth factor op1 excluding impact foreign currency sales orthopaedic implants increased 16 year sales hip implant systems increased 20 year 14 excluding changes foreign currency exchange rates sales growth hip products primarily driven launch trident ceramiconceramic hip system united states second quarter 2003 sales knee implant systems increased 18 year 13 excluding changes foreign currency exchange rates due strong growth scorpio duracon knee systems united states scorpio systems japan pacific region sales trauma implant systems increased 25 year 15 excluding changes foreign currency exchange rates result strong growth intramedullary nail product portfolio united states led t2 nailing system strong growth hip fracture external fixation products japan sales spinal implant systems increased 40 year 35 excluding changes foreign currency exchange rates primarily due incremental sales interbody cages resulting third quarter 2002 acquisition surgical dynamics inc united states strong domestic international growth thoracolumbar implant products worldwide sales medsurg equipment 12098 million 2003 representing increase 20 result higher shipments powered surgical instruments surgical navigation systems endoscopic products patient handling emergency medical equipment excluding impact foreign currency sales medsurg equipment increased 16 year sales powered surgical instruments surgical navigation systems increased 21 year 17 excluding changes foreign currency exchange rates due strong sales growth heavyduty powered instruments micropowered tools interventional pain products domestically europe domestic sales growth dekompressor discectomy probe acquired fourth quarter 2002 sales endoscopic products increased 21 year 19 excluding changes foreign currency exchange rates result strong growth medical video imaging equipment arthroscopic products united states sales patient handling emergency medical equipment increased 12 year 10 excluding changes foreign currency exchange rates due strong domestic growth hospital beds emergency medical equipment physical therapy services revenues 2230 million 2003 representing increase 11 8 growth resulting new physical therapy centers 3 increase coming higher revenues existing centers cost sales represented 362 sales compared 369 2002 lower cost sales percentage 2003 due faster sales growth higher margin orthopaedic implants business increase absorption fixed manufacturing costs caused increased production certain companys manufacturing plants meet current demand research development engineering expenses represented 50 sales 2003 compared 47 2002 higher spending level result final development spending advance companys product launches 2003 continued focus new product development anticipated future product launches new product introductions 2003 included trident ceramic acetabular system simplex p tobramycin bone cement core platform micropowered surgical instruments united states market system 5 heavyduty batterypowered surgical instruments europe selling general administrative expenses increased 22 2003 represented 391 sales compared 387 2002 22 increase selling general administrative expenses partially due increase sales commission expense result 20 increase net sales 2003 addition company incurred 140 million increase insurance costs 2003 resulting increased premiums charged thirdparty insurers wholly owned captive insurance company established 2003 fully described matters increase selling general administrative expenses percentage sales 2003 primarily due higher distribution costs associated increased sales mix orthopaedic implants increased amortization loaner instrument sets increase insurance costs higher advertising costs associated companys previously announced patient education campaign increase intangibles amortization 454 million 2003 289 million 2002 primarily result increased intangible assets recorded result july 1 2002 acquisition surgical dynamics inc spinal implant business sdi tyco international ltd addition company recorded 65 million charge related trademark impairment resulting branding initiative adopted company fourth quarter 2003 branding initiative intended improve companys customers stakeholders overall awareness strykers capabilities charge included intangibles amortization consolidated statements earnings company recognized charges 172 million 115 million net income taxes related restructuring acquisitionrelated items third quarter 2002 restructuring acquisitionrelated items included charge 210 million 141 million net income taxes employmentrelated costs close companys rutherford new jersey manufacturing facility partially offset credit 38 million 26 million net income taxes reverse certain howmedica acquisitionrelated costs reflect actual final payments required interest expense declined 226 million 2003 403 million 2002 primarily result lower outstanding debt balances income 38 million 2003 compared 05 million expense 2002 due foreign currency transaction gains current year compared losses prior year higher interest income effective income tax rate 305 2003 compared 318 2002 companys effective income tax rate 2003 reduced primarily result increased manufacturing lower tax jurisdictions ireland puerto rico net earnings increased 31 4535 million 3456 million 2002 basic net earnings per share increased 31 114 2003 87 2002 diluted net earnings per share increased 31 111 2003 85 2002 excluding impact restructuring acquisitionrelated items year ended december 31 2002 adjusted net earnings increased 27 3571 million 2002 4535 million 2003 adjusted basic net earnings per share increased 27 90 2002 114 2003 adjusted diluted net earnings per share increased 26 88 2002 111 2003 adjusted financial measure replace presentation companys reported financial results stated gaap company provided supplemental nongaap financial measure provides meaningful information regarding companys results consistent comparable basis periods presented management uses nongaap financial measure reviewing operating results business segments analyzing potential future business trends connection budget process addition company believes investors utilize information evaluate periodtoperiod results better understand potential future operating results company believes economic nature restructuring charge acquisitionrelated credit sufficiently unique similar items recorded prior two fiscal years reasonably likely recur within two years addition company believes financial impact individual items insignificant end 2004 company encourages investors users financial statements review consolidated financial statements publicly filed reports entirety rely solely single financial measure reconciliation nongaap financial measure follows millions liquidity capital resources companys working capital december 31 2004 increased 4659 million 10291 million 5632 million december 31 2003 increase working capital resulted growth companys overall business use cash earnings fully repay amounts outstanding companys accounts receivable securitization program fund increases accounts receivable inventory prepaid expenses loaner instrumentation surgical implants accounts payable accrued liabilities increased 2004 result growth business higher obligations sales commissions royalties nonincomebased taxes increased reserves legal claims assessments increases accrued liabilities accounts receivable days sales outstanding excluding effect amounts outstanding 0 december 31 2004 1500 million december 31 2003 companys 2000 million accounts receivable securitization facility 58 days december 31 2004 2003 days sales inventory increased 2 days 122 days december 31 2004 120 days december 31 2003 higher days sales inventory partially due increased inventories support 2004 anticipated 2005 product launches company generated cash 5933 million operations 2004 compared 6485 million 2003 reduction cash operations 2004 compared prior year primarily due repayment amounts previously outstanding accounts receivable securitization facility representing operating cash usage 1500 million 2004 compared operating cash source 200 million 2003 generation cash 5933 million 2004 result cash earnings increases accounts payable current income taxes payable accrued expenses items partially offset aforementioned repayment amounts outstanding accounts receivable securitization facility increases loaner instrumentation accounts receivable increased sales 2004 company used cash 1447 million acquisitions 1878 million capital expenditures 280 million payment dividends 2004 company repaid remaining 155 million debt outstanding companys unsecured credit facility howmedica acquisition total borrowings declined 161 million adjusting effects foreign currency translation 2004 company used cash 1878 million capital expenditures including 361 million related expansion companys manufacturing facility west lebanon new hampshire 207 million related construction companys new manufacturing facilities portage michigan company 3494 million cash equivalents december 31 2004 company also outstanding borrowings totaling 100 million date current maturities longterm debt december 31 2004 93 million company believes cash hand well anticipated cash flows operations sufficient fund future operating capital requirements future manufacturing facility construction capital expenditures future acquisitions supplement current product offerings additional funds required company 8260 million additional borrowing capacity available existing credit facilities including companys 7500 million fiveyear nonamortizing revolving credit agreement expires december 2006 addition company 2000 million eligible accounts receivable could sold accounts receivable securitization facility december 31 2004 companys future contractual obligations agreements initial terms greater one year including agreements purchase materials normal course business summarized follows millions companys additional borrowing capacity along expected expiration period commitments summarized follows millions critical accounting policies preparation companys consolidated financial statements requires management make estimates assumptions affect amounts reported financial statements accompanying notes management evaluates estimates assumptions ongoing basis estimates based historical experience available various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions management believes significant accounting policies see note 1 consolidated financial statements understanding following critical accounting policies important obtaining overall understanding consolidated financial statements allowance doubtful accounts company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends actual customer financial conditions less favorable projected management additional accounts receivable writeoffs may necessary could unfavorably affect future operating results inventory reserves company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory writedowns may required could unfavorably affect future operating results income taxes company operates multiple tax jurisdictions inside outside united states accordingly management must determine appropriate allocation income jurisdictions tax audits associated allocation income complex issues may require extended period time resolve may result income tax adjustments changes income allocation required jurisdictions different tax rates tax adjustments certain jurisdictions significant company records accruals representing managements best estimate probable resolution matters extent additional information becomes available accruals adjusted reflect revised estimated probable outcome matters company distributes products throughout world result companys financial results could significantly affected factors changes foreign currency exchange rates weak economic conditions foreign markets companys operating results primarily exposed changes exchange rates among united states dollar japanese yen european currencies particular euro british pound united states dollar weakens foreign currencies dollar value sales denominated foreign currencies increases united states dollar strengthens opposite situation occurs company manufactures products united states france germany ireland switzerland canada puerto rico incurs costs manufacture applicable local currencies worldwide deployment factories serves partially mitigate impact currency exchange rate changes companys cost sales company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies december 31 2004 company outstanding forward currency exchange contracts purchase 1377 million sell 1731 million various currencies principally united states dollars euros maturities ranging principally 30 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points hypothetical 10 change exchange rates currencies would change december 31 2004 fair value approximately 61 million company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties company certain investments net assets international locations hedged investments subject translation gains losses due changes foreign currencies deferred recorded separate component stockholders equity year ended december 31 2004 strengthening foreign currencies relative us dollar increased value investments net assets related deferred gain stockholders equity 1022 million 2099 million company partially selfinsured product liability claims 2003 company established wholly owned captive insurance company united states manage selfinsured retention limits captive insurance company provides insurance reserves estimated liabilities product claims incurred reported based actuarially determined liabilities actuarial valuations based historical information along certain assumptions future events december 2003 company announced subsidiary physiotherapy associates inc stryker received subpoena united states attorneys office boston massachusetts connection department justice investigation physiotherapy associates billing coding practices physiotherapy associates provides physical occupational speech therapy services patients 428 outpatient centers united states december 31 2004 represented 6 strykers net sales years ended december 31 2004 2003 revenues derived billings us federal healthcare programs approximated 14 physiotherapy associates revenues periods company fully cooperating department justice regarding matter october 22 2004 president united states signed american jobs creation act 2004 act creates temporary incentive united states corporations repatriate accumulated income earned foreign jurisdictions providing 85 dividendsreceived deduction certain dividends controlled foreign corporations deduction subject number limitations significant uncertainty remains way interpret numerous provisions act due factors company yet position determine whether extent might repatriate foreign earnings yet remitted united states based current analysis company may repatriate 8000 million related income tax expense liability 560 million company plans finalize assessment congress treasury department provides additional clarifying language key elements repatriation provision december 2004 financial accounting standards board fasb issued revision statement 123 sharebased payment revision supersedes accounting principles board apb opinion 25 accounting stock issued employees related implementation guidance revision requires companies recognize cost stock options based grantdate fair value pursuant employee stock option plans period recipient required provide services exchange options typically vesting period pursuant requirements statement company plans adopt provisions standard third quarter 2005 using modifiedretrospective transition method provided statement method company restate prior periods presented consistent basis company believe adoption statement material impact trend net earnings net earnings per share item 7aitem 7 managements discussion analysis financial condition results operations throughout discussion references made following financial measures constant currency adjusted net earnings adjusted basic net earnings per share adjusted diluted net earnings per share financial measures replace presentation stryker corporations company stryker reported financial results generally accepted accounting principles gaap company provided supplemental nongaap financial measures provide meaningful information regarding companys results consistent comparable basis periods presented management uses nongaap financial measures reviewing operating results business segments analyzing potential future business trends connection budget process bases certain annual bonus plans nongaap financial measures order measure companys sales performance constant currency basis necessary remove impact changes foreign currency exchange rates affects comparability trend sales order measure companys earnings performance consistent comparable basis necessary exclude certain items affect comparability operating results trend earnings items include purchased inprocess research development charges recorded 2006 2005 2004 additional income taxes associated repatriation foreign earnings recorded 2005 additional details regarding nature determination financial statement impact items included results operations given nature items management believes excluding certain financial metrics representative companys past potential future operational performance addition company believes investors utilize information evaluate periodtoperiod results comparable basis better understand potential future operating results company encourages investors users financial statements review consolidated financial statements publicly filed reports entirety rely solely single financial measure executive level overview stryker one worlds leading medical technology companies broadly based range products orthopaedics significant presence medical specialties stryker works respected medical professionals help people lead active satisfying lives companys products include implants used joint replacement trauma craniomaxillofacial spinal surgeries biologics surgical neurologic ear nose throat interventional pain equipment endoscopic surgical navigation communications digital imaging systems well patient handling emergency medical equipment stryker also provides outpatient physical therapy services united states 25 company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma spinal craniomaxillofacial implant systems bone cement bone growth factor op1 medsurg equipment segment sells surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment category includes physical therapy services corporate administration interest expense interest marketable securities income domestic sales accounted 66 total revenues 2006 companys products marketed directly doctors hospitals healthcare facilities approximately 3200 sales marketing personnel united states stryker primarily maintains separate dedicated sales forces principal product lines provide focus high level expertise medical specialty served international sales accounted 34 total revenues 2006 companys products sold 100 countries companyowned sales subsidiaries branches well thirdparty dealers distributors companys business generally seasonal nature however number orthopaedic implant surgeries lower summer months first quarter 2006 company acquired outstanding stock sightline technologies ltd sightline private developmentstage company upfront payment 500 million cash plus certain transaction costs assumption certain liabilities sightline developer flexible endoscopes improve insertion sterilization colonoscopy procedures acquisition expected enhance companys presence gastrointestinal markets within medsurg equipment segment fourth quarter 2005 company acquired merger outstanding stock plasmasol corp plasmasol developed technology allow stryker provide sterilization equipment use certain medsurg equipment products cost transaction totaled 175 million including upfront cash payment plus assumption certain liabilities first quarter 2005 company acquired merger outstanding stock etraumacom corp etrauma 500 million cash plus certain transaction costs acquisition expanded companys digital imaging equipment product offerings within medsurg equipment segment adding etraumas proprietary picture archive communications systems pacs image management viewing software third quarter 2004 company acquired merger outstanding stock spinecore inc spinecore upfront payment 1200 million cash plus certain transaction costs spinecore developer artificial lumbar cervical discs acquisition expected enhance companys presence spinal implant market important growth area within orthopaedic implants segment additional details including financial statement impacts resulting acquisitions included results operations december 31 2006 company adopted provisions financial accounting standards board fasb statement 158 employers accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r statement requires entity recognize balance sheet asset liability reflecting funded status defined benefit postretirement plans difference projected benefit obligation fair value plan assets changes continuing reflected accumulated comprehensive gain loss component shareholders equity net related income taxes statement change calculation amount net periodic benefit cost included net earnings result adoption statement funded status companys defined benefit pension plans resulted recognition companys december 31 2006 consolidated balance sheet 26 additional 228 million liability corresponding changes accumulated comprehensive gain loss deferred income taxes adoption statement require restatement prior periods effective january 1 2006 company adopted provisions fasb statement 123 revised sharebased payment revised statement requires companies measure cost employee stock options based grantdate fair value recognize cost period recipient required provide services exchange options typically vesting period company adopted provisions revised statement using modifiedretrospective transition method provided revised statement method company restated prior periods presented consistent basis based pro forma expense previously disclosed additional details including financial statement impact resulting adoption included results operations fourth quarter 2005 company completed repatriation 722 million foreign earnings provisions american jobs creation act provided temporary incentive united states companies repatriate accumulated income earned foreign jurisdictions reduced income tax cost additional details including financial statement impact resulting repatriation funds included results operations outlook 2007 companys outlook 2007 continues optimistic regarding underlying growth rates orthopaedic procedures companys broadly based range products orthopaedics medical specialties despite potential increased pricing pressure certain markets company projects diluted net earnings per share 2007 approximate 242 representing 28 increase diluted net earnings per share 189 year ended december 31 2006 excluding impact charge write purchased inprocess research development associated acquisition sightline 2006 fully described results operations company projects diluted net earnings per share 2007 increase 20 adjusted diluted net earnings per share 202 year ended december 31 2006 financial forecast 2007 includes constant currency net sales increase range 11 13 result growth shipments orthopaedic implants medsurg equipment comparable 11 constant currency net sales increase reported full year 2006 foreign currency exchange rates hold near current levels company anticipates favorable impact net sales approximately 1 2 first quarter 2007 favorable impact net sales approximately 0 1 full year 2007 27 results operations table outlines components consolidated statements earnings percentage net sales yeartoyear percentage change dollar amounts table sets forth domesticinternational product line sales information 28 table sets forth additional sales growth information significant products within companys orthopaedic implants medsurg equipment product lines reported basis constant currency basis 2006 compared 2005 stryker corporations net sales increased 11 2006 54056 million 48715 million 2005 net sales grew 10 result increased unit volume changes product mix 1 result higher selling prices domestic sales 35568 million 2006 representing increase 12 result higher shipments orthopaedic implants medsurg equipment international sales 18488 million 2006 representing increase 8 result higher shipments orthopaedic implants medsurg equipment impact foreign currency comparisons dollar value international sales unfavorable 52 million 2006 constant currency basis international sales increased 9 2006 worldwide sales orthopaedic implants 31101 million 2006 representing increase 9 reported constant currency basis result higher shipments reconstructive trauma spinal craniomaxillofacial implant systems bone cement bone growth factor op1 hip implant systems sales hip implant systems increased 2 year reported constant currency basis united states sales growth driven sales recently launched x3 polyethylene increased sales accolade cementless hip products restoration modular hip system revision hip products partially offset declines sales hip systems solid growth trident hip system accolade cementless hip products restoration modular hip system revision hip products europe well solid growth accolade cementless hip products trident hip system pacific region also contributed sales growth hip implant systems knee implant systems sales knee implant systems increased 12 year reported constant currency basis due strong growth triathlon knee system united states europe pacific region solid growth scorpio knee system international markets partially offset slower growth japan result government imposed price cuts 29 trauma implant systems sales trauma implant systems increased 13 year 14 constant currency basis result strong worldwide sales growth gamma3 hip fracture system strong sales growth t2 nailing system united states europe partially offset slower growth japan result price cuts spinal implant systems sales spinal implant systems increased 18 year reported constant currency basis primarily due strong worldwide sales growth interbody devices led sales avs vertebral spacer system well solid worldwide sales growth thoracolumbar products craniomaxillofacial implant systems sales craniomaxillofacial implant systems increased 16 year reported constant currency basis result strong domestic sales growth led products neurologic indications craniomaxillofacial implants worldwide sales medsurg equipment 20371 million 2006 representing increase 16 reported constant currency basis result higher shipments surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment surgical equipment surgical navigation systems sales surgical equipment surgical navigation systems increased 12 year reported constant currency basis due strong domestic sales growth surgical navigation systems operating room equipment solid domestic sales growth interventional pain products strong sales growth powered surgical instruments outside united states also led companys sales growth endoscopiccommunications digital imaging systems sales endoscopic communications digital imaging systems increased 19 year reported constant currency basis result strong worldwide sales growth medical video imaging equipment led recently launched 1188 hd camera related accessories well imaging communications products strong worldwide sales growth general surgery products also contributed companys sales growth patient handling emergency medical equipment sales patient handling emergency medical equipment increased 18 year 17 constant currency basis due strong sales growth hospital bed products united states latin america canada strong domestic sales growth emergency medical equipment well solid stretcher sales growth europe latin america physical therapy services revenues 2584 million 2006 representing decrease 2 primarily due lower revenues existing centers cost sales represented 342 sales 2006 compared 353 2005 lower cost sales percentage 2006 primarily due lower excess obsolete inventory costs result fewer comparative product introductions year reduced royalty costs related expiration certain royalty agreements partially offset faster sales growth lower margin medsurg equipment segment research development engineering expenses represented 60 sales 2006 compared 58 2005 expenses increased 14 2006 3246 million higher spending level result companys continued focus new product development anticipated future product launches continued investments new technologies new product introductions 2006 orthopaedic implants segment included lfit anatomic femoral heads x3 polyethylene liners address range motion dislocation potential avs spacer used anterior lumbar interbody fusion within medsurg equipment segment new product introductions 2006 included 1188 hd camera related accessories next generation stryker 3chip hd cameras system 6 heavy duty power system precision oscillating tip saw features stationary blade shaft oscillating tip selling general administrative expenses increased 11 2006 represented 381 sales compared 380 2005 slight increase selling general administrative expenses percent 30 sales 2006 due higher salesrelated costs primarily compensation loaner instrumentation amortization sample expenses partially offset decreases insurance costs slower growth discretionary spending purchased inprocess research development charge 527 million recorded first quarter 2006 relates acquisition sightline date acquisition flexible endoscope technologies acquired yet reached technological feasibility upfront payment 500 million plus certain transaction costs assumption certain liabilities preliminarily allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair value date acquisition purchased inprocess research development charge 159 million recorded fourth quarter 2005 relates acquisition plasmasol date acquisition sterilization technology acquired yet approved sale us food drug administration fda therefore yet reached technological feasibility purchase price 175 million allocated assets acquired primarily deferred income tax assets associated acquired net operating losses purchased inprocess research development based fair value date acquisition company believes technologies acquired sightline plasmasol acquisitions result introduction new products additional future sales however factors including regulatory delays safety concerns patent disputes could delay introduction marketing potential new products additionally unanticipated issues may arise current future clinical trials could delay terminate products development prior regulatory approval company may experience unfavorable impact operating results unable capitalize efforts attaining proper fda approval december 31 2006 company encountered significant issues expects completion development initial commercialization flexible endoscope technologies sterilization technologies 2007 2008 respectively result adoption fasb statement 123 revised requiring expensing stock options companys operating income years ended december 31 2006 2005 reduced 562 million 487 million respectively companys net earnings periods reduced 365 million 316 million respectively basic diluted net earnings per share years ended december 31 2006 2005 reduced 09 08 respectively interest marketable securities income included income expense increased 414 million 2006 133 million 2005 primarily result increased cash equivalents marketable securities balances compared year earlier period interest expense included income expense increased 95 million 2006 77 million 2005 primarily result borrowings europe complete repatriation foreign earnings fourth quarter 2005 companys effective income tax rate year ended december 31 2006 295 compared effective income tax rate year ended december 31 2005 326 effective income tax rate year ended december 31 2006 reflects impact nondeductibility income tax purposes purchased inprocess research development charge associated acquisition sightline effective income tax rate year ended december 31 2005 reflects impact nondeductibility income tax purposes purchased inprocess research development charge associated acquisition plasmasol well income taxes associated repatriation foreign earnings considering factors companys reported effective income tax rates years ended december 31 2006 2005 lower united states statutory income tax rate primarily result manufacturing lower tax international jurisdictions net earnings 2006 increased 21 7777 million 6436 million 2005 basic net earnings per share increased 20 191 2006 159 2005 diluted net earnings per share increased 20 189 2006 157 2005 excluding impacts charges write purchased inprocess research development 2006 2005 recognize income tax expense associated repatriation foreign earnings 2005 adjusted net earnings increased 21 8304 million 2006 6869 million 2005 adjusted basic net 31 earnings per share increased 20 204 2006 170 2005 adjusted diluted net earnings per share increased 21 202 2006 167 2005 reconciliations nongaap financial measures follows millions except per share amounts weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts 2005 compared 2004 stryker corporations net sales increased 14 2005 48715 million 42623 million 2004 net sales grew 12 result increased unit volume changes product mix 1 related higher selling prices 1 due acquisitions domestic sales 31656 million 2005 representing increase 15 result higher shipments orthopaedic implants medsurg equipment higher revenue physical therapy services international sales 17059 million 2005 representing increase 13 result higher shipments orthopaedic implants medsurg equipment impact foreign currency comparisons dollar value international sales favorable 115 million 2005 constant currency basis international sales increased 12 2005 worldwide sales orthopaedic implants 28495 million 2005 representing increase 11 result higher shipments reconstructive trauma spinal craniomaxillofacial implant systems bone cement bone growth factor op1 sales orthopaedic implants also increased 11 year constant currency basis hip implant systems sales hip implant systems increased 4 year reported constant currency basis due growth sales trident hip system europe pacific region accolade cementless hip products restoration modular hip system revision hips united states partially offset lower sales trident ceramiconceramic hip system hip fracture products united states 32 knee implant systems sales knee implant systems increased 14 year reported constant currency basis due strong sales growth recently launched triathlon knee system united states europe pacific region well scorpio knee system europe japan pacific region trauma implant systems sales trauma implant systems increased 17 year reported constant currency basis result fullscale launch gamma3 hip fracture system united states japan europe second half 2004 strong growth companys t2 nailing system united states internationally also drove trauma sales growth 2005 spinal implant systems sales spinal implant systems increased 17 year reported constant currency basis primarily due strong sales growth interbody devices united states led sales recently launched avs spacer products well solid worldwide growth cervical thoracolumbar product sales craniomaxillofacial implant systems sales craniomaxillofacial implant systems increased 8 year 7 constant currency basis result solid domestic sales products neurologic indications worldwide sales medsurg equipment 17594 million 2005 representing increase 20 result higher shipments surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment sales medsurg equipment also increased 20 year constant currency basis surgical equipment surgical navigation systems sales surgical equipment surgical navigation systems increased 16 year reported constant currency basis due strong worldwide sales growth system 5 heavyduty powered system interventional pain products sterishield personal protection systems surgical navigation products well strong sales growth neptune operating waste management system united states endoscopiccommunications digital imaging systems sales endoscopic communications digital imaging systems increased 24 year reported constant currency basis result strong sales growth medical video imaging equipment led growth digital imaging equipment 1088 hd camera strong growth general surgery products united states partially offset slower sales growth arthroscopy united states resulting discontinuance allograft products year patient handling emergency medical equipment sales patient handling emergency medical equipment increased 23 year 22 constant currency basis due strong sales growth hospital maternity beds emergency medical equipment united states solid stretcher growth u market physical therapy services revenues 2626 million 2005 representing increase 7 growth coming new physical therapy centers cost sales represented 353 sales 2005 compared 355 2004 lower cost sales percentage 2005 partially due increased average selling prices companys products lower excess obsolete inventory costs associated discontinued products partially offset faster sales growth lower margin medsurg equipment segment higher growth royalty costs relative sales growth research development engineering expenses represented 58 sales 2005 compared 50 2004 expenses increased 32 2005 2847 million higher spending level result companys continued focus new product development anticipated future product launches continued investments new technologies together beginning third quarter 2004 spending associated continued development products acquired spinecore new product introductions 2005 orthopaedic implants segment included x3 polyethylene companys nextgeneration highly crosslinked polyethylene featuring higher level strength wear reduction hip knee replacements 33 posteriorly stabilized version triathlon knee system united states europe canada pacific region within medsurg equipment segment new product introductions 2005 included maestro drill expanded companys line micro powered instruments spine neurologic ear nose throat applications selling general administrative expenses increased 10 2005 represented 380 sales compared 395 2004 decrease selling general administrative expenses percent sales 2005 due lower meeting costs slower growth advertising costs insurance premiums relative companys growth net sales decreases partially offset increase sales commission expense result 14 growth net sales 2005 addition higher amortization expense associated loaner instrument sets purchased inprocess research development charge 159 million recorded fourth quarter 2005 relates acquisition plasmasol previously described purchased inprocess research development charge 1208 million recorded third quarter 2004 relates acquisition spinecore private developmentstage company date acquisition artificial lumbar cervical spinal disc implant technologies acquired preliminary stages clinical studies united states yet reached technological feasibility upfront payment 1200 million plus certain transaction costs allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair value date acquisition company believes technologies acquired plasmasol spinecore acquisitions result introduction new products additional future sales however factors including regulatory delays safety concerns patent disputes could delay introduction marketing potential new products additionally unanticipated issues may arise current future clinical trials could delay terminate products development prior regulatory approval company may experience unfavorable impact operating results unable capitalize efforts attaining proper fda approval december 31 2006 company encountered significant issues expects completion development initial commercialization sterilization technologies spinal disc implant technologies beginning 2008 result adoption fasb statement 123 revised companys operating income years ended december 31 2005 2004 reduced 487 million 389 million respectively companys net earnings periods reduced 316 million 257 million respectively basic diluted net earnings per share years ended december 31 2005 2004 reduced 08 06 respectively interest marketable securities income included income expense increased 133 million 2005 47 million 2004 primarily due increased cash equivalents marketable securities balances compared year earlier period interest expense included income expense increased 77 million 2005 68 million 2004 primarily result increased borrowings europe complete repatriation foreign earnings fourth quarter 2005 effective income tax rate 326 year ended december 31 2005 351 year ended december 31 2004 effective income tax rate 2005 reflects charge 274 million recognize income tax expense related liability associated repatriation 722 million foreign earnings provisions american jobs creation act completed fourth quarter effective income tax rate 2005 also reflects impact nondeductibility income tax purposes purchased inprocess research development charge associated acquisition plasmasol effective income tax rate year ended december 31 2004 reflects impact nondeductibility income tax purposes purchased inprocess research development charge associated acquisition spinecore considering factors companys reported effective income tax rates years ended december 31 2005 2004 lower united states statutory income tax rate primarily result manufacturing lower tax international jurisdictions 34 net earnings 2005 increased 46 6436 million 4400 million 2004 basic net earnings per share increased 45 159 2005 110 2004 diluted net earnings per share increased 45 157 2005 108 2004 excluding impacts charges write purchased inprocess research development 2005 2004 recognize income tax expense associated repatriation foreign earnings 2005 adjusted net earnings increased 22 6869 million 2005 5608 million 2004 adjusted basic net earnings per share increased 21 170 2005 140 2004 adjusted diluted net earnings per share increased 22 167 2005 137 2004 reconciliations nongaap financial measures follows millions except per share amounts weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts liquidity capital resources companys working capital december 31 2006 increased 5615 million 21828 million 16213 million december 31 2005 increase working capital resulted growth companys overall business use cash earnings fund increases accounts receivable inventories prepaid expenses accounts receivable days sales outstanding 56 days december 31 2006 compared 54 days december 31 2005 days sales inventory increased 8 days 122 days december 31 2006 114 days december 31 2005 increase days sales inventory december 31 2006 primarily due higher levels inventory support anticipated product launches first quarter sales well managements effort run manufacturing plants steady rate year company generated cash 8673 million operations 2006 compared 8334 million 2005 increase cash operations 2006 compared prior year primarily due increased earnings partially offset growth working capital accounts primarily inventories accounts receivable 35 2006 company used cash 2175 million capital expenditures including 294 million related implementation erp systems multiple manufacturing distribution facilities 241 million expansion companys op1 manufacturing facility lebanon new hampshire 175 million new corporate headquarters kalamazoo michigan 125 million construction homer stryker center education clinical research mahwah new jersey addition company used cash 971 million acquisitions 446 million payment dividends company also purchases sells marketable securities classified availableforsale investments accordance provisions fasb statement 115 accounting certain investments debt equity securities marketable securities totaled 9982 million december 31 2006 addition acquisitions discussed previously company acquired etrauma first quarter 2005 upfront payment 500 million cash plus certain transaction costs acquisition etrauma accounted using purchase method accounting results operations acquired business included companys consolidated financial statements date acquisition materially impact companys reported operating results pro forma consolidated results operations would differ significantly result etrauma acquisition purchase price etrauma allocated assets acquired liabilities assumed based estimated fair value date acquisition based purchase price allocation 220 million allocated identifiable intangible assets amortized remaining lives 5 8 years 302 million allocated goodwill immediately acquisition consummated management company began implement integration plan combine stryker etrauma conjunction integration plan company recorded additional purchase liabilities severance related costs 03 million included purchase price allocation company 4166 million cash equivalents 9982 million marketable securities december 31 2006 company also outstanding borrowings totaling 148 million date classified current obligations company believes cash hand marketable securities well anticipated cash flows operations sufficient fund future operating capital requirements future manufacturing facility construction capital expenditures future business product line acquisitions supplement current product offerings loaner instrumentation surgical implants support new product launches required debt repayments payment dividends additional funds required company 10281 million additional borrowing capacity available existing credit facilities including companys 10000 million 5year nonamortizing revolving unsecured credit facility expires november 2010 addition company 2000 million eligible accounts receivable could sold accounts receivable securitization facility december 31 2006 companys future contractual obligations agreements initial terms greater 1 year including agreements purchase materials normal course business summarized follows millions 36 companys additional borrowing capacity along expected expiration period commitments summarized follows millions critical accounting policies preparation companys consolidated financial statements requires management make estimates assumptions affect amounts reported financial statements accompanying notes management evaluates estimates assumptions ongoing basis estimates based historical experience available various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions management believes significant accounting policies see note 1 consolidated financial statements understanding following critical accounting policies important obtaining overall understanding consolidated financial statements allowance doubtful accounts company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends actual customer financial conditions less favorable projected management additional accounts receivable writeoffs may necessary could unfavorably affect future operating results inventory reserves company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory writedowns may required could unfavorably affect future operating results income taxes company operates multiple tax jurisdictions inside outside united states accordingly management must determine appropriate allocation income jurisdictions tax audits associated allocation income complex issues including inventory transfer pricing product royalty arrangements may require extended period time resolve may result income tax adjustments changes income allocation required jurisdictions different tax rates tax adjustments certain jurisdictions significant company records accruals representing managements best estimate probable resolution matters income tax accruals included 37 within income taxes liability consolidated balance sheets extent additional information becomes available accruals adjusted reflect revised estimated probable outcome matters company distributes products throughout world result companys financial results could significantly affected factors changes foreign currency exchange rates weak economic conditions foreign markets companys operating results primarily exposed changes exchange rates among united states dollar japanese yen european currencies particular euro british pound united states dollar weakens foreign currencies dollar value sales denominated foreign currencies increases united states dollar strengthens opposite situation occurs company manufactures products united states france germany ireland switzerland canada puerto rico incurs costs manufacture applicable local currencies worldwide deployment factories serves partially mitigate impact currency exchange rate changes companys cost sales company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts markedtomarket period resulting gains losses included income expense consolidated statements earnings december 31 2006 company outstanding forward currency exchange contracts purchase 3879 million sell 2270 million various currencies principally united states dollars euros maturities ranging principally 7 180 days december 31 2005 company outstanding forward currency exchange contracts purchase 2176 million sell 1961 million various currencies principally united states dollars euros maturities ranging principally 7 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points hypothetical 10 change foreign currencies relative u dollar would change december 31 2006 fair value approximately 97 million company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties company certain investments net assets international locations hedged investments subject translation gains losses due changes foreign currencies deferred recorded separate component shareholders equity year ended december 31 2006 strengthening foreign currencies relative united states dollar increased value investments net assets related deferred gain shareholders equity 1026 million 1196 million 170 million december 31 2005 company partially selfinsured product liability claims utilizes wholly owned captive insurance company united states manage selfinsured retention limits captive insurance company provides insurance reserves estimated liabilities product claims incurred reported based actuarially determined liabilities actuarial valuations based historical information along certain assumptions future events december 2003 company announced subsidiary physiotherapy associates inc stryker received subpoena united states attorneys office boston massachusetts connection united states department justice investigation physiotherapy associates billing coding practices march 2005 company announced received subpoena united states department justice requesting documents period january 2002 present relating 38 consulting contracts professional service agreements remuneration agreements stryker corporation orthopedic surgeon orthopedic surgeon training medical school graduate using considering surgical use hip knee joint replacementreconstruction products manufactured sold stryker corporation june 2006 company announced received subpoena united states department justice antitrust division requesting documents period january 2001 present regarding possible violations federal criminal law including possible violation antitrust laws relating manufacture sale orthopaedic implant devices company fully cooperating department justice regarding matters june 2006 fasb issued interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 interpretation clarifies accounting income taxes prescribing minimum recognition threshold tax position required meet recognized companys consolidated financial statements interpretation also provides guidance measurement classification tax positions interest penalties requires additional disclosure annual basis company plans adopt provisions interpretation effective january 1 2007 required company yet determined effect adoption interpretation financial position company anticipate material impact difference amounts recognized companys consolidated financial statements prior adoption interpretation amounts reported adoption accounted cumulativeeffect adjustment recorded beginning balance retained earnings january 1 2007 require restatement prior periods item 7aitem 7 managements discussion analysis financial condition results operations throughout discussion references made following financial measures constant currency adjusted net earnings continuing operations adjusted basic net earnings per share continuing operations adjusted diluted net earnings per share continuing operations financial measures alternative representation stryker corporations company stryker past potential future operational performance replace presentation companys reported financial results us generally accepted accounting principles gaap company provided supplemental nongaap financial measures provide meaningful information regarding companys results consistent comparable basis periods presented management uses nongaap financial measures reviewing operating results business segments analyzing potential future business trends connection budget process bases certain annual bonus plans nongaap financial measures order measure companys sales performance constant currency basis necessary remove impact changes foreign currency exchange rates affects comparability trend sales constant currency results calculated translating current year results prior year average foreign currency exchange rates order measure earnings performance consistent comparable basis company excludes restructuring charges recorded 2008 intangible asset impairment charge recorded 2007 purchased inprocess research development charge recorded 2006 affects comparability operating results trend earnings additional details regarding nature determination financial statement impact items included results operations addition company believes investors utilize information evaluate periodtoperiod results comparable basis better understand potential future operating results company encourages investors users financial statements review consolidated financial statements publicly filed reports entirety rely solely single financial measure executive level overview stryker one worlds leading medical technology companies broadly based range products orthopaedics significant presence medical specialties stryker works respected medical professionals help people lead active satisfying lives companys products include implants used joint replacement trauma craniomaxillofacial spinal surgeries biologics surgical neurologic ear nose throat interventional pain equipment endoscopic surgical navigation communications digital imaging systems well patient handling emergency medical equipment domestic sales accounted 64 total revenues 2008 companys products marketed directly doctors hospitals healthcare facilities approximately 3900 sales marketing personnel united states stryker primarily maintains separate dedicated sales forces principal product lines provide focus high level expertise medical specialty served international sales accounted 36 total revenues 2008 companys products sold 100 countries companyowned sales subsidiaries branches well thirdparty dealers distributors companys business generally seasonal nature however number orthopaedic implant surgeries lower summer months fourth quarter 2008 general economic slowdown united states resulted significant rapid contraction hospital capital budgets depressed demand certain medsurg equipment products unprecedented weakening economy caused companys hospital customers reduce capital purchases degree previously experienced prior recessionary periods 28 2008 company repurchased 174 million shares common stock open market cost 10000 million pursuant repurchase programs authorized companys board directors shares repurchased share repurchase programs available general corporate purposes including offsetting dilution associated stock option equitybased employee benefit plans 2008 company decided simplify structure japanese distribution business substantially reduce development efforts associated product technologies acquired sightline technologies ltd sightline 2006 company acquired outstanding stock sightline private developmentstage company upfront payment 500 million cash plus certain transaction costs assumption certain liabilities terms transaction also included milestone payments additional 900 million upon achievement certain operational financial targets related sightlines products unanticipated issues arisen continue delay regulatory approval commercialization efforts new products associated product technologies acquired sightline acquisition however company believes technologies acquired sightline acquisition may result introduction new products additional sales future periods additional details including financial statement impact resulting restructurings acquisition sightline included results operations 2008 company adopted provisions financial accounting standard board fasb statement 157 fair value measurements financial assets liabilities measured recurring basis statement applies financial assets financial liabilities measured reported fair value basis establishes framework measuring fair value assets liabilities expands disclosures fair value measurements impact consolidated financial statements result adoption statement additional disclosure requirements regarding fair value measurements included note 2 consolidated financial statements 2008 company adopted provisions fasb statement 159 fair value option financial assets financial liabilities statement allows companies option measure eligible financial instruments fair value election may applied instrument basis typically irrevocable elected company elected apply fair value option auction rate securities rights agreement fully described liquidity capital resources 2007 company sold outpatient physical therapy business physiotherapy associates 1500 million cash less certain indebtedness physiotherapy associates operating results reported discontinued operations years ended december 31 2007 2006 additional details including financial statement impact resulting divestiture included results operations 2007 company adopted provisions fasb interpretation 48 accounting uncertainty income taxes interpretation clarifies accounting income taxes prescribing minimum recognition threshold income tax position required meet recognized companys consolidated financial statements interpretation also provides guidance measurement classification income tax positions interest penalties requires additional disclosure annual basis additional details including financial statement impact resulting adoption included results operations outlook 2009 company continues face depressed demand certain medsurg equipment products due general economic slowdown addition company anticipates slowdown elective procedures certain orthopaedic implants products may occur company projects diluted net earnings per share 2009 range 312 322 increase 10 14 adjusted diluted net earnings per share continuing operations 283 2008 financial forecast 2009 anticipates constant currency net sales increase range 6 9 foreign currency exchange rates hold near january 31 2009 levels company anticipates unfavorable impact net sales approximately 40 45 first quarter 2009 unfavorable impact net sales approximately 35 45 full year 2009 29 results operations table outlines components net earnings continuing operations consolidated statements earnings percentage net sales yeartoyear percentage change dollar amounts company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma craniomaxillofacial spinal implant systems bone cement bone growth factor op1 medsurg equipment segment sells surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment table sets forth domesticinternational product line sales information millions 30 tables set forth additional geographical sales growth information significant products within companys orthopaedic implants medsurg equipment segments reported basis constant currency basis 2008 compared 2007 companys net sales increased 12 2008 67182 million 60005 million 2007 net sales grew 11 result increased unit volume changes product mix 1 due favorable changes foreign currency exchange rates companys domestic sales 42822 million 2008 representing increase 11 result higher shipments orthopaedic implants medsurg equipment international sales 24360 million 2008 representing increase 13 impact foreign currency comparisons dollar value international sales favorable 847 million 2008 constant currency basis international sales increased 9 2008 result higher shipments orthopaedic implants medsurg equipment 31 worldwide sales orthopaedic implants 39675 million 2008 representing increase 11 constant currency basis sales orthopaedic implants increased 9 2008 result higher shipments reconstructive trauma spinal craniomaxillofacial implant systems bone cement hip implant systems sales hip implant systems increased 3 2008 1 constant currency basis united states sales growth driven increased sales cormet hip resurfacing product sales growth x3 polyethylene accolade cementless hip products partially offset declines hip systems sales growth several hip systems including accolade x3 polyethylene abg ii europe securfit japan pacific region also contributed companys constant currency sales growth 2008 knee implant systems sales knee implant systems increased 14 2008 13 constant currency basis due strong sales growth triathlon knee system united states europe canada pacific region solid sales growth scorpio knee system japan latin america region trauma implant systems sales trauma implant systems increased 18 2008 14 constant currency basis result strong worldwide sales growth gamma3 hip fracture system sps calcaneal foot plating system strong sales growth companys t2 nailing system united states canada pacific region strong sales growth hydroset injectable bone substitute product united states pacific region also contributed companys constant currency sales growth 2008 spinal implant systems sales spinal implant systems increased 19 2008 18 constant currency basis increase driven strong worldwide sales growth thoracolumbar implant systems interbody devices cervical implants craniomaxillofacial implant systems sales craniomaxillofacial implant systems increased 16 2008 15 constant currency basis primarily due strong sales growth products neurological indications craniomaxillofacial implants hydroset injectable bone substitute product united states pacific region worldwide sales medsurg equipment 27507 million 2008 representing increase 14 constant currency basis sales medsurg equipment increased 13 2008 result higher shipments surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment surgical equipment surgical navigation systems sales surgical equipment surgical navigation systems increased 17 2008 15 constant currency basis due strong worldwide sales growth powered surgical operating room equipment well solid sales growth interventional pain products united states pacific region endoscopic communications digital imaging systems sales endoscopic communications digital imaging systems increased 9 2008 8 constant currency basis result strong worldwide sales growth arthroscopy general surgery well strong international sales growth medical video imaging equipment led 1188 hd camera complimentary products partially offset lower sales medical video imaging equipment united states strong sales growth communication products led switchpoint infinity 2 united states canada also contributed companys constant currency sales growth patient handling emergency medical equipment sales patient handling emergency medical equipment increased 18 2008 17 constant currency basis due strong sales growth hospital bed products united states latin america region stretchers emergency medical equipment united states europe 32 cost sales represented 317 sales 2008 compared 311 2007 increase cost sales percentage primarily due increased compliance initiative spending higher commodity freight costs research development engineering expenses represented 55 sales 2008 compared 63 2007 anticipated spending level 2008 decreased 2 3678 million company implemented normalized level spending costs compared prior periods well companys focus research development resources compliance initiatives slowed research development projects reduced outside contractor spending certain projects new product introductions 2008 orthopaedic implants segment included tritanium primary hip system triathlon ts revision knee system triathlon partial knee resurfacing system asnis screw system variax hand foot trauma systems xia iii thoracolumbar spinal system within medsurg equipment segment new product introductions 2008 included s3 medsurg hospital bed neptune 2 waste management system selling general administrative expenses increased 10 2008 represented 391 sales compared 399 2007 decrease selling general administrative expenses percent sales 2008 due tight control discretionary spending second half 2008 partially offset increases salesrelated costs associated compliance activities 2008 company recorded 349 million 217 million net income taxes restructuring charges related decisions simplify structure companys japanese distribution business substantially reduce development efforts associated sightline product technologies acquired 2006 2007 company recorded 198 million charge 127 million net income taxes write patents associated intervertebral body fusion cage products impairment followed us food drug administration fda decision downgrade certain intervertebral body fusion products class ii devices along weak market sales specific products result company performed discounted cash flow analysis remaining life patented technologies determined charge required interest marketable securities income included income expense increased 977 million 2008 855 million 2007 primarily result increased average cash equivalents marketable securities balances 2008 compared 2007 interest expense included income expense increased 305 million 2008 222 million 2007 primarily result interest expense associated unresolved income tax positions companys effective income tax rate earnings continuing operations year ended december 31 2008 274 compared effective income tax rate year ended december 31 2007 280 effective income tax rate year ended december 31 2008 reflects impact restructuring charges 217 million net 132 million income tax benefits effective income tax rate year ended december 31 2007 reflects impact intangible asset impairment charge 127 million net 71 million income tax benefit addition factors companys reported effective income tax rates years ended december 31 2008 2007 lower us statutory income tax rate primarily result manufacturing lower income tax jurisdictions net earnings continuing operations increased 16 2008 11478 million 9867 million 2007 basic net earnings per share continuing operations increased 17 2008 281 241 2007 diluted net earnings per share continuing operations increased 17 2008 278 237 2007 excluding impact restructuring charges recorded 2008 charge reflect intangible asset impairment 2007 adjusted net earnings continuing operations increased 17 2008 11695 million 9994 million 2007 adjusted basic net earnings per share continuing operations increased 18 2008 287 244 2007 adjusted diluted net earnings per share continuing operations increased 18 2008 283 240 2007 33 reconciliations nongaap financial measures follows millions except per share amounts weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts net earnings year ended december 31 2007 included gain 257 million net income taxes 006 per diluted share reflect divestiture companys outpatient physical therapy business physiotherapy associates net earnings discontinued operations 50 million 001 per diluted share net earnings increased 13 2008 11478 million 10174 million 2007 basic net earnings per share increased 13 2008 281 248 2007 diluted net earnings per share increased 14 2008 278 244 2007 compared 2006 companys net sales increased 17 2007 60005 million 51472 million 2006 net sales grew 14 result increased unit volume changes product mix 3 due favorable changes foreign currency exchange rates companys domestic sales 38503 million 2007 representing increase 17 result higher shipments orthopaedic implants medsurg equipment international sales 21502 million 2007 representing increase 16 impact foreign currency comparisons dollar value international sales favorable 1315 million 2007 constant currency basis international sales increased 9 2007 result higher shipments orthopaedic implants medsurg equipment worldwide sales orthopaedic implants 35873 million 2007 representing increase 15 constant currency basis sales orthopaedic implants increased 12 2007 result higher shipments reconstructive trauma spinal craniomaxillofacial implant systems bone cement bone growth factor op1 34 hip implant systems sales hip implant systems increased 9 2007 6 constant currency basis united states sales growth driven sales x3 polyethylene accolade cementless hip products partially offset declines hip systems solid sales growth exeter trident x3 polyethylene accolade hip products europe pacific region latin america region also contributed companys constant currency sales growth 2007 knee implant systems sales knee implant systems increased 16 2007 13 constant currency basis due strong sales growth triathlon knee system united states europe canada pacific region solid sales growth scorpio knee system europe pacific region latin america region trauma implant systems sales trauma implant systems increased 19 2007 15 constant currency basis result strong sales growth gamma3 hip fracture system united states europe canada pacific region well solid sales growth companys t2 nailing system united states europe partially offset sales decline japan result governmentimposed price cuts spinal implant systems sales spinal implant systems increased 25 2007 23 constant currency basis increase driven strong worldwide sales growth thoracolumbar implant systems interbody devices cervical implants craniomaxillofacial implant systems sales craniomaxillofacial implant systems increased 17 2007 14 constant currency basis primarily due strong sales growth products neurological indications craniomaxillofacial implants united states europe pacific region worldwide sales medsurg equipment 24132 million 2007 representing increase 19 constant currency basis sales medsurg equipment increased 17 2007 result higher shipments surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment surgical equipment surgical navigation systems sales surgical equipment surgical navigation systems increased 20 2007 17 constant currency basis due strong sales growth powered surgical operating room equipment united states europe pacific region solid sales growth interventional pain products europe also contributed companys constant currency sales growth endoscopic communications digital imaging systems sales endoscopic communications digital imaging systems increased 21 2007 19 constant currency basis result strong worldwide sales growth medical video imaging equipment led 1188 hd camera complementary products x8000 lightsource vision elect monitor strong sales growth arthroscopy communication products united states europe pacific region also contributed companys constant currency sales growth patient handling emergency medical equipment sales patient handling emergency medical equipment increased 16 2007 15 constant currency basis due strong sales growth stretchers emergency medical equipment united states europe addition constant currency sales growth aided strong sales growth hospital beds united states well strong sales growth maternity beds united states canada europe latin america region cost sales represented 311 sales 2007 compared 314 2006 cost sales percentage 2007 favorably impacted efficiencies gained within manufacturing plants product distribution channels 35 research development engineering expenses represented 63 sales 2007 2006 expenses increased 16 2007 3753 million higher spending level result companys continued focus new product development anticipated future product launches continued investments new technologies new product introductions 2007 orthopaedic implants segment included condylar stabilizing cs ultracongruent insert triathlon knee system scorpio nrg x3 advanced bearing technology omega3 compression hip screw system within medsurg equipment segment new product introductions 2007 included intouch highacuity care bed sdc ultra allinone medical imaging information management system core sumex drill designed use ent procedures 45l pneumosure insufflator selling general administrative expenses increased 17 2007 represented 399 sales compared 398 2006 slight increase selling general administrative expenses percent sales 2007 due higher salesrelated costs primarily compensation increased regulatory compliancerelated costs partially offset decreases insurance costs slower growth discretionary spending previously described 2007 company recorded 198 million charge 127 million net income taxes write patents associated intervertebral body fusion cage products purchased inprocess research development charge 527 million recorded 2006 related acquisition sightline date acquisition flexible endoscope technologies acquired yet reached technological feasibility upfront payment 500 million plus certain transaction costs assumption certain liabilities allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair value date acquisition amount written purchased inprocess research development deductible income tax purposes united states interest marketable securities income included income expense increased 855 million 2007 414 million 2006 primarily result increased cash equivalents marketable securities balances 2007 compared 2006 interest expense included income expense increased 222 million 2007 95 million 2006 primarily result interest expense associated unresolved income tax positions companys effective income tax rate earnings continuing operations year ended december 31 2007 280 compared effective income tax rate year ended december 31 2006 295 effective income tax rate year ended december 31 2007 reflects impact intangible asset impairment charge 127 million net 71 million income tax benefit effective income tax rate year ended december 31 2006 reflects impact nondeductibility income tax purposes purchased inprocess research development charge associated acquisition sightline addition factors companys reported effective income tax rates years ended december 31 2007 2006 lower us statutory income tax rate primarily result manufacturing lower income tax jurisdictions upon adoption fasb interpretation 48 company recognized increase interest expense accrual associated unresolved income tax positions accounted reducing january 1 2007 balance retained earnings 76 million net income taxes addition company reclassified 1792 million current income taxes liability noncurrent liabilities match anticipated timing future income tax payments net earnings continuing operations increased 28 2007 9867 million 7714 million 2006 basic net earnings per share continuing operations increased 27 2007 241 190 2006 diluted net earnings per share continuing operations increased 27 2007 237 187 2006 36 excluding impact charges reflect intangible asset impairment 2007 write purchased inprocess research development recorded 2006 adjusted net earnings continuing operations increased 21 2007 9994 million 8241 million 2006 adjusted basic net earnings per share continuing operations increased 20 2007 244 203 2006 adjusted diluted net earnings per share continuing operations increased 20 2007 240 200 2006 reconciliations nongaap financial measures follows millions except per share amounts weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts sale physiotherapy associates resulted gain sale discontinued operations 257 million net income taxes 006 per diluted share 2007 net earnings discontinued operations year ended december 31 2007 50 million 001 per diluted share net earnings discontinued operations 63 million 002 per diluted share year ended december 31 2006 net earnings increased 31 2007 10174 million 7777 million 2006 basic net earnings per share increased 30 2007 248 191 2006 diluted net earnings per share increased 29 2007 244 189 2006 liquidity capital resources companys working capital december 31 2008 decreased 547 million 35172 million 35719 million december 31 2007 decrease working capital resulted use cash complete 10000 million share repurchase programs partially offset increases accounts receivable inventories prepaid expenses decrease working capital also due reclassification certain marketable securities current assets noncurrent assets within consolidated balance sheet december 31 2008 fully described accounts receivable days sales outstanding 59 days december 31 2008 56 days december 31 2007 days sales inventory increased 18 days 155 days december 31 2008 137 days december 31 2007 support recent future anticipated product launches 37 company generated cash 11759 million operations 2008 compared 10283 million 2007 increase cash operations 2008 primarily due increased earnings partially offset increased inventory levels 2008 company used cash 1552 million capital expenditures including 332 million facility expansions addition company used cash 1356 million payment dividends 10000 million cash repurchase 174 million shares common stock company also purchased sold marketable securities classified availableforsale investments accordance provisions fasb statement 115 accounting certain investments debt equity securities related interpretations company 7011 million cash equivalents 14945 million current marketable securities december 31 2008 company outstanding borrowings totaling 205 million date classified current obligations company believes cash hand marketable securities well anticipated cash flows operations sufficient fund future operating capital requirements future manufacturing facility construction capital expenditures future business product line acquisitions supplement current product offerings loaner instrumentation surgical implants support new product launches required debt repayments payment dividends additional funds required company 10794 million additional borrowing capacity available existing credit facilities including companys 10000 million 5year nonamortizing revolving unsecured credit facility expires november 2010 addition company entire 1000 million accounts receivable securitization facility available december 31 2008 companys additional borrowing capacity along expected expiration period commitments summarized follows millions company reviews declines fair value investments classified availableforsale impairment accordance sfas 115 order determine whether decline fair value otherthantemporary impairment otherthantemporary impairments availableforsale marketable securities recorded earnings primary factors considered company recognize declines fair value investments otherthantemporary impairments intent ability company retain investment issuer period time sufficient allow anticipated recovery market value length time extent market value investment less cost financial condition nearterm prospects issuer based publicly available financial information beginning february 2008 liquidity issues global credit markets resulted failure auctions auctionrate securities ars investments held company amount securities submitted sale auctions exceeded amount purchase bids date company collected interest receivable outstanding ars due expects continue future due current market conditions ars investments continued experience failed auctions failed auctions result lack liquidity securities affect underlying collateral securities company anticipate lack liquidity ars even extended period time affect ability finance operations including expansion programs planned capital expenditures company continues monitor efforts financial markets find alternative means restoring liquidity investments classified noncurrent assets liquidity restored market 38 december 31 2008 company held 1668 million par value ars investments 2008 company entered ars rights agreement rights ubs financial services inc ubs one investment providers whereby company received right sell ars par value ubs time period june 30 2010 july 2 2012 rights nontransferable securities registered us securities exchange commission result accepting rights company released ubs employeesagents claims except claims consequential damages directly indirectly relating ubss marketing sale ars agreed serve class representative receive benefits class action settlement investor fund company elected measure value rights fair value option fasb statement 159 recorded gain 280 million income expense corresponding noncurrent asset simultaneously company transferred ars investments fair value 1388 million availableforsale trading marketable securities result transfer company recognized loss 280 million income expense reflecting reversal related temporary valuation allowance previously recorded within accumulated comprehensive gain loss shareholders equity company anticipates future changes fair value rights offset changes fair value related ars adjusted estimated fair value ongoing basis companys future contractual obligations agreements initial terms greater 1 year including agreements purchase materials normal course business summarized follows millions described note 11 consolidated financial statements december 31 2008 companys defined benefit pension plans underfunded status 1016 million due rules affecting taxdeductible contributions jurisdictions plans offered impact future plan asset performance changes interest rates potential changes legislation united states foreign jurisdictions company able reasonably estimate future periods beyond 2009 contributions fund defined benefit pension plans made described note 12 consolidated financial statements december 31 2008 company recorded liability unresolved income tax positions 2771 million due uncertainties regarding ultimate resolution income tax audits company able reasonably estimate amount future periods income tax payments settle unresolved income tax positions made critical accounting policies estimates preparation companys consolidated financial statements requires management make estimates assumptions affect amounts reported financial statements accompanying notes management evaluates estimates assumptions ongoing basis estimates based historical experience available various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions 39 management believes significant accounting policies see note 1 consolidated financial statements understanding following critical accounting policies important obtaining overall understanding consolidated financial statements allowance doubtful accounts company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends actual customer financial conditions less favorable projected management additional accounts receivable write offs may necessary could unfavorably affect future operating results inventory reserves company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results income taxes company operates multiple income tax jurisdictions inside outside united states accordingly management must determine appropriate allocation income jurisdictions income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty arrangements may require extended period time resolve may result income tax adjustments changes income allocation required jurisdictions different income tax rates income tax adjustments certain jurisdictions significant company records accruals representing managements best estimate probable resolution matters extent additional information becomes available accruals adjusted reflect revised estimated probable outcome matters company distributes products throughout world result companys financial results could significantly affected factors weak economic conditions changes foreign currency exchange rates companys operating results primarily exposed changes exchange rates among us dollar european currencies particular euro british pound japanese yen australian dollar canadian dollar us dollar weakens foreign currencies dollar value sales denominated foreign currencies increases us dollar strengthens opposite situation occurs company manufactures products united states france germany ireland switzerland canada puerto rico incurs costs manufacture applicable local currencies worldwide deployment factories serves partially mitigate impact currency exchange rate changes companys cost sales company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated 40 nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses included income expense consolidated statements earnings december 31 2008 company outstanding forward currency exchange contracts purchase 4125 million sell 2884 million various currencies principally us dollars euros maturities ranging 2 110 days december 31 2007 company outstanding forward currency exchange contracts purchase 4279 million sell 2577 million various currencies principally us dollars euros maturities ranging 4 101 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points hypothetical 10 change foreign currencies relative us dollar would change december 31 2008 fair value approximately 207 million company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties company certain investments net assets international locations hedged investments subject translation gains losses due changes foreign currency exchange rates year ended december 31 2008 weakening foreign currencies relative us dollar decreased value investments net assets related foreign currency translation adjustment gain shareholders equity 686 million 2037 million 2723 million december 31 2007 company partially selfinsured product liability claims utilizes wholly owned captive insurance company united states manage selfinsured retention limits captive insurance company provides insurance reserves estimated liabilities product claims incurred reported based actuarially determined liabilities actuarial valuations based historical information along certain assumptions future events 2008 company certain current former employees received subpoenas us department justice office criminal division united states attorney massachusetts requesting documents related false institutional review board approvals ii amount sales op1 one companys humanitarian device exemptions iii offlabel promotion calstrux combination op1 company process responding us department justice regarding matter 2008 company received warning letter us food drug administration fda related quality systems compliance issues op1 implant manufacturing facility hopkinton massachusetts 2007 company received two warning letters fda regarding compliance certain quality system specifications reconstructive implant manufacturing facilities one letter facility cork ireland another facility mahwah new jersey company takes matters seriously fully cooperating fda address observations 2007 company announced reached resolution us attorneys office district new jersey connection previously announced investigation relating consulting contracts professional service agreements remuneration agreements stryker corporation orthopedic surgeon orthopedic surgeon training medical school graduate using considering surgical use hip knee joint replacementreconstruction products manufactured sold stryker corporation resolution form nonprosecution agreement 18month period ending march 27 2009 term agreement companys orthopaedics subsidiary subject oversight federal monitor appointed us attorney regarding compliance certain standards procedures connection retention payment orthopaedic surgeon consultants related reconstructive products provision certain benefits surgeons subsequent entering nonprosecution agreement us department health human services office inspector general hhs issued civil subpoena company seeking determine whether company violated various laws paying consulting fees providing things value orthopedic surgeons healthcare educational institutions inducements use strykers orthopedic medical devices procedures paid whole part medicare company produced numerous documents materials hhs response subpoena working hhs attempt narrow scope requested production 2008 41 us department justice hhs sought judicial enforcement subpoena court agreed enforce january 2009 time us district court district new jersey dismissed companys complaint asked court quash subpoena sought appropriate relief grounds subpoena overbroad oppressive 2007 company disclosed us securities exchange commission made informal inquiry company regarding possible violations foreign corrupt practices act connection sale medical devices certain foreign countries subsequently 2008 company received subpoena us department justice criminal division requesting certain documents period since january 1 2000 connection us securities exchange commission inquiry company fully cooperating us department justice us securities exchange commission regarding matters 2006 company announced received subpoena us department justice antitrust division requesting documents period since january 2001 regarding possible violations federal criminal law including possible violation antitrust laws relating manufacture sale orthopaedic implant devices 2008 company advised us department justice antitrust division department closed grand jury investigation antitrust related offenses orthopaedic implants industry item 7aitem 7 management’s discussion analysis financial condition results operations throughout discussion references made following financial measures “constant currency” “adjusted net earnings” “adjusted basic net earnings per share” “adjusted diluted net earnings per share” “adjusted net earnings continuing operations” “adjusted basic net earnings per share continuing operations” “adjusted diluted net earnings per share continuing operations” financial measures alternative representation stryker corporation’s company stryker past potential future operational performance replace presentation company’s reported financial results us generally accepted accounting principles gaap company provided supplemental nongaap financial measures provide meaningful information regarding company’s results consistent comparable basis periods presented management uses nongaap financial measures reviewing operating results business segments analyzing potential future business trends connection budget process bases certain annual bonus plans nongaap financial measures order measure company’s sales performance constant currency basis necessary remove impact changes foreign currency exchange rates affects comparability trend sales constant currency results calculated translating current year results prior year average foreign currency exchange rates order measure earnings performance consistent comparable basis company excludes patent litigation gain income tax expenses associated repatriation foreign earnings recorded 2009 restructuring charges recorded 2009 2008 intangible asset impairment charge recorded 2007 affects comparability operating results trend earnings additional details regarding nature determination financial statement impact items included results operations addition company believes investors utilize information evaluate periodtoperiod results comparable basis better understand potential future operating results company encourages investors users financial statements review consolidated financial statements publicly filed reports entirety rely solely single financial measure executive level overview stryker one world’s leading medical technology companies broadly based range products orthopaedics significant presence medical specialties stryker works respected medical professionals help people lead active satisfying lives company’s products include implants used joint replacement trauma spinal surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment well medical device products used variety medical specialties domestic sales accounted 64 total revenues 2009 company’s products marketed directly doctors hospitals healthcare facilities approximately 4100 sales marketing personnel united states stryker primarily maintains separate dedicated sales forces principal product lines provide focus high level expertise medical specialty served international sales accounted 36 total revenues 2009 company’s products sold 100 countries companyowned sales subsidiaries branches well thirdparty dealers distributors company’s business generally seasonal nature however number orthopaedic implant surgeries lower summer months fourth quarter 2009 company acquired ascent healthcare solutions inc ascent market leader reprocessing remanufacturing medical devices united states 5250 million cash transaction addition company settled outstanding patent infringement lawsuit received 625 million pursuant confidential settlement company also repatriated 7870 million foreign earnings united states used part fund acquisition ascent third quarter 2009 company decided terminate certain thirdparty agreements company’s emea division simplify organization structure biotech emea japan canada divisions discontinue selling certain products within orthopaedic implants medsurg business segments additional details including financial statement impact transactions included results operations liquidity capital resources 2009 federal grand jury district massachusetts returned indictment charging stryker biotech llc certain current former employees stryker biotech wire fraud conspiracy defraud us food drug administration fda distribution misbranded device false statements fda company still hopes able reach fair resolution matter conviction charges could result significant monetary fines stryker biotech’s exclusion participating federal state healthcare programs could material affect stryker biotech’s business however ultimate resolution matters reasonably estimatable time company understands certain former stryker biotech employees pled guilty charges connection matter 2009 fda orthopaedic rehabilitation devices advisory panel voted recommend company receive marketing approval op1 putty company reviewing strategic alternatives op1 could impacted ultimate resolution indictment fourth quarter 2008 company decided simplify structure japanese distribution business substantially reduce development efforts associated product technologies acquired sightline technologies ltd sightline 2006 unanticipated issues arose delayed regulatory approval commercialization efforts new products associated product technologies acquired additional details including financial statement impact resulting decisions included results operations results operations table outlines components net earnings continuing operations consolidated statements earnings percentage net sales yeartoyear percentage change dollar amounts company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment includes orthopaedic reconstructive hip knee trauma craniomaxillofacial spinal implant systems related products medsurg equipment segment includes surgical equipment surgical navigation systems endoscopic communications systems well patient handling emergency medical equipment table sets forth domesticinternational product line sales information millions tables set forth additional geographical sales growth information significant products within company’s orthopaedic implants medsurg equipment segments reported basis constant currency basis 2009 compared company’s net sales increased 67231 million 2009 67182 million 2008 net sales grew 2 result increased unit volume changes product mix partially offset unfavorable changes foreign currency exchange rates company’s domestic sales 43174 million 2009 representing increase 1 result higher shipments orthopaedic implants partially offset lower shipments medsurg equipment international sales 24057 million 2009 representing decrease 1 impact foreign currency comparisons dollar value international sales unfavorable 1101 million 2009 constant currency basis international sales increased 3 2009 result higher shipments orthopaedic implants medsurg equipment worldwide sales orthopaedic implants 41197 million 2009 representing increase 4 constant currency basis sales orthopaedic implants increased 6 2009 result higher shipments hips knees trauma craniomaxillofacial spinal implant systems hip implant systems sales hip implant systems increased 2 2009 5 constant currency basis united states sales growth driven trident hip products x3 polyethylene hip products accolade cementless hip products restoration modular hip system revision hip products sales growth several hip systems including x3 polyethylene accolade cementless hip products europe canada latin america pacific regions trident japan also contributed company’s constant currency sales growth 2009 knee implant systems sales knee implant systems increased 4 2009 6 constant currency basis due strong sales growth triathlon knee system united states europe japan canada pacific region solid sales growth scorpio knee system latin america region trauma implant systems sales trauma implant systems increased 5 2009 6 constant currency basis result sales growth gamma 3 hip fracture system sps calcaneal foot plating system united states europe canada latin america pacific regions well sales growth company’s variax distal radius system europe canada latin america region strong sales growth hydroset injectable bone substitute product united states canada pacific region also contributed company’s constant currency sales growth 2009 spinal implant systems sales spinal implant systems increased 10 2009 11 constant currency basis increase driven strong worldwide sales growth thoracolumbar implant systems interbody devices cervical implants united states europe latin america pacific regions craniomaxillofacial implant systems sales craniomaxillofacial cmf implant systems increased 8 2009 9 constant currency basis primarily due strong sales growth products neurological indications united states japan canada latin america pacific regions sales growth hydroset injectable bone substitute products united states europe canada pacific region also contributed company’s constant currency sales growth worldwide sales medsurg equipment 26034 million 2009 representing decrease 5 general economic slowdown united states resulted significant rapid contraction hospital capital budgets depressed demand certain medsurg equipment products severe weakening economy caused company’s hospital customers reduce capital purchases generate 60 sales within medsurg equipment segment degree previously experienced prior recessionary periods constant currency basis sales medsurg equipment decreased 4 2009 higher shipments surgical equipment surgical navigation systems offset lower shipments endoscopic communication systems well patient handling emergency medical equipment surgical equipment surgical navigation systems sales surgical equipment surgical navigation systems increased 1 2009 2 constant currency basis due worldwide sales growth operating room equipment well sales growth powered surgical products united states europe japan latin america region sales growth interventional pain products united states japan pacific region endoscopic communications systems sales endoscopic communications systems decreased 2 2009 1 decrease constant currency basis due lower sales medical video imaging equipment products image portal products united states partially offset worldwide sales growth arthroscopy general surgery products well sales growth communications products japan latin america pacific regions medical video imaging equipment europe japan latin america pacific regions patient handling emergency medical equipment sales patient handling emergency medical equipment decreased 22 2009 20 decrease constant currency basis due lower worldwide sales hospital bed products stretchers united states europe canada pacific latin america regions partially offset sales growth stretchers japan emergency medical equipment united states cost sales represented 325 sales 2009 compared 317 2008 increase cost sales percentage primarily due increased spending compliance initiatives higher excess obsolete inventory costs associated orthopaedic implants businesses well higher unabsorbed costs due lower production levels research development engineering expenses represented 50 sales 2009 compared 55 2008 spending level 2009 decreased 9 3362 million due tight control discretionary spending well company’s continued focus certain research development resources compliance initiatives new product introductions 2009 orthopaedic implants segment included rejuvenate modular primary hip system variax elbow plating system xia uniplanar titanium spinal system within medsurg equipment segment new product introductions 2009 included 1288 hd camera impression nonpowered support surface flyte suit personal protection system remb micro electric system selling general administrative expenses decreased 5 2009 represented 373 sales compared 391 2008 2009 company settled outstanding patent infringement lawsuit received 625 million pursuant confidential settlement agreement gain represented reduction selling general administrative expenses remaining decrease selling general administrative expenses percent sales 2009 due tight control discretionary spending offset increased legal settlement costs net insurance recoveries recorded certain product liability claims 2009 company recorded 670 million 484 million net income taxes restructuring charges related decisions terminate certain thirdparty agent agreements company’s emea division simplify organization structure biotech emea japan canada divisions discontinue selling certain products within orthopaedic implants medsurg equipment segments 2008 company recorded 349 million 217 million net income taxes restructuring charges related decisions simplify structure company’s japanese distribution business substantially reduce development efforts associated sightline product technologies acquired 2006 interest marketable securities income included income expense decreased 539 million 2009 977 million 2008 primarily result lower average yields company’s investments company’s effective income tax rate earnings year ended december 31 2009 318 compared effective income tax rate year ended december 31 2008 274 effective income tax rate year ended december 31 2009 reflects impact restructuring charges 484 million net 186 million income tax benefits patent litigation gain 429 million net 196 million income tax expenses impact 671 million income tax expenses associated repatriation foreign earnings 7870 million effective income tax rate year ended december 31 2008 reflects impact restructuring charges 217 million net 132 million income tax benefits addition factors company’s reported effective income tax rates years ended december 31 2009 2008 lower us statutory income tax rate primarily result manufacturing lower income tax jurisdictions net earnings decreased 4 2009 11074 million 11478 million 2008 basic net earnings per share decreased 1 2009 279 281 2008 diluted net earnings per share decreased 277 2009 278 2008 excluding impact patent litigation gain income tax charge associated repatriation foreign earnings restructuring charges recorded 2009 2008 adjusted net earnings increased 1 2009 11800 million 11695 million 2008 adjusted basic net earnings per share increased 4 2009 297 287 2008 adjusted diluted net earnings per share increased 4 2009 295 283 2008 reconciliations nongaap financial measures follows millions except per share amounts weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts 2008 compared 2007 company’s net sales increased 12 2008 67182 million 60005 million 2007 net sales grew 11 result increased unit volume changes product mix 1 due favorable changes foreign currency exchange rates company’s domestic sales 42822 million 2008 representing increase 11 result higher shipments orthopaedic implants medsurg equipment international sales 24360 million 2008 representing increase 13 impact foreign currency comparisons dollar value international sales favorable 847 million 2008 constant currency basis international sales increased 9 2008 result higher shipments orthopaedic implants medsurg equipment worldwide sales orthopaedic implants 39675 million 2008 representing increase 11 constant currency basis sales orthopaedic implants increased 9 2008 result higher shipments reconstructive trauma spinal craniomaxillofacial implant systems bone cement hip implant systems sales hip implant systems increased 3 2008 1 constant currency basis united states sales growth driven increased sales cormet hip resurfacing product sales growth x3 polyethylene accolade cementless hip products partially offset declines hip systems sales growth several hip systems including accolade x3 polyethylene abg ii europe securfit japan pacific region also contributed company’s constant currency sales growth 2008 knee implant systems sales knee implant systems increased 14 2008 13 constant currency basis due strong sales growth triathlon knee system united states europe canada pacific region solid sales growth scorpio knee system japan latin america region trauma implant systems sales trauma implant systems increased 18 2008 14 constant currency basis result strong worldwide sales growth gamma3 hip fracture system sps calcaneal foot plating system strong sales growth company’s t2 nailing system united states canada pacific region strong sales growth hydroset injectable bone substitute product united states pacific region also contributed company’s constant currency sales growth 2008 spinal implant systems sales spinal implant systems increased 19 2008 18 constant currency basis increase driven strong worldwide sales growth thoracolumbar implant systems interbody devices cervical implants craniomaxillofacial implant systems sales craniomaxillofacial implant systems increased 16 2008 15 constant currency basis primarily due strong sales growth products neurological indications craniomaxillofacial implants hydroset injectable bone substitute product united states pacific region worldwide sales medsurg equipment 27507 million 2008 representing increase 14 constant currency basis sales medsurg equipment increased 13 2008 result higher shipments surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment surgical equipment surgical navigation systems sales surgical equipment surgical navigation systems increased 17 2008 15 constant currency basis due strong worldwide sales growth powered surgical operating room equipment well solid sales growth interventional pain products united states pacific region endoscopic communications sales endoscopic communications systems increased 9 2008 8 constant currency basis result strong worldwide sales growth arthroscopy general surgery well strong international sales growth medical video imaging equipment led 1188 hd camera complimentary products partially offset lower sales medical video imaging equipment united states strong sales growth communication products led switchpoint infinity 2 united states canada also contributed company’s constant currency sales growth patient handling emergency medical equipment sales patient handling emergency medical equipment increased 18 2008 17 constant currency basis due strong sales growth hospital bed products united states latin america region stretchers emergency medical equipment united states europe cost sales represented 317 sales 2008 compared 311 2007 increase cost sales percentage primarily due increased compliance initiative spending higher commodity freight costs research development engineering expenses represented 55 sales 2008 compared 63 2007 anticipated spending level 2008 decreased 2 3678 million company implemented normalized level spending costs compared prior periods well company’s focus certain research development resources compliance initiatives slowed research development projects reduced outside contractor spending certain projects new product introductions 2008 orthopaedic implants segment included tritanium primary hip system triathlon ts revision knee system triathlon partial knee resurfacing system asnis screw system variax hand foot trauma systems xia iii thoracolumbar spinal system within medsurg equipment segment new product introductions 2008 included s3 medsurg hospital bed neptune 2 waste management system selling general administrative expenses increased 10 2008 represented 391 sales compared 399 2007 decrease selling general administrative expenses percent sales 2008 due tight control discretionary spending second half 2008 partially offset increases salesrelated costs associated compliance activities 2008 company recorded 349 million 217 million net income taxes restructuring charges related decisions simplify structure company’s japanese distribution business substantially reduce development efforts associated sightline product technologies acquired 2006 2007 company recorded 198 million charge 127 million net income taxes write patents associated intervertebral body fusion cage products impairment followed us food drug administration fda decision downgrade certain intervertebral body fusion products class ii devices along weak market sales specific products result company performed discounted cash flow analysis remaining life patented technologies determined charge required interest marketable securities income included income expense increased 977 million 2008 855 million 2007 primarily result increased average cash equivalents marketable securities balances 2008 compared 2007 interest expense included income expense increased 305 million 2008 222 million 2007 primarily result interest expense associated unresolved income tax positions company’s effective income tax rate earnings continuing operations year ended december 31 2008 274 compared effective income tax rate year ended december 31 2007 280 effective income tax rate year ended december 31 2008 reflects impact restructuring charges 217 million net 132 million income tax benefits effective income tax rate year ended december 31 2007 reflects impact intangible asset impairment charge 127 million net 71 million income tax benefit addition factors company’s reported effective income tax rates years ended december 31 2008 2007 lower us statutory income tax rate primarily result manufacturing lower income tax jurisdictions net earnings continuing operations increased 16 2008 11478 million 9867 million 2007 basic net earnings per share continuing operations increased 17 2008 281 241 2007 diluted net earnings per share continuing operations increased 17 2008 278 237 2007 excluding impact restructuring charges recorded 2008 charge reflect intangible asset impairment 2007 adjusted net earnings continuing operations increased 17 2008 11695 million 9994 million 2007 adjusted basic net earnings per share continuing operations increased 18 2008 287 244 2007 adjusted diluted net earnings per share continuing operations increased 18 2008 283 240 2007 reconciliations nongaap financial measures follows millions except per share amounts weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts net earnings year ended december 31 2007 included gain 257 million net income taxes 006 per diluted share reflect divestiture company’s outpatient physical therapy business physiotherapy associates net earnings discontinued operations 50 million 001 per diluted share net earnings increased 13 2008 11478 million 10174 million 2007 basic net earnings per share increased 13 2008 281 248 2007 diluted net earnings per share increased 14 2008 278 244 2007 liquidity capital resources company’s working capital december 31 2009 increased 8930 million 44102 million 35172 million december 31 2008 increase working capital resulted cash earnings increases accounts receivable prepaid expenses partially offset use cash fund dividend payments acquisitions increase working capital also due reclassification auction rate securities ars noncurrent assets current assets within consolidated balance sheet december 31 2009 fully described accounts receivable days sales outstanding 56 days december 31 2009 59 days december 31 2008 days sales inventory decreased 10 days 145 days december 31 2009 155 days december 31 2008 days sales inventory december 31 2009 lower december 31 2008 level primarily due lower levels inventory resulting slowdown sales well higher excess obsolete inventory costs associated orthopaedic implants businesses company generated cash 14607 million operations 2009 compared 11759 million 2008 increase cash operations 2009 primarily due reduction inventories slower growth accounts receivable increases income taxes payable 2009 company used cash 1313 million capital expenditures addition company used cash 1984 million payment dividends 5702 million cash fund acquisitions company also purchased sold marketable securities classified availableforsale investments accordance provisions investmentsdebt equity securities topic financial accounting standard board fasb accounting standards codification company 6587 million cash equivalents 22961 million current marketable securities december 31 2009 company outstanding borrowings totaling 180 million date classified current obligations company believes cash hand marketable securities proceeds january 2010 note offering fully described well anticipated cash flows operations sufficient fund future operating capital requirements future manufacturing facility construction capital expenditures future business product line acquisitions supplement current product offerings loaner instrumentation surgical implants support new product launches required debt repayments payment dividends january 15 2010 company sold 5000 million senior unsecured notes due january 15 2015 “2015 notes” 5000 million senior unsecured notes due january 15 2020 “2020 notes” 2015 notes bear interest 300 per year unless previously redeemed mature january 15 2015 2020 notes bear interest 4375 per year unless previously redeemed mature january 15 2020 company intends use net proceeds offering working capital general corporate purposes including acquisitions stock repurchases business opportunities additional funds required company 10492 million additional borrowing capacity available existing credit facilities december 31 2009 including company’s 10000 million 5year nonamortizing revolving unsecured credit facility expires november 2010 company’s additional borrowing capacity along expected expiration period commitments summarized follows millions company reviews declines fair value investments classified availableforsale impairment accordance provisions investmentsdebt equity securities topic fasb codification order determine whether decline fair value otherthantemporary impairment otherthantemporary impairments availableforsale marketable securities recorded earnings beginning february 2008 liquidity issues global credit markets resulted failure auctions ars investments held company amount securities submitted sale auctions exceeded amount purchase bids date company collected interest receivable outstanding ars due expects continue future due current market conditions ars investments continued experience failed auctions failed auctions result lack liquidity securities affect underlying collateral securities company anticipate lack liquidity ars even extended period time affect ability finance operations including expansion programs planned capital expenditures company continues monitor efforts financial markets find alternative means restoring liquidity investments december 31 2009 company held 1563 million par value ars investments 2008 company entered ars rights agreement rights ubs financial services inc ubs one investment providers whereby company received right sell ars par value ubs time period june 30 2010 july 2 2012 rights nontransferable securities registered us securities exchange commission us sec result accepting ars rights company released ubs employeesagents claims except claims consequential damages directly indirectly relating ubs’s marketing sale ars agreed serve class representative receive benefits class action settlement investor fund company elected apply fair value option ars rights pursuant provisions financial instruments topic fasb codification result election twelvemonth period ended december 31 2009 company recorded loss 110 million income expense recognize change fair value estimate ars rights loss offset corresponding gain fair value estimate related trading marketable securities company intends exercise ars rights described becomes due therefore reclassified ars current marketable securities within consolidated balance sheet december 31 2009 company’s future contractual obligations agreements initial terms greater 1 year including agreements purchase materials normal course business summarized follows millions described note 12 consolidated financial statements december 31 2009 company’s defined benefit pension plans underfunded status 851 million due rules affecting taxdeductible contributions jurisdictions plans offered impact future plan asset performance changes interest rates potential changes legislation united states foreign jurisdictions company able reasonably estimate future periods beyond 2010 contributions fund defined benefit pension plans made described note 13 consolidated financial statements december 31 2009 company recorded liability unresolved income tax positions 2927 million due uncertainties regarding ultimate resolution income tax audits company able reasonably estimate amount future periods income tax payments settle unresolved income tax positions made critical accounting policies estimates preparation company’s consolidated financial statements requires management make estimates assumptions affect amounts reported financial statements accompanying notes management evaluates estimates assumptions ongoing basis estimates based historical experience available various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions management believes significant accounting policies see note 1 consolidated financial statements understanding following critical accounting policies important obtaining overall understanding consolidated financial statements allowance doubtful accounts company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends actual customer financial conditions less favorable projected management additional accounts receivable write offs may necessary could unfavorably affect future operating results inventory reserves company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause company’s products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results income taxes company operates multiple income tax jurisdictions inside outside united states accordingly management must determine appropriate allocation income jurisdictions income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty arrangements may require extended period time resolve may result income tax adjustments changes income allocation required jurisdictions different income tax rates income tax adjustments certain jurisdictions significant company records accruals representing management’s best estimate probable resolution matters extent additional information becomes available accruals adjusted reflect revised estimated probable outcome recently adopted accounting standards 2009 company adopted provisions business combinations topic fasb codification topic significantly changes principles requirements acquisition recognized measured financial statements including identifiable assets acquired liabilities assumed topic also provides guidance recognizing measuring goodwill acquired business combination requires disclosures enable users financial statements evaluate nature financial effects business combination additional disclosure requirements regarding business combinations topic fasb codification included note 5 consolidated financial statements 2008 company adopted provisions fair value measurements disclosures topic fasb codification financial assets liabilities measured recurring basis topic applies financial assets financial liabilities measured reported fair value basis establishes framework measuring fair value assets liabilities expands disclosures fair value measurements impact consolidated financial statements result adoption topic additional disclosure requirements regarding fair value measurements included note 2 consolidated financial statements 2009 company adopted nonfinancial assets liabilities guidance fair value measurement disclosures topic previously deferred 2008 company adopted provisions financial instruments topic fasb codification topic allows companies option measure eligible financial instruments fair value election may applied instrument basis typically irrevocable elected company elected apply fair value option ars rights agreement fully described liquidity capital resources matters company distributes products throughout world result company’s financial results could significantly affected factors weak economic conditions changes foreign currency exchange rates company’s operating results primarily exposed changes exchange rates among us dollar european currencies particular euro british pound japanese yen australian dollar canadian dollar us dollar weakens foreign currencies dollar value sales denominated foreign currencies increases us dollar strengthens opposite situation occurs company develops manufactures products united states canada china france germany ireland puerto rico switzerland incurs costs applicable local currencies worldwide deployment facilities serves partially mitigate impact currency exchange rate changes company’s cost sales company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products well 2009 intercompany loans associated repatriation foreign earnings periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses included income expense consolidated statements earnings december 31 2009 company outstanding forward currency exchange contracts purchase 20411 million sell 2805 million various currencies principally us dollars euros maturities ranging 4 106 days december 31 2008 company outstanding forward currency exchange contracts purchase 4125 million sell 2884 million various currencies principally us dollars euros maturities ranging 2 110 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points hypothetical 10 change foreign currencies relative us dollar would change december 31 2009 fair value approximately 791 million company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties company certain investments net assets international locations hedged investments subject translation gains losses due changes foreign currency exchange rates year ended december 31 2009 strengthening foreign currencies relative us dollar increased value investments net assets related foreign currency translation adjustment gain shareholders’ equity 738 million 2775 million 2037 million december 31 2008 2009 company received subpoena attorney general new jersey requesting various documents related financial interests arrangements physicians participating certain clinical trials behalf company evaluating scope subpoena response attorney general new jersey reportedly issued similar subpoenas major medical device manufacturing companies 2009 federal grand jury district massachusetts returned indictment charging stryker biotech llc certain current former employees stryker biotech wire fraud conspiracy defraud us food drug administration fda distribution misbranded device false statements fda company still hopes able reach fair resolution matter conviction charges could result significant monetary fines stryker biotech’s exclusion participating federal state health care programs could material affect stryker biotech’s business however ultimate resolution matters reasonably estimatable time company understands certain former stryker biotech employees pled guilty charges connection matter 2009 company received warning letter us fda related compliance issues one craniomaxillofacial cmf implant products previously sold cmf distribution facility portage michigan 2008 company received warning letter fda related quality systems compliance issues op1 implant manufacturing facility hopkinton massachusetts 2007 company received two warning letters fda regarding compliance certain quality system specifications reconstructive implant manufacturing facilities one letter facility cork ireland another facility mahwah new jersey october 2009 fda informed company warning letter related op1 implant manufacturing facility resolved following productive reinspection earlier 2009 company takes matters seriously continues fully cooperate fda address observations facilities 2007 company announced reached resolution us attorney’s office district new jersey connection previously announced investigation relating “any consulting contracts professional service agreements remuneration agreements stryker corporation orthopedic surgeon orthopedic surgeon training medical school graduate using considering surgical use hip knee joint replacementreconstruction products manufactured sold stryker corporation” resolution form nonprosecution agreement 18month period ended march 27 2009 term agreement company’s orthopaedics subsidiary subject oversight federal monitor appointed us attorney regarding compliance certain standards procedures connection retention payment orthopaedic surgeon consultants related reconstructive products provision certain benefits surgeons subsequent entering nonprosecution agreement us department health human services office inspector general hhs issued civil subpoena company seeking determine whether company violated various laws paying consulting fees providing things value orthopedic surgeons healthcare educational institutions inducements use stryker’s orthopedic medical devices procedures paid whole part medicare company produced numerous documents materials hhs response subpoena working hhs attempt narrow scope requested production 2008 us department justice hhs sought judicial enforcement subpoena court agreed enforce january 2009 time us district court district new jersey dismissed company’s complaint asked court quash subpoena sought appropriate relief grounds subpoena overbroad oppressive 2007 company disclosed us sec made informal inquiry company regarding possible violations foreign corrupt practices act connection sale medical devices certain foreign countries subsequently 2008 company received subpoena us department justice criminal division requesting certain documents period since january 1 2000 connection us sec inquiry company fully cooperating us department justice us sec regarding matters company partially selfinsured product liability claims utilizes wholly owned captive insurance company united states manage selfinsured retention limits captive insurance company provides insurance reserves estimated liabilities product claims incurred reported based actuarially determined liabilities actuarial valuations based historical information along certain assumptions future events item 7aitem 7 management’s discussion analysis financial condition results operations throughout discussion references made following financial measures “constant currency” “adjusted net earnings” “adjusted basic net earnings per share” “adjusted diluted net earnings per share” financial measures alternative representation stryker corporation’s company stryker past potential future operational performance replace presentation company’s reported financial results us generally accepted accounting principles gaap company provided supplemental nongaap financial measures provide meaningful information regarding company’s results consistent comparable basis periods presented management uses nongaap financial measures reviewing operating results business segments analyzing potential future business trends connection budget process bases certain annual bonus plans nongaap financial measures order measure company’s sales performance constant currency basis necessary remove impact changes foreign currency exchange rates affects comparability trend sales constant currency results calculated translating current year results prior year average foreign currency exchange rates order measure earnings performance consistent comparable basis company excludes impairment property plant equipment gain sale certain assets recorded 2010 patent litigation gain recorded 2009 income tax effect associated repatriation foreign earnings recorded 2010 2009 restructuring charges recorded 2009 2008 affects comparability operating results trend earnings additional details regarding nature determination financial statement impact items included results operations addition company believes investors utilize information evaluate periodtoperiod results comparable basis better understand potential future operating results company encourages investors users financial statements review consolidated financial statements publicly filed reports entirety rely solely single financial measure executive level overview stryker one world’s leading medical technology companies dedicated helping healthcare professionals perform jobs efficiently enhancing patient care company provides innovative orthopaedic implants well stateoftheart medical surgical equipment help people lead active satisfying lives company’s products include implants used joint replacement trauma spinal surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment well medical device products used variety medical specialties domestic sales accounted 65 total revenues 2010 company’s products marketed directly doctors hospitals healthcare facilities approximately 4600 sales marketing personnel united states stryker primarily maintains separate dedicated sales forces principal product lines provide focus high level expertise medical specialty served international sales accounted 35 total revenues 2010 company’s products sold approximately 100 countries companyowned sales subsidiaries branches well thirdparty dealers distributors company’s business generally seasonal nature however number orthopaedic implant surgeries lower summer months 2010 company completed several acquisitions cash transactions including sonopet ultrasonic aspirator control consoles handpieces accessories mutoh co ltd synergetics usa inc gaymar industries inc bioimplantable implants product line related assets porex surgical inc december 2010 company announced definitive agreement sell op1 product family use orthopaedic bone applications manufacturing facility based lebanon nh transaction completed february 1 2011 additional details including financial statement impact transaction included results operations october 2010 company announced definitive agreement acquire assets neurovascular division boston scientific corporation neurovascular cash transaction 15 billion transaction completed january 3 2011 acquisition neurovascular expected substantially enhance company’s presence neurovascular market allowing offer comprehensive portfolio products neurosurgical neurovascular devices third quarter 2010 company sold orthopaedics implants manufacturing facility based caen france addition third quarter 2010 company recorded favorable income tax adjustment 74 million reduce income tax liability originally recorded fourth quarter 2009 associated repatriation foreign earnings united states additional details including financial statement impact transactions included results operations august 2010 company refinanced credit facility new 10000 million senior unsecured revolving credit facility due august 2013 2010 facility 2010 facility replaced previously outstanding 10000 million unsecured credit facility due november 2010 2005 facility additional details included liquidity capital resources january 2010 company sold 5000 million senior unsecured notes due january 15 2015 notes 5000 million senior unsecured notes due january 15 2020 notes net proceeds offering continue available working capital general corporate purposes including acquisitions stock repurchases business opportunities additional details included liquidity capital resources results operations table outlines components net earnings continuing operations consolidated statements earnings percentage net sales yeartoyear percentage change dollar amounts company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment includes orthopaedic reconstructive hip knee trauma spinal implant systems related products medsurg equipment segment includes surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment well medical device products used variety medical specialties table sets forth domesticinternational business segment net sales information millions tables set forth additional geographical sales growth information significant products within company’s orthopaedic implants medsurg equipment segments reported basis constant currency basis 2010 compared 2009 company’s net sales increased 9 73200 million 2010 67231 million 2009 net sales grew 7 result increased unit volume changes product mix 1 due favorable impact foreign currency exchange rates net sales 3 due acquisitions partially offset unfavorable impact 2 due changes price company’s domestic sales 47928 million 2010 representing increase 11 result higher shipments orthopaedic implants medsurg equipment international sales 25272 million 2010 representing increase 5 impact foreign currency exchange rate movements dollar value international sales favorable 697 million 2010 constant currency basis international sales increased 2 2010 result higher shipments orthopaedic implants medsurg equipment worldwide sales orthopaedic implants 43084 million 2010 representing increase 5 constant currency basis sales orthopaedic implants increased 3 2010 result higher shipments hips knees trauma spinal implant systems hip implant systems sales hip implant systems increased 5 2010 3 constant currency basis united states sales growth hip products driven sales x3 polyethylene rejuvenate hip products accolade cementless hip products restoration modular hip system revision hip products sales growth x3 polyethylene hip products europe canada pacific latin america regions well sales growth trident hip products japan pacific latin america regions also contributed company’s constant currency sales growth 2010 sales growth accolade cementless hip products europe japan latin america region also contributed company’s constant currency sales growth 2010 knee implant systems sales knee implant systems increased 4 2010 3 constant currency basis due worldwide sales growth triathlon knee system well sales growth scorpio knee products latin america region trauma implant systems sales trauma implant systems increased 8 2010 7 constant currency basis result sales growth gamma3 hip fracture system united states europe canada pacific region well sales growth company’s t2 nailing system united states europe pacific region sales growth variax distal radius products united states europe canada japan latin america region also contributed company’s constant currency sales growth spinal implant systems sales spinal implant systems increased 2 2010 1 constant currency basis increase driven sales growth thoracolumbar implant systems united states europe japan canada latin america region interbody device products japan canada well cervical implants united states canada worldwide sales medsurg equipment 30116 million 2010 representing increase 16 constant currency basis sales medsurg equipment increased 15 2010 result higher shipments surgical equipment surgical navigation systems endoscopic communications systems well patient handling emergency medical equipment sales medsurg equipment also positively impacted 7 acquisitions 1 onetime shipment patient handling equipment surgical equipment surgical navigation systems sales surgical equipment surgical navigation systems increased 8 2010 8 constant currency basis due worldwide sales growth operating room equipment well sales growth powered surgical products united states europe canada pacific latin america regions sales growth interventional pain products united states japan canada latin america region endoscopic communications systems sales endoscopic communications systems increased 7 2010 6 constant currency basis due worldwide sales growth general surgery products sales growth communications products europe japan latin america region sales growth medical video equipment united states japan canada pacific latin america regions also contributed company’s constant currency sales growth patient handling emergency medical equipment sales patient handling emergency medical equipment increased 20 2010 18 constant currency basis due higher sales hospital bed products stretchers united states latin america region strong sales growth ems products united states pacific region also contributed company’s constant currency sales growth sales patient handling emergency medical equipment 2010 also positively impacted 3 acquisitions 3 onetime shipment patient handling equipment cost sales represented 312 sales 2010 compared 325 2009 decrease cost sales percentage primarily due lower excess obsolete inventory charges higher absorption due higher production levels well favorable impact effect foreign currency exchange rates costs company’s euro based manufacturing sites research development engineering expenses represented 54 sales 2010 compared 50 2009 spending level 2010 increased 17 3939 million higher spending level result company’s increased focus new product development anticipated future product launches continued investments new technologies new product introductions 2010 orthopaedic implants segment included adm x3 mobile bearing acetabular system within medsurg equipment segment new product introductions 2010 included prime series stretchers wise 13 transmitter selling general administrative expenses increased 8 2010 represented 370 sales compared 373 2009 2010 company sold orthopaedic implant manufacturing facility caen france recorded gain 243 million included selling general administrative expenses 2009 company settled outstanding patent infringement lawsuit received 625 million pursuant confidential settlement agreement gain also represented reduction selling general administrative expenses remaining decrease selling general administrative expenses percentage sales 2010 primarily due management discretionary spending levels 2010 company announced definitive agreement sell op1 product family use orthopaedic bone applications manufacturing facility based lebanon nh result announcement company recorded 766 million net 469 million income tax expense noncash impairment charge reflect reduction carrying amount associated assets fair value interest marketable securities income included income expense decreased 487 million 2010 539 million 2009 primarily result lower average yields company’s investments interest expense also included income expense increased 775 million 2010 232 million 2009 primarily result interest cost debt issued january 2010 company’s effective income tax rate earnings year ended december 31 2010 264 compared effective income tax rate year ended december 31 2009 318 effective income tax rate year ended december 31 2010 reflects property plant equipment impairment charge 766 million net 469 million income tax benefit gain sale caen facility 134 million net 109 million income tax expense impact favorable income tax expense adjustment 74 million associated repatriation foreign earnings united states completed fourth quarter 2009 effective income tax rate year ended december 31 2009 reflects impact restructuring charges 484 million net 186 million income tax benefits patent litigation gain 429 million net 196 million income tax expenses impact 671 million income tax expenses associated repatriation foreign earnings 7870 million company’s effective income tax rate earnings fourth quarter 2010 222 compared fourth quarter 2009 415 effective income tax rate fourth quarter 2010 reflects property plant equipment impairment charge 766 million net 469 million income tax benefit effective income tax rate fourth quarter 2009 reflects patent litigation gain 429 million net 196 million income tax expenses impact 671 million income tax expenses associated repatriation foreign earnings 7870 million addition factors company’s reported effective income tax rates years ended december 31 2010 2009 lower us statutory income tax rate primarily result manufacturing lower income tax jurisdictions net earnings increased 15 2010 12734 million 11074 million 2009 basic net earnings per share increased 15 2010 321 279 2009 diluted net earnings per share increased 15 319 2010 277 2009 excluding impact property plant equipment impairment charge gain sale certain assets recorded 2010 patent litigation gain recorded 2009 income tax adjustment associated repatriation foreign earnings recorded 2010 2009 restructuring charges recorded 2009 adjusted net earnings increased 13 2010 13292 million 11800 million 2009 adjusted basic net earnings per share increased 13 2010 335 297 2009 adjusted diluted net earnings per share increased 13 2010 333 295 2009 reconciliations nongaap financial measures follows millions except per share amounts weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts 2009 compared 2008 company’s net sales increased 67231 million 2009 67182 million 2008 net sales grew 2 result increased unit volume changes product mix partially offset unfavorable changes foreign currency exchange rates company’s domestic sales 43174 million 2009 representing increase 1 result higher shipments orthopaedic implants partially offset lower shipments medsurg equipment international sales 24057 million 2009 representing decrease 1 impact foreign currency comparisons dollar value international sales unfavorable 1101 million 2009 constant currency basis international sales increased 3 2009 result higher shipments orthopaedic implants medsurg equipment worldwide sales orthopaedic implants 41197 million 2009 representing increase 4 constant currency basis sales orthopaedic implants increased 6 2009 result higher shipments hips knees trauma craniomaxillofacial spinal implant systems hip implant systems sales hip implant systems increased 2 2009 5 constant currency basis united states sales growth driven trident hip products x3 polyethylene hip products accolade cementless hip products restoration modular hip system revision hip products sales growth several hip systems including x3 polyethylene accolade cementless hip products europe canada latin america pacific regions trident hip products japan also contributed company’s constant currency sales growth 2009 knee implant systems sales knee implant systems increased 4 2009 6 constant currency basis due strong sales growth triathlon knee system united states europe japan canada pacific region solid sales growth scorpio knee system latin america region trauma implant systems sales trauma implant systems increased 5 2009 6 constant currency basis result sales growth gamma 3 hip fracture system sps calcaneal foot plating system united states europe canada latin america pacific regions well sales growth company’s variax distal radius system europe canada latin america region strong sales growth hydroset injectable bone substitute product united states canada pacific region also contributed company’s constant currency sales growth 2009 spinal implant systems sales spinal implant systems increased 10 2009 11 constant currency basis increase driven strong worldwide sales growth thoracolumbar implant systems interbody devices cervical implants united states europe latin america pacific regions worldwide sales medsurg equipment 26034 million 2009 representing decrease 5 general economic slowdown united states resulted significant rapid contraction hospital capital budgets depressed demand certain medsurg equipment products severe weakening economy caused company’s hospital customers reduce capital purchases generates majority sales within medsurg equipment segment degree previously experienced prior recessionary periods constant currency basis sales medsurg equipment decreased 4 2009 higher shipments surgical equipment surgical navigation systems offset lower shipments endoscopic communication systems well patient handling emergency medical equipment surgical equipment surgical navigation systems sales surgical equipment surgical navigation systems increased 1 2009 2 constant currency basis due worldwide sales growth operating room equipment well sales growth powered surgical products united states europe japan latin america region sales growth interventional pain products united states japan pacific region endoscopic communications systems sales endoscopic communications systems decreased 2 2009 1 decrease constant currency basis due lower sales medical video imaging equipment products image portal products united states partially offset worldwide sales growth arthroscopy general surgery products sales growth communications products japan latin america pacific regions medical video imaging equipment europe japan latin america pacific regions patient handling emergency medical equipment sales patient handling emergency medical equipment decreased 22 2009 20 decrease constant currency basis due lower worldwide sales hospital bed products stretchers united states europe canada pacific latin america regions partially offset sales growth stretchers japan emergency medical equipment united states cost sales represented 325 sales 2009 compared 317 2008 increase cost sales percentage primarily due increased spending compliance initiatives higher excess obsolete inventory costs associated orthopaedic implants businesses well higher unabsorbed costs due lower production levels research development engineering expenses represented 50 sales 2009 compared 55 2008 spending level 2009 decreased 9 3362 million due tight control discretionary spending well company’s continued focus certain research development resources compliance initiatives new product introductions 2009 orthopaedic implants segment included rejuvenate modular primary hip system variax elbow plating system xia uniplanar titanium spinal system within medsurg equipment segment new product introductions 2009 included 1288 hd camera impression nonpowered support surface flyte suit personal protection system remb micro electric system selling general administrative expenses decreased 5 2009 represented 373 sales compared 391 2008 2009 company settled outstanding patent infringement lawsuit received 625 million pursuant confidential settlement agreement gain represented reduction selling general administrative expenses remaining decrease selling general administrative expenses percent sales 2009 due tight control discretionary spending offset increased legal settlement costs net insurance recoveries recorded certain product liability claims 2009 company recorded 670 million 484 million net income taxes restructuring charges related decisions terminate certain thirdparty agent agreements company’s emea division simplify organization structure biotech emea japan canada divisions discontinue selling certain products within orthopaedic implants medsurg equipment segments 2008 company recorded 349 million 217 million net income taxes restructuring charges related decisions simplify structure company’s japanese distribution business substantially reduce development efforts associated sightline product technologies acquired 2006 interest marketable securities income included income expense decreased 539 million 2009 977 million 2008 primarily result lower average yields company’s investments company’s effective income tax rate earnings year ended december 31 2009 318 compared effective income tax rate year ended december 31 2008 274 effective income tax rate year ended december 31 2009 reflects impact restructuring charges 484 million net 186 million income tax benefits patent litigation gain 429 million net 196 million income tax expenses impact 671 million income tax expenses associated repatriation foreign earnings 7870 million effective income tax rate year ended december 31 2008 reflects impact restructuring charges 217 million net 132 million income tax benefits addition factors company’s reported effective income tax rates years ended december 31 2009 2008 lower us statutory income tax rate primarily result manufacturing lower income tax jurisdictions net earnings decreased 4 2009 11074 million 11478 million 2008 basic net earnings per share decreased 1 2009 279 281 2008 diluted net earnings per share decreased 277 2009 278 2008 excluding impact patent litigation gain income tax charge associated repatriation foreign earnings recorded 2009 restructuring charges recorded 2009 2008 adjusted net earnings increased 1 2009 11800 million 11695 million 2008 adjusted basic net earnings per share increased 4 2009 297 287 2008 adjusted diluted net earnings per share increased 4 2009 295 283 2008 reconciliations nongaap financial measures follows millions except per share amounts weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts liquidity capital resources company’s working capital december 31 2010 increased 16162 million 60264 million 44102 million december 31 2009 increase working capital primarily due issuance 10000 million senior unsecured notes january 2010 well increases accounts receivable inventories prepaid expenses partially offset use cash fund dividend payments acquisitions accounts receivable days sales outstanding 56 days december 31 2010 2009 days sales inventory increased 9 days 154 days december 31 2010 145 days december 31 2009 days sales inventory december 31 2010 higher december 31 2009 level primarily due higher levels inventory support anticipated 2011 sales growth company generated cash 15474 million operations 2010 compared 14607 million 2009 increase cash operations 2010 primarily due increased earnings partially offset increased inventory levels higher tax payments 2010 company used cash 4255 million repurchase common stock 2383 million payment dividends 1821 million capital expenditures 2654 million acquisitions january 15 2010 company sold 5000 million 2015 notes 5000 million 2020 notes 2015 notes bear interest 300 per year unless previously redeemed mature january 15 2015 2020 notes bear interest 4375 per year unless previously redeemed mature january 15 2020 company received net proceeds 9961 million net offering discount 39 million 2015 notes 2020 notes carry effective interest rates 302 446 respectively debt issuance costs 105 million incurred connection sale senior unsecured notes costs capitalized amortized interest expense lives related senior unsecured notes company also purchased sold marketable securities including exercising auction rate securities ars rights agreement classified availableforsale investments trading marketable securities respectively accordance provisions investmentsdebt equity securities topic financial accounting standard board fasb accounting standards codification company 17576 million cash equivalents 26225 million current marketable securities december 31 2010 company outstanding borrowings totaling 10218 million december 31 2010 january 3 2011 company completed acquisition neurovascular division boston scientific corporation initial payment 145 billion funded company’s cash position addition 500 million payable upon completion certain milestones company believes cash current marketable securities hand anticipated future cash flows operations additional borrowing capacity existing credit facilities sufficient fund future operating capital requirements future manufacturing facility construction capital expenditures loaner instrumentation surgical implants support new product launches future debt service requirements payment dividends august 2010 company refinanced credit facility new 10000 million senior unsecured revolving credit facility due august 2013 2010 facility 2010 facility replaces previously outstanding 10000 million unsecured credit facility due november 2010 2005 facility 2010 facility includes increase option permitting company increase size facility additional 5000 million 5000 million multicurrency sublimit euro borrowings 1000 million letter credit sublimit terms conditions covenants substantially 2005 facility 2010 facility annual facility fee ranging 10 45 basis points bears interest libor defined 2010 facility agreement plus applicable margin ranging 65 205 basis points dependent company’s credit rating based company’s current credit ratings 2010 facility annual facility fee 125 basis points interest margin 875 basis points additional funds required company 10275 million additional borrowing capacity available existing credit facilities december 31 2010 including 2010 facility company’s additional borrowing capacity along expected expiration period commitments summarized follows millions company reviews declines fair value investments classified availableforsale impairment accordance provisions investmentsdebt equity securities topic fasb codification order determine whether decline fair value otherthantemporary impairment otherthantemporary impairments availableforsale marketable securities recorded earnings june 2010 company exercised ars rights agreement ars rights entered 2008 ubs financial services inc ubs one investment providers whereby company received right sell ars par value ubs time period june 30 2010 july 2 2012 pursuant agreement company redeemed entire remaining outstanding ars investment 1399 million par value second quarter prior exercise ars rights company applied fair value option ars rights pursuant provisions fair value option financial assets financial liabilities topic fasb codification result election twelvemonth period ended december 31 2010 company recorded loss 170 million income expense recognize change fair value estimate ars rights losses offset corresponding gains fair value estimate related ars investment company’s future contractual obligations agreements initial terms greater 1 year including agreements purchase materials normal course business summarized follows millions described note 11 consolidated financial statements december 31 2010 company’s defined benefit pension plans underfunded status 1077 million due rules affecting taxdeductible contributions jurisdictions plans offered impact future plan asset performance changes interest rates potential changes legislation united states foreign jurisdictions company able reasonably estimate future periods beyond 2011 contributions fund defined benefit pension plans made described note 12 consolidated financial statements december 31 2010 company recorded liability uncertain income tax positions 3656 million due uncertainties regarding ultimate resolution income tax audits company able reasonably estimate future periods income tax payments settle uncertain income tax positions made critical accounting policies estimates preparation company’s consolidated financial statements requires management make estimates assumptions affect amounts reported financial statements accompanying notes management evaluates estimates assumptions ongoing basis estimates based historical experience available various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions management believes significant accounting policies see note 1 consolidated financial statements understanding following critical accounting policies important obtaining overall understanding consolidated financial statements allowance doubtful accounts company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends actual customer financial conditions less favorable projected management additional accounts receivable write offs may necessary could unfavorably affect future operating results inventory reserves company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause company’s products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results income taxes company operates multiple income tax jurisdictions inside outside united states accordingly management must determine appropriate allocation income jurisdictions income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty foreign branch arrangements may require extended period time resolve may result income tax adjustments changes income allocation required jurisdictions different income tax rates income tax adjustments certain jurisdictions significant company records accruals representing management’s best estimate probable resolution matters extent additional information becomes available accruals adjusted reflect revised estimated probable outcome legal contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 17 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory relief could result payment significant claims settlements legal matters management sufficient information reasonably estimate company’s future obligations liability representing management’s best estimate probable cost minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable projected management additional expense may incurred could unfavorably affect future operating results partially mitigate losses arising unfavorable outcomes matters company purchases thirdparty insurance coverage subject certain deductibles loss limitations future operating results may unfavorably impacted settlement payments losses beyond amounts insurance carried addition matters may negatively impact company’s ability obtain costeffective thirdparty insurance coverage future periods recently adopted accounting standards 2010 company adopted provisions improvement financial reporting enterprises involved variable interest entities topic fasb codification topic requires qualitative approach identifying controlling financial interest variable interest entity vie requires ongoing assessment whether entity vie whether interest vie makes holder primary beneficiary vie impact consolidated financial statements result adoption topic fasb codification 2010 company adopted provisions fair value measurements disclosures topic “improving disclosures fair value measurements” fasb codification topic requires companies make new disclosures recurring nonrecurring fair value measurements including significant transfers level 1 level 2 fair value measurements information purchases sales issuances settlements gross basis reconciliation level 3 fair value measurements enhanced disclosures recurring nonrecurring fair value measurements included note 2 consolidated financial statements 2009 company adopted provisions business combinations topic fasb codification topic significantly changes principles requirements acquisition recognized measured financial statements including identifiable assets acquired liabilities assumed topic also provides guidance recognizing measuring goodwill acquired business combination requires disclosures enable users financial statements evaluate nature financial effects business combination additional disclosure requirements regarding business combinations topic fasb codification included note 5 consolidated financial statements matters company distributes products throughout world result company’s financial results could significantly affected factors weak economic conditions changes foreign currency exchange rates company’s operating results primarily exposed changes exchange rates among us dollar european currencies particular euro british pound japanese yen australian dollar canadian dollar us dollar weakens foreign currencies dollar value sales denominated foreign currencies increases us dollar strengthens opposite situation occurs company develops manufactures products united states china france germany ireland puerto rico switzerland incurs costs applicable local currencies worldwide deployment facilities serves partially mitigate impact currency exchange rate changes company’s cost sales company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products well 2010 nonfunctional cash balances associated anticipated acquisition neurovascular division boston scientific 2009 intercompany loans associated repatriation foreign earnings periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses included income expense consolidated statements earnings december 31 2010 company outstanding forward currency exchange contracts purchase 10119 million sell 3669 million various currencies principally us dollars euros maturities ranging 7 99 days december 31 2009 company outstanding forward currency exchange contracts purchase 20411 million sell 2805 million various currencies principally us dollars euros maturities ranging 4 106 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points hypothetical 10 change foreign currencies relative us dollar would change december 31 2010 fair value approximately 639 million company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties company certain investments net assets international locations hedged investments subject translation gains losses due changes foreign currency exchange rates year ended december 31 2010 strengthening us dollar relative foreign currencies decreased value investments net assets related foreign currency translation adjustment loss shareholders’ equity 810 million 1965 million 2775 million december 31 2009 third quarter 2010 company received separate subpoenas us department justice related sales marketing regulatory matters related stryker painpump ii sales marketing regulatory matters related otisknee device company process responding subpoenas march 2010 shareholder’s derivative action complaint certain current former directors officers company filed united states district court western district michigan southern division lawsuit brought westchester putnam counties heavy highway laborers local 60 benefit funds laborers local 235 benefit funds complaint alleges claims breach fiduciary duties gross mismanagement connection certain product recalls fda warning letters government investigations relating physician compensation criminal proceeding brought company’s biotech division case stayed special committee board directors evaluates claims january 2010 purported class action lawsuit company filed united states district court southern district new york behalf purchased company’s common stock january 25 2007 november 13 2008 inclusive lawsuit seeks remedies securities exchange act 1934 may 2010 lawsuit transferred united states district court western district michigan southern division company intends defend vigorously 2009 federal grand jury district massachusetts returned indictment charging stryker biotech llc certain current former employees stryker biotech wire fraud conspiracy defraud fda distribution misbranded device false statements fda company still hopes able reach fair resolution matter ultimate resolution matter reasonably estimable time however conviction charges described could result significant monetary fines stryker biotech presently involved sale health care products services see additional information note 18 consolidated financial statements conviction charges resulting exclusion participating federal state health care programs would expected material effect stryker biotech’s present business operations certain former stryker biotech employees pled guilty charges connection matter 2009 company received warning letter fda related compliance issues one craniomaxillofacial cmf implant products previously sold cmf distribution facility portage michigan 2007 company received two warning letters fda regarding compliance certain quality system specifications reconstructive implant manufacturing facilities one letter facility cork ireland another facility mahwah new jersey march 2010 fda informed company warning letter related mahwah manufacturing facility resolved following reinspection 2009 additional corrective actions may 2010 fda informed company warning letters related cork ireland cmf facilities resolved following fda reinspection cork ireland facility additional corrective actions cork cmf facilities 2007 company announced reached resolution us attorney’s office district new jersey connection investigation relating “any consulting contracts professional service agreements remuneration agreements stryker corporation orthopedic surgeon orthopedic surgeon training medical school graduate using considering surgical use hip knee joint replacementreconstruction products manufactured sold stryker corporation” resolution form nonprosecution agreement included oversight federal monitor 18month period ended march 27 2009 subsequent entering nonprosecution agreement us department health human services office inspector general hhs issued civil subpoena company seeking determine whether company violated various laws paying consulting fees providing things value orthopedic surgeons healthcare educational institutions inducements use stryker’s orthopedic medical devices procedures paid whole part medicare investigation ongoing company produced numerous documents materials hhs response subpoena 2007 company disclosed us securities exchange commission sec made informal inquiry company regarding possible violations foreign corrupt practices act connection sale medical devices certain foreign countries subsequently 2008 company received subpoena us department justice criminal division requesting certain documents period since january 1 2000 connection sec inquiry company fully cooperating us department justice sec regarding matters item 7aitem 7 management’s discussion analysis financial condition results operations supplement reporting financial information determined accounting principles generally accepted united states gaap certain nongaap financial measures including percentage sales growth constant currency adjusted net earnings adjusted diluted net earnings per share believe nongaap measures provide meaningful information assist shareholders understanding financial results assessing prospects future performance management believes percentage sales growth constant currency adjusted net earnings adjusted net earnings per diluted share important indicators operations exclude items may indicative unrelated core operating results provide baseline analyzing trends underlying businesses management uses nongaap financial measures reviewing operating results reportable business segments analyzing potential future business trends connection budget process bases certain annual bonus plans nongaap financial measures measure percentage sales growth constant currency remove impact changes foreign currency exchange rates affect comparability trend sales percentage sales growth constant currency calculated translating current year results prior year average foreign currency exchange rates measure earnings performance consistent comparable basis exclude certain items affect comparability operating results trend earnings nongaap financial measures standardized may possible compare financial measures companies nongaap financial measures similar names adjusted financial measures considered isolation substitute reported sales growth net earnings diluted net earnings per share directly comparable gaap financial measures nongaap financial measures additional way viewing aspects operations viewed gaap results reconciliations corresponding gaap financial measures end discussion results operations provide complete understanding business strongly encourage investors shareholders review financial statements publiclyfiled reports entirety rely single financial measure stryker one worlds leading medical technology companies 2012 revenues 8657 net earnings 1298 dedicated helping healthcare professionals perform jobs efficiently enhancing patient care offer diverse array innovative medical technologies including reconstructive medical surgical neurotechnology spine products help people lead active satisfying lives united states products marketed directly doctors hospitals healthcare facilities general maintain separate dedicated sales forces principal product lines provide focus high level expertise medical specialty served internationally products sold 100 countries companyowned sales subsidiaries branches well thirdparty dealers distributors business generally seasonal nature however number reconstructive surgeries generally lower summer months recent business developments february 2013 made voluntary general offer acquire shares trauson holdings company limited hk750 per ordinary share total consideration 764 cash transaction acquisition expected close end second quarter 2013 expand presence key emerging market product portfolio pipeline targeted large fast growing value segment chinese orthopaedic market december 2012 recorded charge 174 133 net taxes approximately 035 per share related previously disclosed voluntary recall rejuvenate abg ii modularneck hip stems november 2012 completed acquisition surpass medical ltd surpass developing commercializing nextgeneration flow diversion stent technology treat brain aneurysms using unique mesh design delivery system acquisition surpass enhances product offerings within neurotechnology product line october 2012 kevin lobo named president chief executive officer mr lobo replaced curt r hartman served interim chief executive officer since resignation stephen p macmillan august 2012 refinanced credit facility new 1000 unsecured revolving credit facility due august 2017 2012 facility 2012 facility replaced previously outstanding 1000 unsecured credit facility due august 2013 2012 recorded 40 severance related costs connection focused reductions global workforce restructuring activities expected reduce global workforce approximately 5 targeted reductions restructuring activities initiated provide efficiencies realign resources advance medical device excise tax well allow continued investment strategic areas drive growth addition recorded 7 intangible asset impairments 3 agent conversion 25 contractual obligations certain restructuring actions resulted discontinued use specific assets exit certain lease commitments dollar amounts millions except per share amounts otherwise specified results operations consolidated results operations geographic segment net sales net sales increased 42 2012 increasing 135 2011 2012 net sales grew 56 result increased unit volume changes product mix 12 due acquisitions negatively impacted 14 due changes price 12 due unfavorable impact foreign currency exchange rates net sales constant currency net sales 2012 increased 54 2011 net sales grew 61 result increased unit volume changes product mix 24 due favorable impact foreign currency 68 due acquisitions negatively impacted 18 due changes price constant currency net sales 2011 increased 111 increase consolidated net sales 2012 primarily due higher shipments neurotechnology instruments trauma extremities spine reprocessed remanufactured medical devices gains partially offset slowness european markets increase consolidated net sales 2011 primarily due sales growth acquisitions higher united states shipments medsurg products higher international shipments medsurg products neurotechnology spine products united states net sales increased 74 2012 increasing 99 2011 constant currency international sales increased 19 2012 compared 134 2011 following geographical sales growth information segment provided supplement net sales information presented reconstructive net sales 2012 increased 31 2011 primarily due 56 increase unit volume changes product mix 09 due acquisitions net sales negatively impacted 22 due changes price 13 due dollar amounts millions except per share amounts otherwise specified unfavorable impact foreign currency exchange rates net sales constant currency reconstructive net sales increased 44 2012 primarily due increases trauma extremities market share gains part result competitors product recall offset part slowness european markets reconstructive net sales 2011 increased 45 2010 primarily due 34 increase unit volume changes product mix 30 favorable foreign currency impact 08 due acquisitions increase units sold due higher industry demand addition net sales negatively impacted 28 due changes price constant currency reconstructive net sales increased 15 2011 medsurg net sales 2012 increased 33 2011 primarily due 41 increase unit volume changes product mix 01 due acquisitions negatively impacted 01 due changes price 09 due unfavorable impact foreign currency exchange rates net sales constant currency medsurg net sales 2012 increased 42 led higher shipments instruments reprocessed remanufactured medical devices higher shipments partially offset challenging global market conditions capital equipment medsurg net sales 2011 increased 127 2010 led medical endoscopy instruments also increased primarily due 95 increase unit volume changes product mix 16 due favorable impact foreign currency 19 due acquisitions effect pricing net sales significant constant currency medsurg net sales increased 112 2011 neurotechnology spine net sales 2012 increased 92 2011 primarily due 85 increase unit volume changes product mix 42 due acquisitions negatively impacted 22 due changes price 13 due unfavorable impact foreign currency exchange rates net sales constant currency neurotechnology spine net sales 2012 increased 105 neurotechnology spine net sales 2011 increased 485 2010 primarily due acquisition neurovascular sales growth acquisitions 426 remainder increase included 63 due increases unit volume changes product mix 20 due favorable impact foreign currency negative impact changes price 25 constant currency neurotechnology spine net sales 2011 increased 464 consolidated cost sales cost sales decreased 11 2011 321 sales compared 338 2011 cost sales 2012 2011 includes additional cost 18 143 respectively related inventory stepped fair value following acquisitions cost sales 2012 also included 5 restructuring related costs aside factors decrease cost sales percentage 2012 primarily due efficiencies manufacturing distribution network favorable product mix favorable impact effect foreign currency costs eurobased manufacturing operations cost sales 2011 increased 230 2010 338 sales compared 312 2010 increase cost sales percentage 2011 primarily due impact inventory step lower pricing sales resulting increase cost sales percentage sales impact changes product mix weaker united states dollar purchases international manufacturing operations research development engineering expenses research development engineering expenses represented 54 sales compared 56 2011 54 2010 spending level 2012 decreased percentage sales primarily due termination development op1 molecule late 2011 higher spending level 2011 compared 2010 result focus new product development anticipated future product launches continued investments new technologies selling general administrative expenses selling general administrative expenses increased 100 represented 400 sales compared 379 2011 370 2010 2012 recorded 37 acquisition integrationrelated charges compared 66 2011 addition general administrative costs 2012 included 174 related previously disclosed voluntary recall rejuvenate abg ii modularneck hip stems 33 offered doj settle subpoena received 2010 related sales marketing otisknee device 8 separation costs associated former chief executive officer 2011 general administrative expenses included payment intellectual property infringement claim offset favorable resolution value added tax issue 2010 sold manufacturing facility france recorded gain 24 included general administrative expenses restructuring charges 2012 2011 recorded 75 76 respectively restructuring charges related focused reductions global workforce restructuring expected reduce global workforce approximately 5 complete end 2013 total cost approximately 225 targeted reductions restructuring activities initiated provide efficiencies realign resources advance medical device excise tax well allow continued investment strategic areas drive growth income expense 2012 increased 36 2011 decreasing 22 2010 increase expense 2012 2011 reduction expense 2010 2011 primarily due reductions accrued interest expense 2011 resulting settlements dollar amounts millions except per share amounts otherwise specified reached united states internal revenue service irs 2011 reached favorable settlement regarding irs proposed adjustment previously filed 2003 2007 income tax returns related income tax positions taken irish cost sharing arrangements also reached settlement irs respect allocation income wholly owned subsidiary operating puerto rico years 2006 2009 higher interest expense 2012 due effect 2011 tax settlements partially offset higher interest income investments due higher cash equivalents marketable securities balances compared 2011 income taxes effective income tax rate earnings 239 202 264 2012 2011 2010 respectively effective income tax rate 2012 includes net impact effective settlement tax matters 2004 relating two german subsidiaries adjustment estimate foreign tax credits amount shown tax return filed effective income tax rate 2011 includes net impact settlements irs described effective income tax rate 2010 includes impact property plant equipment impairment charge gain sale manufacturing facility favorable income tax expense adjustment associated repatriation foreign earnings united states completed 2009 american taxpayer relief act 2012 act signed january 2 2013 act provided numerous tax provisions corporations including extension research tax credit extension certain provisions companies significant international operations provisions originally expired december 31 2011 retroactively extended december 31 2013 record tax benefits approximately 13 related 2012 research tax credit provisions act net earnings net earnings 2012 decreased 35 2011 1298 basic net earnings per share 2012 decreased 20 2011 341 diluted net earnings per share 2012 decreased 17 2011 339 net earnings 2011 increased 57 2010 1345 basic net earnings per share 2011 increased 84 2010 348 diluted net earnings per share 2011 increased 82 2010 345 reported net earnings includes benefits settlements adjustments related uncertain tax positions restructuring related charges acquisition integration related charges including transaction costs integration related costs additional cost sales inventory sold year stepped fair value addition 2012 net earnings includes charge 133 net taxes related previously disclosed voluntary recall rejuvenate abg ii modularneck hip stems 33 offered united states department justice resolve matter related sales marketing otisknee device recorded corresponding nontax deductible charge excluding impact items adjusted net earnings 2012 increased 77 1560 increasing 90 2011 adjusted diluted net earnings per share 2012 increased 94 407 increasing 117 2011 following reconciles nongaap financial measures adjusted net earnings adjusted diluted net earnings per share directly comparable gaap financial measures reported net earnings diluted net earnings per share dollar amounts millions except per share amounts otherwise specified weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts financial condition liquidity operating activities operating cash flow 1657 2012 increase 156 2011 operating cash flow resulted primarily net earnings adjusted noncash items depreciation amortization sharebased compensation sale inventory stepped fair value acquisition deferred income taxes net accounts receivable inventory accounts payable consumed 50 operating cash flow 2012 inventory contributed 18 operating cash flow inventory days hand decreased 5 days due lower inventory levels driven primarily improved inventory management accounts receivable used 20 primarily support business growth accounts receivable days sales outstanding decreased 3 days due timing sales operating cash flow 1434 2011 decrease 73 2010 operating cash flow resulted primarily net earnings adjusted noncash items depreciation amortization sharebased compensation sale inventory stepped fair value acquisition deferred income taxes net accounts receivable inventory accounts payable consumed 274 operating cash flow 2011 inventory consumed 166 operating cash flow primarily due building inventory related acquisitions business growth increased stock levels advance new product introductions higher inventory levels support anticipated 2012 sales growth inventory days hand increased 4 days due impact accounts receivable used 143 primarily due building accounts receivable related acquisitions business growth accounts receivable days sales outstanding increased 2 days due timing sales investing activities net investing activities consumed 736 cash 2012 2135 2011 primarily due acquisitions capital spending acquisitions used 154 cash 2012 2066 2011 cash used 2012 primarily acquisition surpass medical 99 well milestone payments associated previous acquisitions cash used 2011 primarily acquisitions neurovascular 1450 orthovita 316 memometal 150 concentric 135 capital spending manage capital spending support business growth capital expenditures primarily support integration acquisitions capacity expansion new product introductions innovation cost savings 210 2012 226 2011 proceeds asset sales proceeds asset sales contributed 67 cash 2011 primarily due sale certain assets related op1 product family financing activities dividend payments dividends paid per common share increased 181 085 per share 2012 total dividend payments common shareholders 324 2012 279 2011 increase dividend payments resulted increases quarterly dividend 018 per share 2011 02125 per share 2012 longterm shortterm debt maintain debt levels consider appropriate evaluating number factors including cash flow expectations cash requirements ongoing operations investment financing plans including acquisitions share repurchase activities overall cost capital september 2011 sold 750 unsecured notes due september 2016 net proceeds offerings continue available working capital general corporate purposes including acquisitions stock repurchases business opportunities total debt 1762 2012 1768 2011 share repurchases total use cash share repurchases 108 2012 622 2011 liquidity cash equivalents marketable securities 4285 december 31 2012 3418 december 31 2011 current assets exceeded current liabilities 6272 december 31 2012 5367 december 31 2011 anticipate able support shortterm liquidity operating needs largely cash generated operations also raised funds past capital markets may continue time strong short longterm debt ratings believe enable us refinance debt becomes due august 2012 refinanced credit facility new 1000 unsecured revolving credit facility due august 2017 2012 facility 2012 facility replaced previously outstanding 1000 unsecured credit facility would become due august 2013 2012 facility includes increase option permitting us increase size facility additional 500 multicurrency sublimit euro borrowings 100 letter credit sublimit 2012 facility dollar amounts millions except per share amounts otherwise specified annual facility fee ranging 5 225 basis points bears interest libor defined 2012 facility agreement plus applicable margin ranging 575 1275 basis points dependent credit ratings additional funds required approximately 1063 borrowing capacity available existing credit facilities december 31 2012 including 2012 facility february 2013 made voluntary general offer acquire trauson holdings company limited leading manufacturer trauma spine products china connection offer restricted 800 available borrowing capacity completion tender offer transaction expected close end second quarter 2013 december 31 2012 approximately 60 consolidated cash equivalents marketable securities held outside united states funds considered indefinitely reinvested used expand operations either organically acquisitions outside united states several european countries including spain portugal italy greece southern european region subject credit deterioration due weaknesses economic fiscal conditions continuously monitor investment portfolio exposures european debt crisis currently investments sovereign debt instruments southern european region nonsovereign exposure countries investment portfolio considered immaterial continually evaluate receivables particularly southern european region total net receivables southern european region approximately 198 257 december 31 2012 2011 respectively including approximately 103 170 respectively sovereign receivables believe current reserves related receivables adequate additional credit risk associated european debt crisis expected material adverse impact financial position liquidity guarantees offbalance sheet arrangements guarantees offbalance sheet financing arrangements including variable interest entities magnitude believe could material impact financial condition liquidity contractual obligations forwardlooking cash requirements described note 11 consolidated financial statements december 31 2012 defined benefit pension plans underfunded 193 approximately 183 related plans outside united states due rules affecting taxdeductible contributions jurisdictions plans offered impact future plan asset performance changes interest rates potential changes legislation united states foreign jurisdictions able reasonably estimate future periods beyond 2013 contributions fund defined benefit pension plans made described note 10 consolidated financial statements december 31 2012 recorded liability uncertain income tax positions 227 due uncertainties regarding ultimate resolution income tax audits able reasonably estimate future periods income tax payments settle uncertain income tax positions made future contractual obligations agreements initial terms greater one year including agreements purchase materials normal course business critical accounting policies estimates preparing financial statements accordance gaap certain accounting policies may require choice acceptable accounting methods may require substantial judgment estimation application include allowance doubtful accounts inventory reserves income taxes acquisitions goodwill intangible assets legal contingencies believe accounting policies others set forth note 1 consolidated financial statements reviewed integral understanding results operations financial condition dollar amounts millions except per share amounts otherwise specified allowance doubtful accounts maintain allowance doubtful accounts estimated losses collection accounts receivable make estimates regarding future ability customers make required payments based historical credit experience expected future trends actual customer financial conditions less favorable projected management additional accounts receivable write offs may necessary could unfavorably affect future operating results inventory reserves maintain reserves excess obsolete inventory resulting potential inability sell certain products prices excess current carrying costs make estimates regarding future recoverability costs products record provisions based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results income taxes annual tax rate determined based income statutory tax rates tax impacts items treated differently tax purposes financial reporting purposes tax law requires certain items included tax return different times items recorded financial statements differences permanent expenses deductible tax return differences temporary reverse time depreciation expense temporary differences result deferred tax assets liabilities deferred tax assets generally represent tax effect items used tax deduction credit future years already recorded tax benefit financial statements deferred tax liabilities generally represent tax expense recognized financial statements payment deferred tax effect expenditures deduction already taken tax return yet recognized financial statements assets recorded fair value business combinations corresponding tax basis adjustment inherent determining annual tax rate judgments regarding business plans tax planning opportunities expectations future outcomes realization certain deferred tax assets dependent upon generating sufficient taxable income appropriate jurisdiction prior expiration carryforward periods although realization assured management believes likely deferred tax assets net valuation allowances realized operate multiple jurisdictions complex tax policy regulatory environments certain jurisdictions may take tax positions management believes supportable potentially subject successful challenge applicable taxing authority differences interpretation respective governmental taxing authorities impacted local economic fiscal environment evaluate tax positions establish liabilities accordance applicable accounting guidance uncertainty income taxes review tax uncertainties light changing facts circumstances progress tax audits adjust accordingly number audits process various jurisdictions although resolution tax positions uncertain based currently available information believe likely ultimate outcomes material adverse effect financial position results operations cash flows number estimates assumptions inherent calculating various components tax provision certain changes future events changes tax legislation geographic mix earnings completion tax audits earnings repatriation plans could impact estimates effective tax rate acquisitions goodwill intangibles longlived assets account acquired businesses using purchase method accounting purchase method financial statements include operations acquired business starting completion acquisition addition assets acquired liabilities assumed recorded date acquisition respective estimated fair values excess purchase price estimated fair values net assets acquired recorded goodwill significant judgment required estimating fair value intangible assets assigning respective useful lives accordingly typically obtain assistance thirdparty valuation specialists significant items fair value estimates dollar amounts millions except per share amounts otherwise specified based available historical information future expectations assumptions deemed reasonable management inherently uncertain typically use income method estimate fair value intangible assets based forecasts expected future cash flows attributable respective assets significant estimates assumptions inherent valuations reflect consideration marketplace participants include amount timing future cash flows including expected growth rates profitability underlying product technology life cycles economic barriers entry discount rate applied cash flows unanticipated market macroeconomic events circumstances may occur could affect accuracy validity estimates assumptions determining useful life intangible asset also requires judgment majority acquired intangible assets eg certain trademarks brands customer relationships patents technologies expected determinable useful lives assessment useful lives intangible assets based number factors including competitive environment market share trademark andor brand history underlying product life cycles operating plans macroeconomic environment countries trademarks brands sold estimates useful lives determinablelived intangibles primarily based factors determinablelived intangible assets amortized expense estimated useful life certain acquisitions acquire inprocess research development iprd intangible assets iprd considered indefinitelived intangible asset time research completed time becomes determinablelived intangible asset determined future use time impaired value indefinitelived intangible assets residual goodwill amortized tested least annually impairment testing goodwill performed separately impairment testing indefinitelived intangibles perform annual impairment test goodwill fourth quarter year adopted provisions accounting standards update asu 201108 intangibles goodwill testing goodwill impairment permits us consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability circumstances test goodwill impairment reviewing book value compared fair value reporting unit level test individual indefinitelived intangibles reviewing individual book values compared fair value determine fair value reporting units indefinitelived intangible assets based income approach income approach calculate fair value reporting units indefinitelived intangible assets based present value estimated future cash flows considerable management judgment necessary evaluate impact operating macroeconomic changes estimate future cash flows measure fair value assumptions used impairment evaluations forecasted growth rates cost capital consistent internal projections operating plans believe assumptions estimates also comparable would used marketplace participants recognize material impairment charges goodwill years presented annual impairment testing indicated reporting unit goodwill fair values exceeded respective recorded values future changes judgments assumptions estimates used impairment testing goodwill indefinitelived intangible assets including discount tax rates future cash flow projections could result significantly different estimates fair values significant reduction estimated fair values could result impairment charges could materially affect financial statements review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows individual asset level asset group level undiscounted cash flows expected generated related assets estimated useful life based updated projections evaluation indicates carrying amount assets may recoverable potential impairment measured based upon fair value related assets asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell legal contingencies involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described information note 6 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory dollar amounts millions except per share amounts otherwise specified equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable projected management additional expense may incurred could unfavorably affect future operating results partially mitigate losses arising unfavorable outcomes matters purchase thirdparty insurance coverage subject certain deductibles loss limitations future operating results may unfavorably impacted settlement payments losses beyond amounts insurance carried addition matters may negatively impact ability obtain cost effective thirdparty insurance coverage future periods new accounting pronouncements accounting pronouncements issued became effective year expected material impact consolidated financial statements discussion new accounting pronouncements see note 1 consolidated financial statements information hedging derivative financial instruments sell products throughout world result financial results could significantly affected factors weak economic conditions changes foreign currency exchange rates operating results primarily exposed changes exchange rates among united states dollar european currencies particular euro swiss franc british pound japanese yen australian dollar canadian dollar develop manufacture products united states china france germany ireland puerto rico switzerland incur costs applicable local currencies worldwide deployment facilities serves partially mitigate impact currency exchange rate changes cost sales enter forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses included consolidated statements earnings estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points hypothetical 10 change foreign currencies relative united states dollar would change december 31 2012 fair value approximately 10 exposed credit loss event non performance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties certain investments net assets international locations hedged investments subject translation gains losses due changes foreign currency exchange rates 2012 strengthening foreign currencies relative united states dollar increased value investments net assets related foreign currency translation adjustment gain shareholders equity 50 226 176 december 31 2011 legal regulatory matters june 28 2012 voluntarily recalled rejuvenate abg ii modularneck hip stems terminated global distribution hip products notified healthcare professionals regulatory bodies recall taken due potential risks associated fretting andor corrosion may lead adverse local tissue reactions product liability lawsuits relating voluntary recall filed us previously announced intend reimburse implanted patients reasonable customary costs testing treatment services including necessary revision surgeries continue work medical community evaluate data understand matter associated costs ultimate total cost respect matter depend many factors difficult predict limited information received date may vary materially based number actual costs patients seeking testing treatment services number actual costs patients requiring revision surgeries number actual costs settle lawsuits filed us amount thirdparty insurance recoveries based information received estimate probable loss resolve matter range approximately 190 390 thirdparty insurance recoveries accordingly december 2012 recorded charge earnings 174 representing excess 190 minimum range previously recorded reserves contingent gain dollar amounts millions except per share amounts otherwise specified thirdparty recoveries recorded december 31 2012 noted final outcome matter dependent many variables difficult predict ultimate cost entirely resolve matter may materially different amount current estimate accruals could material adverse effect financial position results operations cash flows 2010 received subpoena united states department justice doj related sales marketing otisknee device subpoena concerns allegations violations federal laws related sales device cleared united states food drug administration fda entered discussions doj regarding potential resolution matter second quarter 2012 recorded nontax deductible charge 33 matter continue discuss matter doj assurance reach consensual resolution rather seeking resolution courts believe strong arguments defend allegations defense ultimately unsuccessful estimate reasonably possible total cost resolve matter may approximately two times greater amount accrued final outcome matter difficult predict ultimate cost resolve matter may materially different amount current estimate accruals could material adverse effect financial position results operations cash flows 2010 shareholders derivative action complaint certain current former directors officers filed united states district court western district michigan southern division lawsuit brought westchester putnam counties heavy highway laborers local 60 benefit funds laborers local 235 benefit funds complaint alleged claims breach fiduciary duties gross mismanagement connection certain product recalls fda warning letters government investigations relating physician compensation criminal proceeding brought biotech division recently entered settlement agreement requires changes certain strykers corporate governance practices following legal matters final outcome dependent many variables cannot predicted accordingly possible time us estimate material loss range losses however ultimate cost resolve matters could material adverse effect financial position results operations cash flows april 2011 lawsuits brought hillrom company inc affiliated entities hillrom us filed united states district court western district wisconsin united states district court southern district indiana wisconsin lawsuit subsequently transferred united states district court indiana suits allege infringement united states patent laws respect certain patient handling equipment manufactured sold seek damages permanent injunctions first lawsuit involved ten patents related use motorized wheel hospital beds stretchers recently entered agreement settling lawsuit agreement included payment hillrom 375 covenant sue crosslicense second lawsuit involves nine patents related electrical network communications hospital beds case stayed respect six patents currently reexamination united states patent office respect suit three remaining patents continue vigorously defend ultimate resolution second suit may relation resolution first suit cannot predicted however ultimate cost could material adverse effect financial position results operations cash flows 2010 received subpoena doj related sales marketing regulatory matters related stryker painpump recently received requests certain documents connection investigation ongoing fully cooperating doj regarding matter 2007 disclosed united states securities exchange commission sec made inquiry us regarding possible violations foreign corrupt practices act connection sale medical devices certain foreign countries subsequently 2008 received subpoena united states doj criminal division requesting certain documents period since january 1 2000 connection sec inquiry fully cooperating doj sec regarding matters 2007 united states department health human services office inspector general hhs issued us civil subpoena seeking determine whether violated various laws paying consulting fees providing things value orthopedic surgeons healthcare educational institutions inducements use strykers orthopedic medical devices procedures paid whole part medicare produced numerous documents materials hhs response subpoena item 7aitem 7 management’s discussion analysis financial condition results operations nongaap financial measures supplement reporting financial information determined accounting principles generally accepted united states gaap certain nongaap financial measures including percentage sales growth constant currency percentage organic sales growth adjusted gross profit adjusted selling general administrative expenses adjusted operating income adjusted income expense adjusted effective income tax rate adjusted net earnings adjusted diluted net earnings per share believe nongaap measures provide meaningful information assist shareholders understanding financial results assessing prospects future performance management believes percentage sales growth constant currency adjusted measures described important indicators operations exclude items may indicative unrelated core operating results provide baseline analyzing trends underlying businesses management uses nongaap financial measures reviewing operating results reportable business segments analyzing potential future business trends connection budget process bases certain management incentive compensation nongaap financial measures measure percentage sales growth constant currency remove impact changes foreign currency exchange rates affect comparability trend sales percentage sales growth constant currency calculated translating current year results prior year average foreign currency exchange rates measure percentage organic sales growth remove impact changes foreign currency exchange rates acquisitions affect comparability trend sales percentage organic sales growth calculated translating current year results prior year average foreign currency exchange rates excluding impact acquisitions measure earnings performance consistent comparable basis exclude certain items affect comparability operating results trend earnings nongaap financial measures standardized may possible compare financial measures companies nongaap financial measures similar names adjusted financial measures considered isolation substitute reported sales growth gross profit selling general administrative expenses operating income incomeexpense effective income tax rate net earnings diluted net earnings per share directly comparable gaap financial measures nongaap financial measures additional way viewing aspects operations viewed gaap results reconciliations corresponding gaap financial measures end discussion results operations provide complete understanding business strongly encourage investors shareholders review financial statements publiclyfiled reports entirety rely single financial measure stryker one worlds leading medical technology companies 2013 revenues 9021 net earnings 1006 dedicated helping healthcare professionals perform jobs efficiently enhancing patient care offer diverse array innovative medical technologies including reconstructive medical surgical neurotechnology spine products help people lead active satisfying lives united states products marketed directly doctors hospitals healthcare facilities general maintain separate dedicated sales forces principal product lines provide focus high level expertise medical specialty served internationally products sold 100 countries companyowned sales subsidiaries branches well thirdparty dealers distributors business generally seasonal nature however number reconstructive implant surgeries generally lower summer months sales capital equipment generally higher fourth quarter recent business developments december 2013 announced intent acquire patient safety technologies inc pst aggregate purchase price 120 pst conducts business wholly owned subsidiary surgicount medical inc proprietary safetysponge® system surgicount 360™ compliance software help prevent retained foreign objects operating room system includes barcoded surgical sponges towels integrated barcode scanner compliance tracking software transaction subject customary closing conditions expected close first quarter 2014 december 2013 acquired mako surgical corp mako aggregate purchase price approximately 1679 acquisition mako combined strong history joint reconstruction capital equipment operating room integration surgical navigation surgical instruments help advance growth robotic arm assisted surgery combined expertise offers potential simplify joint reconstruction procedures reduce variability enhance surgeon patient experience april 2013 william r jellison named vice president chief financial officer mr jellison replaced dean bergy interim chief financial officer march 2013 sold 600 senior unsecured notes due 2018 notes 400 senior unsecured notes due 2043 notes 2018 notes bear interest 13 per year unless previously redeemed mature april 1 2018 2043 notes bear interest 41 per year unless previously redeemed mature april 1 2043 intend use net proceeds offering working capital general dollar amounts millions except per share amounts otherwise specified corporate purposes including acquisitions stock repurchases business opportunities march 2013 acquired trauson holdings company limited total consideration 751 acquisition expanded presence key emerging market product portfolio pipeline targeted large fast growing value segment chinese orthopaedic market 2013 recorded charges rejuvenate abg ii neptune recalls 460 net tax matters discussed fully results operations results operations net sales increased 42 2013 increasing 42 2012 2013 net sales grew 65 result increased unit volume changes product mix 08 due acquisitions negatively impacted 14 due changes price 16 due unfavorable impact foreign currency exchange rates net sales excluding impact acquisitions net sales increased 51 constant currency net sales 2012 increased 56 result unit volume changes product mix 12 due acquisitions negatively impacted 14 due changes price 12 due unfavorable impact foreign currency exchange rates net sales excluding impact acquisitions 2012 net sales increased 42 constant currency net sales 2013 increased primarily due higher shipments trauma extremities products neurotechnology products hips endoscopy products net sales 2012 increased primarily due higher shipments neurotechnology products instruments products trauma extremities products spine products reprocessed remanufactured medical devices gains partially offset slowness european markets united states net sales increased 58 2013 increasing 74 2012 constant currency international sales increased 60 2013 increasing 19 2012 supplemental geographical sales growth information dollar amounts millions except per share amounts otherwise specified reconstructive net sales reconstructive net sales 2013 increased 48 primarily due 79 increase unit volume changes product mix 14 due acquisitions net sales negatively impacted 24 due changes price 21 due unfavorable impact foreign currency exchange rates net sales excluding impact acquisitions net sales increased 55 constant currency 2013 primarily due increases trauma extremities products hips net sales 2012 increased 31 primarily due 56 increase unit volume changes product mix 09 due acquisitions net sales negatively impacted 22 due changes price 13 due unfavorable impact foreign currency exchange rates net sales constant currency net sales increased 44 2012 primarily due increases trauma extremities products market share gains partially due competitors product recall partially offset slowness european markets medsurg net sales medsurg net sales 2013 increased 29 primarily due 38 increase unit volume changes product mix negatively impacted 09 due unfavorable impact foreign currency exchange rates net sales effect pricing significant constant currency net sales 2013 increased 38 led higher shipments endoscopy products net sales 2012 increased 33 primarily due 41 increase unit volume changes product mix 01 due acquisitions negatively impacted 01 due changes price 09 due unfavorable impact foreign currency exchange rates net sales constant currency net sales 2012 increased 42 led higher shipments instruments products reprocessed remanufactured medical devices higher shipments partially offset challenging global market conditions capital equipment neurotechnology spine net sales neurotechnology spine net sales 2013 increased 56 primarily due 88 increase unit volume changes product mix 09 due acquisitions negatively impacted 20 due changes price 21 due unfavorable impact foreign currency exchange rates net sales excluding impact acquisitions net sales 2013 increased 68 constant currency due higher shipments neurotechnology products net sales 2012 increased 92 primarily due 85 increase unit volume changes product mix 42 due acquisitions negatively impacted 22 due changes price 13 due unfavorable impact foreign currency exchange rates net sales constant currency net sales 2012 increased 105 consolidated cost sales cost sales increased 70 2013 330 sales compared 321 2012 medical device excise tax 09 sales current year cost sales percentage sales adversely impacted changes selling prices products unfavorable effect foreign currency exchange rates effects offset improvements manufacturing productivity cost sales 2013 2012 includes additional cost 28 18 respectively related inventory stepped fair value following acquisitions 11 5 respectively restructuring related costs 7 2013 disgorgement profits associated legal settlement cost sales decreased 11 2012 321 sales compared 338 2011 cost sales 2012 2011 includes additional cost 18 143 respectively related inventory stepped fair value following acquisitions 5 2012 restructuring related costs research development engineering expenses research development engineering expenses represented 59 sales 2013 compared 54 2012 56 2011 increased spending level 2013 driven timing projects continued investment new technologies spending level 2012 decreased percentage sales primarily due termination development op1 molecule late 2011 selling general administrative expenses selling general administrative expenses increased 173 2013 represented 451 sales compared 400 2012 379 2011 expenses included 70 37 2013 2012 respectively acquisition integration related charges 622 174 respectively related rejuvenate abg ii neptune recalls 62 33 2013 2012 respectively related regulatory legal matters 25 2013 representing donation educational institution 4 2013 restructuring related charges excluding impact charges selling general administrative expenses 364 sales 2013 compared 372 2012 2011 general administrative expenses included payment intellectual property infringement claim offset favorable resolution value added tax issue restructuring charges 2013 2012 2011 recorded 50 2 cost sales 48 selling general administrative expense 75 76 respectively restructuring charges related focused reductions global workforce restructuring initiatives targeted reductions restructuring activities initiated provide efficiencies realign resources well allow continued investment strategic areas drive growth income expense increased 8 2013 increasing 36 2012 net expense 2013 increased due lower income interest marketable securities offset hedge gains lower interest expense decrease interest expense due favorable tax audit resolutions multiple jurisdictions resulted interest expense credits partially offset higher interest expense borrowings increase 2012 primarily due reductions accrued interest expense 2011 resulting settlements reached united states internal revenue service irs 2011 reached favorable settlement regarding irs proposed adjustment previously filed 2003 2007 income tax returns related income tax positions taken irish cost sharing arrangements also reached settlement irs respect allocation income dollar amounts millions except per share amounts otherwise specified wholly owned subsidiary operating puerto rico years 2006 2009 higher interest expense 2012 due effect 2011 tax settlements partially offset higher interest income investments due higher cash equivalents marketable securities balances compared 2011 income taxes effective income tax rate earnings 170 239 202 2013 2012 2011 respectively effective income tax rate 2013 includes income tax benefits relating favorable audit resolutions multiple jurisdictions effective income tax rate 2012 includes net impact effective settlement tax matters 2004 relating two german subsidiaries adjustment estimate foreign tax credits amount shown tax return filed effective income tax rate 2011 includes net impact settlements irs described american taxpayer relief act 2012 act signed january 2 2013 act provided numerous tax provisions corporations including extension research tax credit extension certain provisions companies significant international operations provisions originally expired december 31 2011 retroactively extended december 31 2013 recorded tax benefits 13 related 2012 research tax credit provision act net earnings net earnings 2013 decreased 225 1006 basic net earnings per share 2013 decreased 220 266 diluted net earnings per share 2013 decreased 224 263 net earnings 2012 decreased 35 1298 basic net earnings per share 2012 decreased 20 341 diluted net earnings per share 2012 decreased 17 339 reported net earnings 2013 includes charges rejuvenate abg ii neptune recalls acquisition integration related charges related neurovascular surpass trauson mako acquisitions additional cost sales inventory sold stepped fair value related trauson mako acquisitions restructuring related charges certain charges related legal regulatory matters donation educational institution benefits associated resolution certain tax matters excluding impact items adjusted net earnings 2013 increased 36 1616 increasing 77 2012 adjusted diluted net earnings per share 2013 increased 39 423 increasing 94 2012 nongaap financial measures following reconciles nongaap financial measures adjusted gross profit adjusted selling general administrative expense adjusted operating income adjusted incomeexpense adjusted net earnings adjusted effective tax rate adjusted diluted net earnings per share directly comparable gaap financial measures weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts dollar amounts millions except per share amounts otherwise specified financial condition liquidity operating activities operating cash flow 1886 2013 increase 138 resulted primarily net earnings adjusted noncash items depreciation amortization sharebased compensation sale inventory stepped fair value acquisition deferred income taxes along decrease 278 cash paid income taxes associated timing cash payments well favorable tax audit resolutions multiple jurisdictions increases partially offset higher levels inventory accounts receivable net accounts receivable inventory accounts payable resulted consumption 165 cash 2013 inventory days hand improved 1 day due continued focus improved inventory management accounts receivable days sales outstanding remained consistent 2012 operating cash flow 1657 2012 increase 156 resulted primarily net earnings adjusted noncash items depreciation amortization sharebased compensation sale inventory stepped fair value acquisition deferred income taxes net accounts receivable inventory accounts payable consumed 50 cash 2012 inventory reductions contributed 18 cash inventory days hand decreased 5 days due lower inventory levels driven primarily improved inventory management accounts receivable increases business growth resulted consumption 20 cash accounts receivable days sales outstanding decreased 3 days due timing sales investing activities net investing activities resulted cash consumption 2217 736 2135 2013 2012 2011 respectively primarily due acquisitions capital spending acquisitions resulted cash consumption 2320 2013 154 2012 2013 cash consumed primarily trauson mako 2012 cash consumed primarily surpass 99 well milestone payments related previous acquisitions cash consumed 2011 2066 primarily acquisitions neurovascular 1450 orthovita 316 memometal 150 concentric 135 capital spending manage capital spending support business growth capital expenditures primarily support integration acquisitions information technology infrastructure upgrades capacity expansion new product introductions innovation cost savings 195 210 226 2013 2012 2011 respectively proceeds asset sales proceeds asset sales contributed 67 cash 2011 primarily due sale certain assets related op1 product family financing activities dividend payments dividends paid per common share increased 247 106 per share 2013 increased 181 085 per share 2012 result annual increase dividends paid per share total dividend payments common shareholders 401 324 279 2013 2012 2011 respectively shortterm longterm debt maintain debt levels consider appropriate evaluating number factors including cash flow expectations cash requirements ongoing operations investment financing plans including acquisitions share repurchase activities overall cost capital march 2013 sold 600 million senior unsecured notes due 2018 notes 400 million senior unsecured notes due 2043 notes 2018 notes bear interest 13 per year mature april 1 2018 2043 notes bear interest 41 per year mature april 1 2043 intend use net proceeds offering working capital general corporate purposes including acquisitions stock repurchases business opportunities total debt 2764 1762 2013 2012 respectively share repurchases total use cash share repurchases 317 108 622 2013 2012 2011 respectively liquidity cash equivalents marketable securities 3980 4285 december 31 2013 2012 respectively current assets exceeded current liabilities 5678 6272 december 31 2013 2012 respectively anticipate able support shortterm liquidity operating needs including settlements related rejuvenate abg ii recalls variety sources including cash operations commercial paper existing credit lines past also raised funds capital markets may continue time future strong shortterm longterm debt ratings believe enable us refinance debt becomes due august 2012 refinanced credit facility new 1000 unsecured revolving credit facility due august 2017 2012 facility 2012 facility replaced previously outstanding 1000 unsecured credit facility would become due august 2013 2012 facility includes increase option permitting us increase size facility additional 500 multicurrency sublimit euro borrowings 100 letter credit sublimit 2012 facility annual facility fee ranging 5 225 basis points bears interest libor defined 2012 facility agreement plus applicable margin ranging 575 1275 basis points dependent credit ratings additional funds required approximately 1052 borrowing capacity available existing credit facilities december 31 2013 including 2012 facility december 31 2013 approximately 78 consolidated cash equivalents marketable securities held outside united states funds considered indefinitely reinvested used expand operations either organically acquisitions outside united states continually evaluate receivables particularly spain portugal italy greece southern european region total net receivables southern european region approximately 199 198 december 31 2013 2012 respectively including approximately 103 sovereign dollar amounts millions except per share amounts otherwise specified receivables years believe current reserves related receivables adequate additional credit risk associated southern european region expected material adverse impact financial position liquidity currently investments sovereign debt instruments southern european region nonsovereign exposure countries investment portfolio considered immaterial guarantees offbalance sheet arrangements guarantees offbalance sheet financing arrangements including variable interest entities magnitude believe could material impact financial condition liquidity contractual obligations forwardlooking cash requirements described note 7 consolidated financial statements december 31 2013 recorded charges earnings totaling 790 representing minimum range probable loss resolve rejuvenate abg ii recalls based information received actuarially determined range probable loss resolve matter estimated approximately 790 1235 thirdparty insurance recoveries final outcome matter dependent many variables difficult predict ultimate cost entirely resolve matter may materially different amount current estimate could material adverse effect financial position results operations cash flows able reasonably estimate future periods payments made described note 12 consolidated financial statements december 31 2013 defined benefit pension plans underfunded 175 approximately 174 related plans outside united states due rules affecting taxdeductible contributions jurisdictions plans offered impact future plan asset performance changes interest rates potential changes legislation united states foreign jurisdictions able reasonably estimate beyond 2013 amounts may required fund defined benefit pension plans described note 11 consolidated financial statements december 31 2013 recorded liability uncertain income tax positions 204 due uncertainties regarding ultimate resolution income tax audits able reasonably estimate future periods income tax payments settle uncertain income tax positions made future contractual obligations agreements initial terms greater one year including agreements purchase materials normal course business critical accounting policies estimates preparing financial statements accordance gaap certain accounting policies may require choice acceptable accounting methods may require substantial judgment estimation application include allowance doubtful accounts inventory reserves income taxes acquisitions goodwill intangible assets legal contingencies believe accounting policies others set forth note 1 consolidated financial statements reviewed integral understanding results operations financial condition allowance doubtful accounts maintain allowance doubtful accounts estimated losses collection accounts receivable make estimates regarding future ability customers make required payments based historical credit experience expected future trends actual customer financial conditions less favorable projected management additional accounts receivable write offs may necessary could unfavorably affect future operating results inventory reserves maintain reserves excess obsolete inventory resulting potential inability sell certain products prices excess current carrying costs make estimates regarding future recoverability costs products record provisions based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results income taxes annual tax rate determined based income statutory tax rates tax impacts items treated differently tax purposes financial reporting purposes tax law requires certain items included tax return different times items reflected financial statements differences permanent expenses deductible dollar amounts millions except per share amounts otherwise specified tax return differences temporary reverse time depreciation expense temporary differences create deferred tax assets liabilities deferred tax assets generally represent tax effect items used tax deduction credit future years already recorded tax benefit income statement deferred tax liabilities generally represent tax expense recognized financial statements payment deferred tax effect expenditures deduction already taken tax return yet recognized financial statements assets recorded fair value business combinations corresponding tax basis adjustment inherent determining annual tax rate judgments regarding business plans tax planning opportunities expectations future outcomes realization certain deferred tax assets dependent upon generating sufficient taxable income appropriate jurisdiction prior expiration carryforward periods although realization assured management believes likely deferred tax assets net valuation allowances realized operate multiple jurisdictions complex tax policy regulatory environments certain jurisdictions may take tax positions management believes supportable potentially subject successful challenge applicable taxing authority differences interpretation respective governmental taxing authorities impacted local economic fiscal environment evaluate tax positions establish liabilities accordance applicable accounting guidance uncertainty income taxes review tax uncertainties light changing facts circumstances progress tax audits adjust accordingly number audits process various jurisdictions although resolution tax positions uncertain based currently available information believe likely ultimate outcomes material adverse effect financial position results operations cash flows number estimates assumptions inherent calculating various components tax provision certain changes future events changes tax legislation geographic mix earnings completion tax audits earnings repatriation plans could impact estimates effective tax rate acquisitions goodwill intangibles longlived assets account acquired businesses using purchase method accounting purchase method financial statements include operations acquired business starting completion acquisition addition assets acquired liabilities assumed recorded date acquisition respective estimated fair values excess purchase price estimated fair values net assets acquired recorded goodwill significant judgment required estimating fair value intangible assets assigning respective useful lives accordingly typically obtain assistance thirdparty valuation specialists significant items fair value estimates based available historical information future expectations assumptions deemed reasonable management inherently uncertain typically use income method estimate fair value intangible assets based forecasts expected future cash flows attributable respective assets significant estimates assumptions inherent valuations reflect consideration marketplace participants include amount timing future cash flows including expected growth rates profitability underlying product technology life cycles economic barriers entry discount rate applied cash flows unanticipated market macroeconomic events circumstances may occur could affect accuracy validity estimates assumptions determining useful life intangible asset also requires judgment exception certain trade names majority acquired intangible assets eg certain trademarks brands customer distributor relationships patents technologies expected determinable useful lives assessment useful lives intangible assets based number factors including competitive environment market share trademark andor brand history underlying product life cycles operating plans macroeconomic environment countries trademarks brands sold estimates useful lives determinablelived intangibles primarily based factors determinablelived intangible assets amortized expense estimated useful life certain acquisitions acquire inprocess research development iprd intangible assets iprd considered indefinitelived intangible asset time research completed time becomes determinablelived intangible asset determined future use time impaired value indefinitelived intangible assets goodwill amortized tested least annually impairment testing goodwill performed separately impairment testing indefinitelived intangibles perform annual impairment test goodwill fourth quarter year adopted provisions accounting standards update asu 201108 intangibles goodwill testing goodwill impairment permits us consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability circumstances test goodwill impairment reviewing book value compared fair value reporting unit level test individual indefinitelived intangibles reviewing individual book values compared fair value dollar amounts millions except per share amounts otherwise specified determine fair value reporting units indefinitelived intangible assets based income approach income approach calculate fair value reporting units indefinitelived intangible assets based present value estimated future cash flows considerable management judgment necessary evaluate impact operating macroeconomic changes estimate future cash flows measure fair value assumptions used impairment evaluations forecasted growth rates cost capital consistent internal projections operating plans believe assumptions estimates also comparable would used marketplace participants recognize material impairment charges goodwill years presented annual impairment testing indicated reporting unit goodwill fair values exceeded respective recorded values future changes judgments assumptions estimates used impairment testing goodwill indefinitelived intangible assets including discount tax rates future cash flow projections could result significantly different estimates fair values significant reduction estimated fair values could result impairment charges could materially affect financial statements review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows individual asset level asset group level undiscounted cash flows expected generated related assets estimated useful life based updated projections evaluation indicates carrying amount assets may recoverable potential impairment measured based upon fair value related assets asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell legal contingencies involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described information note 7 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable projected management additional expense may incurred could unfavorably affect future operating results company currently selfinsured product liabilityrelated claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows new accounting pronouncements accounting pronouncements issued became effective year expected material impact consolidated financial statements information hedging derivative financial instruments sell products throughout world result financial results could significantly affected factors weak economic conditions changes foreign currency exchange rates operating results primarily exposed changes exchange rates among united states dollar european currencies particular euro swiss franc british pound japanese yen australian dollar canadian dollar develop manufacture products united states china france germany ireland puerto rico switzerland incur costs applicable local currencies worldwide deployment facilities serves partially mitigate impact currency exchange rate changes cost sales enter designated nondesignated forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses nondesignated forward contracts ineffectiveness measured designated forward currency exchange contracts included consolidated statements earnings derivative instruments designated qualify cash flow hedge effective portion gain loss derivative reported component accumulated comprehensive income reclassified earnings period hedged transaction affects earnings estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points hypothetical 10 change foreign currencies relative united states dollar would change december 31 2013 fair value approximately 6 exposed credit loss event nonperformance counterparties outstanding forward currency exchange dollar amounts millions except per share amounts otherwise specified contracts anticipate nonperformance counterparties certain investments net assets international locations hedged investments subject translation gains losses due changes foreign currency exchange rates 2013 strengthening foreign currencies relative united states dollar increased value investments net assets related foreign currency translation adjustment gain shareholders equity 80 306 226 december 31 2012 legal regulatory matters 2010 received subpoena united states department justice doj related sales marketing otisknee device subpoena concerns allegations violations federal laws related sales device cleared united states food drug administration fda continue discuss settlement matter doj assurance reach consensual resolution rather seeking resolution courts recorded charges totaling 80 related matter including 47 year ended december 31 2013 june 2012 voluntarily recalled rejuvenate abg ii modularneck hip stems terminated global distribution hip products notified healthcare professionals regulatory bodies recall taken due potential risks associated fretting andor corrosion may lead adverse local tissue reactions product liability lawsuits relating voluntary recall filed us previously announced intend reimburse implanted patients reasonable customary costs testing treatment services including necessary revision surgeries continue work medical community evaluate data understand matter associated costs ultimate total cost respect matter depend many factors difficult predict information received date may vary materially based number actual costs patients seeking testing treatment services number actual costs patients requiring revision surgeries number actual costs settle lawsuits filed us amount thirdparty insurance recoveries based information received actuarially determined range probable loss resolve matter estimated approximately 790 1235 thirdparty insurance recoveries year ended december 31 2013 recorded charges earnings 600 representing excess 790 minimum range previously recorded reserves contingent gain thirdparty insurance recoveries recorded december 31 2013 noted final outcome matter dependent many variables difficult predict ultimate cost entirely resolve matter may materially different amount current estimate accruals could material adverse effect financial position results operations cash flows 2010 filed lawsuit federal court zimmer holdings inc zimmer alleging zimmer product infringed three patents rulings issued august september 2013 trial judge upheld february 2013 jury verdict favor issued permanent injunction barring zimmer making selling infringing products ordered zimmer pay us least 228 zimmer appealing ruling ultimate resolution matter may differ materially accordingly recorded contingent gain related matter following legal matters final outcome dependent many variables cannot predicted accordingly possible time us estimate material loss range losses however ultimate cost resolve matters could material adverse effect financial position results operations cash flows april 2011 lawsuits brought hillrom company inc affiliated entities hillrom us filed united states district court western district wisconsin united states district court southern district indiana wisconsin lawsuit subsequently transferred united states district court indiana suits allege infringement united states patent laws respect certain patient handling equipment manufactured sold seek damages permanent injunctions entered agreement settling first lawsuit terms previously disclosed second lawsuit involves nine patents related electrical network communications hospital beds case stayed respect six patents currently reexamination united states patent office respect three remaining patents hillrom appealing trial courts grant summary judgment favor ultimate resolution particular part suit may differ ultimate resolution entire second suit may relation resolution first suit cannot predicted however ultimate result could material adverse effect financial position results operations cash flows 2010 received subpoena doj related sales marketing regulatory matters related stryker painpump received requests certain documents connection investigation ongoing fully cooperating doj regarding matter item 7aitem 7 management’s discussion analysis financial condition results operations stryker one worlds leading medical technology companies 2014 revenues 9675 net earnings 515 offer diverse array innovative medical technologies including reconstructive medical surgical neurotechnology spine products help people lead active satisfying lives united states products marketed directly doctors hospitals healthcare facilities general maintain separate dedicated sales forces principal product lines provide focus high level expertise medical specialty served internationally products sold 100 countries companyowned sales subsidiaries branches well thirdparty dealers distributors business generally seasonal nature however number orthopaedics implant surgeries generally lower summer months sales capital equipment generally higher fourth quarter heart believe making healthcare better collaborating customers develop innovative products services ultimately improve lives patients express mission statement together customers driven make healthcare better believe success highly competitive product categories operate depends large degree ability develop new products make improvements existing products committed internal innovation develop products services improve outcomes deliver greater cost savings efficiencies augment efforts focused acquisitions success depends ability people execute effectively every day goal drive sales growth highend medtech industry maintain capital allocation strategy prioritizes 1 acquisitions 2 dividends 3 share repurchases overview 2014 achieved sales growth 73 line ongoing goal grow organic sales highend medtech industry excluding impact acquisitions sales grew 58 constant currency converted sales growth 53 growth adjusted net earnings per diluted share see page 12 reconciliation reported net earnings per diluted share adjusted net earnings per diluted share continued capital allocation strategy investing 916 acquisitions paying 462 dividends shareholders using 100 share repurchases november 2014 entered settlement agreement compensate eligible united states patients revision surgery replace rejuvenate modularneck hip stem andor abg ii modularneck hip stem september 2014 acquired assets small bone innovations inc sbi aggregate purchase price approximately 358 sbi products designed promoted upper lower extremity small bone indications focus small joint replacement july 2014 established european regional headquarters netherlands believe increased presence strengthen brand europe support growth global business provide operational efficiencies simplify customers’ experience april 2014 acquired berchtold holding ag berchtold privatelyheld business operations germany united states aggregate purchase price approximately 184 berchtold sells surgical tables equipment booms surgical lighting systems march 2014 acquired patient safety technologies inc pst aggregate purchase price 120 pst conducts business wholly owned subsidiary surgicount medical inc pst’s proprietary safetysponge® system surgicount 360™ compliance software help prevent retained foreign objects operating room business acquisitions 2014 include acquisition pivot medical inc develops sells innovative products hip arthroscopy results operations dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k net sales increased 73 2014 net sales grew 78 result increased unit volume changes product mix 25 due acquisitions negatively impacted 20 due changes price 10 due unfavorable impact foreign currency exchange rates excluding impact acquisitions net sales increased 58 constant currency net sales increased primarily due higher shipments instruments products trauma extremities products endoscopy products neurotechnology products medical products impact acquisitions net sales increased 42 2013 net sales grew 65 result unit volume changes product mix 08 due acquisitions negatively impacted 14 due changes price 16 due unfavorable impact foreign currency exchange rates excluding impact acquisitions 2013 net sales increased 51 constant currency net sales increased primarily due higher shipments trauma extremities products neurotechnology products hips endoscopy products united states net sales increased 96 2014 increasing 58 2013 constant currency international sales increased 57 2014 increasing 60 2013 supplemental geographical sales growth information nm meaningful orthopaedics net sales orthopaedics net sales 2014 increased 52 primarily due 62 increase unit volume changes product mix 30 due acquisitions net sales negatively impacted 29 due changes price 11 due unfavorable impact foreign currency exchange rates constant currency net sales increased 63 2014 primarily due increases trauma extremities products impact acquisitions net sales 2013 increased 33 primarily due 79 increase unit volume changes product mix 14 due acquisitions net sales negatively impacted 24 due changes price 21 due unfavorable impact foreign currency exchange rates excluding impact acquisitions net sales increased 54 constant currency 2013 primarily due increases trauma extremities products hips dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k medsurg net sales medsurg net sales 2014 increased 108 primarily due 95 increase unit volume changes product mix 30 due acquisitions negatively impacted 08 due changes price 09 due unfavorable impact foreign currency exchange rates constant currency net sales 2014 increased 117 led higher shipments instruments products medical products impact acquisitions higher shipments partially offset lower shipments sustainability products net sales 2013 increased 46 primarily due 38 increase unit volume changes product mix negatively impacted 09 due unfavorable impact foreign currency exchange rates effect pricing significant constant currency net sales 2013 increased 55 led higher shipments endoscopy products neurotechnology spine net sales neurotechnology spine net sales 2014 increased 50 primarily due 81 increase unit volume changes product mix 05 due acquisitions negatively impacted 24 due changes price 12 due unfavorable impact foreign currency exchange rates constant currency net sales 2014 increased 62 led higher shipments neurotechnology products net sales 2013 increased 56 primarily due 88 increase unit volume changes product mix 09 due acquisitions negatively impacted 20 due changes price 21 due unfavorable impact foreign currency exchange rates excluding impact acquisitions net sales 2013 increased 68 constant currency due higher shipments neurotechnology products consolidated cost sales cost sales increased 105 2014 340 sales compared 330 2013 cost sales percentage sales adversely impacted changes selling prices products unfavorable product mix unfavorable effect foreign currency exchange rates product mix unfavorable due impact recent acquisitions strong medsurg sales cost sales 2014 2013 includes additional cost 27 28 respectively related inventory stepped fair value following acquisitions 1 11 respectively restructuring related charges 7 2013 disgorgement profits associated legal settlement cost sales increased 70 2013 330 sales compared 321 2012 cost sales 2012 includes additional cost 18 related inventory stepped fair value following acquisitions 5 restructuring related costs research development engineering expenses research development engineering expenses represented 63 sales 2014 compared 59 2013 54 2012 increased spending levels 2014 2013 driven impact acquisitions timing projects continued investment new technologies selling general administrative expenses selling general administrative expenses increased 54 2014 represented 449 sales compared 456 2013 409 2012 driven strong sales growth cost improvement efforts expenses included 75 70 2014 2013 respectively acquisition integration related charges 116 52 respectively restructuring related charges 761 622 respectively related rejuvenate abg ii neptune recalls 62 2013 related regulatory legal matters 25 2013 representing donation educational institution excluding impact charges selling general administrative expenses 350 sales 2014 compared 364 2013 income expense increased 42 2014 increasing 8 2013 net expense 2014 increased primarily due higher interest expense 1000 senior unsecured notes issued may 2014 partially offset lower interest expense due favorable tax audit resolutions net expense 2013 increased due lower income interest marketable securities offset hedge gains lower interest expense decrease interest expense due favorable tax audit resolutions multiple jurisdictions partially offset higher interest expense borrowings income taxes effective income tax rate earnings 556 170 239 2014 2013 2012 respectively effective income tax rate 2014 includes tax impacts establishment european regional headquarters cash repatriation united states planned 2015 effective income tax rate 2013 includes income tax benefits relating favorable audit resolutions multiple jurisdictions effective income tax rate 2012 includes net impact effective settlement tax matters 2004 relating two german subsidiaries adjustment estimate foreign tax credits amount shown tax return filed american taxpayer relief act 2012 act signed january 2 2013 act provided numerous tax provisions corporations including extension research tax credit extension certain provisions companies significant international operations provisions originally expired december 31 2011 retroactively extended december 31 2013 recorded tax benefits 13 related 2012 research tax credit provision act net earnings net earnings 2014 decreased 488 515 compared 2013 basic net earnings per share 2014 decreased 489 136 diluted net earnings per share 2014 decreased 490 134 compared 2013 respectively foreign currency negative impact diluted net earnings per share 2014 approximately 014 net earnings 2013 decreased 225 1006 compared 2012 basic net earnings per share 2013 decreased 220 266 diluted net earnings per share 2013 decreased 224 263 compared 2012 respectively reported net earnings 2014 includes charges rejuvenate abg ii neptune recalls acquisition integration related charges additional cost sales inventory sold stepped fair value related acquisitions restructuring related charges benefits associated resolution certain tax matters excluding impact items adjusted net earnings1 2014 increased 56 1810 increasing 40 2013 adjusted diluted net earnings per share1 2014 increased 53 473 increasing 44 2013 1nongaap financial measures supplement reporting financial information determined accounting principles generally accepted united states gaap certain nongaap financial measures including percentage sales growth constant currency percentage organic sales growth adjusted gross profit cost sales excluding specified items adjusted selling general administrative expenses adjusted amortization intangible assets adjusted operating income adjusted effective income tax rate adjusted net earnings adjusted diluted net earnings per share eps believe dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k nongaap measures provide meaningful information assist investors shareholders understanding financial results assessing prospects future performance management believes percentage sales growth constant currency adjusted measures described important indicators operations exclude items may indicative unrelated core operating results provide baseline analyzing trends underlying businesses management uses nongaap financial measures reviewing operating results reportable business segments analyzing potential future business trends connection budget process bases certain management incentive compensation nongaap financial measures measure percentage sales growth constant currency remove impact changes foreign currency exchange rates affect comparability trend sales percentage sales growth constant currency calculated translating current year results prior year average foreign currency exchange rates measure percentage organic sales growth remove impact changes foreign currency exchange rates acquisitions affect comparability trend sales percentage organic sales growth calculated translating current year results prior year average foreign currency exchange rates excluding impact acquisitions measure earnings performance consistent comparable basis exclude certain items affect comparability operating results trend earnings adjustments irregular timing may indicative past future performance therefore excluded allow investors better understand underlying operating trends following examples types adjustments may included period 1 acquisition integration related costs related integrating recently acquired businesses specific costs related consummation acquisition process 2 amortization intangible assets periodic amortization expense related purchased intangible assets 3 restructuring related charges costs associated focused workforce reductions restructuring activities longlived asset impairments 4 rejuvenate recall matters best estimate minimum range probable loss resolve certain product recalls 5 regulatory legal matters best estimate minimum range probable loss resolve certain regulatory matters legal settlements 6 tax matters certain significant discrete tax items adjustments interest expense related settlement certain tax matters nongaap financial measures standardized may possible compare financial measures companies nongaap financial measures similar names adjusted financial measures considered isolation substitute reported sales growth gross profit cost sales selling general administrative expenses amortization intangible assets operating income effective income tax rate net earnings diluted net earnings per share directly comparable gaap financial measures nongaap financial measures additional way viewing aspects operations viewed gaap results reconciliations corresponding gaap financial measures end discussion results operations provide complete understanding business strongly encourage investors shareholders review financial statements publiclyfiled reports entirety rely single financial measure following reconciles nongaap financial measures adjusted gross profit adjusted selling general administrative expense adjusted operating income adjusted incomeexpense adjusted net earnings adjusted effective tax rate adjusted diluted net earnings per share directly comparable gaap financial measures dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts financial condition liquidity believe financial condition continues high quality evidenced ability generate substantial cash operations ready access capital markets competitive rates operating cash flow provides primary source cash fund operating needs capital expenditures excess operating cash used first fund acquisitions complement portfolio businesses discretionary uses include dividends share repurchases necessary may supplement operating cash flow debt fund activities overall cash position shows strong business results global cash management strategy takes account liquidity management economic factors tax considerations operating activities operating cash flow 1782 2014 decrease 55 resulted primarily net earnings adjusted noncash items recall charges depreciation amortization sharebased compensation sale inventory stepped fair value acquisition deferred income taxes addition increase taxes payable primarily due timing tax payments associated tax liabilities arising establishment european regional headquarters increases partially offset higher levels inventory accounts receivable net accounts receivable inventory accounts payable resulted consumption 249 cash 2014 inventory days hand increased eight days compared 2013 inventory grew support higher sales acquisitions accounts receivable days sales outstanding decreased one day compared 2013 operating cash flow 1886 2013 increase 138 resulted primarily net earnings adjusted noncash items depreciation amortization sharebased compensation sale inventory stepped fair value acquisition deferred income taxes along decrease 278 cash paid income taxes associated timing cash payments well favorable tax audit resolutions multiple jurisdictions net accounts receivable inventory accounts payable consumed 165 cash 2013 inventory days hand improved 1 day due continued focus improved inventory management accounts receivable days sales outstanding remained consistent 2012 investing activities net investing activities resulted cash consumption 1878 2217 736 2014 2013 2012 respectively primarily due acquisitions capital spending acquisitions resulted cash consumption 916 2014 2320 2013 2014 cash consumed primarily sbi berchtold pst pivot 2013 cash consumed primarily trauson mako cash consumed 2012 154 primarily associated acquisition surpass medical ltd capital spending manage capital spending support business growth capital expenditures primarily support integration acquisitions information technology infrastructure upgrades capacity expansion new product introductions innovation cost savings 233 195 210 2014 2013 2012 respectively financing activities dividend payments dividends paid per common share increased 151 122 per share 2014 increased 247 106 per share 2013 result annual increase dividends paid per share total dividend payments common shareholders 462 401 324 2014 2013 2012 respectively shortterm longterm debt maintain debt levels consider appropriate evaluating number factors including cash flow expectations cash requirements ongoing operations investment financing plans including acquisitions share repurchase activities overall cost capital net proceeds borrowings 1159 1005 2014 2013 respectively 2014 proceeds primarily public offerings notes commercial paper proceeds 2013 primarily public offerings notes refer note 8 notes consolidated financial statements information total debt 3973 2764 2014 2013 respectively share repurchases total use cash share repurchases 100 317 108 2014 2013 2012 respectively liquidity cash equivalents marketable securities 5000 3980 december 31 2014 2013 respectively current assets exceeded current liabilities 5209 5678 december 31 2014 2013 respectively anticipate able support shortterm liquidity operating needs including settlements related rejuvenate abg ii recalls variety sources including cash operations commercial paper existing credit lines past also raised funds capital markets may continue time future strong shortterm longterm debt ratings believe enable us refinance debt becomes due additional funds required approximately 1289 borrowing capacity available existing credit facilities december 31 2014 december 31 2014 approximately 68 consolidated cash equivalents marketable securities held outside united states third quarter 2014 announced dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k plan repatriate approximately 2000 total cash outside united states 2015 remainder funds outside united states considered indefinitely reinvested used expand operations either organically acquisitions outside united states continually evaluate receivables particularly spain portugal italy greece southern european region total net receivables southern european region approximately 154 199 december 31 2014 2013 respectively including approximately 78 103 sovereign receivables 2014 2013 respectively believe current reserves related receivables adequate additional credit risk associated southern european region expected material adverse impact financial position liquidity currently investments sovereign debt instruments southern european region nonsovereign exposure countries investment portfolio considered immaterial guarantees offbalance sheet arrangements guarantees offbalance sheet financing arrangements including variable interest entities magnitude believe could material impact financial condition liquidity contractual obligations forwardlooking cash requirements described note 7 consolidated financial statements december 31 2014 recorded charges earnings totaling 748 representing minimum range probable loss resolve rejuvenate abg ii recalls based information received actuarially determined range probable loss resolve matter estimated approximately 1534 1713 179 thirdparty insurance recoveries 2453 final outcome matter dependent many variables difficult predict ultimate cost entirely resolve matter may materially different amount current estimate could material adverse effect financial position results operations cash flows able reasonably estimate future periods payments made described note 11 consolidated financial statements december 31 2014 defined benefit pension plans underfunded 260 approximately 250 related plans outside united states due rules affecting taxdeductible contributions jurisdictions plans offered impact future plan asset performance changes interest rates potential changes legislation united states foreign jurisdictions able reasonably estimate beyond 2014 amounts may required fund defined benefit pension plans described note 10 consolidated financial statements december 31 2014 recorded liability uncertain income tax positions 315 due uncertainties regarding ultimate resolution income tax audits able reasonably estimate future periods income tax payments settle uncertain income tax positions made future contractual obligations agreements initial terms greater one year including agreements purchase materials normal course business critical accounting policies estimates preparing financial statements accordance accounting principles generally accepted united states certain accounting policies may require choice acceptable accounting methods may require substantial judgment estimation application include inventory reserves income taxes acquisitions goodwill intangible assets legal contingencies believe accounting policies others set forth note 1 consolidated financial statements reviewed integral understanding results operations financial condition inventory reserves maintain reserves excess obsolete inventory resulting potential inability sell certain products prices excess current carrying costs make estimates regarding future recoverability costs products record provisions based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results income taxes annual tax rate determined based income statutory tax rates tax impacts items treated differently tax purposes financial reporting purposes tax law requires certain items included tax return different times items reflected financial statements differences permanent expenses deductible tax return differences temporary reverse time depreciation expense temporary differences create deferred tax assets liabilities deferred tax assets generally represent tax effect items used tax deduction credit future years already recorded tax benefit income statement deferred tax liabilities generally represent tax expense recognized financial statements payment deferred tax effect expenditures deduction already taken tax return yet recognized financial statements assets recorded fair value business combinations corresponding tax basis adjustment inherent determining annual tax rate judgments regarding business plans tax planning opportunities expectations future outcomes realization certain deferred tax assets dependent upon generating sufficient taxable income appropriate jurisdiction prior expiration carryforward periods although realization assured management believes likely deferred tax assets net valuation allowances realized dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k operate multiple jurisdictions complex tax policy regulatory environments certain jurisdictions may take tax positions management believes supportable potentially subject successful challenge applicable taxing authority differences interpretation respective governmental taxing authorities impacted local economic fiscal environment evaluate tax positions establish liabilities accordance applicable accounting guidance uncertainty income taxes review tax uncertainties light changing facts circumstances progress tax audits adjust accordingly number audits process various jurisdictions although resolution tax positions uncertain based currently available information believe likely ultimate outcomes material adverse effect financial position results operations cash flows number estimates assumptions inherent calculating various components tax provision certain changes future events changes tax legislation geographic mix earnings completion tax audits earnings repatriation plans could impact estimates effective tax rate acquisitions goodwill intangibles longlived assets account acquired businesses using purchase method accounting purchase method financial statements include operations acquired business starting completion acquisition addition assets acquired liabilities assumed recorded date acquisition respective estimated fair values excess purchase price estimated fair values net assets acquired recorded goodwill significant judgment required estimating fair value intangible assets assigning respective useful lives accordingly typically obtain assistance thirdparty valuation specialists significant items fair value estimates based available historical information future expectations assumptions deemed reasonable management inherently uncertain typically use income method estimate fair value intangible assets based forecasts expected future cash flows attributable respective assets significant estimates assumptions inherent valuations reflect consideration marketplace participants include amount timing future cash flows including expected growth rates profitability underlying product technology life cycles economic barriers entry discount rate applied cash flows unanticipated market macroeconomic events circumstances may occur could affect accuracy validity estimates assumptions determining useful life intangible asset also requires judgment exception certain trade names majority acquired intangible assets eg certain trademarks brands customer distributor relationships patents technologies expected determinable useful lives assessment useful lives intangible assets based number factors including competitive environment market share trademark andor brand history underlying product life cycles operating plans macroeconomic environment countries trademarks brands sold estimates useful lives determinablelived intangibles primarily based factors determinablelived intangible assets amortized expense estimated useful life certain acquisitions acquire inprocess research development iprd intangible assets iprd considered indefinitelived intangible asset time research completed time becomes determinablelived intangible asset determined future use time impaired value indefinitelived intangible assets goodwill amortized tested least annually impairment testing goodwill performed separately impairment testing indefinitelived intangibles perform annual impairment test goodwill fourth quarter year adopted provisions accounting standards update asu 201108 intangibles goodwill testing goodwill impairment permits us consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability circumstances test goodwill impairment reviewing book value compared fair value reporting unit level test individual indefinitelived intangibles reviewing individual book values compared fair value determine fair value reporting units indefinitelived intangible assets based income approach income approach calculate fair value reporting units indefinitelived intangible assets based present value estimated future cash flows considerable management judgment necessary evaluate impact operating macroeconomic changes estimate future cash flows measure fair value assumptions used impairment evaluations forecasted growth rates cost capital consistent internal projections operating plans believe assumptions estimates also comparable would used marketplace participants recognize impairment charges goodwill years presented annual impairment testing indicated reporting unit goodwill fair values exceeded respective recorded values future changes judgments assumptions estimates used impairment testing goodwill indefinitelived intangible assets including discount tax rates future cash flow projections could result significantly different estimates fair values significant reduction estimated fair values could result impairment charges could materially affect financial statements review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows individual asset level asset group level undiscounted cash flows expected generated related assets estimated useful life based updated projections evaluation indicates carrying amount assets may recoverable potential impairment measured based upon fair value related assets asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell legal contingencies involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 7 dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable projected management additional expense may incurred could unfavorably affect future operating results currently selfinsured product liabilityrelated claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows new accounting pronouncements may 2014 fasb issued accounting standard update asu 201409 revenue contracts customers supersedes replaces nearly currentlyexisting guidance united states generally accepted accounting principles related revenue recognition including related disclosure requirements guidance effective us beginning january 1 2017 yet completed assessment impact adoption guidance consolidated financial statements information hedging derivative financial instruments sell products throughout world result financial results could significantly affected factors weak economic conditions changes foreign currency exchange rates operating results primarily exposed changes exchange rates among united states dollar european currencies particular euro swiss franc british pound japanese yen australian dollar canadian dollar develop manufacture products united states china france germany ireland puerto rico switzerland incur costs applicable local currencies worldwide deployment facilities serves partially mitigate impact currency exchange rate changes cost sales enter designated nondesignated forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses nondesignated forward contracts ineffectiveness measured designated forward currency exchange contracts included consolidated statements earnings derivative instruments designated qualify cash flow hedge effective portion gain loss derivative reported component accumulated comprehensive income reclassified earnings period hedged transaction affects earnings estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points hypothetical 10 change foreign currencies relative united states dollar would change december 31 2014 fair value approximately 79 exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties certain investments net assets international locations hedged investments subject translation gains losses due changes foreign currency exchange rates 2014 strengthening foreign currencies relative united states dollar increased value investments net assets related foreign currency translation adjustment loss shareholders equity 440 134 306 december 31 2013 item 7aitem 7 management’s discussion analysis financial condition results operations stryker corporation global leader medical technology 2015 revenues 9946 net earnings 1439 offer diverse array innovative medical technologies including reconstructive medical surgical neurotechnology spine products help people lead active satisfying lives united states products marketed directly doctors hospitals healthcare facilities generally maintain separate dedicated sales forces principal product lines provide focus high level expertise medical specialty served products sold approximately 100 countries companyowned sales subsidiaries branches well thirdparty dealers distributors business generally seasonal nature however number orthopaedic implant surgeries typically lower summer months sales capital equipment generally higher fourth quarter making healthcare better heart collaborating customers develop innovative products services ultimately improve patients lives express mission statement together customers driven make healthcare better believe success highly competitive product categories operate depends ability develop new products make improvements existing products committed internal innovation develop products services improve outcomes deliver greater cost savings efficiencies augment efforts focused acquisitions success depends ability people execute effectively every day goal achieve sales growth highend medical technology industry medtech industry maintain capital allocation strategy prioritizes 1 acquisitions 2 dividends 3 share repurchases overview 2015 achieved sales growth 28 line ongoing goal grow organic sales highend medtech excluding impact acquisitions sales grew 61 constant currency reported net earnings per diluted share 378 2015 achieved 82 growth adjusted net earnings per diluted share see page 12 reconciliation reported net earnings per diluted share adjusted net earnings per diluted share continued capital allocation strategy investing 153 acquisitions paying 521 dividends shareholders using 700 share repurchases 2015 acquired chg hospital beds inc chg designs manufactures markets lowheight hospital beds related accessories recent developments january 26 2016 announced william r jellison elected retire role vice president chief financial officer effective april 1 2016 glenn boehnlein currently serves group vice president chief financial officer medsurg neurotechnology promoted vice president chief financial officer effective april 1 2016 february 1 2016 entered definitive agreement acquire sage products llc sage cash transaction 2775 sage develops manufactures distributes disposable products targeted reducing never events primarily intensive care unit medsurg hospital unit setting sage’s products include solutions oral care skin preparation protection patient cleaning hygiene turning positioning devices heel care boots transaction expected close second quarter 2016 results operations see nongaap financial measures page 12 discussion nongaap financial measures used report dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k consolidated net sales consolidated net sales 2015 increased 28 reported 70 constant currency foreign currency exchange rates negatively impacted net sales 42 excluding 09 impact acquisitions net sales increased 61 constant currency including 76 increased unit volume product mix partially offset 16 lower prices increase led primarily higher product shipments neurotechnology trauma extremities medical instruments consolidated net sales 2014 increased 73 reported 83 constant currency foreign currency exchange rates negatively impacted net sales 10 excluding 25 impact acquisitions net sales increased 58 constant currency including 78 increased unit volume product mix partially offset 20 lower prices increase led primarily higher product shipments instruments trauma extremities endoscopy neurotechnology medical supplemental geographical net sales growth information nm meaningful orthopaedics net sales orthopaedics net sales 2015 increased 17 reported 67 constant currency foreign currency exchange rates negatively impacted net sales 50 excluding 05 impact acquisitions net sales increased 61 constant currency including 86 increased unit volume changes product mix partially offset 24 lower prices increase led primarily higher shipments trauma extremities products orthopaedics net sales 2014 increased 52 reported 63 constant currency net sales negatively impacted 11 due impact foreign currency exchange rates excluding 30 impact acquisitions net sales increased 32 constant currency including 62 increased unit volume changes product mix partially offset 29 lower prices increase led primarily higher shipments trauma extremities products medsurg net sales medsurg net sales 2015 increased 30 reported 62 constant currency foreign currency exchange rates negatively impacted net sales 32 excluding 17 impact acquisitions net sales increased 45 constant currency including 48 increased unit volume changes product mix partially offset 03 lower prices increase led primarily higher shipments medical instruments products medsurg net sales 2014 increased 108 reported 117 constant currency net sales negatively impacted 09 due impact foreign currency exchange rates excluding 30 impact acquisitions net sales increased 87 constant currency including 95 increased unit volume changes product mix partially offset 08 lower prices increase led primarily higher shipments instrument dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k medical products partially offset lower shipments sustainability products neurotechnology spine net sales neurotechnology spine net sales 2015 increased 50 reported 95 constant currency foreign currency exchange rates negatively impacted net sales 45 excluding 01 impact acquisitions net sales constant currency increased 94 including 116 increased unit volume changes product mix partially offset 23 lower prices increase led primarily higher shipments neurotechnology products neurotechnology spine net sales 2014 increased 50 reported 62 constant currency net sales negatively impacted 12 due impact foreign currency exchange rates excluding 05 impact acquisitions net sales increased 57 constant currency including 81 increased unit volume changes product mix partially offset 24 lower prices increase led primarily higher shipments neurotechnology products gross profit gross profit 2015 increased 664 657 2014 primarily due product mix favorable impact foreign currency exchange rates offset decreases selling price products gross profit decreased 657 2014 compared 667 2013 primarily due decreases selling prices products unfavorable product mix unfavorable impact foreign currency exchange rates gross profit adjustments research development engineering expenses research development engineering expenses represented 63 net sales 2015 2014 compared 59 2013 increased spending levels 2015 2014 driven timing projects investments new technologies selling general administrative expenses selling general administrative expenses percentage net sales 2015 decreased 363 367 2014 384 2013 excluding adjustments table selling general administrative expenses increased 2015 due increased expenses related european regional headquarters higher compensation costs due part sales performancerelated commissions partially offset disciplined expense management selling general administrative adjustments recall charges net insurance proceeds recall charges net insurance proceeds due previously disclosed rejuvenate abg ii voluntary recall matters 296 761 622 2015 2014 2013 received 53 179 insurance proceeds 2015 2014 refer note 8 notes consolidated financial statements information intangibles amortization intangibles amortization 210 188 138 2015 2014 2013 increases due acquisitions income expense net income expense net 126 86 44 2015 2014 2013 increase expense primarily driven higher interest costs income tax reserves unfavorable impact foreign currency exchange rate changes income taxes effective income tax rate earnings 171 556 170 2015 2014 2013 effective income tax rate 2014 included tax impact establishment european regional headquarters planned cash repatriation executed 2015 net earnings net earnings 2015 increased 1439 378 per diluted share 515 134 per diluted share 2014 1006 263 per diluted share 2013 impact foreign currency exchange rates reduced net earnings per diluted share approximately 026 014 2015 2014 net earnings adjustments dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k nongaap financial measures supplement reporting financial information determined accounting principles generally accepted united states gaap certain nongaap financial measures including percentage sales growth constant currency percentage organic sales growth adjusted gross profit cost sales excluding specified items adjusted selling general administrative expenses adjusted amortization intangible assets adjusted operating income adjusted effective income tax rate adjusted net earnings adjusted net earnings per diluted share diluted eps believe nongaap measures provide meaningful information assist investors shareholders understanding financial results assessing prospects future performance management believes percentage sales growth constant currency adjusted measures described important indicators operations exclude items may indicative unrelated core operating results provide baseline analyzing trends underlying businesses management uses nongaap financial measures reviewing operating results reportable business segments analyzing potential future business trends connection budget process bases certain management incentive compensation nongaap financial measures measure percentage sales growth constant currency remove impact changes foreign currency exchange rates affect comparability trend sales percentage sales growth constant currency calculated translating current year results prior year average foreign currency exchange rates measure percentage organic sales growth remove impact changes foreign currency exchange rates acquisitions affect comparability trend sales percentage organic sales growth calculated translating current year results prior year average foreign currency exchange rates excluding impact acquisitions measure earnings performance consistent comparable basis exclude certain items affect comparability operating results trend earnings adjustments irregular timing may indicative past future performance therefore excluded allow investors better understand underlying operating trends following examples types adjustments may included period 1 acquisition integration related costs related integrating recently acquired businesses specific costs related consummation acquisition process 2 amortization intangible assets periodic amortization expense related purchased intangible assets 3 restructuringrelated charges costs associated workforce reductions facility rationalizations restructuring activities 4 recall matters best estimate minimum range probable loss resolve certain product recalls 5 regulatory legal matters best estimate minimum range probable loss resolve certain regulatory matters legal settlements 6 tax matters certain significant discrete tax items adjustments interest expense related settlement certain tax matters nongaap financial measures standardized may possible compare financial measures companies nongaap financial measures similar names adjusted financial measures considered isolation substitute reported sales growth gross profit cost sales selling general administrative expenses amortization intangible assets operating income effective income tax rate net earnings net earnings per diluted share directly comparable gaap financial measures nongaap financial measures additional way viewing aspects operations viewed gaap results reconciliations corresponding gaap financial measures provide complete understanding business strongly encourage investors shareholders review financial statements publiclyfiled reports entirety rely single financial measure following reconciles nongaap financial measures adjusted gross profit adjusted selling general administrative expense adjusted operating income adjusted income expense net adjusted net earnings adjusted effective tax rate adjusted diluted eps directly comparable gaap financial measures reconciliation nongaap financial measures directly comparable gaap financial measures dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k weightedaverage basic diluted shares outstanding used calculation nongaap diluted eps weightedaverage basic diluted shares outstanding used calculation reported diluted eps financial condition liquidity believe financial condition continues high quality evidenced ability generate substantial cash operations ready access capital markets competitive rates operating cash flow provides primary source cash fund operating needs capital expenditures excess operating cash used first fund acquisitions complement portfolio businesses discretionary uses include dividends share repurchases necessary may supplement operating cash flow debt fund activities overall cash position shows strong business results global cash management strategy takes account liquidity management economic factors tax considerations operating activities cash provided operations 899 1782 1886 2015 2014 2013 decrease 2015 primarily due recallrelated payments associated rejuvenate abgii recall settlement agreement timing income tax payments net accounts receivable inventory accounts payable resulted consumption 231 249 165 cash 2015 2014 2013 inventory days hand 2015 increased 5 days 2014 increasing eight days 2014 accounts receivable days sales outstanding 2015 increased one day decreasing one day 2014 investing activities cash provided investing activities 1956 2015 compared cash used investing 1878 2014 2217 2013 change primarily due sale portion marketable securities 2015 make recallrelated payments discussed operating activities acquisitions resulted cash consumption 153 916 2320 2015 2014 2013 2015 primary acquisition chg 2014 primary acquisitions patient safety technologies inc pivot medical inc berchtold holding ag small bone innovations inc 2013 acquired trauson holdings company limited mako surgical corp capital expenditures capital expenditures 270 233 195 2015 2014 2013 capital expenditures 2015 primarily related acquisition integration support information technology infrastructure upgrades capacity expansion new product introductions innovation cost savings financing activities dividends paid dividends paid per common share increased 98 134 per share 2015 compared 122 per share 2014 increase 151 2013 dividends paid per common share total dividends paid common shareholders included following table 2015 2014 2013 shortterm longterm debt maintain debt levels consider appropriate evaluating number factors including cash flow expectations cash requirements ongoing operations investment financing plans including acquisitions share repurchase activities overall cost capital dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k net proceeds borrowings 48 1159 1005 2015 2014 2013 2015 proceeds primarily public offerings notes offset payment certain notes due paid january 2015 proceeds 2014 primarily public offerings notes commercial paper refer note 9 notes consolidated financial statements information total debt 4022 3973 2015 2014 share repurchases total use cash share repurchases 700 100 317 2015 2014 2013 decided suspend share repurchase program 2016 liquidity cash equivalents marketable securities 4079 5000 december 31 2015 2014 current assets exceeded current liabilities 4441 4223 december 31 2015 2014 anticipate able support shortterm liquidity operating needs including recallrelated payments related rejuvenate abg ii recalls variety sources including cash operations commercial paper existing credit lines raised funds capital markets may continue time strong shortterm longterm debt ratings believe enable us refinance debt becomes due existing credit facilities additional funds required december 31 2015 approximately 1236 borrowing capacity available existing credit facilities december 31 2015 approximately 46 consolidated cash equivalents marketable securities held locations outside united states 2014 announced would begin repatriation program completed program 2015 repatriated approximately 18 billion united states remaining cash held outside united states considered indefinitely reinvested intend use cash expand operations either organically acquisitions outside united states continually evaluate receivables particularly spain portugal italy greece southern european region total net receivables southern european region approximately 132 154 2015 2014 including approximately 51 78 sovereign receivables 2015 2014 believe current reserves related receivables adequate additional credit risk associated southern european region expected material adverse impact financial position liquidity currently investments sovereign debt instruments southern european region nonsovereign exposure countries considered immaterial 2015 made recallrelated payments 1202 united states rejuvenate abg ii settlement agreement refer note 8 notes consolidated financial statements information guarantees offbalance sheet arrangements guarantees offbalance sheet financing arrangements including variable interest entities magnitude believe could material impact financial condition liquidity contractual obligations forwardlooking cash requirements described note 8 consolidated financial statements 2015 recorded additional charges earnings totaling 295 related rejuvenate abg ii recalls based information received actuarially determined range probable loss resolve matter estimated approximately 1824 2056 232 thirdparty insurance recoveries 2416 final outcome matter dependent many variables difficult predict ultimate cost entirely resolve matter may materially different amount current estimate could material adverse effect financial position results operations cash flows able reasonably estimate future periods payments made described note 12 consolidated financial statements december 31 2015 recorded liability uncertain income tax positions 313 due uncertainties regarding ultimate resolution income tax audits able reasonably estimate future periods income tax payments settle uncertain income tax positions made described note 11 consolidated financial statements december 31 2015 defined benefit pension plans underfunded 240 approximately 231 related plans outside united states due rules affecting taxdeductible contributions jurisdictions plans offered impact future plan asset performance changes interest rates potential changes legislation united states foreign jurisdictions able reasonably estimate beyond 2016 amounts may required fund defined benefit pension plans longterm contractual obligations critical accounting policies estimates preparing financial statements accordance accounting principles generally accepted united states certain accounting policies may require choice acceptable accounting methods may require substantial judgment estimation application include inventory reserves income taxes acquisitions goodwill intangible assets legal contingencies believe accounting policies others set forth note 1 consolidated financial statements reviewed integral understanding results operations financial condition inventory reserves maintain reserves excess obsolete inventory resulting potential inability sell certain products prices excess current carrying costs make estimates regarding future recoverability costs products record provisions based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k income taxes annual tax rate determined based income statutory tax rates tax impacts items treated differently tax purposes financial reporting purposes tax law requires certain items included tax return different times items reflected financial statements differences permanent expenses deductible tax return differences temporary reverse time depreciation expense temporary differences create deferred tax assets liabilities deferred tax assets generally represent tax effect items used tax deduction credit future years already recorded tax benefit income statement deferred tax liabilities generally represent tax expense recognized financial statements payment deferred tax effect expenditures deduction already taken tax return yet recognized financial statements assets recorded fair value business combinations corresponding tax basis adjustment inherent determining annual tax rate judgments regarding business plans tax planning opportunities expectations future outcomes realization certain deferred tax assets dependent upon generating sufficient taxable income appropriate jurisdiction prior expiration carryforward periods although realization assured management believes likely deferred tax assets net valuation allowances realized operate multiple jurisdictions complex tax policy regulatory environments certain jurisdictions may take tax positions management believes supportable potentially subject successful challenge applicable taxing authority differences interpretation respective governmental taxing authorities impacted local economic fiscal environment evaluate tax positions establish liabilities accordance applicable accounting guidance uncertainty income taxes review tax uncertainties light changing facts circumstances progress tax audits adjust accordingly number audits process various jurisdictions although resolution tax positions uncertain based currently available information believe likely ultimate outcomes material adverse effect financial position results operations cash flows number estimates assumptions inherent calculating various components tax provision certain changes future events changes tax legislation geographic mix earnings completion tax audits earnings repatriation plans could impact estimates effective tax rate acquisitions goodwill intangibles longlived assets account acquired businesses using purchase method accounting purchase method financial statements include operations acquired business starting completion acquisition addition assets acquired liabilities assumed recorded date acquisition respective estimated fair values excess purchase price estimated fair values net assets acquired recorded goodwill significant judgment required estimating fair value intangible assets assigning respective useful lives accordingly typically obtain assistance thirdparty valuation specialists significant items fair value estimates based available historical information future expectations assumptions deemed reasonable management inherently uncertain typically use income method estimate fair value intangible assets based forecasts expected future cash flows attributable respective assets significant estimates assumptions inherent valuations reflect consideration marketplace participants include amount timing future cash flows including expected growth rates profitability underlying product technology life cycles economic barriers entry discount rate applied cash flows unanticipated market macroeconomic events circumstances may occur could affect accuracy validity estimates assumptions determining useful life intangible asset also requires judgment exception certain trade names majority acquired intangible assets eg certain trademarks brands customer distributor relationships patents technologies expected determinable useful lives assessment useful lives intangible assets based number factors including competitive environment market share trademark andor brand history underlying product life cycles operating plans macroeconomic environment countries trademarks brands sold estimates useful lives determinablelived intangibles primarily based factors determinablelived intangible assets amortized expense estimated useful life certain acquisitions acquire inprocess research development iprd intangible assets iprd considered indefinitelived intangible asset time research completed time becomes determinablelived intangible asset determined future use time impaired value indefinitelived intangible assets goodwill amortized tested least annually impairment testing goodwill performed separately impairment testing indefinitelived intangibles perform annual impairment test goodwill fourth quarter year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability circumstances test goodwill impairment reviewing book value compared fair value reporting unit level test individual indefinitelived intangibles reviewing individual book values compared fair value determine fair value reporting units indefinitelived intangible assets based income approach income approach calculate fair value reporting units indefinitelived intangible assets based present value estimated future cash flows considerable management judgment necessary evaluate impact operating macroeconomic changes estimate future cash flows measure fair value assumptions used impairment evaluations forecasted growth rates cost capital consistent internal projections operating plans believe assumptions estimates also comparable would used marketplace participants recognize impairment charges goodwill years presented annual impairment testing indicated reporting unit goodwill fair values exceeded respective recorded values future changes judgments assumptions dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k estimates used impairment testing goodwill indefinitelived intangible assets including discount tax rates future cash flow projections could result significantly different estimates fair values significant reduction estimated fair values could result impairment charges could materially affect financial statements review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows individual asset level asset group level undiscounted cash flows expected generated related assets estimated useful life based updated projections evaluation indicates carrying amount assets may recoverable potential impairment measured based upon fair value related assets asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell legal contingencies involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 8 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable projected management additional expense may incurred could unfavorably affect future operating results currently selfinsured product liabilityrelated claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows new accounting pronouncements refer note 1 notes consolidated financial statements information hedging derivative financial instruments sell products globally result financial results could significantly affected factors weak economic conditions changes foreign currency exchange rates operating results primarily exposed changes exchange rates among united states dollar european currencies particular euro swiss franc british pound japanese yen australian dollar canadian dollar develop manufacture products united states canada turkey china france germany ireland puerto rico switzerland incur costs applicable local currencies global deployment facilities serves partially mitigate impact currency exchange rate changes cost sales enter designated nondesignated forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses nondesignated forward contracts ineffectiveness measured designated forward currency exchange contracts included consolidated statements earnings derivative instruments designated qualify cash flow hedge effective portion gain loss derivative reported component accumulated comprehensive income reclassified earnings period hedged transaction affects earnings designated certain longterm intercompany loans payable forward exchange contracts net investment hedges investments certain international subsidiaries use euro functional currency effective portion derivatives designated net investment hedges recorded fair value balance sheet date change fair value recorded component comprehensive income estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points hypothetical 10 change foreign currencies relative united states dollar would change december 31 2015 fair value approximately 178 exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties certain investments net assets international locations hedged investments subject translation gains losses due changes foreign currency exchange rates 2015 weakening foreign currencies relative united states dollar decreased value investments net assets increased related foreign currency translation adjustment loss shareholders equity 390 refer note 3 notes consolidated financial statements information item 7aitem 7 management’s discussion analysis financial condition results operations stryker corporation global leader medical technology offers diverse array innovative medical technologies including orthopaedic medical surgical neurotechnology spine products help people lead active satisfying lives goal achieve sales growth highend medical technology medtech industry maintain capital allocation strategy prioritizes 1 acquisitions 2 dividends 3 share repurchases overview 2016 achieved reported sales growth 139 excluding impact acquisitions sales grew 64 constant currency line ongoing goal grow organic sales highend medtech reported net earnings 1647 2016 achieved 151 growth net earnings per diluted share1 excluding impact certain items achieved adjusted net earnings 2194 growth 133 adjusted net earnings per diluted share1 continued capital allocation strategy investing 4332 acquisitions paying 568 dividends shareholders using 13 share repurchases 2016 completed acquisitions sage products llc sage total consideration approximately 2875 physiocontrol international inc physio total net consideration approximately 1299 synergetics neuro portfolio synergetics sage develops manufactures distributes intensive care disposable products physio develops manufactures markets monitorsdefibrillators aeds cprassist devices along data management support services acquired synergetics products include malis generator spetzler malis disposable forceps existing sonopet tips rf generator refer note 5 consolidated financial statements information january 2017 sold 500 senior unsecured notes 2016 sold 3500 senior unsecured notes repaid 750 senior unsecured notes due september 2016 refer note 9 consolidated financial statements information results operations 1 refer nongaap financial measures discussion nongaap financial measures used report reconciliation directly comparable gaap financial measure dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k consolidated net sales consolidated net sales 2016 increased 139 reported 143 constant currency foreign currency exchange rates negatively impacted net sales 04 excluding 79 impact acquisitions net sales increased constant currency 78 increased unit volume partially offset 14 lower prices unit volume increase primarily due higher shipments knees instruments endoscopy neurotechnology trauma extremities medical products consolidated net sales 2015 increased 28 reported 70 constant currency foreign currency exchange rates negatively impacted net sales 42 excluding 09 impact acquisitions net sales increased constant currency 76 increased unit volume partially offset 16 lower prices unit volume increase led primarily higher shipments neurotechnology trauma extremities medical instruments products orthopaedics net sales orthopaedics net sales 2016 increased 47 reported 51 constant currency foreign currency exchange rates negatively impacted net sales 04 excluding 03 impact acquisitions net sales increased constant currency 69 increased unit volume partially offset 21 lower prices unit volume increase led primarily higher shipments knees trauma extremities products orthopaedics net sales 2015 increased 17 reported 67 constant currency foreign currency exchange rates negatively impacted net sales 50 excluding 05 impact acquisitions net sales increased constant currency 86 increased unit volume partially offset 24 lower prices unit volume increase led primarily higher shipments trauma extremities products medsurg net sales medsurg net sales 2016 increased 256 reported 263 constant currency foreign currency exchange rates negatively impacted net sales 07 excluding 191 impact acquisitions net sales increased constant currency 78 increased unit volume partially offset 06 lower prices unit volume increase led primarily higher shipments instruments endoscopy medical products medsurg net sales 2015 increased 30 reported 62 constant currency foreign currency exchange rates negatively impacted net sales 32 excluding 17 impact acquisitions net sales increased constant currency 48 increased unit volume partially offset 03 lower prices unit volume increase led primarily higher shipments medical instrument products neurotechnology spine net sales neurotechnology spine net sales 2016 increased 99 reported 98 constant currency foreign currency exchange rates positively impacted net sales 01 excluding 14 impact acquisitions net sales constant currency increased 98 increased unit volume partially offset 14 lower prices unit volume increase led primarily higher shipments neurotechnology products neurotechnology spine net sales 2015 increased 50 reported 95 constant currency foreign currency exchange negatively impacted net sales 45 excluding 01 impact acquisitions net sales increased constant currency 116 increased unit volume changes product mix partially offset 23 lower prices unit volume increase led primarily higher shipments neurotechnology products gross profit gross profit 2016 percentage net sales decreased 662 664 2015 benefit suspension medical device excise tax favorable productivity offset unfavorable mix including impact acquisitions unfavorable impact foreign currency exchange gross profit percentage net sales increased 664 2015 657 2014 primarily due product mix favorable impact foreign currency exchange rates offset decreases selling prices products dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k research development engineering expenses research development engineering expenses represented 63 net sales 2016 2015 2014 recent acquisitions spending projects investments new technologies contributed spending levels reflecting continued investment internal innovation selling general administrative expenses selling general administrative expenses percentage net sales 2016 increased 365 363 2015 excluding impact certain items table expenses percentage net sales decreased 348 2016 353 2015 improvement reflects favorable leverage continued focus operating expense improvement initiatives cost containment efforts business mix including leverage recent acquisitions selling general administrative expenses percentage net sales 2015 decreased 363 367 2014 excluding impact certain items noted selling general administrative expenses increased 2015 due increased expenses related european regional headquarters higher compensation costs due part sales performancerelated commissions partially offset disciplined expense management recall charges net insurance proceeds recall charges net insurance proceeds 158 296 761 2016 2015 2014 charges primarily due previously disclosed rejuvenate abgii modularneck hip stems voluntary recalls refer note 6 consolidated financial statements information amortization intangible assets amortization intangible assets 319 210 188 2016 2015 2014 increases primarily due acquisitions refer note 7 consolidated financial statements information income expense net income expense net 245 126 86 2016 2015 2014 increase 2016 primarily driven higher interest expense due higher debt levels result march 2016 debt offering refer note 9 consolidated financial statements information income taxes effective income tax rate earnings 143 171 556 2016 2015 2014 effective income tax rate 2014 includes tax impacts establishment european regional headquarters cash repatriation affected 2014 executed 2015 establishment european regional headquarters contributed lower effective income tax rates 2015 2016 adopted asu 201609 compensationstock compensation improvements employee sharebased payment accounting january 1 2017 impact effective tax rate 2017 net earnings net earnings 2016 increased 1647 435 per diluted share 1439 378 per diluted share 2015 515 134 per diluted share 2014 impact foreign currency exchange rates reduced net earnings per diluted share approximately 011 026 014 2016 2015 2014 nongaap financial measures supplement reporting financial information determined accounting principles generally accepted united states gaap certain nongaap financial measures including percentage sales growth constant currency percentage organic sales growth adjusted gross profit cost sales excluding specified items adjusted selling general administrative expenses adjusted amortization intangible assets adjusted operating income adjusted effective income tax rate adjusted net earnings adjusted net earnings per diluted share diluted eps believe nongaap measures provide meaningful information assist investors shareholders understanding financial results assessing prospects future performance management believes percentage sales growth constant currency adjusted measures described important indicators operations exclude items may indicative unrelated core operating results provide baseline analyzing trends underlying businesses management uses nongaap financial measures reviewing operating results reportable business segments analyzing potential future business trends connection budget process bases certain management incentive compensation nongaap financial measures measure percentage sales growth constant currency remove impact changes foreign currency exchange rates affect comparability trend sales percentage sales growth constant currency calculated translating current year results prior year average foreign currency exchange rates measure percentage organic sales growth remove impact changes foreign currency exchange rates acquisitions affect comparability trend sales percentage organic sales growth calculated translating current year results prior year average foreign currency exchange rates excluding impact acquisitions measure earnings performance consistent comparable basis exclude certain items affect comparability operating results trend earnings adjustments irregular timing may indicative past future performance therefore excluded allow investors better understand underlying operating trends following dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k examples types adjustments may included period 1 acquisition integration related costs related integrating recently acquired businesses specific costs related consummation acquisition process 2 amortization purchased intangible assets periodic amortization expense related purchased intangible assets 3 restructuringrelated charges costs associated workforce reductions restructuringrelated activities 4 rejuvenate recall matters best estimate minimum range probable loss resolve certain product recalls 5 regulatory legal matters best estimate minimum range probable loss resolve certain regulatory matters legal settlements 6 tax matters certain significant discrete tax items adjustments interest expense related settlement certain tax matters nongaap financial measures standardized may possible compare financial measures companies nongaap financial measures similar names adjusted financial measures considered isolation substitute reported sales growth gross profit cost sales selling general administrative expenses amortization intangible assets operating income effective income tax rate net earnings net earnings per diluted share directly comparable gaap financial measures nongaap financial measures additional way viewing aspects operations viewed gaap results reconciliations corresponding gaap financial measures end discussion results operations provide complete understanding business strongly encourage investors shareholders review financial statements publiclyfiled reports entirety rely single financial measure weightedaverage basic diluted shares outstanding used calculation nongaap earnings per share used calculation reported per share amounts reconciliation directly comparable gaap financial measure nongaap financial measures dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k financial condition liquidity believe financial condition continues high quality evidenced ability generate substantial cash operations ready access capital markets competitive rates operating cash flow provides primary source cash fund operating needs capital expenditures excess operating cash used first fund acquisitions complement portfolio businesses discretionary uses include dividends share repurchases necessary supplement operating cash flow debt fund activities overall cash position reflects strong business results global cash management strategy takes account liquidity management economic factors tax considerations operating activities cash provided operations 1812 899 1782 2016 2015 2014 increase cash operations 2016 primarily due lower rejuvenate abg ii recallrelated payments compared 2015 partially offset higher levels inventory 2016 net accounts receivable inventory accounts payable resulted consumption 507 231 249 cash 2016 2015 2014 investing activities cash used provided investing activities 4191 1956 1878 2016 2015 2014 acquisitions resulted cash consumption 4332 153 916 2016 2015 2014 2016 acquired sage physio synergetics certain businesses related assets 2015 primary acquisition chg 2014 primary acquisitions patient safety technologies inc pivot medical inc berchtold holding ag small bone innovations inc purchases property plant equipment purchases property plant equipment 490 270 233 2016 2015 2014 capital expenditures 2016 primarily due capital expenditures associated global erp system construction dedicated additive manufacturing facility marketable securities net cash provided used sale marketable securities 634 2379 729 2016 2015 2014 cash provided sale marketable securities 2016 used repay senior unsecured notes due september 2016 cash provided sales marketable securities 2015 primarily due sale portion marketable securities 2015 used make recallrelated payments financing activities dividends share repurchases dividends paid per common share increased 101 152 per share 2016 compared 138 per share 2015 increase 131 122 2014 borrowings repayments debt maintain debt levels consider appropriate evaluating number factors including cash flow expectations cash requirements ongoing operations investment financing plans including acquisitions share repurchase activities overall cost capital net proceeds borrowings 2912 48 1159 2016 2015 2014 2016 proceeds primarily issuance 3500 senior unsecured notes march 2016 partially offset repayment 750 senior unsecured notes due september 2016 2015 proceeds primarily public offerings notes offset payment certain notes due paid january 2015 refer note 9 consolidated financial statements information liquidity cash equivalents marketable securities 3384 4079 current assets exceeded current liabilities 4713 4441 december 31 2016 2015 anticipate able support shortterm liquidity operating needs including acquisitions recallrelated payments variety sources including cash operations commercial paper existing credit lines raised funds capital markets may continue time result issuance senior unsecured notes march 2016 moodys downgraded unsecured note ratings baa1 a3 standard poors downgraded corporate credit longterm issuelevel rating shortterm rating a1 nevertheless continue strong investmentgrade shortterm longterm debt ratings believe enable us refinance debt needed existing credit facilities additional funds required august 2016 increased borrowing capacity available main credit facility 250 maximum 1500 september 2016 increased amount commercial paper issuable commercial paper program 250 maximum 1500 december 31 2016 approximately 84 consolidated cash equivalents marketable securities held locations outside united states compared 46 december 31 2015 majority cash held locations outside united states considered indefinitely reinvested intend use cash expand operations organically acquisitions january 2017 sold 500 senior unsecured notes interest rate 1800 due january 15 2019 guarantees offbalance sheet arrangements guarantees offbalance sheet financing arrangements including variable interest entities magnitude believe could material impact financial condition liquidity contractual obligations forwardlooking cash requirements described note 6 consolidated financial statements 2016 recorded additional charges earnings totaling 144 related rejuvenate abg ii recalls based information received actuarially determined range probable loss resolve matter estimated approximately 1968 2224 2200 2456 232 thirdparty insurance recoveries final outcome matter dependent many variables difficult predict ultimate cost entirely resolve matter may materially different amount current estimate could material adverse effect financial position results dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k operations cash flows able reasonably estimate future periods payments made described note 10 consolidated financial statements december 31 2016 reserve uncertain income tax positions 287 due uncertainties regarding ultimate resolution income tax audits able reasonably estimate future periods income tax payments settle uncertain income tax positions made described note 11 consolidated financial statements december 31 2016 defined benefit pension plans underfunded 280 approximately 271 related plans outside united states due rules affecting taxdeductible contributions jurisdictions plans offered impact future plan asset performance changes interest rates potential changes legislation united states foreign jurisdictions able reasonably estimate beyond 2017 amounts may required fund defined benefit pension plans critical accounting policies estimates preparing financial statements accordance accounting principles generally accepted united states certain accounting policies may require choice acceptable accounting methods may require substantial judgment estimation application include inventory reserves income taxes acquisitions goodwill intangible assets legal contingencies believe accounting policies others set forth note 1 consolidated financial statements reviewed integral understanding results operations financial condition inventory reserves maintain reserves excess obsolete inventory resulting potential inability sell certain products prices excess current carrying costs make estimates regarding future recoverability costs products record provisions based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results income taxes annual tax rate determined based income statutory tax rates tax impacts items treated differently tax purposes financial reporting purposes tax law requires certain items included tax return different times items reflected financial statements differences permanent expenses deductible tax return differences temporary reverse time depreciation expense temporary differences create deferred tax assets liabilities deferred tax assets generally represent tax effect items used tax deduction credit future years already recorded tax benefit income statement deferred tax liabilities generally represent tax expense recognized financial statements payment deferred tax effect expenditures deduction taken tax return yet recognized financial statements assets recorded fair value business combinations corresponding tax basis adjustment inherent determining annual tax rate judgments regarding business plans tax planning opportunities expectations future outcomes realization certain deferred tax assets dependent upon generating sufficient taxable income appropriate jurisdiction prior expiration carryforward periods although realization assured management believes likely deferred tax assets net valuation allowances realized operate multiple jurisdictions complex tax policy regulatory environments certain jurisdictions may take tax positions management believes supportable potentially subject successful challenge applicable taxing authority differences interpretation respective governmental taxing authorities impacted local economic fiscal environment evaluate tax positions establish liabilities accordance applicable accounting guidance uncertainty income taxes review tax uncertainties light changing facts circumstances progress tax audits adjust accordingly number audits process various jurisdictions although resolution tax positions uncertain based currently available information believe likely ultimate outcomes material adverse effect financial position results operations cash flows due number estimates assumptions inherent calculating various components tax provision certain changes future events changes tax legislation geographic mix earnings completion tax audits earnings repatriation plans could impact estimates effective tax rate acquisitions goodwill intangibles longlived assets financial statements include operations acquired business starting completion acquisition addition assets acquired liabilities assumed recorded date acquisition respective estimated fair values excess purchase price estimated fair values net assets acquired recorded goodwill significant judgment required estimating fair value intangible assets assigning respective useful lives accordingly typically obtain assistance thirdparty valuation specialists significant items fair value estimates based available historical information future expectations assumptions deemed reasonable management inherently uncertain typically use income method estimate fair value intangible assets based forecasts expected future cash flows attributable respective assets significant estimates assumptions inherent valuations reflect consideration marketplace participants include amount timing future cash flows including expected growth rates profitability underlying product technology life cycles economic barriers entry discount rate applied cash flows unanticipated market macroeconomic events circumstances dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k may occur could affect accuracy validity estimates assumptions determining useful life intangible asset also requires judgment exception certain trade names majority acquired intangible assets eg certain trademarks brands customer distributor relationships patents technologies expected determinable useful lives assessment useful lives intangible assets based number factors including competitive environment market share trademark brand history underlying product life cycles operating plans macroeconomic environment countries trademarked branded products sold estimates useful lives determinablelived intangibles primarily based factors determinablelived intangible assets amortized expense estimated useful life certain acquisitions acquire inprocess research development iprd intangible assets iprd considered indefinitelived intangible asset time research completed time becomes determinablelived intangible asset determined future use time impaired value indefinitelived intangible assets goodwill amortized tested least annually impairment testing goodwill performed separately impairment testing indefinitelived intangibles perform annual impairment test goodwill fourth quarter year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability circumstances test goodwill impairment reviewing book value compared fair value reporting unit level test individual indefinitelived intangibles reviewing individual book values compared fair value determine fair value reporting units indefinitelived intangible assets based income approach income approach calculate fair value reporting units indefinitelived intangible assets based present value estimated future cash flows considerable management judgment necessary evaluate impact operating macroeconomic changes estimate future cash flows measure fair value assumptions used impairment evaluations forecasted growth rates cost capital consistent internal projections operating plans believe assumptions estimates also comparable would used marketplace participants recognize impairment charges goodwill years presented annual impairment testing indicated reporting unit goodwill fair values exceeded respective recorded values future changes judgments assumptions estimates used impairment testing goodwill indefinitelived intangible assets including discount tax rates future cash flow projections could result significantly different estimates fair values significant reduction estimated fair values could result impairment charges could materially affect results operations review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows individual asset level asset group level undiscounted cash flows expected generated related assets estimated useful life based updated projections evaluation indicates carrying amount assets may recoverable potential impairment measured based upon fair value related assets asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell legal contingencies involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 6 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable projected management additional expense may incurred could unfavorably affect future operating results currently selfinsured product liabilityrelated claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows new accounting pronouncements refer note 1 consolidated financial statements information item 7aitem 7 management’s discussion analysis financial condition results operations overview 2017 goal achieve sales growth highend medical technology medtech industry maintain capital allocation strategy prioritizes 1 acquisitions 2 dividends 3 share repurchases 2017 achieved reported net sales growth 99 excluding impact acquisitions net sales grew 71 constant currency line ongoing goal grow organic sales highend medtech reported net earnings 1020 net earnings per diluted share 268 excluding impact certain items achieved adjusted net earnings 2465 growth 119 adjusted net earnings per diluted share1 continued capital allocation strategy investing 831 acquisitions paying 636 dividends shareholders using 230 share repurchases december 2017 announced definitive merger agreement acquire entellus medical inc entellus highgrowth global medical technology company focused delivering superior patient physician experiences products designed minimally invasive treatment various ear nose throat ent disease states 2400 per share total consideration approximately 662 expect acquisition close february 2018 september 2017 acquired novadaq technologies inc novadaq total consideration approximately 716 novadaq leading developer fluorescence imaging technology provides surgeons visualization blood flow vessels related tissue perfusion cardiac cardiovascular gastrointestinal plastic microsurgical reconstructive procedures refer note 5 consolidated financial statements information august 2017 initiated voluntary product recall involving specific lots sage products sage oral care products took action response warning letter received united states food drug administration fda dated july 17 2017 set forth concerns regarding potential crosscontamination oral care solutions manufactured thirdparty supplier equipment also used manufacture nonpharmaceutical products discontinued business thirdparty supplier oral care solutions manufactured inhouse resumed shipping oral care products october returned full supply capacity end 2017 also placed sage clothbased products temporary ship hold third quarter response concerns set forth fda warning letter regarding testing methods used sage products containing solutions resumed shipping products manufactured inhouse tested testing method required fda september 2017 returned full supply capacity end 2017 january 2017 issued 500 senior unsecured notes refer note 9 consolidated financial statements information 1 refer nongaap financial measures discussion nongaap financial measures used report reconciliation directly comparable gaap financial measure consolidated results operations dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k consolidated net sales consolidated net sales 2017 increased 99 reported 98 constant currency foreign currency exchange rates positively impacted net sales 01 excluding 27 impact acquisitions net sales increased constant currency 82 increased unit volume partially offset 11 lower prices unit volume increase primarily due higher shipments neurotechnology endoscopy knees trauma extremities instruments products consolidated net sales 2016 increased 139 reported 143 constant currency foreign currency exchange rates negatively impacted net sales 04 excluding 79 impact acquisitions net sales increased constant currency 78 increased unit volume partially offset 14 lower prices unit volume increase primarily due higher shipments knees instruments endoscopy neurotechnology trauma extremities medical products orthopaedics net sales orthopaedics net sales 2017 increased 66 reported 65 constant currency foreign currency exchange rates positively impacted net sales 01 excluding 03 impact acquisitions net sales increased constant currency 86 increased unit volume partially offset 24 lower prices unit volume increase led primarily higher shipments knees trauma extremities products orthopaedics net sales 2016 increased 47 reported 51 constant currency foreign currency exchange rates negatively impacted net sales 04 excluding 03 impact acquisitions net sales increased constant currency 69 increased unit volume partially offset 21 lower prices unit volume increase led primarily higher shipments knees trauma extremities products medsurg net sales medsurg net sales 2017 increased 136 reported 134 constant currency foreign currency exchange rates positively impacted net sales 02 excluding 56 impact acquisitions net sales increased constant currency 75 increased unit volume 02 higher prices unit volume increase led primarily higher shipments endoscopy instruments medical products medsurg net sales 2016 increased 256 reported 263 constant currency foreign currency exchange rates negatively impacted net sales 07 excluding 191 impact acquisitions net sales increased constant currency 78 increased unit volume partially offset 06 lower prices unit volume increase led primarily higher shipments instruments endoscopy medical products neurotechnology spine net sales neurotechnology spine net sales 2017 increased 82 reported 83 constant currency foreign currency exchange rates impacted net sales nominally excluding 07 impact acquisitions net sales constant currency increased 91 increased unit volume partially offset 15 lower prices unit volume increase led primarily higher shipments neurotechnology products neurotechnology spine net sales 2016 increased 99 reported 98 constant currency foreign currency exchange rates positively impacted net sales 01 excluding 14 impact acquisitions net sales constant currency increased 98 increased unit volume partially offset 14 lower prices unit volume increase led primarily higher shipments neurotechnology products gross profit gross profit 2017 percentage net sales decreased 657 662 2016 primarily due impact restructuringrelated charges impact hurricanes unfavorable mix inflation partially offset higher sales volumes increased productivity favorable impact foreign currency exchange gross profit percentage net sales decreased 662 2016 664 2015 benefit suspension medical device excise tax favorable productivity offset unfavorable mix including impact acquisitions unfavorable impact foreign currency exchange dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k research development engineering expenses research development engineering expenses represented 63 net sales 2017 2016 2015 projects develop new products investments new technologies recent acquisitions contributed spending levels reflecting continued commitment innovation selling general administrative expenses selling general administrative expenses percentage net sales 2017 increased 366 365 2016 excluding impact certain items table expenses percentage net sales 348 2017 2016 reflects favorable leverage higher sales volumes continued focus operating expense improvement initiatives including leverage recent acquisitions partially offset unfavorable impact foreign currency exchange selling general administrative expenses percentage net sales 2016 increased 365 363 2015 excluding impact certain items noted selling general administrative expenses percentage sales decreased 2016 due favorable leverage continued focus operating expense improvement initiatives cost containment efforts business mix including leverage recent acquisitions recall charges net insurance proceeds recall charges net insurance proceeds 173 158 296 2017 2016 2015 charges primarily due previously disclosed rejuvenate abgii modularneck hip stems voluntary recalls refer note 6 consolidated financial statements information amortization intangible assets amortization intangible assets 371 319 210 2017 2016 2015 increase 2017 2016 due acquisitions refer note 7 consolidated financial statements information income expense net income expense net 227 245 126 2017 2016 2015 decrease 2017 primarily driven higher interest income decreased foreign currency transaction losses partially offset higher interest expense due higher debt levels result january 2017 debt offering refer note 9 consolidated financial statements information income taxes effective income tax rate earnings 506 143 171 2017 2016 2015 effective income tax rate 2017 includes impact complying tax cuts jobs act 2017 signed law december 2017 partially offset benefits adoption asu 201609 compensationstock compensation improvements employee sharebased payment accounting january 1 2017 continued lower effective income tax rates result european regional headquarters establishment european regional headquarters contributed lower effective income tax rates 2016 2015 net earnings net earnings 2017 decreased 1020 268 per diluted share 1647 435 per diluted share 2016 1439 378 per diluted share 2015 impact foreign currency exchange rates reduced net earnings per diluted share approximately 007 011 026 2017 2016 2015 nongaap financial measures supplement reporting financial information determined accounting principles generally accepted united states gaap certain nongaap financial measures including percentage sales growth constant currency percentage organic sales growth adjusted gross profit adjusted selling general administrative expenses adjusted amortization intangible assets adjusted operating income adjusted effective income tax rate adjusted net earnings adjusted net earnings per diluted share diluted eps believe nongaap measures provide meaningful information assist investors shareholders understanding financial results assessing prospects future performance management believes percentage sales growth constant currency adjusted measures described important indicators operations exclude items may indicative unrelated core operating results provide baseline analyzing trends underlying businesses management uses nongaap financial measures reviewing operating results reportable business segments analyzing potential future business trends connection budget process bases certain management incentive compensation nongaap financial measures measure percentage sales growth constant currency remove impact changes foreign currency exchange rates affect comparability trend sales percentage sales growth constant currency calculated translating current prior year results foreign currency exchange rate measure percentage organic sales growth remove impact changes foreign currency exchange rates acquisitions dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k affect comparability trend sales percentage organic sales growth calculated translating current year results prior year average foreign currency exchange rates excluding impact acquisitions measure earnings performance consistent comparable basis exclude certain items affect comparability operating results trend earnings adjustments irregular timing may indicative past future performance following examples types adjustments may included period 1 acquisition integrationrelated costs related integrating recently acquired businesses specific costs eg inventory stepup deal costs related consummation acquisition process 2 amortization purchased intangible assets periodic amortization expense related purchased intangible assets 3 restructuringrelated charges costs associated termination sales relationships certain countries workforce reductions elimination product lines weatherrelated asset impairments associated costs restructuringrelated activities 4 rejuvenate recall matters best estimate minimum range probable loss resolve certain product recalls 5 regulatory legal matters best estimate minimum range probable loss resolve certain regulatory matters legal settlements 6 tax matters charges represent impact accounting compliance tax cuts jobs act 2017 certain significant discrete tax items adjustments interest expense related settlement certain tax matters nongaap financial measures standardized may possible compare financial measures companies nongaap financial measures similar names adjusted financial measures considered isolation substitute reported sales growth gross profit cost sales selling general administrative expenses amortization intangible assets operating income effective income tax rate net earnings net earnings per diluted share directly comparable gaap financial measures nongaap financial measures additional way viewing aspects operations viewed gaap results reconciliations corresponding gaap financial measures end discussion results operations strongly encourage investors shareholders review financial statements publiclyfiled reports entirety rely single financial measure weightedaverage basic diluted shares outstanding used calculation nongaap earnings per share used calculation reported per share amounts reconciliation directly comparable gaap financial measure nongaap financial measure dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k financial condition liquidity believe financial condition continues high quality evidenced ability generate substantial cash operations readily access capital markets competitive rates operating cash flow provides primary source cash fund operating needs capital expenditures excess operating cash used first fund acquisitions complement portfolio businesses discretionary uses include dividends share repurchases supplement operating cash flow debt fund activities necessary overall cash position reflects strong business results global cash management strategy takes account liquidity management economic factors tax considerations operating activities cash provided operations 1559 1915 981 2017 2016 2015 decrease cash operations 2017 primarily due higher rejuvenate abg ii recallrelated payments compared 2016 unfavorable impact foreign currency remeasurement net accounts receivable inventory accounts payable resulted consumption 461 507 231 cash 2017 2016 2015 investing activities cash used provided investing activities 1613 4191 1956 2017 2016 2015 acquisitions net cash acquired acquisitions resulted cash consumption 831 4332 153 2017 2016 2015 2017 acquired novadaq certain businesses related assets 2016 primary acquisitions sage physio 2015 primary acquisition chg hospital beds inc purchases property plant equipment purchases property plant equipment 598 490 270 2017 2016 2015 capital expenditures 2017 primarily due capital expenditures associated development global erp system investments new existing plants equipment support sales growth marketable securities net cash used provided purchase sale marketable securities 183 634 2379 2017 2016 2015 cash provided sale marketable securities 2016 used repay senior unsecured notes due september 2016 cash provided sales marketable securities 2015 primarily used make recallrelated payments financing activities dividends share repurchases dividends paid per common share increased 118 170 per share 2017 compared 152 per share 2016 increase 101 138 2015 borrowings repayments debt maintain debt levels consider appropriate evaluating number factors including cash requirements ongoing operations investment financing plans including acquisitions share repurchase activities overall cost capital net proceeds borrowings 299 2912 48 2017 2016 2015 2017 proceeds primarily issuance 500 senior unsecured notes january 2017 partially offset payment 200 commercial paper 2016 proceeds primarily issuance 3500 senior unsecured notes march 2016 partially offset repayment 750 senior unsecured notes due september 2016 refer note 9 consolidated financial statements information liquidity cash equivalents marketable securities 2793 3384 current assets exceeded current liabilities 4508 4713 december 31 2017 2016 anticipate able support shortterm liquidity operating needs including acquisitions recallrelated payments variety sources including cash operations commercial paper existing credit lines raised funds capital markets may continue time result issuance senior unsecured notes march 2016 moodys downgraded unsecured note ratings baa1 a3 standard poors downgraded corporate credit longterm issuelevel rating shortterm rating a1 nevertheless continue strong investmentgrade shortterm longterm debt ratings believe enable us refinance debt needed existing credit facilities additional funds required borrowing capacity available main credit facility 1500 amount commercial paper issuable commercial paper program 1500 cash equivalents marketable securities held locations outside united states approximately 62 84 december 31 2017 2016 majority cash held locations outside united states considered indefinitely reinvested intend use cash expand operations organically acquisitions dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k guarantees offbalance sheet arrangements guarantees offbalance sheet financing arrangements including variable interest entities magnitude believe could material impact financial condition liquidity contractual obligations forwardlooking cash requirements described note 6 consolidated financial statements 2017 recorded additional charges earnings totaling 104 related rejuvenate abg ii recalls based information received actuarially determined range probable loss resolve matter estimated approximately 2072 2307 2304 2539 232 thirdparty insurance recoveries final outcome matter dependent many variables difficult predict ultimate cost entirely resolve matter may materially different amount current estimate could material adverse effect financial position results operations cash flows able reasonably estimate future periods payments made described note 10 consolidated financial statements december 31 2017 reserve uncertain income tax positions 540 due uncertainties regarding ultimate resolution income tax audits able reasonably estimate future periods income tax payments settle uncertain income tax positions made described note 11 consolidated financial statements december 31 2017 defined benefit pension plans underfunded 338 approximately 331 related plans outside united states due rules affecting taxdeductible contributions jurisdictions plans offered impact future plan asset performance changes interest rates potential changes legislation united states foreign jurisdictions able reasonably estimate amounts may required fund defined benefit pension plans critical accounting policies estimates preparing financial statements accordance generally accepted accounting principles certain accounting policies may require substantial judgment estimation application believe accounting policies others set forth note 1 consolidated financial statements critical understanding results operations financial condition actual results could differ estimates assumptions differences could material results operations financial condition inventory reserves maintain reserves excess obsolete inventory resulting potential inability sell certain products prices excess current carrying costs make estimates regarding future recoverability costs products record provisions based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results income taxes annual tax rate determined based income statutory tax rates tax impacts items treated differently tax purposes financial reporting purposes tax law requires certain items included tax return different times items reflected financial statements differences permanent expenses deductible tax return differences temporary reverse time depreciation expense temporary differences create deferred tax assets liabilities deferred tax assets generally represent tax effect items used tax deduction credit future years already recorded tax benefit income statement deferred tax liabilities generally represent tax expense recognized financial statements payment deferred tax effect expenditures deduction taken tax return yet recognized financial statements assets recorded fair value business combinations corresponding tax basis adjustment inherent determining annual tax rate judgments regarding business plans tax planning opportunities expectations future outcomes realization certain deferred tax assets dependent upon generating sufficient taxable income appropriate jurisdiction prior expiration carryforward periods although realization assured management believes likely deferred tax assets net valuation allowances realized operate multiple jurisdictions complex tax policy regulatory environments certain jurisdictions may take tax positions management believes supportable potentially subject successful challenge applicable taxing authority differences interpretation respective governmental taxing authorities impacted local economic fiscal environment evaluate tax positions establish liabilities accordance applicable accounting guidance uncertainty income taxes review tax uncertainties light changing facts circumstances progress tax audits adjust accordingly number audits process various jurisdictions although resolution tax positions uncertain based currently available information believe likely ultimate outcomes material adverse effect financial position results operations cash flows due number estimates assumptions inherent calculating various components tax provision certain changes future events changes tax legislation geographic mix earnings completion tax audits earnings repatriation plans could impact estimates effective tax rate dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k acquisitions goodwill intangibles longlived assets financial statements include operations acquired business starting completion acquisition addition assets acquired liabilities assumed recorded date acquisition respective estimated fair values excess purchase price estimated fair values net assets acquired recorded goodwill significant judgment required estimating fair value intangible assets assigning respective useful lives accordingly typically obtain assistance thirdparty valuation specialists significant items fair value estimates based available historical information future expectations assumptions deemed reasonable management inherently uncertain typically use income method estimate fair value intangible assets based forecasts expected future cash flows attributable respective assets significant estimates assumptions inherent valuations reflect consideration marketplace participants include amount timing future cash flows including expected growth rates profitability underlying product technology life cycles economic barriers entry discount rate applied cash flows unanticipated market macroeconomic events circumstances may occur could affect accuracy validity estimates assumptions determining useful life intangible asset also requires judgment exception certain trade names majority acquired intangible assets eg certain trademarks brands customer distributor relationships patents technologies expected determinable useful lives assessment useful lives intangible assets based number factors including competitive environment market share trademark brand history underlying product life cycles operating plans macroeconomic environment countries trademarked branded products sold estimates useful lives determinablelived intangibles primarily based factors determinablelived intangible assets amortized expense estimated useful life acquisitions acquire inprocess research development iprd intangible assets iprd considered indefinitelived intangible asset research completed becomes determinablelived intangible asset determined future use impaired value indefinitelived intangible assets goodwill amortized tested least annually impairment testing goodwill performed separately impairment testing indefinitelived intangibles perform annual impairment test goodwill fourth quarter year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances also use discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability circumstances test goodwill impairment reviewing book value compared fair value reporting unit level test individual indefinitelived intangibles reviewing individual book values compared fair value determine fair value reporting units indefinitelived intangible assets based income approach income approach calculate fair value reporting units indefinitelived intangible assets based present value estimated future cash flows considerable management judgment necessary evaluate impact operating macroeconomic changes estimate future cash flows measure fair value assumptions used impairment evaluations forecasted growth rates cost capital consistent internal projections operating plans believe assumptions estimates also comparable would used marketplace participants recognize impairment charges goodwill years presented annual impairment testing indicated reporting unit goodwill fair values exceeded respective recorded values future changes judgments assumptions estimates used impairment testing goodwill indefinitelived intangible assets including discount tax rates future cash flow projections could result significantly different estimates fair values significant reduction estimated fair values could result impairment charges could materially affect results operations review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows individual asset level asset group level undiscounted cash flows expected generated related assets estimated useful life based updated projections evaluation indicates carrying amount assets may recoverable potential impairment measured based upon fair value related assets asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell legal contingencies involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 6 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable projected management additional expense may incurred could unfavorably affect future operating results currently selfinsured product liabilityrelated claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows new accounting pronouncements refer note 1 consolidated financial statements information dollar amounts millions except per share amounts otherwise specified item 7aitem 7 management’s discussion analysis financial condition results operations overview 2018 goal achieve sales growth highend medical technology medtech industry maintain capital allocation strategy prioritizes 1 acquisitions 2 dividends 3 share repurchases 2018 achieved reported net sales growth 93 excluding impact acquisitions adoption accounting standards update 20149 revenue contracts customers well related amendments sales grew 79 constant currency reported net earnings 3553 net earnings per diluted share 934 excluding impact certain items achieved adjusted net earnings 2779 growth 126 adjusted net earnings per diluted share1 continued capital allocation strategy investing 2451 acquisitions paying 703 dividends shareholders using 300 share repurchases november 2018 completed acquisition k2m group holdings inc k2m 2750 per share aggregate purchase price approximately 1380 k2m global leader complex spine minimally invasive solutions focused achieving threedimensional total body balance k2m part spine business within neurotechnology spine february 2018 completed acquisition entellus medical inc entellus 2400 per share aggregate purchase price 697 net cash acquired entellus focused delivering superior patient physician experiences products designed minimally invasive treatment various ear nose throat ent disease states entellus part neurotechnology business within neurotechnology spine march 2018 issued 600 senior unsecured notes coupon 3650 due march 7 2028 april 2018 repaid 600 senior unsecured notes coupon 1300 november 2018 issued €300 senior unsecured notes floating interest rate three month euribor plus 28 bps due november 30 2020 €550 senior unsecured notes fixed interest rate 1125 due november 30 2023 €750 senior unsecured notes fixed interest rate 2125 due november 30 2027 €650 senior unsecured notes fixed interest rate 2625 due november 30 2030 refer note 10 consolidated financial statements information december 2018 transfer certain intellectual properties tax jurisdictions resulted 15 billion noncash tax benefit corresponding 15 billion deferred tax asset benefit transaction realized reduction cash paid taxes period nine years corresponding charge tax expense consistent benefit recognized 2018 also adjusted reported net earnings going forward nongaap financial measure 1 refer nongaap financial measures discussion nongaap financial measures used report reconciliation directly comparable gaap financial measure consolidated results operations dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k consolidated net sales consolidated net sales 2018 increased 93 reported 90 constant currency foreign currency exchange rates positively impacted net sales 03 excluding 19 impact acquisitions 09 impact adoption new revenue recognition standard asc 606 net sales increased constant currency 93 increased unit volume partially offset 14 due lower prices unit volume increase primarily due higher shipments medical instruments endoscopy neurotechnology knees trauma extremities products consolidated net sales 2017 increased 99 reported 98 constant currency foreign currency exchange rates positively impacted net sales 01 excluding 27 impact acquisitions net sales increased constant currency 82 increased unit volume partially offset 11 due lower prices unit volume increase primarily due higher shipments neurotechnology endoscopy knees trauma extremities instruments products orthopaedics net sales orthopaedics net sales 2018 increased 59 reported 54 constant currency foreign currency exchange rates positively impacted net sales 05 excluding 05 impact adoption asc 606 net sales increased constant currency 81 increased unit volume partially offset 22 due lower prices unit volume increase primarily due higher shipments knees trauma extremities products orthopaedics net sales 2017 increased 66 reported 65 constant currency foreign currency exchange rates positively impacted net sales 01 excluding 03 impact acquisitions net sales increased constant currency 86 increased unit volume partially offset 24 due lower prices unit volume increase primarily due higher shipments knees trauma extremities products medsurg net sales medsurg net sales 2018 increased 88 reported 87 constant currency foreign currency exchange rates positively impacted net sales 01 excluding 14 impact acquisitions 13 impact adoption asc 606 net sales increased constant currency 93 increased unit volume partially offset 07 due lower prices unit volume increase primarily due higher shipments medical instruments endoscopy products medsurg net sales 2017 increased 136 reported 134 constant currency foreign currency exchange rates positively impacted net sales 02 excluding 56 impact acquisitions net sales increased constant currency 75 increased unit volume 02 due higher prices unit volume increase primarily due higher shipments endoscopy instruments medical products neurotechnology spine net sales neurotechnology spine net sales 2018 increased 180 reported 174 constant currency foreign currency exchange rates positively impacted net sales 06 excluding 74 impact acquisitions 06 impact adoption asc 606 net sales constant currency increased 122 increased unit volume partially offset 16 due lower prices unit volume increase primarily due higher shipments neurotechnology products neurotechnology spine net sales 2017 increased 82 reported 83 constant currency foreign currency exchange rates impacted net sales nominally excluding 07 impact acquisitions net sales constant currency increased 91 increased unit volume partially offset 15 due lower prices unit volume increase primarily due higher shipments neurotechnology products dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k adopted accounting standards update 201409 revenue contracts customers well related amendments asc 606 issued financial accounting standards board modified retrospective basis effective january 1 2018 refer note 1 note 2 consolidated financial statements information following sales growth data subsequent analysis presented supplement discussion analysis net sales quantifying excluding impact adoption asc 606 businesses related primarily reclassification certain costs previously presented selling general administrative expenses net sales consolidated net sales excluding asc 606 impact consolidated net sales increased 102 2018 98 constant currency foreign currency exchange rates positively impacted net sales 04 excluding 19 impact acquisitions net sales constant currency increased 93 unit volume partially offset 14 due lower prices unit volume increase primarily due higher shipments medical instruments endoscopy neurotechnology knees trauma extremities products orthopaedics net sales excluding asc 606 impact orthopaedics net sales increased 64 2018 59 constant currency foreign currency exchange rates positively impacted net sales 05 net sales constant currency increased 81 unit volume partially offset 22 due lower prices unit volume increase primarily due higher shipments knee trauma extremities products medsurg net sales excluding asc 606 impact medsurg net sales increased 101 2018 100 constant currency foreign currency exchange rates positively impacted net sales 01 excluding 14 impact acquisitions net sales constant currency increased 93 unit volume partially offset 07 due lower prices unit volume increase primarily due higher shipments medical instruments endoscopy products neurotechnology spine net sales excluding asc 606 impact neurotechnology spine net sales increased 186 2018 180 constant currency foreign currency exchange rates positively impacted net sales 06 excluding 74 impact acquisitions net sales constant currency increased 122 unit volume partially offset 16 due lower prices unit volume increase primarily due higher shipments neurotechnology products gross profit gross profit 2018 percentage net sales 657 consistent 2017 excluding impact items noted gross profit decreased 660 664 2017 primarily due impact adopting asc 606 lower selling prices gross profit percentage net sales decreased 657 2017 663 2016 excluding impact items noted gross profit decreased 664 667 2016 primarily due impact hurricanes unfavorable mix inflation partially offset higher sales volumes increased productivity favorable impact foreign currency exchange research development engineering expenses research development engineering expenses represented 63 net sales 2018 2017 2016 projects develop new products investments new technologies recent acquisitions contributed spending levels dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k selling general administrative expenses selling general administrative expenses percentage net sales 2018 increased 375 366 2017 excluding impact items noted expenses decreased 339 2018 348 2017 primarily due leverage higher sales volumes favorable impact adoption asc 606 continued focus operating expense improvement initiatives partially offset leverage recent acquisitions selling general administrative expenses percentage net sales 2017 increased 366 365 2016 excluding impact certain items noted selling general administrative expenses percentage sales decreased 2017 reflects favorable leverage higher sales volumes continued focus operating expense improvement initiatives including leverage recent acquisitions partially offset unfavorable impact foreign currency exchange recall charges net insurance proceeds recall charges net insurance proceeds 23 173 158 2018 2017 2016 charges primarily due disclosed rejuvenate abgii modularneck hip stems lfit v40 femoral head voluntary recalls refer note 7 consolidated financial statements information amortization intangible assets amortization intangible assets 417 371 319 2018 2017 2016 increase 2018 2017 due acquisitions refer notes 6 8 consolidated financial statements information income expense net income expense net 181 234 254 2018 2017 2016 decrease 2018 primarily due increase interest income due higher interest rates partially offset higher interest expense due higher interest rates higher debt outstanding refer note 10 consolidated financial statements information income taxes effective tax rate 508 506 143 2018 2017 2016 effective income tax rate 2018 reflects tax effect related transfer intellectual properties tax jurisdictions continuing impact complying tax cuts jobs act 2017 tax act continued lower effective income tax rates result european operations effective income tax rate 2017 reflects compliance tax act offset lower effective income tax rates result european operations effective income tax rate 2016 reflects lower effective income tax rates result european operations net earnings net earnings 2018 increased 3553 934 per diluted share 1020 268 per diluted share 2017 1647 435 per diluted share 2016 impact foreign currency exchange rates reduced net earnings per diluted share approximately 006 007 011 2018 2017 2016 nongaap financial measures supplement reporting financial information determined accounting principles generally accepted united states gaap certain nongaap financial measures including percentage sales growth excluding impact adoption asc 606 percentage sales growth constant currency percentage sales growth constant currency excluding impact adoption asc 606 percentage organic sales growth adjusted gross profit adjusted selling general administrative expenses adjusted amortization intangible assets adjusted operating income adjusted effective income tax rate adjusted net earnings adjusted net earnings per diluted share diluted eps believe nongaap financial measures provide meaningful information assist investors shareholders understanding financial results assessing prospects future performance management believes percentage sales growth constant currency adjusted measures described important indicators operations exclude items may indicative unrelated core operating results provide baseline analyzing trends underlying businesses management uses nongaap financial measures reviewing operating results reportable business segments analyzing potential future business trends connection budget process bases certain management incentive compensation nongaap financial measures measure percentage sales growth constant currency remove impact changes foreign currency exchange rates affect comparability trend sales percentage sales growth constant currency calculated translating current prior year results foreign currency exchange rate measure percentage organic sales growth remove impact changes foreign currency exchange rates acquisitions impact adoption asc 606 affect comparability trend sales percentage organic sales growth calculated translating current year results prior year average foreign currency exchange rates excluding impact acquisitions adoption asc 606 measure earnings performance consistent comparable basis exclude certain items affect comparability operating results trend earnings adjustments irregular timing may indicative past future performance following examples types adjustments may included period 1 acquisition integrationrelated costs related integrating recently acquired businesses specific costs dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k eg inventory stepup deal costs related consummation acquisition process 2 amortization purchased intangible assets periodic amortization expense related purchased intangible assets 3 restructuringrelated charges costs associated termination sales relationships certain countries workforce reductions elimination product lines weatherrelated asset impairments associated costs restructuringrelated activities 4 medical device regulations costs specific updating quality system product labeling asset writeoffs product remanufacturing comply medical device reporting regulations requirements european union china regulations medical devices 5 recallrelated matters best estimate minimum range probable loss resolve rejuvenate lfit v40 product recalls 6 regulatory legal matters best estimate minimum range probable loss resolve certain regulatory matters legal settlements 7 tax matters charges represent impact accounting certain significant discrete tax items including adjustments related tax act nongaap financial measures standardized may possible compare financial measures companies nongaap financial measures similar names adjusted financial measures considered isolation substitute reported sales growth gross profit selling general administrative expenses amortization intangible assets operating income effective income tax rate net earnings net earnings per diluted share directly comparable gaap financial measures nongaap financial measures additional way viewing aspects operations viewed gaap results reconciliations corresponding gaap financial measures end discussion consolidated results operations strongly encourage investors shareholders review financial statements publiclyfiled reports entirety rely single financial measure weightedaverage diluted shares outstanding used calculation nongaap net earnings per diluted share used calculation reported net earnings per diluted share respective period reconciliation directly comparable gaap financial measure nongaap financial measure dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k financial condition liquidity believe financial condition continues high quality evidenced ability generate substantial cash operations readily access capital markets competitive rates operating cash flow provides primary source cash fund operating needs capital expenditures excess operating cash used first fund acquisitions complement portfolio businesses discretionary uses include dividends share repurchases supplement operating cash flow debt fund activities necessary overall cash position reflects strong business results global cash management strategy takes account liquidity management economic factors tax considerations operating activities cash provided operations 2610 1559 1915 2018 2017 2016 increase primarily due lower recallrelated payments higher net earnings cash receipts related contracts customers unsatisfied performance obligations partially due adoption asc 606 cash receipts interest rate hedge settlement partially offset payments related tax cuts jobs act 2017 net accounts receivable inventory accounts payable resulted consumption 329 461 507 cash 2018 2017 2016 investing activities cash used investing activities 2857 1613 4191 2018 2017 2016 increase cash used 2018 primarily due increased payments acquisitions primarily 697 acquisition entellus 1400 acquisition k2m 2017 acquired novadaq certain businesses related assets 2016 primary acquisitions sage physio financing activities cash provided used financing activities 1329 794 2258 2018 2017 2016 increase cash provided primarily due higher net borrowings primarily issuance €2250 senior unsecured notes partially offset 70 higher repurchases common stock 67 increase dividends paid maintain debt levels consider appropriate evaluating number factors including cash requirements ongoing operations investment financing plans including acquisitions share repurchase activities overall cost capital refer note 10 consolidated financial statements information liquidity cash equivalents marketable securities 3699 2793 current assets exceeded current liabilities 4926 4508 december 31 2018 2017 anticipate able support shortterm liquidity operating needs variety sources including cash operations commercial paper existing credit lines raised funds capital markets 2018 may continue time continue strong investmentgrade shortterm longterm debt ratings believe enable us refinance debt needed existing credit facilities additional funds required borrowing capacity available main credit facility 1500 amount commercial paper issuable commercial paper program 1500 cash equivalents marketable securities held locations outside united states approximately 25 62 december 31 2018 2017 intend use cash expand operations organically acquisitions guarantees offbalance sheet arrangements guarantees offbalance sheet financing arrangements including variable interest entities magnitude believe could material impact financial condition liquidity contractual obligations forwardlooking cash requirements described note 7 consolidated financial statements 2018 recorded charges earnings related rejuvenate abg ii lfit anatomic cocr v40 femoral heads recall matters recorded charges represent minimum range probable cost resolve matters final outcome matters dependent many variables difficult predict ultimate cost entirely resolve matters may materially different amount current estimates could material adverse effect financial position results operations cash flows able reasonably estimate future periods payments made described note 11 consolidated financial statements december 31 2018 reserve uncertain dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k income tax positions 528 due uncertainties regarding ultimate resolution income tax audits able reasonably estimate future periods income tax payments settle uncertain income tax positions made described note 12 consolidated financial statements december 31 2018 defined benefit pension plans underfunded 359 approximately 336 related plans outside united states due rules affecting taxdeductible contributions jurisdictions plans offered impact future plan asset performance changes interest rates potential changes legislation united states foreign jurisdictions able reasonably estimate amounts may required fund defined benefit pension plans critical accounting policies estimates preparing financial statements accordance generally accepted accounting principles certain accounting policies may require substantial judgment estimation application believe accounting policies others set forth note 1 consolidated financial statements critical understanding results operations financial condition actual results could differ estimates assumptions differences could material results operations financial condition inventory reserves maintain reserves excess obsolete inventory resulting potential inability sell certain products prices excess current carrying costs make estimates regarding future recoverability costs products record provisions based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results income taxes annual tax rate determined based income statutory tax rates tax impacts items treated differently tax purposes financial reporting purposes tax law requires certain items included tax return different times items reflected financial statements differences permanent expenses deductible tax return differences temporary reverse time depreciation expense temporary differences create deferred tax assets liabilities deferred tax assets generally represent tax effect items used tax deduction credit future years already recorded tax benefit income statement deferred tax liabilities generally represent tax expense recognized financial statements payment deferred tax effect expenditures deduction taken tax return yet recognized financial statements assets recorded fair value business combinations corresponding tax basis adjustment inherent determining annual tax rate judgments regarding business plans tax planning opportunities expectations future outcomes realization certain deferred tax assets dependent upon generating sufficient taxable income appropriate jurisdiction prior expiration carryforward periods although realization assured management believes likely deferred tax assets net valuation allowances realized operate multiple jurisdictions complex tax policy regulatory environments certain jurisdictions may take tax positions management believes supportable potentially subject successful challenge applicable taxing authority differences interpretation respective governmental taxing authorities impacted local economic fiscal environment evaluate tax positions establish liabilities accordance applicable accounting guidance uncertainty income taxes review tax uncertainties light changing facts circumstances progress tax audits adjust accordingly number audits process various jurisdictions although resolution tax positions uncertain based currently available information believe likely ultimate outcomes material adverse effect financial position results operations cash flows due number estimates assumptions inherent calculating various components tax provision certain changes future events changes tax legislation geographic mix earnings completion tax audits earnings repatriation plans could impact estimates effective tax rate acquisitions goodwill intangibles longlived assets financial statements include operations acquired business starting completion acquisition addition assets acquired liabilities assumed recorded date acquisition respective estimated fair values excess purchase price estimated fair values net assets acquired recorded goodwill significant judgment required estimating fair value intangible assets assigning respective useful lives accordingly typically obtain assistance thirdparty valuation specialists significant items fair value estimates based available historical information future expectations assumptions deemed reasonable management inherently uncertain typically use income method estimate fair value intangible assets based forecasts expected future cash flows attributable respective assets significant estimates assumptions inherent valuations reflect consideration marketplace participants include amount timing future cash flows including expected growth rates profitability underlying product technology life cycles economic barriers entry discount rate applied cash flows unanticipated market macroeconomic events circumstances may occur could affect accuracy validity estimates assumptions determining useful life intangible asset also requires judgment exception certain trade names majority acquired intangible assets eg certain trademarks brands customer distributor relationships patents dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k technologies expected determinable useful lives assessment useful lives intangible assets based number factors including competitive environment market share trademark brand history underlying product life cycles operating plans macroeconomic environment countries trademarked branded products sold estimates useful lives determinablelived intangibles primarily based factors determinablelived intangible assets amortized expense estimated useful life acquisitions acquire inprocess research development iprd intangible assets acquisitions accounted business combinations iprd considered indefinitelived intangible asset research completed becomes determinablelived intangible asset determined future use impaired asset acquisitions iprd expensed immediately unless alternative future use value indefinitelived intangible assets goodwill amortized tested least annually impairment testing goodwill performed separately impairment testing indefinitelived intangibles perform annual impairment test goodwill fourth quarter year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances also use discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability circumstances test goodwill impairment reviewing book value compared fair value reporting unit level test individual indefinitelived intangibles reviewing individual book values compared fair value determine fair value reporting units indefinitelived intangible assets based income approach income approach calculate fair value reporting units indefinitelived intangible assets based present value estimated future cash flows considerable management judgment necessary evaluate impact operating macroeconomic changes estimate future cash flows measure fair value assumptions used impairment evaluations forecasted growth rates cost capital consistent internal projections operating plans believe assumptions estimates also comparable would used marketplace participants recognize impairment charges goodwill years presented annual impairment testing indicated reporting unit goodwill fair values exceeded respective recorded values future changes judgments assumptions estimates used impairment testing goodwill indefinitelived intangible assets including discount tax rates future cash flow projections could result significantly different estimates fair values significant reduction estimated fair values could result impairment charges could materially affect results operations review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows individual asset level asset group level undiscounted cash flows expected generated related assets estimated useful life based updated projections evaluation indicates carrying amount assets may recoverable potential impairment measured based upon fair value related assets asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell legal contingencies involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 7 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable projected management additional expense may incurred could unfavorably affect future operating results currently selfinsured product liabilityrelated claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows new accounting pronouncements refer note 1 consolidated financial statements information item 7aitem 7 management’s discussion analysis financial condition results operations overview 2019 goal achieve sales growth highend medical technology medtech industry maintain longterm capital allocation strategy prioritizes 1 acquisitions 2 dividends 3 share repurchases 2019 achieved reported net sales growth 94 excluding impact acquisitions sales grew 81 constant currency reported net earnings 2083 net earnings per diluted share 548 excluding impact certain items achieved adjusted net earnings 3139 growth 130 adjusted net earnings per diluted share1 continued capital allocation strategy investing 802 acquisitions paying 778 dividends shareholders using 307 share repurchases january 2019 repaid 500 senior unsecured notes coupon 1800 due january 15 2019 march 2019 repaid 750 senior unsecured notes coupon 2000 due march 8 2019 december 2019 issued €24 billion senior unsecured notes comprised €850 senior unsecured notes coupon 0250 due december 3 2024 €800 senior unsecured notes coupon 0750 due march 1 2029 €750 senior unsecured notes coupon 1000 due december 3 2031 january 2020 repaid 500 senior unsecured notes coupon 4375 due january 15 2020 refer note 10 consolidated financial statements information 2019 completed acquisitions total net cash consideration 802 294 future milestone payments primarily due upon achievement certain regulatory commercial milestones november 2019 announced definitive agreement acquire issued outstanding ordinary shares wright medical group nv wright 3075 per share aggregate purchase price approximately 54 billion including convertible notes expect acquisition close second half 2020 subject expiration waiting period extension thereof hartscottrodino antitrust improvements act 1976 amended receipt required approvals clearances applicable antitrust laws adoption certain resolutions wright’s shareholders customary conditions wright global medical device company focused extremities biologics following closing plan integrate wright trauma extremities business within orthopaedics see note 6 consolidated financial statements information 2019 repurchased 19 million shares common stock cost 307 authorized repurchase program total dollar value shares common stock could acquired authorized repurchase program 1033 december 31 2019 issued €24 billion senior unsecured notes also announced intention suspend share repurchase program 2020 2021 1 refer nongaap financial measures discussion nongaap financial measures used report reconciliation directly comparable gaap financial measure consolidated results operations dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k nm meaningful consolidated net sales consolidated net sales 2019 increased 94 reported 107 constant currency foreign currency exchange rates negatively impacted net sales 13 excluding 26 impact acquisitions net sales constant currency increased 90 increased unit volume partially offset 09 due lower prices unit volume increase primarily due higher shipments medical instruments endoscopy neurotechnology knees hips trauma extremities products consolidated net sales 2018 increased 93 reported 90 constant currency foreign currency exchange rates positively impacted net sales 03 excluding 19 impact acquisitions 09 impact adoption new revenue recognition standard asc 6062 net sales increased constant currency 93 increased unit volume partially offset 14 due lower prices unit volume increase primarily due higher shipments medical instruments endoscopy neurotechnology knees trauma extremities products orthopaedics net sales orthopaedics net sales 2019 increased 52 reported 67 constant currency foreign currency exchange rates negatively impacted net sales 15 net sales constant currency increased 82 unit volume partially offset 15 due lower prices unit volume increase primarily due higher shipments knee hip trauma extremities products orthopaedics net sales 2018 increased 59 reported 54 constant currency foreign currency exchange rates positively impacted net sales 05 excluding 05 impact adoption asc 6062 net sales increased constant currency 81 increased unit volume partially offset 22 due lower prices unit volume increase primarily due higher shipments knees trauma extremities products medsurg net sales medsurg net sales 2019 increased 88 reported 99 constant currency foreign currency exchange rates negatively impacted net sales 11 excluding 10 impact acquisitions net sales constant currency increased 94 increased unit volume partially offset 05 due lower prices unit volume increase primarily due higher shipments medical instruments endoscopy products sustainability solutions medsurg net sales 2018 increased 88 reported 87 constant currency foreign currency exchange rates positively impacted net sales 01 excluding 14 impact acquisitions 13 impact adoption asc 6062 net sales increased constant currency 93 increased unit volume partially offset 07 due lower prices unit volume increase primarily due higher shipments medical instruments endoscopy products neurotechnology spine net sales neurotechnology spine net sales 2019 increased 192 reported 205 constant currency foreign currency exchange rates negatively impacted net sales 13 excluding 116 impact acquisitions net sales constant currency increased 96 increased unit volume partially offset 07 due lower prices unit volume increase primarily due higher shipments neurotechnology products neurotechnology spine net sales 2018 increased 180 reported 174 constant currency foreign currency exchange rates positively impacted net sales 06 excluding 74 impact acquisitions 06 impact adoption asc 6062 net sales constant currency increased 122 increased unit volume partially offset 16 due lower prices unit volume increase primarily due higher shipments neurotechnology products 2 adopted accounting standards update 201409 revenue contracts customers well related amendments asc 606 issued financial accounting standards board modified retrospective basis effective january 1 2018 refer note 1 note 2 consolidated financial statements information revenue recognition policies disclosures dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k gross profit gross profit percentage net sales decreased 651 2019 657 2018 excluding impact items noted gross profit decreased 659 661 2018 primarily due impact lower selling prices gross profit 2018 percentage net sales 657 consistent 2017 excluding impact items noted gross profit decreased 661 664 2017 primarily due impact adopting asc 6062 lower selling prices research development engineering expenses research development engineering expenses percentage net sales increased 65 2019 63 2018 2017 excluding impact items noted expenses decreased 61 2019 63 2018 2017 primarily due leverage higher sales volumes projects develop new products investments new technologies recent acquisitions contributed spending levels selling general administrative expenses selling general administrative expenses percentage net sales 2019 decreased 360 375 2018 excluding impact items noted expenses decreased 335 2019 339 2018 primarily due leverage higher sales volumes continued focus operating expense improvement initiatives partially offset leverage recent acquisitions selling general administrative expenses percentage net sales 2018 increased 375 366 2017 excluding impact items noted expenses decreased 339 2018 348 2017 primarily due leverage higher sales volumes favorable impact adoption asc 606 continued focus operating expense improvement initiatives partially offset leverage recent acquisitions recall charges net insurance proceeds recall charges net insurance proceeds 192 23 173 2019 2018 2017 charges primarily due previously disclosed rejuvenate abgii modularneck hip stems lfit v40 femoral head voluntary recalls refer note 7 consolidated financial statements information amortization intangible assets amortization intangible assets 464 417 371 2019 2018 2017 increase 2019 2018 due acquisitions refer notes 6 8 consolidated financial statements information income expense net income expense net 151 181 234 2019 2018 2017 decrease 2019 primarily due increase interest income due higher interest rates partially offset higher interest expense due higher interest rates higher debt outstanding refer note 10 consolidated financial statements information income taxes effective tax rate 187 508 506 2019 2018 2017 effective income tax rate 2019 reflects tax related transfer intellectual properties tax jurisdictions continued lower effective income tax rates result european operations effective income tax rate 2018 reflects tax effect related transfer intellectual properties tax jurisdictions continuing impact complying tax cuts jobs act 2017 tax act continued lower effective income tax rates result european operations effective income tax rate 2017 reflects compliance tax act offset lower effective income tax rates result european operations net earnings net earnings 2019 decreased 2083 548 per diluted share 3553 934 per diluted share 2018 increased 1020 268 per diluted share 2017 impact foreign currency exchange rates reduced net earnings per diluted share approximately 014 006 007 2019 2018 2017 dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k nongaap financial measures supplement reporting financial information determined accounting principles generally accepted united states gaap certain nongaap financial measures including percentage sales growth constant currency percentage organic sales growth adjusted gross profit adjusted selling general administrative expenses adjusted research development engineering expenses adjusted operating income adjusted effective income tax rate adjusted net earnings adjusted net earnings per diluted share diluted eps believe nongaap financial measures provide meaningful information assist investors shareholders understanding financial results assessing prospects future performance management believes percentage sales growth constant currency adjusted measures described important indicators operations exclude items may indicative unrelated core operating results provide baseline analyzing trends underlying businesses management uses nongaap financial measures reviewing operating results reportable business segments analyzing potential future business trends connection budget process bases certain management incentive compensation nongaap financial measures measure percentage sales growth constant currency remove impact changes foreign currency exchange rates affect comparability trend sales percentage sales growth constant currency calculated translating current prior year results foreign currency exchange rate measure percentage organic sales growth remove impact changes foreign currency exchange rates acquisitions affect comparability trend sales percentage organic sales growth calculated translating current year results prior year average foreign currency exchange rates excluding impact acquisitions measure earnings performance consistent comparable basis exclude certain items affect comparability operating results trend earnings adjustments irregular timing may indicative past future performance following examples types adjustments may included period 1 acquisition integrationrelated costs related integrating recently acquired businesses specific costs eg inventory stepup deal costs related consummation acquisition process 2 amortization purchased intangible assets periodic amortization expense related purchased intangible assets 3 restructuringrelated charges costs associated termination sales relationships certain countries workforce reductions elimination product lines weatherrelated asset impairments associated costs restructuringrelated activities 4 medical device regulations costs specific updating quality system product labeling asset writeoffs product remanufacturing comply medical device reporting regulations requirements european union china regulations medical devices 5 recallrelated matters best estimate minimum range probable loss resolve rejuvenate lfit v40 product recalls 6 regulatory legal matters best estimate minimum range probable loss resolve certain regulatory matters legal settlements 7 tax matters charges represent impact accounting certain significant discrete tax items nongaap financial measures standardized may possible compare financial measures companies nongaap financial measures similar names adjusted financial measures considered isolation substitute reported sales growth gross profit selling general administrative expenses research development engineering expenses operating income expense net effective income tax rate net earnings net earnings per diluted share directly comparable gaap financial measures nongaap financial measures additional way viewing aspects operations viewed gaap results reconciliations corresponding gaap financial measures end discussion consolidated results operations strongly encourage investors shareholders review financial statements publiclyfiled reports entirety rely single financial measure weightedaverage diluted shares outstanding used calculation nongaap net earnings per diluted share used calculation reported net earnings per diluted share respective period reconciliation directly comparable gaap financial measure nongaap financial measure dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k financial condition liquidity believe financial condition continues high quality evidenced ability generate substantial cash operations readily access capital markets competitive rates operating cash flow provides primary source cash fund operating needs capital expenditures excess operating cash used first fund acquisitions complement portfolio businesses discretionary uses include dividends share repurchases however issued €24 billion senior unsecured notes announced intention suspend share repurchase program 2020 2021 supplement operating cash flow debt fund activities necessary overall cash position reflects strong business results global cash management strategy takes account liquidity management economic factors tax considerations operating activities cash provided operations 2191 2610 1559 2019 2018 2017 decrease 2018 primarily due higher usage cash working capital primarily accounts receivable inventory lower net earnings partially offset payments related tax cuts jobs act 2017 higher recall charges net accounts receivable inventory accounts payable resulted consumption 900 329 461 cash 2019 2018 2017 investing activities cash used investing activities 1455 2857 1613 2019 2018 2017 decrease cash used 2019 primarily due decreased payments acquisitions primarily 360 acquisition mobius 442 related certain businesses related assets 2018 acquired entellus k2m 2017 acquired novadaq certain businesses related assets financing activities cash provided used financing activities 3 1329 794 2019 2018 2017 2019 issuance €24 billion senior unsecured notes mostly offset 1342 repayments longterm debt 778 dividends paid 307 repurchases common stock january 2020 repaid 500 senior unsecured notes coupon 4375 due january 15 2020 maintain debt levels consider appropriate evaluating number factors including cash requirements ongoing operations investment financing plans including acquisitions share repurchase activities overall cost capital refer note 10 consolidated financial statements information liquidity cash equivalents marketable securities 4425 3699 current assets exceeded current liabilities 6960 4926 december 31 2019 2018 anticipate able support shortterm liquidity operating needs variety sources including cash operations commercial paper existing credit lines raised funds capital markets 2019 2018 may continue time result announcement planned acquisition wright standard poors downgraded corporate credit longterm issuelevel rating nevertheless continue dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k strong investmentgrade shortterm longterm debt ratings believe enable us refinance debt becomes due existing credit facilities additional funds required borrowing capacity available main credit facility 1500 amount commercial paper issuable commercial paper program 1500 cash equivalents marketable securities held locations outside united states approximately 25 december 31 2019 2018 intend use cash expand operations organically acquisitions guarantees offbalance sheet arrangements guarantees offbalance sheet financing arrangements including variable interest entities magnitude believe could material impact financial condition liquidity contractual obligations forwardlooking cash requirements described note 7 consolidated financial statements 2019 recorded charges earnings related rejuvenate abg ii lfit anatomic cocr v40 femoral heads recall matters recorded charges represent minimum range probable cost resolve matters final outcome matters dependent many variables difficult predict ultimate cost entirely resolve matters may materially different amount current estimates could material adverse effect financial position results operations cash flows able reasonably estimate future periods payments made described note 11 consolidated financial statements december 31 2019 reserve uncertain income tax positions 472 due uncertainties regarding ultimate resolution income tax audits able reasonably estimate future periods income tax payments settle uncertain income tax positions made described note 12 consolidated financial statements december 31 2019 defined benefit pension plans underfunded 441 approximately 434 related plans outside united states due rules affecting taxdeductible contributions jurisdictions plans offered impact future plan asset performance changes interest rates potential changes legislation united states foreign jurisdictions able reasonably estimate amounts may required fund defined benefit pension plans critical accounting policies estimates preparing financial statements accordance generally accepted accounting principles certain accounting policies may require substantial judgment estimation application believe accounting policies others set forth note 1 consolidated financial statements critical understanding results operations financial condition actual results could differ estimates assumptions differences could material results operations financial condition inventory reserves maintain reserves excess obsolete inventory resulting potential inability sell certain products prices excess current carrying costs make estimates regarding future recoverability costs products record provisions based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results income taxes annual tax rate determined based income statutory tax rates tax impacts items treated differently tax purposes financial reporting purposes tax law requires certain items included tax return different times items reflected financial statements differences permanent expenses deductible tax return differences temporary reverse time depreciation expense temporary differences create deferred tax assets liabilities deferred tax assets generally represent tax effect items used tax deduction credit future years already recorded tax benefit income statement deferred tax liabilities generally represent tax expense recognized financial statements payment deferred tax effect expenditures deduction taken tax return yet recognized financial statements assets recorded fair value business combinations corresponding tax basis adjustment inherent determining annual tax rate judgments regarding business plans tax planning opportunities expectations future outcomes realization certain deferred tax assets dependent upon generating sufficient taxable income appropriate jurisdiction prior expiration carryforward periods although realization assured management believes likely deferred tax assets net valuation allowances realized operate multiple jurisdictions complex tax policy regulatory environments certain jurisdictions may take tax positions management believes supportable potentially subject successful challenge applicable taxing authority differences interpretation respective governmental taxing authorities impacted local economic fiscal environment evaluate tax positions establish liabilities accordance applicable accounting guidance uncertainty income taxes review tax uncertainties light changing facts circumstances progress tax audits adjust accordingly number audits process various jurisdictions although resolution tax positions uncertain based currently available information believe likely ultimate outcomes material adverse effect financial position results operations cash flows due number estimates assumptions inherent calculating various components tax provision certain changes future events changes tax legislation geographic mix earnings completion tax audits earnings dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k repatriation plans could impact estimates effective tax rate acquisitions goodwill intangibles longlived assets financial statements include operations acquired business starting completion acquisition addition assets acquired liabilities assumed recorded date acquisition respective estimated fair values excess purchase price estimated fair values net assets acquired recorded goodwill significant judgment required estimating fair value intangible assets assigning respective useful lives accordingly typically obtain assistance thirdparty valuation specialists significant items fair value estimates based available historical information future expectations assumptions deemed reasonable management inherently uncertain typically use income method estimate fair value intangible assets based forecasts expected future cash flows attributable respective assets significant estimates assumptions inherent valuations reflect consideration marketplace participants include amount timing future cash flows including expected growth rates profitability underlying product technology life cycles economic barriers entry discount rate applied cash flows unanticipated market macroeconomic events circumstances may occur could affect accuracy validity estimates assumptions determining useful life intangible asset also requires judgment exception certain trade names majority acquired intangible assets eg certain trademarks brands customer distributor relationships patents technologies expected determinable useful lives assessment useful lives intangible assets based number factors including competitive environment market share trademark brand history underlying product life cycles operating plans macroeconomic environment countries trademarked branded products sold estimates useful lives determinablelived intangibles primarily based factors determinablelived intangible assets amortized expense estimated useful life acquisitions acquire inprocess research development iprd intangible assets acquisitions accounted business combinations iprd considered indefinitelived intangible asset research completed becomes determinablelived intangible asset determined future use impaired asset acquisitions iprd expensed immediately unless alternative future use value indefinitelived intangible assets goodwill amortized tested least annually impairment testing goodwill performed separately impairment testing indefinitelived intangibles perform annual impairment test goodwill fourth quarter year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances also use discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability circumstances test goodwill impairment reviewing book value compared fair value reporting unit level test individual indefinitelived intangibles reviewing individual book values compared fair value determine fair value reporting units indefinitelived intangible assets based income approach income approach calculate fair value reporting units indefinitelived intangible assets based present value estimated future cash flows considerable management judgment necessary evaluate impact operating macroeconomic changes estimate future cash flows measure fair value assumptions used impairment evaluations forecasted growth rates cost capital consistent internal projections operating plans believe assumptions estimates also comparable would used marketplace participants recognize impairment charges goodwill years presented annual impairment testing indicated reporting unit goodwill fair values exceeded respective recorded values future changes judgments assumptions estimates used impairment testing goodwill indefinitelived intangible assets including discount tax rates future cash flow projections could result significantly different estimates fair values significant reduction estimated fair values could result impairment charges could materially affect results operations review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows individual asset level asset group level undiscounted cash flows expected generated related assets estimated useful life based updated projections evaluation indicates carrying amount assets may recoverable potential impairment measured based upon fair value related assets asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell legal contingencies involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 7 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable projected management additional expense may incurred could unfavorably affect future operating results currently selfinsured product liabilityrelated claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows new accounting pronouncements refer note 1 consolidated financial statements information dollar amounts millions except per share amounts otherwise specified item 7aitem 7management’s discussion analysis financial condition results operations stryker one worlds leading medical technology companies together customers driven make healthcare better offer innovative products services orthopaedics medical surgical neurotechnology spine help improve patient hospital outcomes goal achieve sales growth highend medical technology medtech industry maintain longterm capital allocation strategy prioritizes 1 acquisitions 2 dividends 3 share repurchases covid19 pandemic covid19 global pandemic led severe disruptions market global united states economies may continue prolonged duration trigger recession period economic slowdown response various governmental authorities private enterprises implemented numerous measures contain pandemic travel bans restrictions quarantines shelterinplace orders shutdowns significant number global suppliers vendors distributors manufacturing facilities located regions affected pandemic operations materially adversely affected restrictive government private enterprise measures implemented response pandemic products particularly sensitive reductions elective medical procedures elective medical procedures suspended first quarter 2020 many markets products marketed sold negatively affected business cash flows financial condition results operations saw progressive improvement second third quarters extent individuals required continue deprioritize delay elective procedures result covid19 pandemic otherwise experienced fourth quarter business cash flows financial condition results operations could negatively affected overview 2020 response covid19 pandemic included unprecedented measures slow spread virus taken local governments health care authorities globally including postponement elective medical procedures social contact restrictions could continue significant negative impact stryker’s operations financial results 2020 reported net sales declined 36 excluding impact acquisitions sales declined 48 constant currency reported net earnings 1599 net earnings per diluted share 420 excluding impact certain items achieved adjusted net earnings1 2827 adjusted net earnings per diluted share1 743 representing decline 100 continued capital allocation strategy investing 4222 acquisitions paying 863 dividends shareholders 2020 received 3292 issuance debt total debt repayments 2297 exercised right acquisition clause credit term loan facilities increase maximum permitted leverage 501 effective december 31 2020 refer note 10 consolidated financial statements information 2020 completed acquisitions total net cash consideration 4222 82 future milestone payments primarily due upon achievement certain regulatory commercial milestones november 2020 completed acquisition wright 3075 per share aggregate purchase price 41 billion 56 billion including convertible notes wright global medical device company focused extremities biologics wright part trauma extremities business within orthopaedics december 2020 completed acquisition orthosensor inc orthosensor leader digital evolution musculoskeletal care sensor technology total joint replacement orthosensor part joint replacement business within orthopaedics 2020 repurchase shares common stock authorized repurchase program total dollar value shares common stock could acquired authorized repurchase program 1033 december 31 2020 previously announced intention suspend share repurchase program 2021 1 refer nongaap financial measures discussion nongaap financial measures used report reconciliation directly comparable gaap financial measure consolidated results operations dollar amounts millions except per share amounts otherwise specified11 stryker corporation 2020 form 10k nm meaningful consolidated net sales consolidated net sales 2020 significantly negatively impacted global response covid19 pandemic consolidated net sales decreased 36 reported constant currency excluding 12 impact acquisitions net sales constant currency decreased 41 decreased unit volume 07 due lower prices unit volume decrease primarily due lower shipments instruments endoscopy neurotechnology spine knee hip products partially offset higher shipments medical products consolidated net sales 2019 increased 94 reported 107 constant currency foreign currency exchange rates negatively impacted net sales 13 excluding 26 impact acquisitions net sales constant currency increased 90 increased unit volume partially offset 09 due lower prices unit volume increase primarily due higher shipments medical instruments endoscopy neurotechnology knee hip trauma extremities products orthopaedics net sales orthopaedics net sales 2020 decreased 56 reported 57 constant currency foreign currency exchange rates positively impacted net sales 01 excluding 24 impact acquisitions net sales constant currency decreased due postponement elective medical procedures part global response covid19 pandemic 66 decreased unit volume 15 due lower prices unit volume decrease primarily due lower shipments knee hip trauma extremities products orthopaedics net sales 2019 increased 52 reported 67 constant currency foreign currency exchange rates negatively impacted net sales 15 net sales constant currency increased 82 unit volume partially offset 15 due lower prices unit volume increase primarily due higher shipments knee hip trauma extremities products medsurg net sales medsurg net sales 2020 decreased 14 reported 13 constant currency foreign currency exchange rates negatively impacted net sales 01 excluding 05 impact acquisitions net sales constant currency decreased 18 decreased unit volume nominal impact changes pricing unit volume decrease primarily due lower shipments instruments endoscopy sustainability solutions products partially offset higher shipments medical products medsurg net sales 2019 increased 88 reported 99 constant currency foreign currency exchange rates negatively impacted net sales 11 excluding 10 impact acquisitions net sales constant currency increased 94 increased unit volume partially offset 05 due lower prices unit volume increase primarily due higher shipments medical instruments endoscopy sustainability solutions products neurotechnology spine net sales neurotechnology spine net sales 2020 decreased 47 reported 49 constant currency foreign currency dollar amounts millions except per share amounts otherwise specified12 stryker corporation 2020 form 10k exchange rates positively impacted net sales 02 excluding 08 impact acquisitions net sales constant currency decreased 49 decreased unit volume 08 due lower prices unit volume decrease primarily due lower shipments spine neurotechnology products neurotechnology spine net sales 2019 increased 192 reported 205 constant currency foreign currency exchange rates negatively impacted net sales 13 excluding 116 impact acquisitions net sales constant currency increased 96 increased unit volume partially offset 07 due lower prices unit volume increase primarily due higher shipments neurotechnology products gross profit gross profit significantly negatively impacted global response covid19 pandemic 2020 decreasing percentage net sales 631 651 2019 excluding impact items noted gross profit decreased 638 659 2019 primarily due lower sales volumes lower selling prices lower manufacturing volumes unfavorable product mix due postponement elective medical procedures part global response covid19 pandemic gross profit percentage net sales decreased 651 2019 657 2018 excluding impact items noted gross profit decreased 659 2019 661 2018 primarily due impact lower selling prices research development engineering expenses research development engineering expenses percentage net sales increased 69 2020 65 2019 63 2018 excluding impact items noted expenses increased 63 2020 61 2019 consistent 2018 projects develop new products investments new technologies integration recent acquisitions impact lower sales contributed increase partially offset operating expense savings actions response covid19 pandemic selling general administrative expenses selling general administrative expenses percentage net sales 2020 increased 374 360 2019 included charges related certain process asset impairments primarily portion investment new global erp system process developed future deployment exit costs resulting decision suspend certain investments due pandemicrelated constraints excluding impact items noted expenses decreased 331 2020 335 2019 primarily due operating expense savings actions taken response covid19 pandemic selling general administrative expenses percentage net sales 2019 decreased 360 375 2018 excluding impact items noted expenses decreased 335 2019 339 2018 primarily due leverage higher sales volumes continued focus operating expense improvement initiatives partially offset leverage recent acquisitions recall charges net insurance proceeds recall charges 17 192 23 2020 2019 2018 charges primarily due previously disclosed rejuvenate abgii modularneck hip stems lfit v40 femoral head voluntary recalls refer note 7 consolidated financial statements information amortization intangible assets amortization intangible assets 472 464 417 2020 2019 2018 increase 2020 2019 due acquisitions refer notes 6 8 consolidated financial statements information operating income operating income significantly negatively impacted global response covid19 pandemic 2020 decreasing percentage sales 155 182 2019 187 2018 excluding impact items noted operating income decreased 244 sales 2020 263 2019 259 2018 primarily due unfavorable business mix impact lower sales volumes postponement elective medical procedures part global response covid19 pandemic partially offset continued focus operating expense savings actions income expense net income expense net 269 151 181 2020 2019 2018 increase net expense 2020 primarily due increased interest expense driven dollar amounts millions except per share amounts otherwise specified13 stryker corporation 2020 form 10k additional debt bond offerings completed december 2019 june 2020 refer note 10 consolidated financial statements information income taxes effective tax rate 182 187 508 2020 2019 2018 effective income tax rate 2020 reflects continued lower effective income tax rates result european operations tax effect related transfer intellectual property tax jurisdictions tax effect future remittances undistributed earnings foreign subsidiaries effective income tax rate 2019 reflects tax related transfer intellectual properties tax jurisdictions continued lower effective income tax rates result european operations effective income tax rate 2018 reflects tax effect related transfer intellectual properties tax jurisdictions continuing impact complying tax cuts jobs act 2017 tax act continued lower effective income tax rates result european operations net earnings significantly negatively impacted global response covid19 pandemic 2020 net earnings decreased 1599 420 per diluted share 2083 548 per diluted share 2019 3553 934 per diluted share 2018 adjusted net earnings per diluted share1 743 decreased 100 826 2019 compared 731 2018 impact foreign currency exchange rates reduced net earnings per diluted share approximately 002 014 006 2020 2019 2018 nongaap financial measures supplement reporting financial information determined accounting principles generally accepted united states gaap certain nongaap financial measures including percentage sales growth constant currency percentage organic sales growth adjusted gross profit adjusted selling general administrative expenses adjusted research development engineering expenses adjusted operating income adjusted income expense net adjusted effective income tax rate adjusted net earnings adjusted net earnings per diluted share diluted eps free cash flow free cash flow conversion believe nongaap financial measures provide meaningful information assist investors shareholders understanding financial results assessing prospects future performance management believes percentage sales growth constant currency adjusted measures described important indicators operations exclude items may indicative unrelated core operating results provide baseline analyzing trends underlying businesses management uses nongaap financial measures reviewing operating results reportable business segments analyzing potential future business trends connection budget process bases certain management incentive compensation nongaap financial measures measure percentage sales growth constant currency remove impact changes foreign currency exchange rates affect comparability trend sales percentage sales growth constant currency calculated translating current prior year results foreign currency exchange rate measure percentage organic sales growth remove impact changes foreign currency exchange rates acquisitions affect comparability trend sales percentage organic sales growth calculated translating current year results prior year average foreign currency exchange rates excluding impact acquisitions measure earnings performance consistent comparable basis exclude certain items affect comparability operating results trend earnings adjustments irregular timing may indicative past future performance following examples types adjustments may included period 1acquisition integrationrelated costs related integrating recently acquired businesses specific costs eg inventory stepup deal costs related consummation acquisition process 2amortization purchased intangible assets periodic amortization expense related purchased intangible assets 3restructuringrelated charges costs associated termination sales relationships certain countries workforce reductions elimination product lines certain longlived asset impairments associated costs restructuringrelated activities 4medical device regulations costs specific updating quality system product labeling asset writeoffs product remanufacturing comply medical device reporting regulations requirements european union china regulations medical devices 5recallrelated matters best estimate minimum range probable loss resolve rejuvenate lfit v40 product recalls 6regulatory legal matters best estimate minimum range probable loss resolve certain regulatory matters legal settlements 7tax matters charges represent impact accounting certain significant discrete tax items measure free cash flow adjust cash provided operating activities amount purchases property plant equipment proceeds longlived asset disposals remove impact certain legal settlements recall payments measure free cash flow conversion divide free cash flow adjusted net earnings nongaap financial measures standardized may possible compare financial measures companies nongaap financial measures similar names adjusted financial measures considered isolation substitute reported sales growth gross profit selling general administrative expenses dollar amounts millions except per share amounts otherwise specified14 stryker corporation 2020 form 10k research development engineering expenses operating income expense net effective income tax rate net earnings net earnings per diluted share directly comparable gaap financial measures nongaap financial measures additional way viewing aspects operations viewed gaap results reconciliations corresponding gaap financial measures end discussion consolidated results operations strongly encourage investors shareholders review financial statements publiclyfiled reports entirety rely single financial measure weightedaverage diluted shares outstanding used calculation nongaap net earnings per diluted share used calculation reported net earnings per diluted share respective period reconciliation directly comparable gaap financial measure nongaap financial measure dollar amounts millions except per share amounts otherwise specified15 stryker corporation 2020 form 10k financial condition liquidity believe financial condition continues high quality evidenced ability generate substantial cash operations readily access capital markets competitive rates despite covid19 pandemic operating cash flow provides primary source cash fund operating needs capital expenditures excess operating cash used first fund acquisitions complement portfolio businesses discretionary uses include dividends share repurchases however 2019 announced intention suspend share repurchase program 2020 2021 supplement operating cash flow debt fund activities necessary overall cash position reflects business results global cash management strategy takes account liquidity management economic factors tax considerations operating activities cash provided operating activities 3277 2191 2610 2020 2019 2018 increase 2019 primarily due cash working capital including higher accounts receivable collections less spending inventory due lower production lower sales increase accounts payable partially offset decreased net earnings investing activities cash used investing activities 4701 1455 2857 2020 2019 2018 increase cash used 2020 primarily due acquisition wright orthosensor 2019 acquired mobius certain businesses related assets 2018 acquired entellus k2m financing activities cash provided used financing activities 11 3 1329 2020 2019 2018 change cash primarily driven securing 400 term loan november 2020 issuance 600 notes november 2020 2300 notes june 2020 offset total debt repayments 2297 dividend payments 863 2020 compared issuance €24 billion notes november 2019 repayments 1342 debt dividend payments 778 share repurchases 307 2019 share repurchases suspended 2020 maintain debt levels consider appropriate evaluating number factors including cash requirements ongoing operations investment financing plans including acquisitions share repurchase activities overall cost capital refer note 10 consolidated financial statements information liquidity cash equivalents marketable securities 3024 4425 current assets exceeded current liabilities 4666 6658 december 31 2020 2019 despite impact covid19 pandemic anticipate able support shortterm liquidity operating needs variety sources including cash operations commercial paper existing credit lines capital expenditure operating expense reductions maintain revolving credit facility 15 billion committed capital expires august 2023 15 billion unsecured revolving credit facility matures april 2021 raised funds capital markets 2020 2019 2018 may continue timetotime continue strong investmentgrade shortterm longterm debt ratings believe enable us refinance debt needed cash equivalents marketable securities held locations outside united states approximately 30 25 december 31 2020 2019 intend use cash expand operations organically acquisitions guarantees offbalance sheet arrangements guarantees offbalance sheet financing arrangements including variable interest entities magnitude believe could material impact financial condition liquidity contractual obligations forwardlooking cash requirements described note 7 consolidated financial statements 2020 recorded charges earnings related rejuvenate abg ii lfit anatomic cocr v40 femoral heads recall matters recorded product liabilities relating wright legacy hip products claims recorded reserves represent minimum range probable cost remaining resolve matters final outcome matters dependent many variables difficult predict ultimate cost entirely resolve matters may materially different amount current estimates could material adverse effect financial position results operations cash flows able reasonably estimate future periods payments made described note 11 consolidated financial statements december 31 2020 reserve uncertain income tax positions 457 due uncertainties regarding ultimate resolution income tax audits able reasonably estimate future periods income tax payments settle uncertain income tax positions made described note 12 consolidated financial statements december 31 2020 defined benefit pension plans underfunded 596 approximately 588 related plans outside united states due rules affecting taxdeductible contributions jurisdictions plans offered impact future plan asset performance changes interest rates potential changes legislation united states foreign jurisdictions able reasonably estimate amounts may required fund defined benefit pension plans dollar amounts millions except per share amounts otherwise specified16 stryker corporation 2020 form 10k critical accounting policies estimates preparing financial statements accordance generally accepted accounting principles certain accounting policies may require substantial judgment estimation application believe accounting policies others set forth note 1 consolidated financial statements critical understanding results operations financial condition actual results could differ estimates assumptions differences could material results operations financial condition inventory reserves maintain reserves excess obsolete inventory resulting potential inability sell certain products prices excess current carrying costs make estimates regarding future recoverability costs products record provisions based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results income taxes annual tax rate determined based income statutory tax rates tax impacts items treated differently tax purposes financial reporting purposes tax law requires certain items included tax return different times items reflected financial statements differences permanent expenses deductible tax return differences temporary reverse time depreciation expense temporary differences create deferred tax assets liabilities deferred tax assets generally represent tax effect items used tax deduction credit future years already recorded tax benefit income statement deferred tax liabilities generally represent tax expense recognized financial statements payment deferred tax effect expenditures deduction taken tax return yet recognized financial statements assets recorded fair value business combinations corresponding tax basis adjustment inherent determining annual tax rate judgments regarding business plans tax planning opportunities expectations future outcomes realization certain deferred tax assets dependent upon generating sufficient taxable income appropriate jurisdiction prior expiration carryforward periods although realization assured management believes likely deferred tax assets net valuation allowances realized operate multiple jurisdictions complex tax policy regulatory environments certain jurisdictions may take tax positions management believes supportable potentially subject successful challenge applicable taxing authority differences interpretation respective governmental taxing authorities impacted local economic fiscal environment evaluate tax positions establish liabilities accordance applicable accounting guidance uncertainty income taxes review tax uncertainties light changing facts circumstances progress tax audits adjust accordingly number audits process various jurisdictions although resolution tax positions uncertain based currently available information believe likely ultimate outcomes material adverse effect financial position results operations cash flows due number estimates assumptions inherent calculating various components tax provision certain changes future events changes tax legislation geographic mix earnings completion tax audits earnings repatriation plans could impact estimates effective tax rate acquisitions goodwill intangibles longlived assets financial statements include operations acquired business starting completion acquisition addition assets acquired liabilities assumed recorded date acquisition respective estimated fair values excess purchase price estimated fair values net assets acquired recorded goodwill significant judgment required estimating fair value intangible assets assigning respective useful lives accordingly typically obtain assistance thirdparty valuation specialists significant items fair value estimates based available historical information future expectations assumptions deemed reasonable management inherently uncertain typically use income method estimate fair value intangible assets based forecasts expected future cash flows attributable respective assets significant estimates assumptions inherent valuations reflect consideration marketplace participants include amount timing future cash flows including expected growth rates profitability underlying product technology life cycles economic barriers entry discount rate applied cash flows unanticipated market macroeconomic events circumstances may occur could affect accuracy validity estimates assumptions determining useful life intangible asset also requires judgment exception certain trade names majority acquired intangible assets eg certain trademarks brands customer distributor relationships patents technologies expected determinable useful lives assessment useful lives intangible assets based number factors including competitive environment market share trademark brand history underlying product life cycles operating plans macroeconomic environment countries trademarked branded products sold estimates useful lives determinablelived intangibles primarily based factors determinablelived intangible assets amortized expense estimated useful life acquisitions acquire inprocess research development iprd intangible assets acquisitions accounted business combinations iprd considered indefinitelived intangible asset research completed becomes determinablelived intangible asset determined future use impaired asset acquisitions iprd expensed immediately unless alternative future use value indefinitelived intangible assets goodwill amortized tested least annually impairment testing goodwill performed separately impairment testing indefinitelived intangibles perform annual impairment test goodwill fourth quarter dollar amounts millions except per share amounts otherwise specified17 stryker corporation 2020 form 10k year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances also use discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability circumstances test goodwill impairment reviewing book value compared fair value reporting unit level test individual indefinitelived intangibles reviewing individual book values compared fair value determine fair value reporting units indefinitelived intangible assets based income approach income approach calculate fair value reporting units indefinitelived intangible assets based present value estimated future cash flows considerable management judgment necessary evaluate impact operating macroeconomic changes estimate future cash flows measure fair value assumptions used impairment evaluations forecasted growth rates cost capital consistent internal projections operating plans believe assumptions estimates also comparable would used marketplace participants annual impairment testing indicated reporting unit goodwill fair values significantly exceeded respective recorded values future changes judgments assumptions estimates used impairment testing goodwill indefinitelived intangible assets including discount tax rates future cash flow projections could result significantly different estimates fair values significant reduction estimated fair values could result impairment charges could materially affect results operations review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows individual asset level asset group level undiscounted cash flows expected generated related assets estimated useful life based updated projections evaluation indicates carrying amount assets may recoverable potential impairment measured based upon fair value related assets asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell legal contingencies involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 7 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable projected management additional expense may incurred could unfavorably affect future operating results currently selfinsured certain claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows new accounting pronouncements refer note 1 consolidated financial statements information item 7aitem 7 managements discussion analysis financial condition results operations information caption managements discussion analysis financial condition results operations pages 24 27 1994 annual report pages 37 40 edgar filing incorporated herein reference item 8item 7 financial statements exhibits exhibit press release c exhibits exhibit index appears page 19 report financial statement schedules response portion item 14 submitted separate section report following signature page compensation arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date 32097 david j simpson david j simpson vice president chief financial officer secretary pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated john w brown 32097 david j simpson 32097 john w brown chairman president david j simpson vice president chief executive officer chief financial officer principal executive officer secretary principal financial officer howard e cox jr 32097 jeffrey r winter 32097 howard e cox jrdirector jeffrey r winter controller principal accounting officer donald engelman 32097 ronda e stryker 32097 donald engelman phddirector ronda e strykerdirector jerome h grossman 32097 william u parfet 32097 jerome h grossmanmddirector william u parfetdirector john lillard 32097 john lillarddirector annual report form 10k item 14a1 2 c list financial statements financial statement schedule certain exhibits financial statement schedule year ended december 31 1996 stryker corporation kalamazoo michigan form 10kitem 14a1 2 stryker corporation subsidiaries list financial statements financial statement schedule following consolidated financial statements stryker corporation subsidiaries report independent auditors included annual stockholders report registrant year ended december 31 1996 incorporated reference item 8item 7 managements discussion analysis financial condition results operations executive level overview stryker corporation company stryker one worlds leading medical technology companies broadly based range products orthopaedics significant presence medical specialties stryker works respected medical professionals help people lead active satisfying lives companys products include implants used joint replacement trauma craniomaxillofacial spinal surgeries biologics surgical neurologic ear nose throat interventional pain equipment endoscopic surgical navigation communications digital imaging systems well patient handling emergency medical equipment stryker also provides outpatient physical therapy services united states company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma spinal micro implant systems bone cement bone growth factor op1 medsurg equipment segment sells surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment category includes physical therapy services corporate administration interest expense interest income domestic sales accounted 65 total revenues 2005 companys products marketed directly 6000 hospitals doctors healthcare facilities approximately 2800 sales marketing personnel united states stryker primarily maintains separate dedicated sales forces principal product lines provide focus high level expertise medical specialty served international sales accounted 35 total revenues 2005 companys products sold 100 countries companyowned sales subsidiaries branches thirdparty dealers distributors companys business generally seasonal nature however number orthopaedic implant surgeries lower summer months fourth quarter 2005 company completed repatriation 722 million foreign earnings provisions american jobs creation act provided temporary incentive united states companies repatriate accumulated income earned foreign jurisdictions reduced income tax cost additional details including financial statement impact resulting repatriation funds included results operations fourth quarter 2005 company acquired merger outstanding stock plasmasol corp plasmasol developed technology allow stryker provide sterilization equipment use certain medsurg equipment products cost transaction totaled approximately 175 million including upfront cash payment plus assumption certain liabilities first quarter 2005 company acquired merger etraumacom corp etrauma approximately 500 million cash plus certain transaction costs acquisition expanded companys digital imaging equipment product offerings within medsurg equipment segment adding etraumas proprietary picture archive communications systems pacs image management viewing software third quarter 2004 company completed acquisition merger outstanding stock spinecore inc spinecore upfront payment 1200 million cash plus certain transaction costs spinecore developer artificial lumbar cervical discs terms transaction also include milestone royalty payments additional 2400 million upon achievement commercialization spinecores products united states expected occur 2008 acquisition expected enhance companys presence spinal implant market important growth area within orthopaedic implants segment additional details including financial statement impacts resulting acquisitions included results operations outlook 2006 companys outlook 2006 continues optimistic regarding underlying growth rates orthopaedic procedures companys broadly based range products orthopaedics medical specialties despite potential increased pricing pressure orthopaedic implants products united states japan certain foreign markets company projects diluted earnings per share 202 2006 including recognition cost employee stock options described matters projection represents 21 increase adjusted restated diluted net earnings per share 167 2005 calculated follows purchased inprocess research development charge additional income taxes repatriation foreign earnings fully described results operations financial forecast 2006 includes net sales increase range 11 14 result growth shipments orthopaedic implants medsurg equipment higher revenue physical therapy services offset unfavorable foreign currency exchange rate movements foreign currency exchange rates hold near current levels company anticipates unfavorable impact net sales approximately 2 3 first quarter 2006 unfavorable impact net sales approximately 1 2 full year 2006 excluding effect foreign currency exchange rates company expects annual net sales growth range 12 15 2006 comparable 14 sales growth excluding effect foreign currency exchange rates reported full year 2005 results operations table outlines components consolidated statements earnings percentage net sales yeartoyear percentage change dollar amounts table sets forth domesticinternational product line sales information table sets forth additional sales growth information significant products within companys orthopaedic implants medsurg equipment product lines reported basis constant currency basis excludes impact changes foreign currency exchange rates 2005 compared 2004 stryker corporations net sales increased 14 2005 48715 million 42623 million 2004 net sales grew 12 result increased unit volume changes product mix 1 related higher selling prices 1 due acquisitions domestic sales 31656 million 2005 representing increase 15 result higher shipments orthopaedic implants medsurg equipment higher revenue physical therapy services international sales 17059 million 2005 representing increase 13 result higher shipments orthopaedic implants medsurg equipment impact foreign currency comparisons dollar value international sales favorable 115 million 2005 excluding impact foreign currency international sales increased 12 2005 worldwide sales orthopaedic implants 28551 million 2005 representing increase 11 result higher shipments reconstructive trauma spinal micro implant systems bone cement bone growth factor op1 excluding impact foreign currency sales orthopaedic implants increased 11 year hip implant systems sales hip implant systems increased 4 year also 4 excluding changes foreign currency exchange rates due growth trident hip system europe pacific region accolade cementless hip products restoration modular hip system revision hips united states partially offset lower sales trident ceramiconceramic hip system hip fracture products united states knee implant systems sales knee implant systems increased 14 year 13 excluding changes foreign currency exchange rates due strong growth recently launched triathlon knee system united states europe pacific region well scorpio knee system europe japan pacific region trauma implant systems sales trauma implant systems increased 15 year 16 excluding changes foreign currency exchange rates result fullscale launch gamma3 hip fracture system united states japan europe second half 2004 strong growth companys t2 nailing system united states internationally also drove trauma sales growth 2005 spinal implant systems sales spinal implant systems increased 17 year also 17 excluding changes foreign currency exchange rates primarily due strong sales growth interbody devices united states led sales recently launched avs spacer products well solid worldwide growth cervical thoracolumbar product sales micro implant systems sales micro implant systems increased 12 year also 12 excluding changes foreign currency exchange rates result strong worldwide sales implant products hand indications solid domestic sales products neuro indications worldwide sales medsurg equipment 17538 million 2005 representing increase 21 result higher shipments surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment excluding impact foreign currency sales medsurg equipment increased 20 year surgical equipment surgical navigation systems sales surgical equipment surgical navigation systems increased 16 year also 16 excluding changes foreign currency exchange rates due strong worldwide sales growth system 5 heavyduty powered systems interventional pain products sterishield personal protection systems surgical navigation products well strong sales growth neptune operating waste management system united states endoscopic communications digital imaging systems sales endoscopic communications digital imaging systems increased 24 year also 24 excluding changes foreign currency exchange rates result strong growth medical video imaging equipment led growth digital imaging equipment 1088 high definition camera strong growth general surgery products united states partially offset slower growth arthroscopy united states resulting discontinuance allograft products year patient handling emergency medical equipment sales patient handling emergency medical equipment increased 23 year 22 excluding changes foreign currency exchange rates due strong sales growth hospital maternity beds emergency medical equipment united states solid growth stretcher sales united states physical therapy services revenues 2626 million 2005 representing increase 7 growth coming new physical therapy centers cost sales represented 352 sales 2005 compared 354 2004 lower cost sales percentage 2005 partially due increased average selling prices companys products lower excess obsolete inventory costs associated discontinued products partially offset faster sales growth lower margin medsurg equipment segment higher growth royalty costs relative sales growth research development engineering expenses represented 57 sales 2005 compared 50 2004 expenses increased 33 2005 2798 million higher spending level result companys continued focus new product development anticipated future product launches continued investments new technologies together beginning third quarter 2004 spending associated continued development products acquired spinecore new product introductions 2005 orthopaedic implants segment included x3 polyethylene companys nextgeneration highly crosslinked polyethylene featuring higher level strength wear reduction hip knee replacements posteriorstabilized version triathlon knee system united states europe canada pacific region within medsurg equipment segment new product introductions 2005 included maestro drill expanded companys line micro powered instruments spine neurology ear nose throat applications selling general administrative expenses increased 10 2005 represented 372 sales compared 388 2004 decrease selling general administrative expenses percent sales 2005 due lower meeting costs slower growth advertising costs insurance premiums relative companys growth net sales decreases partially offset increase sales commission expense result 14 growth net sales 2005 addition higher amortization expense associated loaner instrument sets purchased inprocess research development charge 159 million recorded fourth quarter 2005 relates acquisition plasmasol private developmentstage company date acquisition sterilization technology acquired yet approved sale us food drug administration fda therefore yet reached technological feasibility purchase price 175 million preliminarily allocated assets acquired primarily deferred tax assets associated acquired net operating losses purchased inprocess research development based fair value date acquisition purchased inprocess research development charge 1208 million recorded third quarter 2004 relates acquisition spinecore private developmentstage company date acquisition artificial lumbar cervical spinal disc implant technologies acquired preliminary stages clinical studies united states yet reached technological feasibility upfront payment 1200 million plus certain transaction costs allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair value date acquisition interest expense included income expense increased 77 million 2005 68 million 2004 primarily result increased borrowings europe complete repatriation foreign earnings fourth quarter 2005 interest income included income expense increased 133 million 2005 47 million 2004 primarily due increased cash marketable securities balances throughout year effective income tax rate 327 year ended december 31 2005 350 year ended december 31 2004 reported effective income tax rate 2005 reflects charge 274 million recognize income tax expense related liability associated repatriation 722 million foreign earnings provisions american jobs creation act completed fourth quarter reported effective income tax rate 2005 also reflects nondeductibility income tax purposes 159 million purchased inprocess research development charge associated plasmasol acquisition reported effective income tax rate year ended december 31 2004 reflects nondeductibility income tax purposes 1208 million purchased inprocess research development charge associated spinecore acquisition excluding impact income taxes repatriation foreign earnings 2005 impact purchased inprocess research development charges 2005 2004 companys effective income tax rate reduced 295 2005 compared 300 2004 primarily result increased manufacturing lower tax jurisdictions net earnings 2005 increased 45 6752 million 4657 million 2004 basic net earnings per share increased 44 167 2005 116 2004 diluted net earnings per share increased 44 164 2005 114 2004 excluding impacts charges write purchased inprocess research development 2005 2004 recognize income tax expense associated repatriation foreign earnings 2005 adjusted net earnings increased 23 7185 million 2005 5865 million 2004 adjusted basic net earnings per share increased 22 178 2005 146 2004 adjusted diluted net earnings per share increased 22 175 2005 143 2004 adjusted financial measure replace presentation companys reported financial results stated generally accepted accounting principles gaap company provided supplemental nongaap financial measure provides meaningful information regarding companys results consistent comparable basis periods presented management uses nongaap financial measure reviewing operating results business segments analyzing potential future business trends connection budget process addition company believes investors utilize information evaluate periodtoperiod results better understand potential future operating results company encourages investors users financial statements review consolidated financial statements publicly filed reports entirety rely solely single financial measure reconciliation nongaap financial measure follows millions 2004 compared 2003 stryker corporations net sales increased 18 2004 42623 million 36253 million 2003 net sales grew 13 result increased unit volume changes product mix 3 due changes foreign currency exchange rates 2 related higher selling prices domestic sales 27530 million 2004 representing increase 18 result higher shipments orthopaedic implants medsurg equipment higher revenue physical therapy services international sales 15093 million 2004 representing increase 17 result higher shipments orthopaedic implants medsurg equipment impact foreign currency comparisons dollar value international sales favorable 1208 million 2004 excluding impact foreign currency international sales increased 7 2004 worldwide sales orthopaedic implants 25625 million 2004 representing increase 17 result higher shipments reconstructive trauma spinal micro implant systems bone cement bone growth factor op1 excluding impact foreign currency sales orthopaedic implants increased 13 year hip implant systems sales hip implant systems increased 14 year 9 excluding changes foreign currency exchange rates sales growth hip products slowed 2004 primarily due tougher comparables resulting launch trident ceramiconceramic hip system united states second quarter 2003 knee implant systems sales knee implant systems increased 18 year 14 excluding changes foreign currency exchange rates due strong growth scorpio duracon knee systems united states trauma implant systems sales trauma implant systems increased 17 year 11 excluding changes foreign currency exchange rates result fullscale launch gamma3 hip fracture system united states japan europe 2004 strong growth companys t2 nailing system united states internationally also drove trauma sales growth 2004 spinal implant systems sales spinal implant systems increased 18 year 15 excluding changes foreign currency exchange rates primarily due strong sales growth cervical interbody products united states micro implant systems sales micro implant systems increased 16 year 12 excluding changes foreign currency exchange rates result strong sales implant products hand indications solid domestic sales implant products neuro indications worldwide sales medsurg equipment 14549 million 2004 representing increase 20 result higher shipments surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment excluding impact foreign currency sales medsurg equipment increased 18 year surgical equipment surgical navigation systems sales surgical equipment surgical navigation systems increased 17 year 15 excluding changes foreign currency exchange rates due strong sales growth heavyduty powered instruments interventional pain products surgical navigation systems domestically europe endoscopic communications digital imaging systems sales endoscopic communications digital imaging systems increased 21 year 20 excluding changes foreign currency exchange rates result solid growth digital imaging equipment sports medicine products united states patient handling emergency medical equipment sales patient handling emergency medical equipment increased 25 year 23 excluding changes foreign currency exchange rates due strong growth hospital beds emergency medical equipment domestically international markets physical therapy services revenues 2449 million 2004 representing increase 10 6 growth resulting new physical therapy centers 4 increase coming higher revenues existing centers cost sales represented 354 sales 2004 compared 362 2003 lower cost sales percentage 2004 partially due increased average selling prices companys products improved manufacturing efficiencies several companys manufacturing distribution facilities including mahwah new jersey manufacturing distribution facility lower purchase prices raw materials including cobalt chromium titanium alloys research development engineering expenses represented 50 sales 2004 2003 expenses increased 17 2004 2110 million higher spending level result final development spending advance companys product launches 2004 continued focus new product development anticipated future product launches together beginning third quarter 2004 spending associated continued development products acquired spinecore new product introductions 2004 orthopaedic implants segment included restoration modular hip system united states europe triathlon knee system united states europe scorpio nrg knee centpillar hip systems japan worldwide launch oasys posterior cervical fixation system fullscale launch gamma3 hip fracture system united states japan europe triathlon knee system represents companys evolutionary design developed closely reproduce natural knee motion provide mobility stability 150 degrees flexion within medsurg equipment segment new product introductions 2004 included new video platform 1088 high definition camera first fully digital highdefinition progressivescan medical video camera new mseries stretcher designed fit needs acute care specialty surgical care facilities selling general administrative expenses increased 17 2004 represented 388 sales compared 391 2003 17 increase selling general administrative expenses partially due increase sales commission expense result 18 increase net sales 2004 increased meeting costs higher amortization expense associated loaner instrument sets addition company incurred 121 million increase insurance costs 2004 resulting increased premiums charged thirdparty insurers wholly owned captive insurance company established 2003 fully described matters purchased inprocess research development charge 1208 million recorded third quarter 2004 relates acquisition spinecore interest expense included income expense declined 68 million 2004 226 million 2003 primarily result lower outstanding debt balances effective income tax rate 350 2004 reported effective income tax rate 2004 reflects nondeductibility income tax purposes purchased inprocess research development charge associated spinecore acquisition excluding effect nondeductible charge companys effective income tax rate reduced 300 2004 compared 305 2003 primarily result increased manufacturing lower tax jurisdictions net earnings 2004 increased 3 4657 million 4535 million 2003 basic net earnings per share increased 2 116 2004 114 2003 diluted net earnings per share increased 3 114 2004 111 2003 excluding impact 1208 million purchased inprocess research development charge recorded 2004 adjusted net earnings increased 29 5865 million 2004 4535 million 2003 adjusted basic net earnings per share increased 28 146 2004 114 2003 adjusted diluted net earnings per share increased 29 143 2004 111 2003 reconciliation nongaap financial measure previously described follows millions liquidity capital resources companys working capital december 31 2005 increased 5922 million 16213 million 10291 million december 31 2004 increase working capital resulted growth companys overall business use cash earnings fund increases accounts receivable inventories prepaid expenses accrued liabilities increased 2005 result growth business higher obligations acquisitions sales commissions royalties dividends increases accrued liabilities accounts receivable days sales outstanding 54 days december 31 2005 compared 58 days december 31 2004 days sales inventory decreased 8 days 114 days december 31 2005 122 days december 31 2004 decrease days sales outstanding days sales inventory december 31 2005 primarily due improved asset management company generated cash 8638 million operations 2005 compared 5933 million 2004 increase cash operations 2005 compared prior year primarily due higher net earnings 2005 elimination amounts outstanding accounts receivable securitization facility representing operating cash usage 1500 million 2004 along improvements days sales outstanding days sales inventory 2005 company used cash 2717 million capital expenditures including 509 million expansion companys manufacturing facility lebanon new hampshire 415 million related implementation erp systems multiple manufacturing distribution facilities 273 million construction companys new manufacturing facilities portage michigan 201 million companys new manufacturing facility neuchâtel switzerland addition company used cash 597 million acquisitions 362 million payment dividends also purchased sold marketable securities classified availableforsale investments accordance provisions financial accounting standards board fasb statement 115 accounting certain investments debt equity securities totaled 5653 million december 31 2005 first quarter 2005 company acquired etrauma approximately 500 million cash plus certain transaction costs acquisition etrauma accounted using purchase method accounting results operations acquired business included companys consolidated financial statements date acquisition materially impact companys reported operating results pro forma consolidated results operations would differ significantly result etrauma acquisition purchase price etrauma preliminarily allocated assets acquired liabilities assumed based estimated fair value date acquisition based preliminary purchase price allocation 220 million allocated identifiable intangibles amortized remaining lives 5 8 years 316 million allocated goodwill immediately acquisition consummated management company began implement integration plan combine stryker etrauma conjunction integration plan company recorded additional purchase liabilities severance related costs 03 million included purchase price allocation company 4912 million cash equivalents 5653 million marketable securities december 31 2005 company also outstanding borrowings totaling 2316 million date current maturities longterm debt december 31 2005 474 million company believes cash hand marketable securities well anticipated cash flows operations sufficient fund future operating capital requirements future manufacturing facility construction capital expenditures future business product line acquisitions supplement current product offerings loaner instrumentation surgical implants support new product launches required debt repayments november 2005 company established 10000 million unsecured credit facility replaced previously outstanding 7500 million unsecured credit facility new facility expires november 2010 includes senior term loan original principal amount €1900 million senior 5year nonamortizing revolving credit agreement maximum amount 10000 million less outstanding amount senior term loan total €1900 million drawn senior term loan facilitate repatriation foreign earnings remains outstanding december 31 2005 additional funds required company 8421 million additional borrowing capacity available existing credit facilities including companys 10000 million unsecured credit facility addition company 2000 million eligible accounts receivable could sold accounts receivable securitization facility december 31 2005 companys future contractual obligations agreements initial terms greater 1 year including agreements purchase materials normal course business summarized follows millions companys additional borrowing capacity along expected expiration period commitments summarized follows millions critical accounting policies preparation companys consolidated financial statements requires management make estimates assumptions affect amounts reported financial statements accompanying notes management evaluates estimates assumptions ongoing basis estimates based historical experience available various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions management believes significant accounting policies see note 1 consolidated financial statements understanding following critical accounting policies important obtaining overall understanding consolidated financial statements allowance doubtful accounts company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends actual customer financial conditions less favorable projected management additional accounts receivable writeoffs may necessary could unfavorably affect future operating results inventory reserves company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory writedowns may required could unfavorably affect future operating results income taxes company operates multiple tax jurisdictions inside outside united states accordingly management must determine appropriate allocation income jurisdictions tax audits associated allocation income complex issues including inventory transfer pricing product royalty arrangements may require extended period time resolve may result income tax adjustments changes income allocation required jurisdictions different tax rates tax adjustments certain jurisdictions significant company records accruals representing managements best estimate probable resolution matters income tax accruals included within income taxes liability consolidated balance sheets extent additional information becomes available accruals adjusted reflect revised estimated probable outcome matters company distributes products throughout world result companys financial results could significantly affected factors changes foreign currency exchange rates weak economic conditions foreign markets companys operating results primarily exposed changes exchange rates among united states dollar japanese yen european currencies particular euro british pound united states dollar weakens foreign currencies dollar value sales denominated foreign currencies increases united states dollar strengthens opposite situation occurs company manufactures products united states france germany ireland switzerland canada puerto rico incurs costs manufacture applicable local currencies worldwide deployment factories serves partially mitigate impact currency exchange rate changes companys cost sales company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies december 31 2005 company outstanding forward currency exchange contracts purchase 1316 million sell 921 million various currencies principally united states dollars euros maturities ranging principally 30 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points hypothetical 10 change exchange rates currencies would change december 31 2005 fair value approximately 02 million company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties company certain investments net assets international locations hedged investments subject translation gains losses due changes foreign currencies deferred recorded separate component shareholders equity year ended december 31 2005 weakening foreign currencies relative us dollar decreased value investments net assets related deferred gain shareholders equity 1929 million 170 million company partially selfinsured product liability claims utilizes wholly owned captive insurance company united states manage selfinsured retention limits captive insurance company provides insurance reserves estimated liabilities product claims incurred reported based actuarially determined liabilities actuarial valuations based historical information along certain assumptions future events december 2003 company announced subsidiary physiotherapy associates inc received subpoena united states attorneys office boston massachusetts connection department justice investigation physiotherapy associates billing coding practices march 2005 company announced received subpoena united states department justice requesting documents period january 2002 present relating consulting contracts professional service agreements remuneration agreements stryker corporation orthopedic surgeon orthopedic surgeon training medical school graduate using considering surgical use hip knee joint replacementreconstruction products manufactured sold stryker corporation company fully cooperating department justice regarding matters december 2004 fasb issued revision statement 123 sharebased payment revision supersedes accounting principles board apb opinion 25 accounting stock issued employees related implementation guidance april 14 2005 united states securities exchange commission adopted new rule allowing companies delay required adoption date revised statement first fiscal year beginning june 15 2005 based ruling company adopt provisions revised statement effective january 1 2006 rather july 1 2005 initially required revised statement revised statement requires companies recognize cost stock options based grantdate fair value determined employee stock option plans period recipient required provide services exchange options typically vesting period company plans adopt provisions revised statement using modifiedretrospective transition method provided revised statement method company restate prior periods presented consistent basis based pro forma expense previously disclosed statement 123 result companys net earnings 2005 2004 2003 reduced 316 million 257 million 191 million respectively 08 06 04 per diluted share respectively company believe adoption revised statement material impact trend net earnings net earnings per share item 7aitem 7 managements discussion analysis financial condition results operations throughout discussion references made following financial measures constant currency adjusted net earnings continuing operations adjusted basic net earnings per share continuing operations adjusted diluted net earnings per share continuing operations financial measures alternative representation stryker corporations company stryker past potential future operational performance replace presentation companys reported financial results us generally accepted accounting principles gaap company provided supplemental nongaap financial measures provide meaningful information regarding companys results consistent comparable basis periods presented management uses nongaap financial measures reviewing operating results business segments analyzing potential future business trends connection budget process bases certain annual bonus plans nongaap financial measures order measure companys sales performance constant currency basis necessary remove impact changes foreign currency exchange rates affects comparability trend sales constant currency results calculated translating current year results prior year average foreign currency exchange rates order measure earnings performance consistent comparable basis company excludes intangible asset impairment charge recorded 2007 purchased inprocess research development charges recorded 2006 2005 additional income taxes associated repatriation foreign earnings recorded 2005 affects comparability operating results trend earnings additional details regarding nature determination financial statement impact items included results operations addition company believes investors utilize information evaluate periodtoperiod results comparable basis better understand potential future operating results company encourages investors users financial statements review consolidated financial statements publicly filed reports entirety rely solely single financial measure executive level overview stryker one worlds leading medical technology companies broadly based range products orthopaedics significant presence medical specialties stryker works respected medical professionals help people lead active satisfying lives companys products include implants used joint replacement trauma spinal craniomaxillofacial surgeries biologics surgical neurologic ear nose throat interventional pain equipment endoscopic surgical navigation communications digital imaging systems well patient handling emergency medical equipment company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma spinal craniomaxillofacial implant systems bone cement bone growth factor op1 medsurg equipment segment sells surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment category includes corporate administration interest expense interest marketable securities income domestic sales accounted 64 total revenues 2007 companys products marketed directly doctors hospitals healthcare facilities approximately 3500 sales marketing personnel united states stryker primarily maintains separate dedicated sales forces principal product lines provide focus high level expertise medical specialty served international sales accounted 36 total revenues 2007 companys products sold 100 countries companyowned sales subsidiaries branches well thirdparty dealers distributors 27 companys business generally seasonal nature however number orthopaedic implant surgeries lower summer months 2007 company announced reached resolution us attorneys office district new jersey connection previously announced investigation relating consulting contracts professional service agreements remuneration agreements stryker corporation orthopedic surgeon orthopedic surgeon training medical school graduate using considering surgical use hip knee joint replacementreconstruction products manufactured sold stryker corporation resolution form nonprosecution agreement 18month period term agreement companys orthopaedics subsidiary subject oversight federal monitor appointed us attorney regarding compliance certain standards procedures connection retention payment orthopaedic surgeon consultants related reconstructive products provision certain benefits surgeons 2007 company sold outpatient physical therapy business physiotherapy associates water street healthcare partners 1500 million cash less certain indebtedness physiotherapy associates operating results reported discontinued operations periods presented additional details including financial statement impact resulting divestiture included results operations matters 2007 company adopted provisions financial accounting standards board fasb interpretation 48 accounting uncertainty income taxes interpretation clarifies accounting income taxes prescribing minimum recognition threshold income tax position required meet recognized companys consolidated financial statements interpretation also provides guidance measurement classification income tax positions interest penalties requires additional disclosure annual basis additional details including financial statement impact resulting adoption included results operations 2006 company acquired outstanding stock sightline technologies ltd sightline private developmentstage company upfront payment 500 million cash plus certain transaction costs assumption certain liabilities sightline developed flexible endoscopes improve insertion sterilization colonoscopy procedures terms transaction also include milestone payments additional 900 million upon achievement certain operational financial targets related sightlines products first expected occur 2008 acquisition expected enhance companys presence gastrointestinal markets within medsurg equipment segment 2005 company acquired merger outstanding stock plasmasol corp plasmasol developed technology allow stryker provide sterilization equipment use certain medsurg equipment products cost transaction totaled 175 million including upfront cash payment plus assumption certain liabilities 2005 company acquired merger outstanding stock etraumacom corp etrauma 500 million cash plus certain transaction costs acquisition expanded companys digital imaging equipment product offerings within medsurg equipment segment adding etraumas proprietary picture archive communications systems pacs image management viewing software sightlines plasmasols etraumas operating results included companys consolidated financial statements date acquisitions materially impact companys operating results pro forma consolidated results operations would differ significantly result acquisitions additional details including financial statement impacts resulting acquisitions included results operations 28 2005 company completed repatriation 722 million foreign earnings provisions american jobs creation act provided temporary incentive us companies repatriate accumulated income earned foreign jurisdictions reduced income tax cost additional details including financial statement impact resulting repatriation funds included results operations outlook 2008 companys outlook 2008 continues optimistic regarding underlying growth rates orthopaedic procedures sales growth companys broadly based range products orthopaedics medical specialties despite potential increased pricing pressure certain markets company projects diluted net earnings per share 2008 approximate 288 representing 22 increase diluted net earnings per share continuing operations 237 year ended december 31 2007 excluding impact charge reflect intangible asset impairment 2007 fully described results operations company projects diluted net earnings per share 2008 increase 20 adjusted diluted net earnings per share continuing operations 240 year ended december 31 2007 financial forecast 2008 includes constant currency net sales increase range 11 13 result growth shipments orthopaedic implants medsurg equipment foreign currency exchange rates hold near december 31 2007 levels company anticipates favorable impact net sales approximately 25 3 first quarter 2008 favorable impact net sales approximately 1 15 full year 2008 results operations table outlines components net earnings continuing operations consolidated statements earnings percentage net sales yeartoyear percentage change dollar amounts 29 table sets forth domesticinternational product line sales information tables set forth additional geographical sales growth information significant products within companys orthopaedic implants medsurg equipment segments reported basis constant currency basis 30 2007 compared 2006 companys net sales increased 17 2007 60005 million 51472 million 2006 net sales grew 14 result increased unit volume changes product mix 3 due favorable changes foreign currency exchange rates companys domestic sales 38503 million 2007 representing increase 17 international sales 21502 million 2007 representing increase 16 result higher shipments orthopaedic implants medsurg equipment impact foreign currency comparisons dollar value international sales favorable 1315 million 2007 constant currency basis international sales increased 9 2007 worldwide sales orthopaedic implants 35707 million 2007 representing increase 15 result higher shipments reconstructive trauma spinal craniomaxillofacial implant systems bone cement bone growth factor op1 constant currency basis sales orthopaedic implants increased 12 2007 hip implant systems sales hip implant systems increased 9 year 6 constant currency basis united states sales growth driven sales x3 polyethylene accolade cementless hip products partially offset declines hip systems solid sales growth exeter trident x3 polyethylene accolade hip products europe pacific region latin america region also led companys constant currency sales growth 2007 knee implant systems sales knee implant systems increased 16 year 13 constant currency basis due strong growth triathlon knee system united states europe canada pacific region solid growth scorpio knee system europe pacific region latin america region 31 trauma implant systems sales trauma implant systems increased 19 2007 15 constant currency basis result strong sales growth gamma3 hip fracture system united states europe canada pacific region well solid sales growth companys t2 nailing system united states europe partially offset sales decline japan result governmentimposed price cuts spinal implant systems sales spinal implant systems increased 25 2007 23 constant currency basis sales growth 2007 driven strong worldwide sales growth thoracolumbar implant systems interbody devices cervical implants craniomaxillofacial implant systems sales craniomaxillofacial implant systems increased 17 2007 14 constant currency basis primarily due strong sales growth products neurological indications craniomaxillofacial implants united states europe pacific region worldwide sales medsurg equipment 24298 million 2007 representing increase 19 result higher shipments surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment constant currency basis sales medsurg equipment increased 17 2007 surgical equipment surgical navigation systems sales surgical equipment surgical navigation systems increased 20 2007 17 constant currency basis due strong sales growth powered surgical operating room equipment united states europe pacific region solid sales growth interventional pain products europe also led companys constant currency sales growth endoscopic communications digital imaging systems sales endoscopic communications digital imaging systems increased 21 2007 19 constant currency basis result strong worldwide sales growth medical video imaging equipment led 1188 hd camera complementary products x8000 lightsource vision elect monitor strong sales growth arthroscopy communication products united states europe pacific region also led companys constant currency sales growth patient handling emergency medical equipment sales patient handling emergency medical equipment increased 16 2007 15 constant currency basis due strong sales growth stretchers emergency medical equipment united states europe addition constant currency sales growth 2007 led strong sales growth hospital beds united states well strong sales growth maternity beds united states canada europe latin america region cost sales represented 311 sales 2007 compared 314 2006 cost sales percentage 2007 favorably impacted efficiencies gained within manufacturing plants product distribution channels research development engineering expenses represented 63 sales 2007 2006 expenses increased 16 2007 3753 million higher spending level result companys continued focus new product development anticipated future product launches continued investments new technologies new product introductions 2007 orthopaedic implants segment included condylar stabilizing cs ultracongruent insert triathlon knee system scorpio nrg x3 advanced bearing technology omega 3 compression hip screw system within medsurg equipment segment new product introductions 2007 included intouch highacuity care bed sdc ultra allinone medical imaging information management system core sumex drill designed use ent procedures 45l pneumosure insufflator selling general administrative expenses increased 17 2007 represented 399 sales compared 398 2006 slight increase selling general administrative expenses percent sales 2007 due higher salesrelated costs primarily compensation increased regulatory compliance 32 related costs partially offset decreases insurance costs slower growth discretionary spending 2007 company recorded 198 million charge 127 million net income taxes write patents associated intervertebral body fusion cage products impairment followed us food drug administration fda decision downgrade certain intervertebral body fusion products class ii devices along weak market sales specific products result company performed discounted cash flow analysis remaining life patented technologies determined charge required purchased inprocess research development charge 527 million recorded 2006 relates acquisition sightline date acquisition flexible endoscope technologies acquired yet reached technological feasibility upfront payment 500 million plus certain transaction costs assumption certain liabilities allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair value date acquisition amount written purchased inprocess research development deductible income tax purposes united states company believes technologies acquired sightline acquisition result introduction new products additional future sales however unanticipated issues may arise could delay terminate products development prior commercialization could unfavorable impact companys operating results december 31 2007 company must refine certain product specifications highlighted customer preference trials validate manufacturing processes order achieve plan initial commercialization flexible endoscope technologies 2008 interest marketable securities income included income expense increased 855 million 2007 414 million 2006 primarily result increased cash equivalents marketable securities balances 2007 compared 2006 interest expense included income expense increased 222 million 2007 95 million 2006 primarily result interest expense associated unresolved income tax positions companys effective income tax rate earnings continuing operations year ended december 31 2007 280 compared effective income tax rate year ended december 31 2006 295 effective income tax rate year ended december 31 2007 reflects impact intangible asset impairment charge 127 million net 71 million income tax benefit effective income tax rate year ended december 31 2006 reflects impact nondeductibility income tax purposes purchased inprocess research development charge associated acquisition sightline considering factors companys reported effective income tax rates years ended december 31 2007 2006 lower us statutory income tax rate primarily result manufacturing lower income tax international jurisdictions upon adoption fasb interpretation 48 company recognized increase interest expense accrual associated unresolved income tax positions accounted reducing january 1 2007 balance retained earnings 76 million net income taxes addition company reclassified 1792 million current income taxes liability noncurrent liabilities match anticipated timing future income tax payments net earnings continuing operations increased 28 2007 9867 million 7714 million 2006 basic net earnings per share continuing operations increased 27 2007 241 190 2006 diluted net earnings per share continuing operations increased 27 2007 237 187 2006 excluding impacts charges reflect intangible asset impairment 2007 write purchased inprocess research development recorded 2006 adjusted net earnings continuing operations increased 21 2007 9994 million 8241 million 2006 adjusted basic net earnings per share continuing operations increased 20 2007 244 203 2006 adjusted diluted net earnings per share continuing operations increased 20 2007 240 200 2006 33 reconciliations nongaap financial measures follows millions except per share amounts percentage change reported net earnings continuing operations 9867 7714 28 intangible asset impairment 127 purchased inprocess research development 527 100 adjusted net earnings continuing operations 9994 8241 basic net earnings per share common stock reported basic net earnings per share common stock continuing operations 241 190 intangible asset impairment 03 purchased inprocess research development 13 100 adjusted basic net earnings per share common stock continuing operations 244 203 weightedaverage basic shares outstanding 4097 4065 diluted net earnings per share common stock reported diluted net earnings per share common stock continuing operations 237 187 intangible asset impairment 03 purchased inprocess research development 13 100 adjusted diluted net earnings per share common stock continuing operations 240 200 weightedaverage diluted shares outstanding 4172 4118 weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts sale physiotherapy associates resulted gain sale discontinued operations 257 million net income taxes 06 per diluted share 2007 net earnings discontinued operations year ended december 31 2007 50 million 01 per diluted share compared net earnings discontinued operations 63 million 02 per diluted share year ended december 31 2006 net earnings increased 31 2007 10174 million 7777 million 2006 basic net earnings per share increased 30 2007 248 191 2006 diluted net earnings per share increased 29 2007 244 189 2006 compared 2005 companys net sales increased 12 2006 51472 million 46089 million 2005 net sales grew 11 result increased unit volume changes product mix 1 result higher selling prices domestic sales 32984 million 2006 representing increase 14 result higher shipments orthopaedic implants medsurg equipment international sales 18488 million 2006 representing increase 8 result higher shipments orthopaedic implants medsurg equipment impact foreign currency comparisons dollar value international sales unfavorable 52 million 2006 constant currency basis international sales increased 9 2006 34 worldwide sales orthopaedic implants 31101 million 2006 representing increase 9 reported constant currency basis result higher shipments reconstructive trauma spinal craniomaxillofacial implant systems bone cement bone growth factor op1 hip implant systems sales hip implant systems increased 2 year reported constant currency basis united states sales growth driven sales recently launched x3 polyethylene increased sales accolade cementless hip products restoration modular hip system revision hip products partially offset declines sales hip systems solid growth trident hip system accolade cementless hip products restoration modular hip system revision hip products europe well solid growth accolade cementless hip products trident hip system pacific region also contributed sales growth hip implant systems knee implant systems sales knee implant systems increased 12 year reported constant currency basis due strong growth triathlon knee system united states europe pacific region solid growth scorpio knee system international markets partially offset slower growth japan result government imposed price cuts trauma implant systems sales trauma implant systems increased 13 year 14 constant currency basis due strong worldwide sales growth gamma3 hip fracture system strong sales growth t2 nailing system united states europe partially offset slower growth japan result price cuts spinal implant systems sales spinal implant systems increased 18 year reported constant currency basis primarily due strong worldwide sales growth interbody devices led sales avs vertebral spacer system well solid worldwide sales growth thoracolumbar products craniomaxillofacial implant systems sales craniomaxillofacial implant systems increased 16 year reported constant currency basis result strong domestic sales growth led products neurologic indications craniomaxillofacial implants worldwide sales medsurg equipment 20371 million 2006 representing increase 16 reported constant currency basis result higher shipments surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment surgical equipment surgical navigation systems sales surgical equipment surgical navigation systems increased 12 year reported constant currency basis due strong domestic sales growth surgical navigation systems operating room equipment solid domestic sales growth interventional pain products strong sales growth powered surgical instruments outside united states also led companys sales growth endoscopic communications digital imaging systems sales endoscopic communications digital imaging systems increased 19 year reported constant currency basis result strong worldwide sales growth medical video imaging equipment led recently launched 1188 hd camera related accessories well imaging communications products strong worldwide sales growth general surgery products also contributed companys sales growth patient handling emergency medical equipment sales patient handling emergency medical equipment increased 18 year 17 constant currency basis due strong sales growth hospital bed products united states latin america region canada strong domestic sales growth emergency medical equipment well solid stretcher sales growth europe latin america region 35 cost sales represented 314 sales 2006 compared 323 2005 lower cost sales percentage 2006 primarily due lower excess obsolete inventory costs result fewer comparative product introductions year reduced royalty costs related expiration certain royalty agreements partially offset faster sales growth lower margin medsurg equipment segment research development engineering expenses represented 63 sales 2006 compared 62 2005 expenses increased 14 2006 3246 million higher spending level result companys continued focus new product development anticipated future product launches continued investments new technologies new product introductions 2006 orthopaedic implants segment included lfit anatomic femoral heads x3 polyethylene liners address range motion dislocation potential avs spacer used anterior lumbar interbody fusion within medsurg equipment segment new product introductions 2006 included 1188 hd camera related accessories next generation stryker 3chip hd cameras system 6 heavy duty power system stryker precision oscillating tip saw features stationary blade shaft oscillating tip selling general administrative expenses increased 11 2006 represented 398 sales compared 399 2005 slight decrease selling general administrative expenses percentage sales 2006 due decreases insurance costs slower growth discretionary spending partially offset higher salesrelated costs primarily compensation loaner instrumentation amortization sample expenses purchased inprocess research development charge 527 million recorded 2006 relates acquisition sightline purchased inprocess research development charge 159 million recorded 2005 relates acquisition plasmasol date plasmasol acquisition sterilization technology acquired yet approved sale fda therefore yet reached technological feasibility purchase price 175 million allocated assets acquired primarily deferred income tax assets associated acquired net operating losses purchased inprocess research development based fair value date acquisition amounts written purchased inprocess research development deductible income tax purposes united states company believes technologies acquired sightline plasmasol acquisitions result introduction new products additional future sales however unanticipated issues may arise could delay terminate products development prior regulatory approval commercialization could unfavorable impact companys operating results previously described december 31 2007 company must refine certain product specifications highlighted customer preference trials validate manufacturing processes order achieve plan initial commercialization flexible endoscope technologies 2008 december 31 2007 company encountered significant issues expects completion development initial commercialization sterilization technologies 2010 interest marketable securities income included income expense increased 414 million 2006 133 million 2005 primarily result increased cash equivalents marketable securities balances 2006 compared 2005 interest expense included income expense increased 95 million 2006 77 million 2005 primarily result borrowings europe complete repatriation foreign earnings 2005 companys effective income tax rate earnings continuing operations year ended december 31 2006 295 compared effective income tax rate year ended december 31 2005 325 effective income tax rate year ended december 31 2006 reflects impact nondeductibility income tax purposes purchased inprocess research development charge associated acquisition sightline effective income tax rate year ended december 31 2005 reflects impact nondeductibility income tax purposes purchased inprocess research development charge associated acquisition plasmasol well additional 274 million income taxes recorded result repatriation foreign earnings considering factors companys reported effective income tax rates years ended december 31 2006 2005 lower us statutory income tax rate primarily result manufacturing lower income tax international jurisdictions 36 net earnings continuing operations increased 22 2006 7714 million 6325 million 2005 basic net earnings per share continuing operations increased 21 2006 190 157 2005 diluted net earnings per share continuing operations increased 21 2006 187 154 2005 excluding impacts charges write purchased inprocess research development 2006 2005 recognize income tax expense associated repatriation foreign earnings 2005 adjusted net earnings continuing operations increased 22 2006 8241 million 6758 million 2005 adjusted basic net earnings per share continuing operations increased 22 2006 203 167 2005 adjusted diluted net earnings per share continuing operations increased 21 2006 200 165 2005 reconciliations nongaap financial measures follows millions except per share amounts weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts net earnings discontinued operations year ended december 31 2006 63 million 02 per diluted share compared net earnings discontinued operations 111 million 03 per diluted share year ended december 31 2005 net earnings increased 21 2006 7777 million 6436 million 2005 basic net earnings per share increased 20 2006 191 159 2005 diluted net earnings per share increased 20 2006 189 157 2005 37 liquidity capital resources companys working capital december 31 2007 increased 13891 million 35719 million 21828 million december 31 2006 increase working capital resulted growth companys overall business proceeds sale physiotherapy associates use cash earnings fund increases accounts receivable inventories prepaid expenses accounts receivable days sales outstanding 56 days december 31 2007 2006 days sales inventory decreased one day 137 days december 31 2007 138 days december 31 2006 company generated cash 10283 million operations 2007 compared 8673 million 2006 increase cash operations 2007 compared prior year primarily due increased earnings partially offset growth working capital accounts primarily accounts receivable inventories 2007 company borrowed additional 1037 million used cash 1029 million payments borrowings company also used cash 1877 million capital expenditures including 143 million related implementation erp systems multiple manufacturing distribution facilities 139 million facility expansions 70 million complete construction homer stryker center education clinical research mahwah new jersey addition company used 548 million acquisitions 897 million payment dividends company also purchased sold marketable securities classified availableforsale investments accordance provisions fasb statement 115 accounting certain investments debt equity securities company 2905 million cash equivalents 21203 million marketable securities december 31 2007 company also outstanding borrowings totaling 168 million date classified current obligations company believes cash hand marketable securities well anticipated cash flows operations sufficient fund future operating capital requirements future manufacturing facility construction capital expenditures future business product line acquisitions supplement current product offerings loaner instrumentation surgical implants support new product launches required debt repayments payment dividends december 31 2007 approximately 9 companys investments availableforsale securities held triple rated per standard poors assetbacked debt securities majority related investments automobile loans december 31 2007 less 1 companys investments marketable securities exposed risk loss related declining value subprimemortgage securities market additional funds required company 10473 million additional borrowing capacity available existing credit facilities including companys 10000 million 5year nonamortizing revolving unsecured credit facility expires november 2010 addition company entire 2000 million accounts receivable securitization facility available december 31 2007 companys future contractual obligations agreements initial terms greater 1 year including agreements purchase materials normal course business summarized follows millions due uncertainties regarding ultimate resolution income tax audits timing employee retirements company able reasonably estimate future periods income tax payments settle unresolved income tax positions contributions fund defined benefits plans made 38 companys additional borrowing capacity along expected expiration period commitments summarized follows millions critical accounting policies preparation companys consolidated financial statements requires management make estimates assumptions affect amounts reported financial statements accompanying notes management evaluates estimates assumptions ongoing basis estimates based historical experience available various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions management believes significant accounting policies see note 1 consolidated financial statements understanding following critical accounting policies important obtaining overall understanding consolidated financial statements allowance doubtful accounts company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends actual customer financial conditions less favorable projected management additional accounts receivable write offs may necessary could unfavorably affect future operating results inventory reserves company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results income taxes company operates multiple income tax jurisdictions inside outside united states accordingly management must determine appropriate allocation income jurisdictions income tax audits associated allocation income complex issues including inventory transfer pricing product royalty arrangements may require extended period time resolve may result income tax adjustments changes income allocation required jurisdictions different income tax rates income tax adjustments certain jurisdictions significant company records accruals representing managements best estimate probable resolution matters 39 extent additional information becomes available accruals adjusted reflect revised estimated probable outcome matters company distributes products throughout world result companys financial results could significantly affected factors changes foreign currency exchange rates weak economic conditions foreign markets companys operating results primarily exposed changes exchange rates among us dollar japanese yen european currencies particular euro british pound us dollar weakens foreign currencies dollar value sales denominated foreign currencies increases us dollar strengthens opposite situation occurs company manufactures products united states france germany ireland switzerland canada puerto rico incurs costs manufacture applicable local currencies worldwide deployment factories serves partially mitigate impact currency exchange rate changes companys cost sales company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts marked market period resulting gains losses included income expense consolidated statements earnings december 31 2007 company outstanding forward currency exchange contracts purchase 4279 million sell 2577 million various currencies principally us dollars euros maturities ranging principally 4 101 days december 31 2006 company outstanding forward currency exchange contracts purchase 3879 million sell 2270 million various currencies principally us dollars euros maturities ranging principally 7 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points hypothetical 10 change foreign currencies relative us dollar would change december 31 2007 fair value approximately 74 million company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties company certain investments net assets international locations hedged investments subject translation gains losses due changes foreign currencies year ended december 31 2007 strengthening foreign currencies relative us dollar increased value investments net assets related deferred gain shareholders equity 1527 million 2723 million 1196 million december 31 2006 company partially selfinsured product liability claims utilizes wholly owned captive insurance company united states manage selfinsured retention limits captive insurance company provides insurance reserves estimated liabilities product claims incurred reported based actuarially determined liabilities actuarial valuations based historical information along certain assumptions future events 2003 company announced received subpoena us attorneys office district massachusetts connection us department justice investigation physiotherapy associates billing coding practices terms physiotherapy sale agreement stryker retained responsibility certain cash damages paid connection investigation companys liability damages fixed sale agreement interest accrued date payment occurred 2007 liabilities previously recorded company sufficient cover obligations 40 2007 company disclosed us securities exchange commission made informal inquiry company regarding possible violations foreign corrupt practices act connection sale medical devices certain foreign countries subsequently 2008 company received subpoena us department justice criminal division requesting certain documents period january 1 2000 present connection us securities exchange commission inquiry 2006 company announced received subpoena us department justice antitrust division requesting documents period january 2001 present regarding possible violations federal criminal law including possible violation antitrust laws relating manufacture sale orthopaedic implant devices company fully cooperating us department justice us securities exchange commission regarding matters 2007 company received two warning letters fda regarding compliance certain quality system specifications reconstructive implant manufacturing facilities one letter facility cork ireland another facility mahwah new jersey company takes matters seriously fully cooperating fda address observations item 7aitem 7 management’s discussion analysis financial condition results operations supplement reporting financial information determined gaap certain nongaap financial measures including percentage sales growth constant currency adjusted net earnings adjusted diluted net earnings per share believe nongaap measures provide meaningful information assist shareholders understanding financial results assessing prospects future performance management believes percentage sales growth constant currency adjusted net earnings adjusted net earnings per diluted share important indicators operations exclude items may indicative unrelated core operating results provide baseline analyzing trends underlying businesses management uses nongaap financial measures reviewing operating results reportable business segments analyzing potential future business trends connection budget process bases certain annual bonus plans nongaap financial measures measure percentage sales growth constant currency remove impact changes foreign currency exchange rates affect comparability trend sales percentage sales growth constant currency calculated translating current year results prior year average foreign currency exchange rates measure earnings performance consistent comparable basis exclude certain items affect comparability operating results trend earnings nongaap financial measures standardized may possible compare financial measures companies nongaap financial measures similar names adjusted financial measures considered isolation substitute reported sales growth net earnings diluted net earnings per share directly comparable gaap financial measures nongaap financial measures additional way viewing aspects operations viewed gaap results reconciliations corresponding gaap financial measures end discussion results operations provide complete understanding business strongly encourage investors shareholders review financial statements publiclyfiled reports entirety rely single financial measure stryker one worlds leading medical technology companies 2011 revenues 8307 net earnings 1345 dedicated helping healthcare professionals perform jobs efficiently enhancing patient care offer diverse array innovative medical technologies including reconstructive medical surgical neurotechnology spine products help people lead active satisfying lives 2011 began segregating reporting three reportable business segments reconstructive medsurg neurotechnology spine see note 13 consolidated financial statements additional information recent business developments january 2012 reached settlement regarding 2009 indictment charging stryker biotech llc certain thencurrent employees former employee stryker biotech wire fraud conspiracy defraud fda distribution misbranded device false statements fda reached settlement united states attorneys office district massachusetts stryker pled one misdemeanor charge paid nontax deductible fine 15 result resolution department justice dismissed thirteen felony charges stryker biotech contained 2009 federal grand jury indictment charges thencurrent former employees stryker biotech also dismissed settlement represented recognized subsequent event accordingly recorded fourth quarter 2011 results 2011 recorded 38 severance related costs connection focused reductions global workforce restructuring activities expected reduce global workforce approximately 5 end 2012 targeted reductions restructuring activities initiated provide efficiencies realign resources advance new medical device excise tax scheduled begin 2013 well allow continued investment strategic areas drive growth addition recorded 25 intangible asset impairments 13 contractual obligations certain restructuring actions resulted discontinued use specific assets exit certain lease commitments 2011 recorded income tax benefit related favorable settlement united states internal revenue service irs regarding proposed adjustment previously filed 2003 2007 income tax returns related income tax positions taken respect cost sharing arrangements two wholly owned entities operating ireland recorded charges uncertain tax positions related outcome irs settlements net benefit adjustments uncertain tax positions 99 net tax october 2011 acquired concentric medical inc concentric manufactures markets minimally invasive products treatment acute ischemic stroke cash transaction 135 acquisition concentric enhances product offerings within neurotechnology spine segment july 2011 completed acquisition memometal technologies memometal cash transaction 150 including assumption 9 debt well additional 12 paid upon completion certain milestones acquisition dollar amounts millions except per share amounts otherwise specified memometal enhances product offerings within reconstructive segment june 2011 completed acquisition orthovita inc orthovita cash transaction 316 acquisition orthovita complements existing product offerings primarily within neurotechnology spine business segment february 2011 completed previously announced sale op1 product family use orthopaedic bone applications manufacturing facility based west lebanon nh total consideration 60 january 2011 completed previously announced acquisition assets neurovascular division boston scientific corporation neurovascular cash transaction 1450 additional 50 payment made upon completion certain milestones acquisition neurovascular substantially enhances presence neurotechnology market allowing us offer comprehensive portfolio products neurosurgical neurovascular devices september 2011 sold 750 senior unsecured notes due september 2016 january 2010 sold 500 senior unsecured notes due january 15 2015 500 senior unsecured notes due january 15 2020 net proceeds offerings continue available working capital general corporate purposes including acquisitions stock repurchases business opportunities results operations consolidated results operations geographic segment net sales net sales increased 135 2011 increasing 89 2010 2011 net sales grew 61 result increased unit volume changes product mix 24 due favorable impact foreign currency 68 due acquisitions partially offset unfavorable impact 18 due changes price 2010 net sales grew 69 result increased unit volume changes product mix 10 due favorable impact foreign currency 26 due acquisitions partially offset unfavorable impact 17 due changes price united states net sales increased 99 2011 increasing 110 2010 constant currency international sales increased 134 2011 compared 22 2010 2011 acquisitions contributed 496 68 net sales compared 177 26 2010 remaining increases 2011 2010 primarily due higher united states shipments medsurg products higher international shipments medsurg products neurotechnology spine products following geographical sales growth information segment provided supplement net sales information presented dollar amounts millions except per share amounts otherwise specified reconstructive net sales 2011 increased 45 2010 primarily due 34 increase unit volume changes product mix increase units sold due higher industry demand addition net sales negatively impacted unfavorable impact changes price partially offset favorable impact foreign currency constant currency reconstructive net sales increased 15 2011 reconstructive net sales 2010 increased 49 2009 primarily due increases unit volumes hips knees trauma extremities products due higher worldwide industry demand constant currency reconstructive net sales increased 35 2010 medsurg net sales 2011 increased 127 2010 led medical endoscopy instruments also increased primarily due 95 increase unit volume changes product mix favorable impact foreign currency acquisitions constant currency medsurg net sales increased 112 2011 medsurg net sales 2010 increased 155 2009 led increases medical well increases endoscopy instruments net sales 2010 positively impacted 71 acquisitions remainder due increases unit volume higher worldwide demand constant currency medsurg net sales increased 147 2010 neurotechnology spine net sales 2011 increased 485 2010 primarily due acquisition neurovascular sales growth acquisitions 426 remainder increase included 63 due increases unit volume changes product mix favorable impact foreign currency partially offset unfavorable impact changes price constant currency neurotechnology spine net sales 2011 increased 464 neurotechnology spine net sales 2010 increased 61 2009 primarily due increases unit volumes spine neurotechnology product lines higher worldwide demand constant currency neurotechnology spine net sales 2010 increased 56 consolidated cost sales cost sales increased 230 2010 338 sales compared 312 2010 cost sales 2011 includes additional cost 143 97 net taxes related inventory stepped fair value following acquisitions neurovascular dollar amounts millions except per share amounts otherwise specified orthovita memometal concentric remaining increase cost sales percentage primarily due impact lower pricing sales resulting increase cost sales percent sales impact changes product mix weaker united states dollar purchases international manufacturing operations cost sales 2010 decreased 47 2009 312 sales compared 325 2009 decrease cost sales percentage primarily due lower excess obsolete inventory charges higher absorption due higher production levels well favorable impact effect foreign currency costs eurobased manufacturing sites research development engineering expenses research development engineering expenses represented 56 sales 2011 compared 54 2010 50 2009 higher spending levels result focus new product development anticipated future product launches continued investments new technologies selling general administrative expenses selling general administrative expenses 2011 increased 164 represented 379 sales compared 370 2010 373 2009 2011 recorded 66 45 net taxes transaction acquisition costs integrationrelated charges associated acquisitions neurovascular orthovita memometal concentric businesses addition 2011 general administrative expenses include payment intellectual property infringement claim offset favorable resolution value added tax issue 2010 sold manufacturing facility france recorded gain 24 13 net taxes included general administrative expenses 2009 settled outstanding patent infringement lawsuit received 62 43 net taxes pursuant legal agreement restructuring charges 2011 recorded 76 60 net taxes restructuring charges related focused reductions global workforce restructuring expected reduce global workforce approximately 5 substantially complete end 2012 total cost approximately 150 175 actions initiated 2011 provide efficiencies realign resources advance new medical device excise tax scheduled begin 2013 well allow continued investment strategic areas drive growth 2009 recorded 67 49 net taxes restructuring charges related agency conversion charges associated termination certain thirdparty agent agreements asset impairment charges related primarily identifiable intangible assets result decision discontinue selling certain products severance related costs resulting decision simplify organization structure biotech emea japan canada divisions contractual obligations charges connection termination various supplier contracts well incidental costs related discontinued product lines property plant equipment impairment 2010 recorded 124 76 net taxes noncash impairment charge reduce carrying amount certain assets fair value related op1 product family related manufacturing facility income expense 2011 decreased 22 2010 primarily due reductions accrued interest expense resulting settlements reached united states internal revenue service irs reached favorable settlement regarding irs proposed adjustment previously filed 2003 2007 income tax returns related income tax positions taken irish cost sharing arrangements also reached settlement irs respect allocation income wholly owned subsidiary operating puerto rico years 2006 2009 positive effect interest expense tax settlements helped offset lower average yields investments combined lower cash equivalent marketable securities balances compared 2010 decrease balances corresponding reduction interest investment income primarily due purchases neurovascular orthovita memometal concentric businesses funded cash expense 2010 increased 52 2009 primarily due lower average yields investments combined higher interest cost debt issued january 2010 income taxes effective income tax rate earnings 202 264 318 2011 2010 2009 respectively effective income tax rate 2011 includes net impact settlement irs income allocation issues wholly owned subsidiary operating puerto rico irish cost sharing arrangements effective settlement united states federal tax matters tax years 2003 2007 charges uncertain income tax positions effective income tax rate 2010 includes impact property plant equipment impairment charge gain sale manufacturing facility favorable income tax expense adjustment associated repatriation foreign earnings united states completed 2009 effective income tax rate 2009 includes impact restructuring charges patent litigation gain impact income tax expenses associated repatriation foreign earnings dollar amounts millions except per share amounts otherwise specified net earnings net earnings 2011 increased 57 2010 1345 basic net earnings per share 2011 increased 84 2010 348 diluted net earnings per share 2011 increased 82 2010 345 net earnings 2010 increased 150 2009 1273 basic net earnings per share 2010 increased 150 321 compared 279 2009 diluted net earnings per share 2010 increased 150 319 compared 277 2009 reported net earnings includes benefits settlements adjustments related uncertain tax positions restructuring related charges acquisition integration related charges related neurovascular orthovita memometal concentric acquisitions including transaction costs integration related costs additional cost sales inventory sold year “stepped up” fair value excluding impact items adjusted net earnings 2011 increased 90 1448 increasing 126 2010 adjusted diluted net earnings per share 2011 increased 117 372 increasing 129 2010 following reconciles nongaap financial measures adjusted net earnings adjusted diluted net earnings per share directly comparable gaap financial measures reported net earnings diluted net earnings per share weightedaverage basic diluted shares outstanding used calculation nongaap financial measures weightedaverage shares outstanding used calculation reported per share amounts financial condition liquidity operating activities operating cash flow 1434 2011 decrease 73 2010 operating cash flow resulted primarily net earnings adjusted noncash items depreciation amortization stockbased compensation sale inventory steppedup fair value acquisition deferred income taxes partially offset increase working capital net accounts receivable inventory loaner instrumentation accounts payable consumed 498 operating cash flow 2011 inventory consumed 166 operating cash flow primarily due building inventory related acquisitions business growth increased stock levels advance new product introductions higher inventory levels support anticipated 2012 sales growth inventory days hand increased 4 days due impact accounts receivable used 143 primarily due building accounts receivable related acquisitions business growth accounts receivable days sales outstanding increased 2 days due dollar amounts millions except per share amounts otherwise specified timing sales operating cash flow 1547 2010 6 increase 2009 operating cash flow resulted primarily net earnings adjusted noncash items depreciation amortization stockbased compensation sale inventory steppedup fair value acquisition property plant equipment impairment deferred income taxes gain sale property plant equipment partially offset increase working capital net accounts receivable inventory loaner instrumentation accounts payable consumed 349 operating cash flow 2010 primarily due increases inventories accounts receivable inventory consumed 131 operating cash flow driven higher inventory levels support anticipated 2011 sales growth inventory days hand increased 9 days due impact foreign exchange higher inventory levels accounts receivable used 121 primarily support business growth accounts receivable days sales outstanding 56 unchanged prior year investing activities net investing activities consumed 2135 cash 2011 795 cash 2010 primarily due acquisitions capital spending partially offset proceeds sale assets acquisitions used 2066 cash 2011 primarily acquisitions neurovascular 1450 orthovita 316 memometal 150 concentric 135 2010 acquisitions used 265 cash primarily acquisitions sonopet ultrasonic aspirator control consoles handpieces accessories gaymar industries inc bioimplantable implants product line related assets porex surgical inc capital spending manage capital spending support business growth capital expenditures primarily support capacity expansion new product introductions innovation cost savings 226 2011 182 2010 proceeds asset sales proceeds asset sales contributed 67 cash 2011 primarily due sale certain assets related op1 product family 2010 proceeds asset sales contributed 61 cash primarily due sale manufacturing facility france financing activities dividend payments dividends paid per common share increased 200 072 per share 2011 total dividend payments common shareholders 279 2011 238 2010 increase dividend payments resulted increases quarterly dividend 015 per share 2010 018 per share 2011 longterm shortterm debt maintain debt levels consider appropriate evaluating number factors including cash flow expectations cash requirements ongoing operations investment financing plans including acquisitions share repurchase activities overall cost capital september 2011 sold 750 senior unsecured notes due september 2016 january 2010 sold 500 senior unsecured notes due january 15 2015 500 senior unsecured notes due january 15 2020 net proceeds offerings continue available working capital general corporate purposes including acquisitions stock repurchases business opportunities total debt 1768 2011 1021 2010 share repurchases total use cash share repurchases 622 2011 426 2010 liquidity cash marketable securities 3418 december 31 2011 4380 december 31 2010 current assets exceeded current liabilities 5383 december 31 2011 6027 december 31 2010 anticipate able support shortterm liquidity operating needs largely cash generated operations funded may continue time fund capital markets strong short longterm debt ratings believe enable us refinance debt becomes due addition 1000 credit facility diverse group financial institutions needed provide sufficient funding meet shortterm financing requirements approximately 1098 borrowing capacity available existing credit facilities december 31 2011 december 31 2011 approximately 62 consolidated cash equivalents marketable securities held locations outside united states funds considered indefinitely reinvested used expand operations either organically acquisitions outside united states intend repatriate significant amounts cash foreseeable future guarantees offbalance sheet arrangements guarantees offbalance sheet financing arrangements including variable interest entities magnitude believe could material impact financial condition liquidity dollar amounts millions except per share amounts otherwise specified contractual obligations forwardlooking cash requirements described note 12 consolidated financial statements december 31 2011 defined benefit pension plans underfunded status 106 approximately 94 related plans outside united states due rules affecting taxdeductible contributions jurisdictions plans offered impact future plan asset performance changes interest rates potential changes legislation united states foreign jurisdictions able reasonably estimate future periods beyond 2012 contributions fund defined benefit pension plans made described note 11 consolidated financial statements december 31 2011 recorded liability uncertain income tax positions 249 due uncertainties regarding ultimate resolution income tax audits able reasonably estimate future periods income tax payments settle uncertain income tax positions made future contractual obligations agreements initial terms greater one year including agreements purchase materials normal course business critical accounting policies estimates preparing financial statements accordance us gaap certain accounting policies may require choice acceptable accounting methods may require substantial judgment estimation application include allowance doubtful accounts inventory reserves income taxes acquisitions goodwill intangible assets legal contingencies believe accounting policies others set forth note 1 consolidated financial statements reviewed integral understanding results operations financial condition allowance doubtful accounts maintain allowance doubtful accounts estimated losses collection accounts receivable make estimates regarding future ability customers make required payments based historical credit experience expected future trends actual customer financial conditions less favorable projected management additional accounts receivable write offs may necessary could unfavorably affect future operating results inventory reserves maintain reserves excess obsolete inventory resulting potential inability sell certain products prices excess current carrying costs make estimates regarding future recoverability costs products record provisions based historical experience expiration sterilization dates expected future trends actual product life cycles product demand acceptance new product introductions less favorable projected management additional inventory write downs may required could unfavorably affect future operating results income taxes annual tax rate determined based income statutory tax rates tax impacts items treated differently tax purposes financial reporting purposes tax law requires certain items included tax return different times items reflected financial statements differences permanent expenses deductible tax return differences temporary reversing time depreciation expense temporary differences create deferred tax assets liabilities deferred tax assets generally represent tax effect items used tax deduction credit future years already recorded tax benefit income statement deferred tax liabilities generally represent tax expense recognized financial statements payment deferred tax effect expenditures deduction already taken tax return yet recognized financial statements assets recorded fair value business combinations corresponding tax basis adjustment inherent determining annual tax rate judgments regarding business plans tax planning opportunities expectations future outcomes realization certain deferred tax assets dependent upon generating sufficient taxable income appropriate dollar amounts millions except per share amounts otherwise specified jurisdiction prior expiration carryforward periods although realization assured management believes likely deferred tax assets net valuation allowances realized operate multiple jurisdictions complex tax policy regulatory environments certain jurisdictions may take tax positions management believes supportable potentially subject successful challenge applicable taxing authority differences interpretation respective governmental taxing authorities impacted local economic fiscal environment evaluate tax positions establish liabilities accordance applicable accounting guidance uncertainty income taxes review tax uncertainties light changing facts circumstances progress tax audits adjust accordingly number audits process various jurisdictions although resolution tax positions uncertain based currently available information believe likely ultimate outcomes material adverse effect financial position results operations cash flows number estimates assumptions inherent calculating various components tax provision certain changes future events changes tax legislation geographic mix earnings completion tax audits earnings repatriation plans could impact estimates effective tax rate acquisitions goodwill intangibles account acquired businesses using purchase method accounting purchase method consolidated financial statements include operations acquired business starting completion acquisition addition assets acquired liabilities assumed must recorded date acquisition respective estimated fair values excess purchase price estimated fair values net assets acquired recorded goodwill significant judgment required estimating fair value intangible assets assigning respective useful lives accordingly typically obtain assistance thirdparty valuation specialists significant items fair value estimates based available historical information future expectations assumptions deemed reasonable management inherently uncertain typically use income method estimate fair value intangible assets based forecasts expected future cash flows attributable respective assets significant estimates assumptions inherent valuations reflect consideration marketplace participants include amount timing future cash flows including expected growth rates profitability underlying product technology life cycles economic barriers entry discount rate applied cash flows unanticipated market macroeconomic events circumstances may occur could affect accuracy validity estimates assumptions determining useful life intangible asset also requires judgment certain intangibles expected indefinite lives based history plans continue support build acquired brands acquired intangible assets eg certain trademarks brands customer relationships patents technologies expected determinable useful lives assessment trademarks brands indefinite life determinable life based number factors including competitive environment market share trademark andor brand history underlying product life cycles operating plans macroeconomic environment countries trademarks brands sold estimates useful lives determinablelived intangibles primarily based factors acquired technology customerrelated intangibles expected determinable useful lives costs determinablelived intangibles amortized expense estimated life value indefinitelived intangible assets residual goodwill amortized tested least annually impairment testing goodwill performed separately impairment testing indefinitelived intangibles perform annual impairment test goodwill fourth quarter year earlyadopted provisions accounting standards update asu 201108 intangibles goodwill testing goodwill impairment permits us consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability circumstances test goodwill impairment reviewing book value compared fair value reporting unit level test individual indefinitelived intangibles reviewing individual book values compared fair value determine fair value reporting units indefinitelived intangible assets based income approach income approach calculate fair value reporting units indefinitelived intangible assets based present value estimated future cash flows considerable management judgment necessary evaluate impact operating macroeconomic changes estimate future cash flows measure fair value assumptions used impairment evaluations forecasted growth rates cost capital consistent internal projections operating plans believe assumptions estimates also comparable would used marketplace participants certain events changes operating conditions occur indefinitelived intangible assets may reclassified determinable life asset additional impairment assessment may performed dollar amounts millions except per share amounts otherwise specified recognize material impairment charges goodwill indefinitelived intangible assets years presented annual impairment testing indicated reporting unit goodwill indefinitelived intangible asset fair values exceeded respective recorded values however future changes judgments assumptions estimates used impairment testing goodwill indefinitelived intangible assets including discount tax rates future cash flow projections could result significantly different estimates fair values significant reduction estimated fair values could result impairment charges could materially affect financial statements given year recorded value goodwill indefinitelived intangible assets recently acquired businesses derived recent business operating plans macroeconomic environmental conditions therefore susceptible adverse change could require impairment charge review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows individual asset level asset group level defined undiscounted cash flows expected generated related assets estimated useful life based updated projections evaluation indicates carrying amount assets may recoverable potential impairment measured based upon fair value related assets asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell legal contingencies involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 7 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable cost minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable projected management additional expense may incurred could unfavorably affect future operating results partially mitigate losses arising unfavorable outcomes matters purchase thirdparty insurance coverage subject certain deductibles loss limitations future operating results may unfavorably impacted settlement payments losses beyond amounts insurance carried addition matters may negatively impact ability obtain costeffective thirdparty insurance coverage future periods new accounting pronouncements new accounting pronouncements issued became effective year expected material impact consolidated financial statements discussion new accounting pronouncements see note 1 consolidated financial statements information hedging derivative financial instruments distribute products throughout world result financial results could significantly affected factors weak economic conditions changes foreign currency exchange rates operating results primarily exposed changes exchange rates among united states dollar european currencies particular euro swiss franc british pound japanese yen australian dollar canadian dollar develop manufacture products united states china france germany ireland puerto rico switzerland incur costs applicable local currencies worldwide deployment facilities serves partially mitigate impact currency exchange rate changes cost sales enter forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses included income expense consolidated statements earnings estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points hypothetical 10 change foreign currencies relative united states dollar would change december 31 2011 fair value approximately 48 exposed credit loss event nonperformance dollar amounts millions except per share amounts otherwise specified counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties certain investments net assets international locations hedged investments subject translation gains losses due changes foreign currency exchange rates 2011 strengthening united states dollar relative foreign currencies decreased value investments net assets related foreign currency translation adjustment loss shareholders equity 20 176 196 december 31 2010 legal regulatory matters april 2011 lawsuits brought hillrom company inc affiliated entities us filed united states district court western district wisconsin united states district court southern district indiana suits allege infringement united states patent laws respect certain patient handling equipment manufactured sold us seek damages permanent injunctions wisconsin lawsuit subsequently transferred united states district court indiana intend vigorously defend matters third quarter 2010 received subpoena united states department justice related sales marketing regulatory matters related stryker painpump also third quarter 2010 received subpoena united states department justice related sales marketing otisknee device investigations ongoing march 2010 shareholders derivative action complaint certain current former directors officers filed united states district court western district michigan southern division lawsuit brought westchester putnam counties heavy highway laborers local 60 benefit funds laborers local 235 benefit funds complaint alleges claims breach fiduciary duties gross mismanagement connection certain product recalls united states food drug administration fda warning letters government investigations relating physician compensation criminal proceeding brought biotech division case stayed special committee board directors evaluates claims january 2010 purported class action lawsuit us filed united states district court southern district new york behalf purchased common stock january 25 2007 november 13 2008 inclusive lawsuit seeks remedies securities exchange act 1934 may 2010 lawsuit transferred united states district court western district michigan southern division defending vigorously 2009 federal grand jury district massachusetts returned indictment charging stryker biotech llc certain thencurrent employees former employee stryker biotech wire fraud conspiracy defraud fda distribution misbranded device false statements fda january 2012 stryker biotech reached settlement united states attorneys office district massachusetts stryker pled one misdemeanor charge paid nontax deductible fine 15 result resolution department justice dismissed thirteen felony charges stryker biotech contained 2009 federal grand jury indictment charges thencurrent former employees stryker biotech also dismissed 2007 united states department health human services office inspector general hhs issued civil subpoena us seeking determine whether violated various laws paying consulting fees providing things value orthopedic surgeons healthcare educational institutions inducements use strykers orthopedic medical devices procedures paid whole part medicare investigation ongoing produced numerous documents materials hhs response subpoena 2007 disclosed united states securities exchange commission sec made inquiry us regarding possible violations foreign corrupt practices act connection sale medical devices certain foreign countries subsequently 2008 received subpoena united states department justice criminal division requesting certain documents period since january 1 2000 connection sec inquiry fully cooperating united states department justice sec regarding matters item 7a nannanitem 7a quantitative qualitative desclosures market risk information subcaption caption managements discussion analysis financial condition results operations page 30 1997 annual report incorporated herein reference item 8item 7a quantitative qualitative desclosures market risk information subcaption matters caption managements discussion analysis financial condition results operations pages 38 39 1998 annual report incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk company manufactures products united states france germany ireland switzerland canada puerto rico distributes products throughout world result companys financial results could significantly affected factors changes foreign currency exchange rates weak economic conditions foreign markets companys operating results exposed changes exchange rates us dollar japanese yen european currencies company enters forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk company would otherwise result changes exchange rates principal transactions hedged intercompany purchases manufactured products intercompany payables periods forward foreign exchange contracts correspond periods hedged transactions realized gains losse december 31 1999 company outstanding forward foreign exchange contracts purchase 311 million sell 473 million various currencies principally us dollars maturities principally ranging 30 180 days december 31 1998 company also outstanding forward foreign exchange contracts purchase 797 million sell 923 million various currencies principally us dollars maturities ranging 30 180 days estimated fair value foreign currency contracts represents measurement contracts monthend spot rates december 31 1999 1998 difference fair values contract amounts material hypothetical 10 change exchange rates currencies would change 1999 fair value approximately 70 million 1998 fair value 190 million companys exposure market risk changes interest rates relates borrowings company manages interest rate risk borrowings interest rate swap agreements fixed base rate 8000 million 12608 million variable borrowings outstanding december 31 1999 market interest rates similar borrowings average 1 2000 1999 companys interest expense considering effects interest rate item 8item 7a quantitative qualitative disclosures market risk company manufactures products united states france germany ireland switzerland canada puerto rico distributes products throughout world result companys financial results could significantly affected factors changes foreign currency exchange rates weak economic conditions foreign markets companys operating results exposed changes exchange rates us dollar japanese yen european currencies particular euro british pound us dollar strengthens foreign currencies dollar value foreign currency sales declines relative cost ussourced product increases thereby decreasing gross margins us dollar weakens opposite situation occurs company enters forward foreign exchange contracts mitigate impact currency fluctuations transactions denominated foreign currencies thereby limiting risk company would otherwise result changes exchange rates foreign currency exposures principally relate intercompany payables arising intercompany purchases manufactured products periods forward foreign exchange contracts correspond periods exposed transactions realized gains losses included measurement recording foreigncurrencydenominated transactions december 31 2000 company outstanding forward foreign exchange contracts purchase 827 million sell 338 million various currencies principally us dollars euros maturities principally ranging 30 90 days december 31 1999 company also outstanding forward foreign exchange contracts purchase 311 million sell 473 million various currencies principally us dollars maturities ranging 30 180 days estimated fair value foreign currency contracts represents measurement contracts monthend spot rates adjusted amortized forward points december 31 2000 1999 difference fair values contract amounts material hypothetical 10 change exchange rates currencies would change 2000 fair value approximately 16 million would changed 1999 fair value approximately 70 million companys exposure market risk changes interest rates relates borrowings company manages interest rate risk borrowings interest rate swap agreements fixed base rate 6000 million notional amount 10125 million variable borrowings outstanding december 31 2000 market interest rates similar borrowings average 1 2001 2000 companys interest expense considering effects interest rate swaps would increase earnings income taxes would decrease 39 million comparison market interest rates average 1 less 2001 2000 companys interest expense considering effects interest rate swaps would decrease earnings income taxes would increase 39 million amounts determined considering impact hypothetical interest rates companys borrowing cost interest rate swap agreements without actions management mitigate exposure changes item 8item 7a quantitative qualitative disclosures market risks see quantitative qualitative disclosures market risks matters section companys managements discussion analysis financial condition results operations pages 27 28 item 8item 7a quantitative qualitative disclosures market risks see quantitative qualitative disclosures market risks matters section companys managements discussion analysis financial condition results operations pages 26 29 item 8item 7a quantitative qualitative disclosures market risks see quantitative qualitative disclosures market risks matters section companys managements discussion analysis financial condition results operations pages 27 29 item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk included results operations matters sections companys managements discussion analysis financial condition pages 21 27 29 30 respectively item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk included results operations matters sections companys managements discussion analysis financial condition pages 27 28 37 38 respectively 39 item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk included results operations liquidity capital resources matters sections companys managements discussion analysis financial condition pages 30 42 item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk included “results operations liquidity capital resources” “other matters” sections company’s management’s discussion analysis financial condition item 7 report item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk included “results operations liquidity capital resources” “other matters” sections company’s management’s discussion analysis financial condition item 7 report item 8item 7a quantitative qualitative disclosures market risk consider material area market risk exposure exchange rate risk quantitative qualitative disclosures exchange rate risk included information section managements discussion analysis financial condition item 7 caption hedging derivative financial instruments page 19 dollar amounts millions except per share amounts otherwise specified item 8item 7a quantitative qualitative disclosures market risk consider material area market risk exposure exchange rate risk quantitative qualitative disclosures exchange rate risk included information section managements discussion analysis financial condition item 7 caption information hedging derivative financial instruments dollar amounts millions except per share amounts otherwise specified item 8item 7a quantitative qualitative disclosures market risk consider material area market risk exposure exchange rate risk quantitative qualitative disclosures exchange rate risk included information section managements discussion analysis financial condition item 7 caption information hedging derivative financial instruments dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k item 8item 7a quantitative qualitative disclosures market risk consider material area market risk exposure exchange rate risk quantitative qualitative disclosures exchange rate risk included information section managements discussion analysis financial condition item 7 caption information hedging derivative financial instruments dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k item 8item 7a quantitative qualitative disclosures market risk sell products globally result financial results could significantly affected factors weak economic conditions changes foreign currency exchange rates operating results primarily exposed changes exchange rates among united states dollar european currencies particular euro swiss franc british pound japanese yen australian dollar canadian dollar develop manufacture products united states canada turkey china france germany ireland mexico puerto rico switzerland incur costs applicable local currencies global deployment facilities serves partially mitigate impact currency exchange rate changes cost sales refer notes 1 3 4 consolidated financial statements information regarding use derivative instruments mitigate risks hypothetical 10 change foreign currencies relative united states dollar would change december 31 2016 fair value approximately 188 dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k item 8item 7a quantitative qualitative disclosures market risk sell products globally result financial results could significantly affected factors weak economic conditions changes foreign currency exchange rates operating results primarily exposed changes exchange rates among united states dollar european currencies particular euro swiss franc british pound japanese yen australian dollar canadian dollar develop manufacture products united states canada china france germany ireland japan mexico puerto rico sweden switzerland turkey incur costs applicable local currencies global deployment facilities serves partially mitigate impact currency exchange rate changes cost sales refer notes 1 3 4 consolidated financial statements information regarding use derivative instruments mitigate risks hypothetical 10 change foreign currencies relative united states dollar would change december 31 2017 fair value approximately 349 dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k item 8item 7a quantitative qualitative disclosures market risk sell products globally result financial results could significantly affected factors weak economic conditions changes foreign currency exchange rates operating results primarily exposed changes exchange rates among united states dollar european currencies particular euro swiss franc british pound japanese yen australian dollar canadian dollar develop manufacture products united states canada china france germany ireland japan mexico puerto rico sweden switzerland turkey incur costs applicable local currencies global deployment facilities serves partially mitigate impact currency exchange rate changes cost sales refer notes 1 4 5 consolidated financial statements information regarding use derivative instruments mitigate risks hypothetical 10 change foreign currencies relative united states dollar would change december 31 2018 fair value instruments approximately 334 dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k item 8item 7a quantitative qualitative disclosures market risk sell products globally result financial results could significantly affected factors weak economic conditions changes foreign currency exchange rates operating results primarily exposed changes exchange rates among united states dollar european currencies particular euro swiss franc british pound japanese yen australian dollar canadian dollar develop manufacture products united states canada china france germany ireland japan mexico puerto rico sweden switzerland turkey incur costs applicable local currencies global deployment facilities serves partially mitigate impact currency exchange rate changes cost sales refer notes 1 4 5 consolidated financial statements information regarding use derivative instruments mitigate risks hypothetical 10 change foreign currencies relative united states dollar would change december 31 2019 fair value instruments approximately 523 item 8item 7aquantitative qualitative disclosures market risk sell products globally result financial results could significantly affected factors market risk exposure weak economic conditions exchange rate risk impacts covid19 pandemic operations financial results operating results primarily exposed changes exchange rates among united states dollar australian dollar british pound canadian dollar euro japanese yen develop manufacture products united states canada china france germany ireland japan mexico puerto rico switzerland turkey incur costs applicable local currencies global deployment facilities serves partially mitigate impact currency exchange rate changes cost sales refer notes 1 4 5 consolidated financial statements information regarding use derivative instruments mitigate risks hypothetical 10 change foreign currencies relative united states dollar would change december 31 2020 fair value instruments approximately 550 able quantify impacts covid19 pandemic financial results qualitative disclosures covid19 pandemic included part ii item 7 managements discussion analysis financial condition results operations part item 1a risk factors form 10k dollar amounts millions except per share amounts otherwise specified18 stryker corporation 2020 form 10k item 8nannanitem 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk included results operations matters sections companys managements discussion analysis financial condition pages 25 31 34 35 respectively item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk included results operations matters sections companys managements discussion analysis financial condition pages 29 37 40 41 respectively 41 item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk included results operations” “financial condition liquidity information sections managements discussion analysis financial condition item 7 report dollar amounts millions except per share amounts otherwise specified item 8 item 8 financial statements supplementary data consolidated financial statements company subsidiaries report independent auditors included pages 33 45 pages 37 48 1993 annual report incorporated herein reference quarterly results operations appearing caption summary quarterly data page 44 page 47 1993 annual report incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements company subsidiaries report independent auditors included pages 24 37 1995 annual report incorporated herein reference quarterly results operations appearing caption summary quarterly data page 36 1995 annual report incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements company subsidiaries report independent auditors included pages 31 46 1997 annual report incorporated herein reference quarterly results operations appearing caption summary quarterly data page 45 1997 annual report incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements company subsidiaries report independent auditors included pages 40 60 1998 annual report incorporated herein reference quarterly results operations appearing caption summary quarterly data page 60 1998 annual report incorporated herein reference item 9item 8 financial statements supplementary data stryker corporation subsidiaries consolidated balance sheets millions except per share amounts see accompanying notes consolidated financial statements consolidated statements earnings stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements stockholders equity stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements cash flows stryker corporation subsidiaries millions see accompanying notes consolidated financial statements notes consolidated financial statements stryker corporation subsidiaries december 31 1999 millions except per share amounts 1 significant accounting policies business stryker corporation develops manufactures markets specialty surgical medical products sold primarily hospitals throughout world provides outpatient physical therapy services united states principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries elimination significant intercompany accounts transactions revenue recognition revenue recognized sale products services related goods shipped services rendered use estimates preparation consolidated financial statements conformity generally accepted accounting principles requires company management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates foreign currency translation financial statements companys international affiliates translated us dollars using current exchange rates balance sheets average exchange rates statements earnings cash flows unrealized translation adjustments included accumulated comprehensive gain loss stockholders equity transaction gains losses resulting settlement foreign currency receivables payables included net earnings cash equivalents investments cash equivalents highly liquid investments maturity three months less purchased investments include marketable debt securities classified current assets marketable equity securities investments classified assets investments consist mutual funds acquired offset changes certain liabilities related deferred compensation arrangements companys investments stated fair value based quoted market prices adjustments fair value equity debt securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive gain loss stockholders equity adjustments investments classified trading recorded operating expenses interest dividends realized gains losses sale securities included expense income inventories stated lower cost market cost approximately 90 94 1998 inventories determined using lower firstin firstout fifo cost market cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost property plant equipment property plant equipment stated cost depreciation computed straightline decliningbalance methods estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment goodwill intangible assets goodwill intangible assets represent excess purchase price fair value tangible net assets acquired businesses goodwill amortized straightline basis 10 40 years weighted average life 29 years developed technology amortized straightline basis 20 years intangible assets consisting primarily customer base reflects expected continued customer patronage trademarks trade names assembled work force amortized straightline basis 5 35 years weighted average life 23 years carrying amounts goodwill intangible assets reviewed facts circumstances suggest may impaired review indicates carrying amount intangible asset recoverable determined using undiscounted cash flow analysis carrying amount goodwill intangible asset reduced estimated shortfall cash flows fair value deferred charges deferred charges represent net book value loaner instruments surgical implants provided customers company instruments amortized straightline basis periods ranging one three years amortization expense instruments included selling general administrative expenses consolidated statements earnings deferred loan costs deferred loan costs 291 associated companys senior secured credit facilities amortized terms related debt using effectiveinterest method classified assets amortization expenses deferred loans costs included interest expense 74 1999 04 1998 income taxes company accounts income taxes using liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates effect years differences expected reverse deferred tax expense represents change net deferred tax assets liabilities year derivative financial instruments company uses derivative financial instruments manage economic impact fluctuations interest rates foreign currency exchange rates company enters interest rate swaps foreign currency forward contracts manage economic risks interest rate differentials paid received result interest rate swaps accrued recognized adjustment interest expense related designated debt foreign currency forward contracts used hedge intercompany financial activity carried balance sheet realized gains losses included measurement recording hedged transactions stock options company follows accounting principles board apb opinion 25 accounting stock issued employees accounting employee stock options apb 25 compensation expense recognized exercise price companys employee stock options equals market price underlying stock date grant comprehensive income components accumulated comprehensive gain loss follows unrealized foreign accumulated gains currency losses translation comprehensive securities adjustments gain loss balances december 31 1997 04 94 98 comprehensive earnings 1998 04 08 balances december 31 1998 90 comprehensive loss 1999 03 338 341 balances december 31 1999 03 428 431 new accounting standards yet adopted june 1998 financial accounting standards board fasb issued statement 133 accounting derivative instruments hedging activities statement 133 requires company record derivatives balance sheet fair value changes fair value derivatives meet criteria treated hedge statement 133 included earnings derivatives meet hedge criteria restatement 1998 financial statements january 27 2000 company announced restatement financial statements year ended december 31 1998 reduce acquisitionrelated charges recorded fourth quarter 1998 acquisitionrelated charges previously included 310 reserves conversion certain foreign distributors direct sales contractual terms reached december 31 1998 company reversed reserve decem company initially anticipated converting one foreign distributors direct sales potential cost 300 however january 27 2000 date 1998 financial statement restatement announced company longer expects negotiate termination distributor agreement decision made result changes companys management late 1999 consequent changes integration plan respect distributor reclassifications certain prior year amounts reclassified conform presentation used 1999 2 financial instruments following summary companys investments gross unrealized estimated cost gains losses fair value december 31 1999 debt securities 35 equity securities 45 08 14 39 investments 60 total 140 08 14 134 december 31 1998 debt securities 173 equity securities 17 05 07 15 investments 36 total 226 05 07 224 gross realized gains sales companys investments totaled 25 26 01 1999 1998 1997 respectively gross realized losses total 01 11 08 1999 1998 1997 respectively december 31 1999 100 companys investments debt securities mature within one year interest income included income totaled 42 1999 165 1998 150 1997 company enters forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk company would otherwise result changes exchange rates principal transactions hedged company intercompany purchases manufactured products intercompany payables periods forward foreign exchange contracts correspond periods hedge transactions realized december 31 1999 company outstanding forward foreign exchange contracts purchase 311 sell 473 various currencies principally us dollars maturities principally ranging 30 180 days december 31 1998 company also outstanding forward foreign exchange contracts purchase 797 sell 923 various currencies principally us dollars maturities ranging 30 180 days estimated fair value foreign currency contracts represents company manages interest rate risk borrowings purchase interest rate swap agreements fixed base rate 8000 12608 variable borrowings outstanding december 31 1999 agreements company fixed base rate 8000 notional amount us dollardenominated borrowings average rate 57 interest rate swaps mature various terms ranging september 2000 december 2004 fair value 3 inventories summarized follows inventories december 31 1998 reflect stepup 2132 fair value connection acquisition howmedica see note 4 business acquisitions november 1999 company acquired outstanding common stock infomedix communications corporation known stryker communications corporation develops builds sells video communications hardware software enables telecommunication surgical images medical education cash 12 02 shares stryker common stock 94 value use stryker common stock represents noncash investing activity reflected consolidated statement april 1999 company acquired portion japanese distributor leibinger products associated distribution products cash approximately 27 entire purchase price allocated tangible assets acquired december 4 1998 company acquired howmedica orthopaedic division pfizer inc 16500 cash howmedica develops manufactures markets wide range specialty medical products utilized treatment musculoskeletal disorders howmedica products include hip knee implants primary revision surgery bone cement trauma systems used bone repair craniomaxillofacial fixation devices specialty surgical equipment used neurosurgery acquisition fun acquisition howmedica accounted using purchase method accounting results operations howmedica included companys consolidated financial statements beginning december 5 1998 purchase price 16500 cash plus estimate contractually required adjustment based increase howmedicas working capital since december 31 1997 liabilities assumed preliminarily allocated december 1998 assets acquired based esti based final purchase price allocation goodwill 4887 recorded company connection acquisition goodwill represents excess purchase price purchase liabilities fair value net identifiable tangible intangible assets acquired approximately 4883 purchase price allocated identifiable intangible assets including purchased research development 784 developed technology 2270 customer base 1418 trademarks purchased research development 784 howmedica acquisition determined based independent valuation howmedicas research development projects using information assumptions provided management among inprocess projects included valuation two considered significant projects relate development new spinal technology used treatment spinal disorders development improved polyethylene used hip connection final purchase price allocation howmedica inventories steppedup 2075 fair value stepup charged additional nonrecurring cost sales acquired inventory sold cost sales 1999 fourth quarter 1998 increased result stepup increases cost sales reduced pretax earnings 1999 1982 1288 net tax 1998 fourth quarter pretax earnings 78 52 net tax december immediately acquisition consummated management company began implement integration plan combine stryker howmedica conjunction integration plan company recorded additional purchase liabilities 1265 805 net related tax benefits included final acquisition cost allocation company also incurred 377 costs charges related acquisition charged operations 1999 1998 see note 5 1999 company finalized purchase price allocation reflect additional purchase liabilities relating companys integration activities restructuring implemented shown table related increases decreases additional purchase liabilities resulted corresponding changes goodwill associated acquisition howmedica additional purchase liabilities include 842 severance related costs howmedica employees 263 cost convert howmedicas distribution network direct sales 160 cost associated howmedica facility closures contractual obligations severance related costs provided workforce reductions covering approximately 1250 howmedica employees areas general management marketing research development general administration product many activities additional purchase liabilities recorded completed 1999 activities include conversion howmedicas distribution network direct sales planned workforce reductions covering approximately 980 howmedica employees remaining workforce reductions expected completed third quarter 2000 payments distributor conversion obligations severance related costs expected completed first half 20 following table provides rollforward december 4 1998 date acquisition december 31 1999 additional purchase liabilities recorded connection acquisition howmedica facility severance closures related distributor contractual costs conversions obligations balances established december 4 1998 704 277 131 payments 16 03 balances december 31 1998 688 277 128 additions reductions 138 14 29 payments 571 185 37 foreign currency translation effects 24 13 balances december 31 1999 231 78 133 following unaudited pro forma financial information presents combined results operations stryker howmedica acquisition occurred january 1 1997 giving effect certain adjustments including amortization goodwill intangible assets increased interest expense debt related acquisition reduced interest income cash utilized complete acquisition related tax effects pro forma financial information necessarily ref pro forma financial information presented include nonrecurring charges purchased research development sale inventory steppedup fair value date acquisition integration activities items included actual results operations 1998 pro forma financial information includes pretax costs approximately 317 1998 270 1997 representing allocation certain pfizer corporate division overhead costs howmedic november 1998 company purchased manufacturing rights facilities product onhand op1 bone growth device creative biomolecules inc approximately 193 cash addition purchase agreement provided increases royalty payments associated potential future op1 sales acquisition accounted using purchase method connection acquisition 49 purchase price paid tangible research development assets 1998 companys osteonics corp subsidiary purchased four independent distributors cost approximately 197 entire purchase price allocated tangible assets acquired 1998 1997 company acquired additional shares outstanding common stock matsumoto medical instruments inc japanese distributor thereby increasing direct ownership 83 december 31 1998 75 december 31 1997 1998 additional shares acquired cash 33 01 shares stryker common stock 38 value 1997 additional shares matsumoto purchased cash 286 acquisition additional shares accounted using companys physiotherapy associates inc subsidiary purchased number physical therapy clinic operations aggregate purchase price clinics 1999 1998 1997 approximately 22 26 56 respectively intangible assets acquired principally employment contracts goodwill amortized periods ranging 1 15 years acquisitions howmedica pro forma consolidated results would differ significantly reported results 5 acquisitionrelated restructuring charges 1999 1998 company recorded acquisitionrelated restructuring pretax charges consisting following items acquisitionrelated charges include 265 47 1999 218 1998 reorganization strykers distribution channels accommodate integration howmedica sales force reorganization strykers distribution channels encompasses conversion remaining osteonics distributors united states certain distributors europe pacific direct sales form branches agents conversions provide company greater control di facilitate integration howmedica organization company believes action improves ability manage sales marketing competing stryker howmedicabranded products within individual markets cost conversions based contractual terms 218 acquisitionrelated charge 1998 included 140 related buyback inventory us distributors converted direct sales inventory repurchased original selling price 171 returned inventory manufactured cost 31 resulting reversal gross profit original sale totaling 140 1998 expensed transaction costs represent costs associated acquisitions howmedica manufacturing rights facilities 1999 restructuring charges 142 relate reorganization strykers japanese distribution operation accommodate integration howmedica discontinue distribution ophthalmology products japan charge includes 116 cover severancerelated costs approximately 110 employees 26 costs associated discontinuance ophthalmology product line planned workforce reductions covering approximately 80 employees completed company utilized 27 reserves related distributor reorganizations charged operations 1996 delay use reserves occurred distributor located country howmedica direct sales operation company yet able complete purchase howmedica assets country lengthy regulatory approval process regulatory approval anticipated late 2000 company anticipates following table provides rollforward remaining liabilities associated acquisitionrelated restructuring special pretax charges recorded company 19991998 1996 6 borrowings financing arrangements longterm debt follows december 1998 company entered 16500 senior secured credit facilities conjunction acquisition howmedica see note 4 facilities provide 11500 term loans sixyear 2500 us revolving credit facility sixyear 2500 reducing multicurrency facility term loans consist three tranches tranche provides sixyear 5750 term loan tranche b sevenyear 2900 term loan tranche c eightyear 2850 term loan term loans bear interest base rate defined plus applicable margin ranging 125 300 depending leverage ratio company sixyear 2500 us revolving credit facility bears interest base rate defined plus applicable margin ranging 125 225 dependin company fixed base rate 8000 notional amount usdollardenominated borrowings average rate 57 using interest rate swaps see note 2 borrowings credit facilities guaranteed certain companys subsidiaries fully secured substantial portion assets company subsidiaries credit agreement requires company comply certain financial covenants places certain limitations amount increases dividend payments november 1999 company established oneyear accounts receivables securitization facility pursuant certain subsidiaries company sell ongoing basis domestic receivables stryker funding corporation wholly owned specialpurpose subsidiary company turn may sell aggregate 1300 undivided percentage ownership interests receivables multiseller commercial paper conduit administered bank creditors stryker funding december 1999 1127 undivided ownership interest accounts receivables sold stryker funding corporation proceeds paid stryker funding corporation originating subsidiaries part purchase price receivables purchased ultimately used company reduce longterm debt sale stryker funding corporation reflected balance sheet reduction accounts receivable amount undivided interest receivable december 1999 company entered financing arrangement provides sale future foreign currency revenues december 31 1999 company committed borrowings 2000 cumulative principal amount approximately 310 borrowings outstanding arrangement december 311999 maturities debt four years succeeding 2000 2001 1222 2002 1587 2003 1972 2004 2329 carrying amounts companys longterm debt approximate fair values based companys current borrowing rates similar types borrowing agreements quoted rates interest paid debt 1261 1999 122 1998 41 1997 approximates interest expense 7 capital stock company key employee director stock option plans options granted price less fair market value date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows weighted average shares exercise price options outstanding january 1 1997 32 1340 granted 08 2886 canceled 01 1772 exercised 04 650 options outstanding december 31 1997 35 1777 granted 19 3860 canceled 12 3993 exercised 04 852 options outstanding december 31 1998 38 2239 granted 15 4856 canceled 01 3980 exercised 03 1205 options outstanding december 31 1999 49 3037 price range 732 1500 11 1109 price range 1501 3000 15 2463 price range 3001 4500 09 3451 price range 4501 4856 14 4856 options outstanding december 31 1999 49 3037 shares reserved future grants 78 92 december 31 1999 1998 respectively exercise prices options outstanding december 31 1999 ranged 732 4856 summary shares exercisable follows weighted average shares exercise price range 732 1500 11 1109 price range 1501 3000 09 2571 price range 3001 4500 01 3111 shares exercisable december 31 1999 21 1813 company follows apb opinion 25 accounting stock option plans accordingly compensation cost recognized consolidated statements earnings options issued company stock option plans compensation cost companys stockbased compensation plans determined based fair value grant dates awards plans consistent method fasb statement 123 accounting stockbased compensation compan net earnings reported 194 600 1253 pro forma 130 576 1236 basic net earnings per share reported 020 062 130 pro forma 013 060 128 diluted net earnings per share reported 020 061 128 pro forma 013 059 126 weighted average per share fair value options granted 1999 1998 1997 estimated date grant using blackscholes option pricing model 2335 1574 1149 respectively fair value options granted estimated date grant using following assumptions riskfree interest rate 646 475 565 expected dividend yield 029 030 041 expected stock price volatility 380 376 294 expected option life 64 years 64 years 63 years company 05 authorized shares 1 par value preferred stock none outstanding 8 earnings per share following table sets forth computation basic diluted net earnings per share net earnings 194 600 1253 weightedaverage shares outstanding basic net earnings per share 969 963 962 effect dilutive employee stock options 24 18 19 adjusted weightedaverage shares outstanding diluted net earnings per share 993 981 basic net earnings per share 020 062 130 diluted net earnings per share 020 061 128 9 retirement plans certain companys subsidiaries defined benefit plans covering employees summary information related companys defined benefit plans follows components net periodic benefit cost service cost 45 09 08 interest cost 39 04 03 expected return plan assets 39 03 02 amortization transition amounts prior service cost 02 01 recognized actuarial gain 03 01 net periodic benefit cost 44 09 07 december 31 1999 defined benefit plans plan assets excess benefit obligations plan assets totaling 565 benefit obligations totaling 486 defined benefit plans benefit obligations excess plan assets plan assets totaling 44 benefit obligations totaling 190 retirement plan expense companys profit sharing defined contribution retirement plans totaled 289 1999 143 1998 112 1997 portion companys retirement plan expenses funded stryker common stock totaling 20 1999 17 1998 15 1997 use stryker common stock represents noncash investing activity reflected consolidated statements cash flows 10 income taxes earnings income taxes consist following united states operations 597 669 1804 foreign operations 299 240 149 298 909 1953 components provision income taxes follow current federal 381 569 576 state including puerto rico 38 86 foreign credit 172 07 18 591 648 680 deferred tax expense credit 487 339 20 104 309 700 reconciliation us statutory income tax rate companys effective tax rate follows us statutory income tax rate 350 add deduct state taxes less effect federal deduction 107 34 24 tax benefit relating operations puerto rico 216 69 14 earnings foreign sales corporation 120 51 17 nondeductible purchased research development permanent differences 158 66 01 tax benefit relating foreign tax credit 119 foreign income taxes rates different us statutory rate 156 01 05 33 11 19 349 340 358 large percentage fluctuations shown 1999 reconciliation caused low base pretax earnings used computation deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes tax effect significant temporary differences comprise companys deferred tax assets liabilities follows net operating loss carryforwards totaling approximately 838 december 31 1999 available reduce future taxable earnings certain foreign subsidiaries significant portion carryforwards may carried forward indefinitely deferred tax assets liabilities included consolidated balance sheets follows provision made us federal state income taxes foreign taxes may result future remittances undistributed earnings 2225 december 31 1999 foreign subsidiaries expected earnings reinvested overseas indefinitely determination amount unrecognized deferred income tax liability unremitted earnings practicable total income taxes paid 694 1999 562 1998 875 1997 11 segment geographic data company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive products hip knee shoulder spinal implants traumarelated products medsurg equipment segment sells powered surgical instruments endoscopic systems medical video imaging equipment patient care handling systems includes physical therapy services corporate administration interes companys reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies company evaluates performance based net earnings segment identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents shortterm investments property plant equipment sales financial information business segment follows companys area operations outside united states japan europe principally includes pacific canada latin america middle east geographic information follows gains losses foreign currency transactions included expense income totaled 10 21 03 1999 1998 1997 respectively 12 leases company leases various manufacturing office facilities equipment operating leases future minimum lease commitments leases follows 221 192 203 159 828 thereafter 88 1691 rent expense totaled 423 1999 327 1998 263 1997 december 1999 company entered fiveyear lease new office manufacturing distribution facility built united states estimated 700 cost facility funded lessor payments lease commence 2002 based libor plus applicable margin ranging 125 225 applied estimated cost facility company option renew lease additional fiveyear period subject certain condi e lease term company purchase property company guarantees residual value lessor lessors net investment property 13 contingencies company involved various claims legal actions arising normal course business company anticipate material losses result actions beyond amounts already provided accompanying financial statements summary quarterly data stryker corporation subsidiaries unaudited millions except per share data first quarter 1999 company recorded charge 197 reorganization strykers japanese distribution operation accommodate integration howmedica discontinue distribution ophthalmology products japan fourth quarter 1998 company recorded charge 833 writeoff purchased research development acquisitionrelated charges 330 charges relate acquisitions howmedica manufacturing rights facilities product onhand companys op1 bone growth device see note 4 price quotations reported supplied new york stock exchange report independent auditors board directors stockholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 1999 1998 related consolidated statements earnings stockholders equity cash flows three years period ended december 31 1999 audits also included financial statement schedule listed index item 14 financial statements financial statement schedule responsibility companys management responsib n opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management wel opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 1999 1998 consolidated results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states also opinion financial statement schedule considered relat ernst young llp kalamazoo michigan february 4 2000 item 9item 8 financial statements supplementary data consolidated balance sheets stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements earnings stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements stockholders equity stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements cash flows stryker corporation subsidiaries millions see accompanying notes consolidated financial statements notes consolidated financial statements stryker corporation subsidiaries december 31 2000 millions except per share amounts 1 significant accounting policies business stryker corporation develops manufactures markets specialty surgical medical products sold primarily hospitals throughout world provides outpatient physical therapy services united states principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries elimination significant intercompany accounts transactions revenue recognition revenue recognized sale products services related goods shipped services rendered shipping handling costs incurred related shipment handling products included cost sales use estimates preparation consolidated financial statements conformity generally accepted accounting principles requires company management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates foreign currency translation financial statements companys international affiliates translated us dollars using current exchange rates balance sheets average exchange rates statements earnings cash flows unrealized translation adjustments included accumulated comprehensive gain loss stockholders equity transaction gains losses resulting settlement foreign currency receivables payables included net earnings cash equivalents investments cash equivalents highly liquid investments maturity three months less purchased investments include marketable debt securities classified current assets marketable equity securities investments classified assets investments consist mutual funds acquired offset changes certain liabilities related deferred compensation arrangements companys investments stated fair value based quoted market prices interest dividends realized gains losses sale cash equivalents equity debt securities included expense income adjustments fair value equity debt securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive gain loss stockholders equity adjustments investments classified trading recorded offsets related changes liabilities deferred compensation arrangements accounts receivable securitization november 1999 company established accounts receivable securitization facility pursuant certain subsidiaries company sell ongoing basis domestic receivables stryker funding corporation wholly owned specialpurpose subsidiary company turn may sell aggregate 1300 undivided percentage ownership interest receivables multiseller commercial paper conduit administered bank creditors stryker funding corporation claim assets equity becomes available company amounts accounts receivable sold stryker funding corporation totaled 1273 970 december 31 2000 1999 respectively reflected balance sheet reductions accounts receivable amount receivables sold subject change monthly based level defined eligible receivables less contractual reserves companys retained interest accounts receivable administered stryker funding corporation represents overcollateralization undivided interest sold totaled 556 940 december 31 2000 1999 respectively costs associated securitization facility including conduits financing cost issuing commercial paper 71 2000 06 1999 included selling general administrative expenses inventories stated lower cost market cost approximately 89 90 1999 inventories determined using lower firstin firstout fifo cost market cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost property plant equipment property plant equipment stated cost depreciation computed straightline decliningbalance methods estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment goodwill intangible assets goodwill intangible assets represent excess purchase price fair value tangible net assets acquired businesses goodwill amortized straightline basis 10 40 years weighted average life 32 years intangible assets include developed technology amortized straightline basis 20 years customer base reflects expected continued customer patronage trademarks trade names patents assembled work force amortized straightline basis 5 35 years weighted average life 18 years intangible assets carrying amounts goodwill intangible assets reviewed facts circumstances suggest may impaired review indicates carrying amount intangible asset recoverable determined using undiscounted cash flow analysis carrying amount goodwill intangible asset reduced estimated shortfall cash flows fair value deferred charges deferred charges represent net book value loaner instruments surgical implants provided customers company instruments amortized straightline basis periods ranging one three years amortization expenses instruments included selling general administrative expenses deferred loan costs deferred loan costs associated companys senior secured credit facilities amortized terms related debt using effectiveinterest method deferred loan costs classified assets net book value 131 213 december 31 2000 1999 respectively amortization expenses deferred loan costs included interest expense 82 2000 74 1999 04 1998 income taxes company accounts income taxes using liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates effect years differences expected reverse deferred tax expense represents change net deferred tax assets liabilities year derivative financial instruments company uses derivative financial instruments manage economic impact fluctuations interest rates foreign currency exchange rates company enters interest rate swaps foreign currency forward contracts manage economic risks interest rate differentials paid received result interest rate swaps accrued recognized adjustment interest expense related designated debt foreign currency forward contracts principally used mitigate effects changes foreign currency exchange rates intercompany financial activity recorded balance sheet realized gains losses included measurement recording transactions stock options company follows accounting principles board apb opinion 25 accounting stock issued employees accounting employee stock options apb 25 compensation expense recognized exercise price companys employee stock options equals market price underlying stock date grant comprehensive gain loss components accumulated comprehensive gain loss follows foreign accumulated unrealized currency losses translation comprehensive securities adjustments loss balances december 31 1998 90 comprehensive loss 1999 03 338 341 balances december 31 1999 03 428 431 comprehensive loss 2000 05 588 593 balances december 31 2000 08 1016 1024 new accounting standards yet adopted june 1998 financial accounting standards board fasb issued statement 133 accounting derivative instruments hedging activities statements 137 138 issued june 1999 june 2000 respectively amended original statement statements require company recognize derivatives balance sheet fair value derivatives hedges must adjusted fair value earnings derivative hedge depending nature hedge changes fair value derivatives either offset change fair value hedged assets liabilities firm commitments earnings recognized accumulated comprehensive gain loss hedged item recognized earnings ineffective portion derivatives change fair value must immediately recognized earnings company required adopt statement 133 amended beginning first quarter 2001 upon adoption january 1 2001 company recognize gain cumulative effect accounting change 35 accumulated comprehensive gain loss 2 financial instruments risk management following summary companys investments gross unrealized estimated cost gains losses fair value december 31 2000 equity securities 26 13 investments 74 total 100 13 87 december 31 1999 debt securities 35 equity securities 45 08 14 39 investments 60 total 140 08 14 134 gross realized gains sales companys investments totaled 72 25 26 2000 1999 1998 respectively gross realized losses totaled 39 01 11 2000 1999 1998 respectively interest income included income totaled 41 2000 42 1999 165 1998 company enters forward foreign exchange contracts mitigate impact currency fluctuations transactions denominated foreign currencies thereby limiting risk company would otherwise result changes exchange rates foreign currency exposures principally relate intercompany payables arising intercompany purchases manufactured products periods forward foreign exchange contracts correspond periods exposed transactions realized gains losses included measurement recording foreigncurrencydenominated transactions december 31 2000 company outstanding forward foreign exchange contracts purchase 827 sell 338 various currencies principally us dollars euros maturities principally ranging 30 90 days december 31 1999 company also outstanding forward foreign exchange contracts purchase 311 sell 473 various currencies principally us dollars maturities ranging 30 180 days estimated fair value foreign currency contracts represents measurement contracts monthend spot rates adjusted amortized forward points december 31 2000 1999 difference fair values contract amounts material company manages interest rate risk borrowings purchase interest rate swap agreements fixed base rate 6000 notional amount 10125 variable borrowings outstanding december 31 2000 agreements company fixed base rate 6000 notional amount usdollardenominated borrowings average rate 54 interest rate swaps mature various terms ranging september 2001 december 2003 fair value companys interest rate swap agreements represents estimated receipts payments would made terminate agreements company would received 35 241 december 31 2000 december 31 1999 respectively terminate agreements 3 inventories summarized follows 4 business acquisitions october 2000 company acquired intellectual property rights certain assets associated sale stryker painpump products united states canada mexico mckinley medical llp cash 84 stryker painpump pain management device used aid postsurgical patient recovery acquisition accounted using purchase method accounting substantially purchase price allocated patents amortized nine years august 2000 company completed acquisition image guided technologies inc igt merger 03 shares stryker common stock value 120 igt manufactures threedimensional optical measurement devices optical localizers anatomical imagedisplay workstations used physicians perform imageguided surgery acquisition accounted using purchase method accounting intangible assets acquired principally patents goodwill amortized periods ranging 10 15 years june 2000 company acquired outstanding common stock colorado biomedical inc merger 02 shares stryker common stock value 78 colorado biomedical inc manufactures colorado micro needle used precision electrosurgery various surgical specialties acquisition accounted using purchase method accounting intangible assets acquired principally patents goodwill amortized periods ranging 7 15 years february 2000 company purchased neptune system product line medical waste management system used hospital operating rooms acquisition accounted using purchase method accounting total cost 100 70 represents royalties paid following three years intangible assets acquired principally patents amortized 15 years company right terminate purchase agreement within threeyear period sales neptune system meet certain levels agreement terminated company relinquish rights patents company exercise right terminate agreement end three years company required pay additional royalties totaling minimum amount 304 following four years february 2000 company acquired remaining 50 interest patent rights diapason spinal product line cash ffr 502 76 acquired patents amortized approximately nine years november 1999 company acquired outstanding common stock infomedix communications corporation known stryker communications corporation develops builds sells video communications hardware software enables telecommunication surgical images medical education cash 12 02 shares stryker common stock 94 value acquisition accounted using purchase method accounting substantially purchase price infomedix allocated goodwill amortized 20 years april 1999 company acquired portion japanese distributor leibinger products associated distribution products cash approximately 27 entire purchase price allocated tangible assets acquired december 4 1998 company acquired howmedica orthopaedic division pfizer inc 16500 cash howmedica develops manufactures markets wide range specialty medical products utilized treatment musculoskeletal disorders howmedica products include hip knee implants primary revision surgery bone cement trauma systems used bone repair craniomaxillofacial fixation devices specialty surgical equipment used neurosurgery acquisition funded cash equivalents approximately 15000 borrowed 16500 credit facilities established december 1998 see note 6 acquisition howmedica accounted using purchase method accounting results operations howmedica included companys consolidated financial statements beginning december 5 1998 purchase price 16500 cash plus estimate contractually required adjustment based increase howmedicas working capital since december 31 1997 liabilities assumed preliminarily allocated december 1998 assets acquired based estimated fair values date acquisition purchase price allocation finalized fourth quarter 1999 except amount final working capital adjustment remained dispute significant portion disputed working capital adjustment amount determined fourth quarter 2000 175 potential additional purchase price remaining dispute december 31 2000 based final purchase price allocation adjusted determined working capital adjustment amounts goodwill 4486 recorded company connection acquisition goodwill represents excess purchase price purchase liabilities fair value net identifiable tangible intangible assets acquired approximately 4883 purchase price allocated identifiable intangible assets including purchased research development 784 developed technology 2270 customer base 1418 trademarks assembled work force 411 purchased research development charged operations fourth quarter 1998 purchased research development 784 howmedica acquisition determined based independent valuation howmedicas research development projects using information assumptions provided management among inprocess projects included valuation two considered significant projects relate development new spinal technology used treatment spinal disorders development improved polyethylene used hip knee implants amount purchased inprocess research development allocated spinal project 507 amount allocated polyethylene project 260 estimated future revenues associated spinal project deemed approximately 80 attributable inprocess research development based technological progression towards completion polyethylene project future revenues deemed approximately 75 attributable inprocess research development based criterion spinal project development expected completed 2002 planned timing estimated future revenues expected delayed due clinical trial regulatory approval requirements timing estimated future revenues associated polyethylene project slightly delayed due leveraging technology previously existing company combination completed 2000 introduction crossfire highly crosslinked polyethylene howmedica implants purchased research development projects valued using income approach employs discounted cash flow method connection final purchase price allocation howmedica inventories steppedup 2075 fair value stepup charged additional nonrecurring cost sales acquired inventory sold cost sales 1999 fourth quarter 1998 increased result stepup increases cost sales reduced pretax earnings 1999 1982 1288 net tax 1998 fourth quarter pretax earnings 78 52 net tax immediately acquisition consummated management company began implement integration plan combine stryker howmedica conjunction integration plan company recorded additional purchase liabilities 1265 805 net related tax benefits included final acquisition cost allocation company also incurred 377 costs charges related acquisition charged operations 1999 1998 see note 5 1999 company finalized purchase price allocation reflect additional purchase liabilities relating companys integration activities restructuring implemented shown table related increases decreases additional purchase liabilities resulted corresponding changes goodwill associated acquisition howmedica additional purchase liabilities include severance related costs howmedica employees cost convert howmedicas distribution network direct sales cost associated howmedica facility closures contractual obligations severance related costs provided workforce reductions covering approximately 1250 howmedica employees areas general management marketing research development general administration product manufacturing cost distributor conversions based negotiated contracts howmedica facility closures include two facilities europe leased facility used centralized administrative functions finance accounting information systems leased facility used centralized warehousing distribution europe certain regions facility closures also include certain facilities united states leased facility supporting administration warehousing distribution howmedicas craniomaxillofacial business united states leased facilities supporting administration marketing research development portion us warehousing distribution howmedicas orthopaedic implant business contractual obligations represent noncancelable commitments thirdparty research development related projects continued acquisition purchase commitments inventory related discontinued howmedica products substantially activities additional purchase liabilities recorded completed 1999 2000 activities include conversion howmedicas distribution network direct sales planned workforce reductions howmedica employees payments distributor conversion obligations severance related costs expected completed third quarter 2001 two howmedica facilities europe howmedicas us craniomaxillofacial facility closed 1999 remaining leased facilities united states closed 2000 exception one facility expected closed 2001 facility closure contractual obligations include lease obligation payments extend 2008 following table provides rollforward december 4 1998 date howmedica acquisition december 31 2000 additional purchase liabilities recorded connection acquisition howmedica facility severance closures related distributor contractual costs conversions obligations balances established december 4 1998 704 277 131 payments 16 03 balances december 31 1998 688 277 128 additions reductions 138 14 29 payments 571 185 37 foreign currency translation effects 24 13 balances december 31 1999 231 78 133 reductions 01 04 payments 201 42 58 foreign currency translation effects 12 04 balances december 31 2000 17 36 67 following unaudited pro forma financial information presents combined results operations stryker howmedica 1998 acquisition occurred january 1 1998 giving effect certain adjustments including amortization goodwill intangible assets increased interest expense debt related acquisition reduced interest income cash utilized complete acquisition related tax effects pro forma financial information necessarily reflect results operations would occurred stryker howmedica operated combined entity 1998 pro forma financial information presented include nonrecurring charges purchased research development sale inventory steppedup fair value date acquisition integration activities items included actual results operations 1998 pro forma financial information includes pretax costs approximately 317 representing allocation certain pfizer corporate division overhead costs howmedica november 1998 company purchased manufacturing rights facilities product onhand op1 bone growth device creative biomolecules inc approximately 193 cash addition purchase agreement provided increases royalty payments associated potential future op1 sales acquisition accounted using purchase method connection acquisition 49 purchase price paid tangible research development assets alternative future use allocated purchased research development charged operations fourth quarter 1998 companys osteonics corp subsidiary purchased four independent distributors cost approximately 197 entire purchase price allocated tangible assets acquired 1998 company acquired additional shares outstanding common stock matsumoto medical instruments inc japanese distributor thereby increasing direct ownership 83 december 31 1998 additional shares acquired cash 33 01 shares stryker common stock 38 value acquisition additional shares accounted using purchase method january 1999 company acquired remaining outstanding common stock matsumoto increasing direct ownership 100 acquisition additional shares completed cash 10 02 shares stryker common stock 97 value companys physiotherapy associates inc subsidiary purchased number physical therapy clinic operations aggregate purchase price clinics 2000 1999 1998 approximately 50 22 26 respectively intangible assets acquired principally employment contracts goodwill amortized periods ranging 1 15 years use shares stryker common stock connection certain acquisitions discussed represents noncash investing activity reflected consolidated statements cash flows acquisitions howmedica pro forma consolidated results would differ significantly reported results 5 acquisitionrelated restructuring charges 2000 1999 1998 company recorded acquisitionrelated restructuring pretax charges credits consisting following items acquisitionrelated charges credits reorganization distribution channels 12 47 218 expensed transaction costs 112 12 47 330 less margin impact related sales credits 140 total acquisitionrelated charges credits 12 47 190 restructuring charges credits reorganization distribution channels 21 severance related costs 13 116 discontinuance product line 04 26 14 total restructuring charges 02 142 total acquisitionrelated restructuring charges credits 10 189 190 acquisitionrelated charges include 253 credit 12 fourth quarter 2000 charges 47 1999 218 1998 reorganization strykers distribution channels accommodate integration howmedica sales force reorganization strykers distribution channels encompasses conversion remaining osteonics distributors united states certain distributors europe pacific direct sales form branches agents conversions provide company greater control distribution channels facilitate integration howmedica organization company believes action improves ability manage sales marketing competing stryker howmedicabranded products within individual markets cost conversions based contractual terms 218 acquisitionrelated charge 1998 included 140 related buyback inventory us distributors converted direct sales inventory repurchased original selling price 171 returned inventory manufactured cost 31 resulting reversal gross profit original sale totaling 140 1998 expensed transaction costs represent costs associated acquisitions howmedica manufacturing rights facilities product onhand companys op1 bone growth device see note 4 2000 restructuring charges 02 relate various restructuring events fourth quarter 2000 credit 21 related reorganization distribution channels reflects charge 06 terminate two small european distributors offset credit 27 reverse reserves distributor reorganization charged operations 1996 delay use 1996 reserves occurred distributor located country howmedica direct sales operation purchase howmedica assets country delayed lengthy regulatory approval process completed 2000 evaluating business country company decided terminate distributor reversed previously recorded reserve severance related costs 13 reflect charges 40 offset credit 27 40 charge covers severance costs 95 employees primarily europe approximately 10 planned workforce reductions completed december 2000 remaining reductions expected completed 2001 27 credit relates reduction expected cost complete headcount reductions associated 1999 reorganization companys japanese distribution operations discussed 04 credit related discontinuance product line represents reversal portion loss reserves established discontinued ophthalmology inventories sold contingent basis 1999 described charges 14 represent asset writeoffs primarily goodwill inventory lease commitments associated certain operations principally europe closed fourth quarter 2000 1999 restructuring charges 142 relate reorganization strykers japanese distribution operation accommodate integration howmedica discontinue distribution ophthalmology products japan charges include 116 cover severancerelated costs approximately 110 employees 26 costs associated discontinuance ophthalmology product line planned workforce reductions covering approximately 80 employees completed portion reserve reversed 2000 remaining headcount reductions expected completed 2001 26 costs discontinuance ophthalmology product line provided cover obsolescence remaining ophthalmology inventories including loss reserves certain remaining inventory sold contingent basis japanese distribution company 1999 company exited ophthalmology business end 1999 net sales ophthalmology products 77 1999 118 1998 following table provides rollforward remaining liabilities associated acquisitionrelated restructuring special pretax charges recorded company 2000 1999 1998 1996 distributor severance discontinuance conversions related costs product line balance january 1 1998 139 additions recognized charges 1998 consolidated statement earnings 78 payments 39 balance december 31 1998 178 additions recognized charges 1999 consolidated statement earnings 47 116 26 payments 91 85 inventory writeoffs 19 foreign currency translation effects 12 03 balances december 31 1999 134 43 10 additions reductions recognized charges credits 2000 consolidated statement earnings 33 13 04 14 payments 68 05 asset writeoffs 10 foreign currency translation effects 01 04 02 01 balances december 31 2000 34 47 04 05 6 borrowings financing arrangements longterm debt follows december 1998 company entered 16500 senior secured credit facilities conjunction acquisition howmedica see note 4 facilities provide 11500 term loans sixyear 2500 us revolving credit facility sixyear 2500 reducing multicurrency facility term loans consist three tranches tranche provides sixyear 5750 term loan tranche b sevenyear 2900 term loan tranche c eightyear 2850 term loan term loans bear interest base rate defined plus applicable margin ranging 125 300 depending leverage ratio company sixyear 2500 us revolving credit facility bears interest base rate defined plus applicable margin ranging 125 225 depending leverage ratio company sixyear 2500 reducing multicurrency facility provides borrowings yen euro us dollars negotiated currencies multicurrency borrowings bear interest base rate defined plus applicable margin ranging 0875 175 depending leverage ratio company december 31 2000 company borrowed yen 118745 euro 1298 yen borrowing acts hedge companys net investment japan result adjustments made loan balance reflect applicable currency exchange rates december 31 included within accumulated comprehensive gain loss stockholders equity addition revolving credit facility multicurrency facility require commitment fee ranges 0375 050 unused portion facility depending leverage ratio company december 31 2000 weighted average interest rate borrowings senior secured credit facilities 776 company fixed base rate 6000 notional amount usdollardenominated borrowings average rate 54 using interest rate swaps see note 2 borrowings credit facilities guaranteed certain companys subsidiaries fully secured substantial portion assets company subsidiaries credit agreement requires company comply certain financial covenants places certain limitations amount increases dividend payments november 2000 company entered financing arrangement provides sale future foreign currency revenues december 31 2000 company committed borrowings 2001 cumulative principal amount approximately 443 borrowings outstanding arrangement december 31 2000 maturities debt four years succeeding 2001 2002 1569 2003 1953 2004 2336 2005 2462 carrying amounts companys longterm debt approximate fair values based quoted rates similar types borrowing agreements interest paid debt 943 2000 1261 1999 122 1998 approximates interest expense 7 capital stock company key employee director stock option plans options granted price less fair market value date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows weighted average shares exercise price options outstanding january 1 1998 71 888 granted 38 1930 canceled 24 1997 exercised 08 426 options outstanding december 31 1998 77 1119 granted 29 2428 canceled 03 1990 exercised 06 603 options outstanding december 31 1999 97 1518 granted 28 3245 canceled 02 2341 exercised 11 742 options outstanding december 31 2000 112 2019 price range 559 1000 15 624 price range 1001 2000 43 1447 price range 2001 3000 26 2425 price range 3001 4519 28 3246 options outstanding december 31 2000 112 2019 shares reserved future grants 130 156 december 31 2000 1999 respectively exercise prices options outstanding december 31 2000 ranged 559 4519 summary shares exercisable follows weighted average shares exercise price range 559 1000 15 624 price range 1001 2000 24 1378 price range 2001 3000 05 2422 shares exercisable december 31 2000 44 1248 company follows apb opinion 25 accounting stock option plans accordingly compensation cost recognized consolidated statements earnings options issued company stock option plans compensation cost companys stockbased compensation plans determined based fair value grant dates awards plans consistent method fasb statement 123 accounting stockbased compensation companys net earnings net earnings per share would follows net earnings reported 2210 194 600 pro forma 2111 137 575 basic net earnings per share reported 113 10 31 pro forma 108 07 30 diluted net earnings per share reported 110 10 31 pro forma 105 07 29 weighted average per share fair value options granted 2000 1999 1998 estimated date grant using blackscholes option pricing model 1482 1168 822 respectively fair value options granted estimated date grant using following assumptions riskfree interest rate 517 646 475 expected dividend yield 026 029 030 expected stock price volatility 370 380 376 expected option life 65 years 64 years 64 years april 19 2000 companys stockholders approved amendment companys restated articles incorporation increase authorized shares common stock 5000 1500 april 19 2000 companys board directors approved twoforone stock split effective may 12 2000 stockholders record may 1 2000 share per share data adjusted reflect increase authorized shares stock split though occurred beginning periods presented company 05 authorized shares 1 par value preferred stock none outstanding 8 earnings per share following table sets forth computation basic diluted net earnings per share net earnings 2210 194 600 weightedaverage shares outstanding basic net earnings per share 1951 1938 1926 effect dilutive employee stock options 60 48 37 adjusted weightedaverage shares outstanding diluted net earnings per share 2011 1986 1963 basic net earnings per share 113 10 31 diluted net earnings per share 110 10 31 9 retirement plans certain companys subsidiaries defined benefit plans covering employees summary information related companys defined benefit plans follows components net periodic benefit cost service cost 38 45 09 interest cost 39 04 expected return plan assets 39 03 amortization transition amounts prior service cost 03 02 01 recognized actuarial gain 02 03 net periodic benefit cost 39 44 09 december 31 2000 defined benefit plans plan assets excess benefit obligations plan assets totaling 234 benefit obligations totaling 209 defined benefit plans benefit obligations excess plan assets plan assets totaling 364 benefit obligations totaling 504 retirement plan expense companys profit sharing defined contribution retirement plans totaled 327 2000 319 1999 143 1998 portion companys retirement plan expenses funded stryker common stock totaling 31 2000 20 1999 17 1998 use stryker common stock represents noncash investing activity reflected consolidated statements cash flows 10 income taxes earnings income taxes consist following united states operations 1974 405 669 foreign operations 1375 107 240 3349 298 909 components provision income taxes follow current federal 448 381 569 state including puerto rico 101 38 86 foreign credit 303 172 07 852 591 648 deferred tax expense credit 287 487 339 1139 104 309 reconciliation us statutory income tax rate companys effective tax rate follows us statutory income tax rate 350 add deduct state taxes less effect federal deduction 17 107 34 tax benefit relating operations ireland puerto rico 69 305 57 earnings foreign sales corporation 22 120 51 nondeductible permanent differences purchased research development 38 186 66 tax benefit relating foreign tax credit 22 119 foreign income taxes rates different us statutory rate 70 276 13 22 26 11 340 349 340 large percentage fluctuations shown 1999 reconciliation caused low base pretax earnings used computation deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes tax effect significant temporary differences comprise companys deferred tax assets liabilities follows net operating loss carryforwards totaling approximately 1059 december 31 2000 available reduce future taxable earnings certain foreign subsidiaries significant portion carryforwards may carried forward indefinitely deferred tax assets liabilities included consolidated balance sheets follows provision made us federal state income taxes foreign taxes may result future remittances undistributed earnings 3636 december 31 2000 foreign subsidiaries expected earnings reinvested overseas indefinitely determination amount unrecognized deferred income tax liability unremitted earnings practicable total income taxes paid 753 2000 694 1999 562 1998 11 segment geographic data company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive products hip knee shoulder spinal implants traumarelated products medsurg equipment segment sells powered surgical instruments endoscopic systems medical video imaging equipment patient care handling equipment includes physical therapy services corporate administration interest expense interest income companys reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies company evaluates performance based net earnings segment identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents shortterm investments property plant equipment sales financial information business segment follows companys area operations outside united states japan europe principally includes pacific canada latin america middle east geographic information follows gains losses foreign currency transactions included expense income totaled 46 10 21 2000 1999 1998 respectively 12 leases company leases various manufacturing office facilities equipment operating leases future minimum lease commitments leases follows 259 279 220 864 67 thereafter 41 1730 rent expense totaled 422 2000 423 1999 327 1998 december 1999 company entered fiveyear lease new office manufacturing distribution facility built united states lease 700 funded lessor complete facility payments lease commence 2002 based libor plus applicable margin ranging 125 225 applied estimated cost facility company option renew lease additional fiveyear period subject certain conditions end lease term company purchase property company guarantees residual value lessor lessors net investment property 13 contingencies company involved various claims legal actions arising normal course business company anticipate material losses result actions beyond amounts already provided accompanying financial statements summary quarterly data stryker corporation subsidiaries unaudited millions except per share data price quotations reported supplied new york stock exchange first quarter 1999 company recorded charge 197 reorganization strykers japanese distribution operation accommodate integration howmedica discontinue distribution ophthalmology products japan report independent auditors board directors stockholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2000 1999 related consolidated statements earnings stockholders equity cash flows three years period ended december 31 2000 audits also included financial statement schedule listed index item 14 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2000 1999 consolidated results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein ernst young llp grand rapids michigan january 31 2001 item 9item 8 financial statements supplementary data consolidated balance sheets stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements earnings stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements stockholders equity stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements cash flows stryker corporation subsidiaries millions see accompanying notes consolidated financial statements notes consolidated financial statements stryker corporation subsidiaries december 31 2001 millions except per share amounts note 1 significant accounting policies business stryker corporation develops manufactures markets specialty surgical medical products sold primarily hospitals throughout world provides outpatient physical therapy services united states principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries elimination significant intercompany accounts transactions revenue recognition revenue recognized sale products services related goods shipped services rendered shipping handling products amounts billed customers shipping handling products included net sales 2001 prior 2001 amounts recorded offset cost sales costs incurred related shipping handling products included cost sales prior 2001 certain shipping costs reported selling general administrative expenses use estimates preparation consolidated financial statements conformity generally accepted accounting principles requires company management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates foreign currency translation financial statements companys international affiliates translated us dollars using current exchange rates balance sheets average exchange rates statements earnings cash flows unrealized translation adjustments included accumulated comprehensive gain loss stockholders equity transaction gains losses resulting settlement nonfunctional currency receivables payables included net earnings cash equivalents investments cash equivalents highly liquid investments maturity three months less purchased investments include marketable equity securities investments classified assets investments consist mutual funds acquired offset changes certain liabilities related deferred compensation arrangements companys investments stated fair value based quoted market prices interest dividends realized gains losses sale cash equivalents marketable securities included expense income adjustments fair value marketable securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive gain loss stockholders equity adjustments investments classified trading recorded offsets related changes liabilities deferred compensation arrangements accounts receivable securitization november 1999 company established accounts receivable securitization facility pursuant certain subsidiaries company sell ongoing basis domestic accounts receivable stryker funding corporation wholly owned specialpurpose subsidiary company turn may sell aggregate 1300 undivided percentage ownership interest receivables multiseller commercial paper conduit administered bank creditors stryker funding corporation claim assets equity becomes available company amounts accounts receivable sold stryker funding corporation net companys retained interest totaled 1300 1273 december 31 2001 2000 respectively reflected balance sheet reductions accounts receivable amount receivables sold subject change monthly based level defined eligible receivables less contractual reserves companys retained interest accounts receivable held stryker funding corporation form subordinated note represents overcollateralization undivided interest sold retained interest totaled 768 556 december 31 2001 2000 respectively discount expense associated securitization facility including conduits financing cost issuing commercial paper 58 2001 71 2000 06 1999 included selling general administrative expenses inventories stated lower cost market cost approximately 87 89 2000 inventories determined using lower firstin firstout fifo cost market cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost company records excess obsolete inventory reserves based product line inventory levels compared past sales history expiration sterilization dates pertinent criteria property plant equipment property plant equipment stated cost depreciation computed straightline decliningbalance methods estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment goodwill intangible assets goodwill intangible assets represent excess purchase price fair value tangible net assets acquired businesses goodwill arising business combinations prior july 1 2001 amortized straightline basis 10 40 years weighted average life 31 years intangible assets include developed technology amortized straightline basis 20 years customer base reflects expected continued customer patronage trademarks trade names patents assembled workforce amortized straightline basis 5 35 years weighted average life 17 years intangible assets company currently evaluates recoverability goodwill estimating future undiscounted cash flows businesses goodwill relates evaluation made whenever events changes circumstances indicate carrying amount goodwill may recoverable estimated cash flows determined operational level identifiable cash flows determined estimated future undiscounted cash flows less carrying amount net assets related goodwill impairment losses goodwill recognized charged operations determining cash flows company considers current projected levels income well business trends market economic conditions june 2001 financial accounting standards board fasb issued statement 141 business combinations statement 142 goodwill intangible assets statement 141 requires purchase method accounting used business combinations initiated june 30 2001 statement 142 prohibits amortization goodwill intangible assets indefinite useful lives requires company evaluate intangibles impairment annual basis effective business combinations completed june 30 2001 company began applying provisions statement 142 acquisitions completed subsequent june 30 2001 goodwill recorded result acquisitions amortized goodwill intangible assets arising business combinations completed july 1 2001 company required apply provisions statement 142 beginning january 1 2002 accordance statement provisions assembled workforce intangible asset unamortized balance 55 reclassified intangibles goodwill date application nonamortization provisions statement year ending december 31 2002 expected reduce intangibles amortization approximately 16 million increase net earnings approximately 11 million 05 per diluted share first quarter 2002 company perform initial impairment tests goodwill indefinitelived intangible assets january 1 2002 company test impairment using twostep process prescribed statement 142 first step screen potential impairment second step necessary measures amount impairment charge resulting initial impairment tests reflected cumulative effect change accounting principle first quarter 2002 company yet determined effect tests consolidated results operations financial position company perform subsequent impairment test fourth quarter 2002 least annually thereafter deferred charges deferred charges represent net book value loaner instruments surgical implants provided customers company instruments amortized straightline basis periods ranging one three years amortization expenses instruments included selling general administrative expenses deferred loan costs deferred loan costs associated companys borrowings amortized terms related borrowings using effectiveinterest method deferred loan costs classified assets net book value 29 131 december 31 2001 2000 respectively amortization expenses deferred loan costs included interest expense 59 2001 82 2000 74 1999 prepayment remaining amounts outstanding companys senior secured credit facilities december 2001 resulted writeoff related unamortized deferred loan costs 71 see note 6 income taxes company accounts income taxes using liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates effect years differences expected reverse deferred income tax expense represents change net deferred tax assets liabilities year derivative financial instruments company uses derivative financial instruments manage economic impact fluctuations interest rates currency exchange rates company enters interest rate swaps currency forward contracts manage economic risks january 1 2001 company adopted fasb statement 133 accounting derivative instruments hedging activities amended statements 137 138 statements require company recognize derivatives balance sheet fair value derivatives hedges must adjusted fair value earnings derivative hedge depending nature hedge changes fair value derivatives either offset change fair value hedged assets liabilities firm commitments earnings recognized accumulated comprehensive gain loss hedged item recognized earnings company entered interest rate swap agreements effectively convert portion variablerate borrowings fixedrate basis 2003 thus reducing impact changes interest rates future interest expense approximately 77 companys outstanding variablerate borrowings december 31 2001 hedged designation interest rate swap agreements classified cash flow hedges upon adoption statements january 1 2001 company recognized gain cumulative effect accounting change 35 accumulated comprehensive gain loss related interest rate swap agreements loss 220 attributable decrease fair value interest rate swap agreements recorded component accumulated comprehensive gain loss 2001 future interest rate swap agreements determined ineffective terminated contractual termination dates became probable hedged variable cash flows associated variablerate borrowings would stop company would required reclassify earnings portion unrealized gains losses cash flow hedges included accumulated comprehensive gain loss interest rate differentials paid received result interest rate swaps recognized adjustment interest expense related designated borrowings based maturities companys interest rate swap agreements interest expense year ending december 31 2002 expected increase 82 recognition amounts included unrealized losses cash flow hedges december 31 2001 company uses currency forward contracts crosscurrency swaps mitigate effects currency exchange rate fluctuations nonfunctional currency receivables payables arising principally intercompany financial activity currency forward contracts crosscurrency swaps markedtomarket period resulting gains losses included expense income consolidated statements earnings company uses yendenominated floatingrate borrowings protect portion value investment subsidiary japan realized unrealized gains losses hedge included consolidated statements earnings recorded foreign currency translation adjustments within accumulated comprehensive gain loss stockholders equity net gains losses 58 77 74 attributable yendenominated floatingrate borrowings hedge recorded foreign currency translation adjustments 2001 2000 1999 respectively stock options company follows accounting principles board apb opinion 25 accounting stock issued employees accounting employee stock options apb 25 compensation expense recognized exercise price companys employee stock options equals market price underlying stock date grant comprehensive gain loss components accumulated comprehensive gain loss follows unrealized foreign accumulated unrealized gains losses currency losses cash flow translation comprehensive securities hedges adjustments gain loss balances december 31 1999 03 428 431 comprehensive loss 2000 05 588 593 balances december 31 2000 08 1016 1024 cumulative effect accounting change related cash flow hedges 35 comprehensive loss 2001 01 220 464 685 balances december 31 2001 09 185 1480 1674 note 2 financial instruments risk management following summary companys investments gross unrealized estimated cost gains losses fair value december 31 2001 equity securities 26 14 12 investments 93 total 119 14 105 december 31 2000 equity securities 26 13 investments 74 total 100 13 87 company realize gains losses sales companys investments 2001 gross realized gains sales companys investments totaled 72 25 2000 1999 respectively gross realized losses totaled 39 01 2000 1999 respectively interest income included income totaled 22 2001 41 2000 42 1999 company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures relate principally intercompany payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies december 31 2001 company outstanding forward currency exchange contracts purchase 974 sell 721 various currencies principally us dollars euros maturities ranging principally 30 180 days december 31 2000 company outstanding forward currency exchange contracts purchase 827 sell 338 various currencies principally us dollars euros maturities ranging 30 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted amortized forward points company manages interest rate risk borrowings purchase interest rate swap agreements company fixed base rate 5500 notional amount 7172 variablerate borrowings outstanding december 31 2001 average rate 544 interest rate swaps mature various terms ranging september 2002 december 2003 fair value companys interest rate swap agreements represents estimated receipts payments would made terminate agreements company would paid 185 december 31 2001 would received 35 december 31 2000 terminate interest rate swap agreements outstanding respective dates company exposed credit loss event nonperformance counterparties instruments anticipate nonperformance counterparties note 3 inventories summarized follows note 4 business acquisitions november 2001 company acquired business independent italian distributor certain companys products cost approximately euro 282 253 initial cash payment euro 73 65 made november 2001 remaining purchase price paid ratably fiveyear period purchase consolidates distribution substantially companys products italy acquisition accounted using purchase method accounting tangible assets acquired include 51 inventory 08 deferred charges intangible assets acquired principally include customer base noncompete agreements approximately 102 purchase price allocated customer base amortized 20 years approximately 92 purchase price allocated intangibles principally noncompete agreements amortized weighted average life four years august 2000 company completed acquisition image guided technologies inc igt merger 03 shares stryker common stock value 120 igt manufactures threedimensional optical measurement devices optical localizers anatomical imagedisplay workstations used physicians perform imageguided surgery acquisition accounted using purchase method accounting intangible assets acquired principally patents goodwill amortized periods ranging 10 15 years june 2000 company acquired outstanding common stock colorado biomedical inc merger 02 shares stryker common stock value 78 colorado biomedical inc manufactures colorado micro needle used precision electrosurgery various surgical specialties acquisition accounted using purchase method accounting intangible assets acquired principally patents goodwill amortized periods ranging 7 15 years february 2000 company purchased neptune system product line medical waste management system used hospital operating rooms acquisition accounted using purchase method accounting total cost 100 70 represents royalties paid following three years intangible assets acquired principally patents amortized 15 years company right terminate purchase agreement within threeyear period sales neptune system meet certain levels agreement terminated company relinquish rights patents company exercise right terminate agreement end three years company required pay additional royalties totaling minimum amount 304 following four years november 1999 company acquired outstanding common stock infomedix communications corporation known stryker communications corporation develops builds sells video communications hardware software enables telecommunication surgical images medical education cash 12 03 shares stryker common stock 94 value acquisition accounted using purchase method accounting substantially entire purchase price infomedix allocated goodwill amortized 20 years december 4 1998 company acquired howmedica orthopaedic division pfizer inc 16500 cash acquisition howmedica accounted using purchase method accounting purchase price 16500 cash plus final payment 272 made july 2001 contractually required working capital adjustment liabilities assumed allocated assets acquired based estimated fair values date acquisition connection final purchase price allocation howmedica inventories steppedup 2075 fair value stepup charged additional nonrecurring cost sales acquired inventory sold cost sales 1999 increased result stepup reduced pretax earnings 1999 1982 1288 net income taxes company also incurred 47 charges related acquisition charged operations 1999 see note 5 company recorded additional purchase liabilities 1265 805 net related tax benefits included final acquisition cost allocation additional purchase liabilities included severance related costs howmedica employees cost convert howmedicas distribution network direct sales cost associated howmedica facility closures contractual obligations severance related costs provided workforce reductions covering approximately 1250 howmedica employees cost distributor conversions based negotiated contracts howmedica facility closures included two facilities europe certain facilities united states contractual obligations represented noncancelable commitments thirdparty research development related projects continued acquisition purchase commitments inventory related discontinued howmedica products substantially activities additional purchase liabilities recorded completed 1999 2000 activities included conversion howmedicas distribution network direct sales planned workforce reductions howmedica employees payments severance related costs expected completed first quarter 2002 two howmedica facilities europe one us facility closed 1999 remaining leased facilities united states closed 2000 2001 facility closure contractual obligations include lease obligation payments extend 2008 following table provides rollforward december 31 1999 december 31 2001 additional purchase liabilities recorded connection acquisition howmedica facility severance closures related distributor contractual costs conversions obligations balances december 31 1999 231 78 133 reductions 01 04 payments 201 42 58 foreign currency translation effects 12 04 balances december 31 2000 17 36 67 reductions 01 payments 14 09 52 foreign currency translation effects 01 balances december 31 2001 01 27 13 use shares stryker common stock connection certain acquisitions discussed represents noncash investing activity reflected consolidated statements cash flows pro forma consolidated results would differ significantly reported results acquisitions note 5 acquisitionrelated restructuring charges 2001 2000 1999 company recorded acquisitionrelated restructuring pretax charges credits consisting following items acquisitionrelated charges credits severance related costs 09 reorganization distribution channels 12 47 total acquisitionrelated charges credits 09 12 47 restructuring charges credits reorganization distribution channels 07 21 severance related costs 06 13 116 discontinuance product line 04 26 14 total restructuring charges credits 03 02 142 total acquisitionrelated restructuring charges credits 06 10 189 2001 acquisitionrelated charges include 09 severance related costs associated reorganization companys sales structure italy accommodate integration business acquired fourth quarter 2001 companys independent italian distributor see note 4 reorganization established direct sales force italy distribute companys full product portfolio 09 charge covers severance costs three employees italy costs cancel contracts discontinued agents reorganization sales structure italy expected completed first quarter 2002 acquisitionrelated charges reorganization strykers distribution channels credit 12 2000 charge 47 1999 encompassed conversion remaining osteonics distributors united states certain distributors europe pacific direct sales form branches agents accommodate integration howmedica sales force conversions provided company greater control distribution channels facilitated integration howmedica organization cost conversions based contractual terms 2001 restructuring credits 03 relate various restructuring events fourth quarter 2001 07 charge related reorganization distribution channels reflects cost terminate distributor latin america cost termination based contractual terms 06 credit severance related costs reflects charges 08 offset credits 14 08 charge covers severance costs 10 employees europe planned workforce reductions expected completed first quarter 2002 14 credit relates reduction expected cost complete headcount reductions associated 2000 1999 reorganizations companys european japanese distribution operations 04 credit related discontinuance product line represents reversal remaining loss reserves established japan discontinued ophthalmology inventories sold contingent basis 1999 2000 restructuring charges 02 relate various restructuring events fourth quarter 2000 credit 21 related reorganization distribution channels reflects charge 06 terminate two small european distributors offset credit 27 reverse reserves distributor reorganization charged operations 1996 delay use 1996 reserves occurred distributor located country howmedica direct sales operation purchase howmedica assets country delayed lengthy regulatory approval process completed 2000 evaluating business country company decided terminate distributor reversed previously recorded reserve severance related costs 13 reflect charges 40 partially offset credit 27 40 charge covers severance costs 95 employees primarily europe planned workforce reductions completed 2001 remaining amount reserve reversed 2001 27 credit relates reduction expected cost complete headcount reductions associated 1999 reorganization companys japanese distribution operations 04 credit related discontinuance product line represents reversal portion loss reserves established japan discontinued ophthalmology inventories sold contingent basis 1999 charges 14 represent asset writeoffs primarily goodwill inventory lease commitments associated certain operations principally europe closed fourth quarter 2000 1999 restructuring charges 142 relate reorganization strykers japanese distribution operation accommodate integration howmedica discontinue distribution ophthalmology products japan charges include 116 cover severancerelated costs approximately 110 employees 26 costs associated discontinuance ophthalmology product line planned workforce reductions completed remaining amount reserve reversed 2001 26 costs discontinuance ophthalmology product line provided cover obsolescence remaining ophthalmology inventories including loss reserves certain remaining inventory sold contingent basis japanese distribution company 1999 company exited ophthalmology business end 1999 net sales ophthalmology products 77 1999 following table provides rollforward remaining liabilities associated acquisitionrelated restructuring special pretax charges recorded company 2001 2000 1999 1998 1996 distributor severance discontinuance conversions related costs product line balance january 1 1999 178 additions recognized charges 1999 consolidated statement earnings 47 116 26 payments 91 85 inventory writeoffs 19 foreign currency translation effects 12 03 balances december 31 1999 134 43 10 additions reductions recognized charges credits 2000 consolidated statement earnings 33 13 04 14 payments 68 05 asset writeoffs 10 foreign currency translation effects 01 04 02 01 balances december 31 2000 34 47 04 05 additions reductions recognized charges credits 2001 consolidated statement earnings 07 03 04 payments 14 20 03 foreign currency translation effects 01 04 balances december 31 2001 26 00 02 note 6 borrowings financing arrangements longterm debt follows december 2001 company established 10000 unsecured credit facilities replaced 16500 senior secured credit facilities established 1998 conjunction acquisition howmedica total 7305 initially drawn new credit facilities 6427 prepaid debt outstanding 1998 facilities 878 used terminate companys synthetic lease purchase mahwah new jersey manufacturing distribution facility see note 12 unsecured credit facilities include 2500 364day revolving credit agreement 7500 fiveyear nonamortizing revolving credit agreement 2500 364day revolving credit agreement bears interest base rate defined plus applicable margin ranging 0245 0800 depending companys debt rating 7500 fiveyear nonamortizing revolving credit agreement 2500 multicurrency sublimit yen euro borrowed fiveyear facility also 500 swing line sublimit 1000 letter credit sublimit fiveyear facility bears interest base rate defined plus applicable margin ranging 0235 0775 depending companys debt rating unsecured credit facilities require commitment fee ranging 0055 0225 aggregate commitment facilities depending companys debt rating addition utilization fee 0125 required sum outstanding amounts exceeds 50 aggregate commitments december 31 2001 weighted average interest rate borrowings unsecured credit facilities considering effects companys interest rate swaps 490 facilities require company comply certain financial covenants december 31 2001 company borrowed yen 48205 euro 332 multicurrency sublimit available fiveyear revolving credit agreement yen borrowing acts hedge companys net investment japan result adjustments made loan balance reflect applicable currency exchange rates december 31 included within accumulated comprehensive gain loss stockholders equity 16500 senior secured credit facilities prepaid december 2001 consisted 11500 term loans sixyear 2500 us revolving credit facility sixyear 2500 reducing multicurrency facility senior secured credit facilities weighted average interest rate borrowings considering effects companys interest rate swaps 705 2001 prepayment remaining amounts outstanding senior secured credit facilities december 2001 resulted writeoff related unamortized deferred loan costs 71 reflected extraordinary loss 48 net income taxes 23 02 per basic diluted share consolidated statements earnings company fixed base rate 5500 notional amount variablerate borrowings average rate 544 using interest rate swaps see note 2 maturities debt four years succeeding 2002 2003 02 2004 01 2005 01 2006 7174 carrying amounts companys longterm debt approximate fair values based quoted amounts similar types borrowing agreements interest paid debt 669 2001 943 2000 1261 1999 approximates interest expense note 7 capital stock company key employee director stock option plans options granted price less fair market value date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows weighted average shares exercise price options outstanding january 1 1999 77 1119 granted 29 2428 canceled 03 1990 exercised 06 603 options outstanding december 31 1999 97 1518 granted 28 3245 canceled 02 2341 exercised 11 742 options outstanding december 31 2000 112 2019 granted 20 4686 canceled 02 2678 exercised 08 1306 options outstanding december 31 2001 122 2487 price range 559 1000 12 629 price range 1001 2000 39 1450 price range 2001 3000 25 2425 price range 3001 4000 26 3241 price range 4001 5339 20 4685 options outstanding december 31 2001 122 2487 shares reserved future grants 112 130 december 31 2001 2000 respectively exercise prices options outstanding december 31 2001 ranged 559 5339 summary shares exercisable follows weighted average shares exercise price range 559 1000 12 629 price range 1001 2000 30 1391 price range 2001 3000 10 2424 price range 3001 4519 05 3246 shares exercisable december 31 2001 57 1575 company follows apb opinion 25 accounting stock option plans accordingly compensation cost recognized consolidated statements earnings options issued company stock option plans compensation cost companys stockbased compensation plans determined based fair value grant dates awards plans consistent method fasb statement 123 accounting stockbased compensation companys net earnings net earnings per share would follows net earnings reported 2670 2210 194 pro forma 2552 2111 137 basic net earnings per share reported 136 113 10 pro forma 130 108 07 diluted net earnings per share reported 132 110 10 pro forma 126 105 07 weightedaverage fair value per share options granted 2001 2000 1999 estimated date grant using blackscholes option pricing model 2176 1482 1168 respectively fair value options granted estimated date grant using following assumptions riskfree interest rate 499 517 646 expected dividend yield 015 026 029 expected stock price volatility 380 370 380 expected option life 66 years 65 years 64 years april 19 2000 companys stockholders approved amendment companys restated articles incorporation increase authorized shares common stock 5000 1500 april 19 2000 companys board directors approved twoforone stock split effective may 12 2000 stockholders record may 1 2000 share per share data adjusted reflect increase authorized shares stock split though occurred beginning periods presented company 05 authorized shares 1 par value preferred stock none outstanding note 8 earnings per share following table sets forth computation basic diluted earnings per share earnings extraordinary item 2718 2210 194 extraordinary loss net income taxes 48 net earnings 2670 2210 194 weightedaverage shares outstanding basic earnings per share 1963 1951 1938 effect dilutive employee stock options 67 60 48 adjusted weightedaverage shares outstanding diluted earnings per share 2030 2011 1986 basic earnings per share common stock extraordinary item 138 113 10 extraordinary loss 02 net earnings 136 113 10 diluted earnings per share common stock extraordinary item 134 110 10 extraordinary loss 02 net earnings 132 110 10 note 9 retirement plans certain companys subsidiaries defined benefit plans covering employees defined benefit plans benefit obligations excess plan assets summary information related companys defined benefit plans follows components net periodic benefit cost service cost 39 38 45 interest cost 41 39 expected return plan assets 38 39 amortization transition amounts prior service cost 03 02 recognized actuarial gain 02 03 plan termination loss 05 net periodic benefit cost 48 39 44 subsidiary company terminated defined benefit plan 2001 transferred plan assets related benefit obligations defined contribution retirement plan loss plan termination 05 retirement plan expense companys profit sharing defined contribution retirement plans totaled 365 2001 319 2000 319 1999 portion companys retirement plan expenses funded stryker common stock totaling 34 2001 31 2000 20 1999 use stryker common stock represents noncash investing activity reflected consolidated statements cash flows amount stryker common stock held companys defined contribution retirement plans totaled 426 07 shares 343 07 shares december 31 2001 2000 respectively value stryker common stock percentage total defined contribution retirement plan assets 179 december 31 2001 149 december 31 2000 note 10 income taxes earnings income taxes extraordinary item consist following united states operations 2412 1974 405 foreign operations 1645 1375 107 4057 3349 298 components provision income taxes follow current income tax expense federal 514 448 381 state including puerto rico 142 101 38 foreign 392 303 172 1048 852 591 deferred income tax expense credit 291 287 487 1339 1139 104 reconciliation us statutory income tax rate companys effective income tax rate follows us statutory income tax rate 350 add deduct state taxes less effect federal deduction 15 17 107 tax benefit relating operations ireland puerto rico 71 69 305 earnings foreign sales corporation 09 22 120 nondeductible deductible permanent differences 13 37 186 tax benefit relating foreign tax credit 01 22 119 foreign income taxes rates different us statutory rate 67 71 276 08 22 26 330 340 349 large percentage fluctuations shown 1999 reconciliation caused low base pretax earnings used computation deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes tax effect significant temporary differences comprise companys deferred tax assets liabilities follows net operating loss carryforwards totaling approximately 960 december 31 2001 available reduce future taxable earnings certain foreign subsidiaries significant portion carryforwards may carried forward indefinitely deferred tax assets liabilities included consolidated balance sheets follows provision made us federal state income taxes foreign taxes may result future remittances undistributed earnings 4725 december 31 2001 foreign subsidiaries expected earnings reinvested overseas indefinitely determination amount unrecognized deferred income tax liability unremitted earnings practicable total income taxes paid 630 2001 753 2000 694 1999 note 11 segment geographic data company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma spinal implants medsurg equipment segment sells powered surgical instruments endoscopic systems medical video imaging equipment hospital beds stretchers leibinger craniomaxillofacial implants imageguided surgical systems includes physical therapy services corporate administration interest expense interest income companys reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies company evaluates performance based net earnings segment identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents investments property plant equipment sales financial information business segment follows companys areas operation outside united states japan europe principally include pacific canada latin america middle east geographic information follows gains losses foreign currency transactions included expense income totaled 01 46 10 2001 2000 1999 respectively note 12 leases company leases various manufacturing office facilities equipment operating leases future minimum lease commitments leases follows 311 242 168 108 74 thereafter 142 1045 rent expense totaled 516 2001 422 2000 423 1999 december 1999 company entered fiveyear lease new office manufacturing distribution facility built mahwah new jersey december 2001 company terminated lease purchasing facility 878 note 13 contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor matters subject many uncertainties outcomes predictable assurance company records amounts losses deemed probable subject reasonable estimate however company anticipate material losses result proceedings beyond amounts already provided accompanying financial statements summary quarterly data unaudited stryker corporation subsidiaries millions except per share data price quotations reported supplied new york stock exchange excludes net extraordinary loss per share 02 basic 02 diluted report independent auditors board directors stockholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2001 2000 related consolidated statements earnings stockholders equity cash flows three years period ended december 31 2001 audits also included financial statement schedule listed index item 14 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2001 2000 consolidated results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 1 financial statements 2001 company changed method accounting derivative financial instruments ernst young llp grand rapids michigan january 29 2002 item 9item 8 financial statements supplementary data consolidated balance sheets stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements earnings stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements stockholders equity stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements cash flows stryker corporation subsidiaries millions see accompanying notes consolidated financial statements notes consolidated financial statements stryker corporation subsidiaries december 31 2002 millions except per share amounts note 1 significant accounting policies business stryker corporation develops manufactures markets specialty surgical medical products sold primarily hospitals throughout world provides outpatient physical therapy services united states principles consolidation consolidated financial statements include accounts company majorityowned subsidiaries elimination significant intercompany accounts transactions revenue recognition revenue recognized sale products services related goods shipped title passes services rendered shipping handling products amounts billed customers shipping handling products included net sales 2002 2001 prior 2001 amounts recorded offset cost sales costs incurred related shipping handling products included cost sales 2002 2001 prior 2001 certain shipping costs reported selling general administrative expenses use estimates preparation consolidated financial statements conformity generally accepted accounting principles requires company management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes actual results could differ estimates foreign currency translation functional currencies companys international affiliates local currencies accordingly financial statements companys international affiliates translated united states dollars using current exchange rates balance sheets average exchange rates statements earnings cash flows unrealized translation adjustments included accumulated comprehensive gain loss stockholders equity transaction gains losses resulting settlement nonfunctional currency receivables payables included net earnings cash equivalents investments cash equivalents highly liquid investments maturity three months less purchased investments include marketable equity securities investments classified assets investments consist mutual funds acquired offset changes certain liabilities related deferred compensation arrangements companys investments stated fair value based quoted market prices interest dividends realized gains losses sale cash equivalents marketable equity securities included expense income adjustments fair value marketable equity securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive gain loss stockholders equity adjustments fair value investments classified trading recorded earnings offsets related changes liabilities deferred compensation arrangements accounts receivable securitization company accounts receivable securitization facility pursuant certain subsidiaries company sell ongoing basis domestic accounts receivable stryker funding corporation wholly owned specialpurpose subsidiary company turn may sell aggregate 1300 undivided percentage ownership interest receivables multiseller commercial paper conduit administered bank creditors stryker funding corporation claim assets equity becomes available company amounts accounts receivable sold stryker funding corporation net companys retained interest totaled 1300 december 31 2002 2001 reflected balance sheet reductions accounts receivable amount receivables sold subject change monthly based level defined eligible receivables less contractual reserves companys retained interest accounts receivable held stryker funding corporation form subordinated note represents overcollateralization undivided interest sold retained interest totaled 985 768 december 31 2002 2001 respectively discount expense associated securitization facility including conduits financing cost issuing commercial paper 27 2002 58 2001 71 2000 included selling general administrative expenses inventories stated lower cost market cost approximately 88 87 2001 inventories determined using lower firstin firstout fifo cost market cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability cost products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends property plant equipment property plant equipment stated cost depreciation computed either straightline decliningbalance method estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses amounts allocated intangible assets intangible assets include developed technology amortized straightline basis 20 years customer relationships reflect expected continued customer patronage trademarks trade names patents amortized straightline basis 5 35 years weighted average life 15 years intangible assets deferred charges deferred charges represent net book value loaner instruments surgical implants provided customers company instruments amortized straightline basis threeyear period amortization expenses instruments included selling general administrative expenses deferred loan costs deferred loan costs associated companys borrowings amortized terms related borrowings using effectiveinterest method deferred loan costs classified assets net book value 25 29 december 31 2002 2001 respectively amortization expenses deferred loan costs included interest expense 06 2002 59 2001 82 2000 prepayment remaining amounts outstanding companys senior secured credit facilities december 2001 resulted writeoff related unamortized deferred loan costs 71 see note 7 income taxes company accounts income taxes using liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates effect years differences expected reverse deferred income tax expense credit represents change net deferred tax assets liabilities year derivative financial instruments company uses derivative financial instruments manage economic impact fluctuations interest rates currency exchange rates company enters interest rate swaps currency forward contracts manage economic risks january 1 2001 company adopted financial accounting standards board fasb statement 133 accounting derivative instruments hedging activities amended statements 137 138 statements require company recognize derivatives balance sheet fair value derivatives hedges must adjusted fair value earnings derivative hedge depending nature hedge changes fair value derivatives either offset change fair value hedged assets liabilities firm commitments earnings recognized accumulated comprehensive gain loss hedged item recognized earnings see note 2 legal contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor matters potential future outcomes matters outside managements complete control generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory relief could result payment significant claims settlements legal matters management sufficient information reasonably estimate companys future obligations liability representing managements best estimate probable cost resolution legal matters recorded estimates based consultation outside counsel previous settlement experience settlement strategies stock options december 31 2002 company key employee director stock option plans described fully note 8 company follows accounting principles board apb opinion 25 accounting stock issued employees accounting stock option plans opinion 25 compensation expense recognized exercise price companys stock options equals market price underlying stock date grant compensation expense companys stockbased compensation plans determined based fair value grant dates awards plans consistent method fasb statement 123 accounting stockbased compensation companys net earnings net earnings per share would follows net earnings reported 3456 2670 2210 deduct compensation expense fair value method 171 118 99 pro forma 3285 2552 2111 basic net earnings per share reported 175 136 113 pro forma 166 130 108 diluted net earnings per share reported 170 132 110 pro forma 161 126 105 weightedaverage fair value per share options granted 2002 2001 2000 estimated date grant using blackscholes option pricing model 2294 2176 1482 respectively fair value options granted estimated date grant using following assumptions riskfree interest rate 376 499 517 expected dividend yield 018 015 026 expected stock price volatility 374 380 370 expected option life 65 years 66 years 65 years comprehensive gain loss components accumulated comprehensive gain loss follows unrealized foreign accumulated unrealized gains losses unfunded currency gains losses cash flow pension translation comprehensive securities hedges losses adjustments gain loss balances january 1 2001 08 1016 1024 cumulative effect accounting change related cash flow hedges 35 comprehensive loss 2001 01 220 464 685 balances december 31 2001 09 185 1480 1674 comprehensive gain loss 2002 02 93 64 794 825 balances december 31 2002 07 92 64 686 849 recently issued accounting standards july 2002 fasb issued statement 146 accounting costs associated exit disposal activities statement 146 addresses timing recognition related measurement costs onetime termination benefits associated closing rutherford facility provisions statement 146 employmentrelated closing costs rutherford would recognized 12month closing period statement 146 effective exit activities initiated december 31 2002 early application allowed company initiated actions related rutherford june 2002 adopt provisions statement 146 recording costs rutherford closing accordingly actual employmentrelated costs closing expensed upon approval shutdown agreement third quarter 2002 see note 6 restructuring acquisitionrelated liabilities information regarding rutherford closing november 2002 fasb issued interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation 45 changes current practice accounting disclosure guarantees interpretation 45 require certain guarantees recorded liabilities fair value companys balance sheet current practice requires liabilities related guarantees recorded loss probable reasonably estimable terms defined fasb statement 5 accounting contingencies interpretation 45 also requires guarantor make significant new disclosures even likelihood making payments guarantee remote another change current practice disclosure requirements interpretation 45 effective immediately included note 14 contingencies initial recognition measurement provisions applicable prospective basis guarantees issued modified december 31 2002 company yet determined effect new recognition measurement provisions companys future financial results december 2002 fasb issued statement 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 statement 148 amends statement 123 accounting stockbased compensation provide alternative methods transition voluntary change fairvalue based method accounting stockbased employee compensation addition statement 148 amends disclosure requirements statement 123 require disclosure interim financial statements regarding method accounting stockbased employee compensation effect method used reported results company intend adopt fairvalue based method accounting stockbased employee compensation final standard issued fasb addresses concerns related applicability current option pricing models nonexchange traded employee stock option plans reclassifications certain prior year amounts reclassified conform presentation used 2002 note 2 financial instruments risk management following summary companys investments gross unrealized estimated cost losses fair value december 31 2002 equity securities 26 11 15 investments 113 total 139 11 128 december 31 2001 equity securities 26 14 12 investments 93 total 119 14 105 net realized losses sales companys investments 2002 2001 totaled 01 09 respectively net realized gains sales companys investments totaled 33 2000 interest income included income totaled 24 2002 22 2001 41 2000 company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures relate principally intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies currency forward contracts crosscurrency swaps markedtomarket period resulting gains losses included expense income consolidated statements earnings december 31 2002 company outstanding forward currency exchange contracts purchase 820 sell 977 various currencies principally united states dollars euros maturities ranging principally 30 180 days december 31 2001 company outstanding forward currency exchange contracts purchase 974 sell 721 various currencies principally united states dollars euros maturities ranging principally 30 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted amortized forward points company entered interest rate swap agreements effectively convert portion variablerate borrowings fixedrate basis 2003 thus reducing impact changes interest rates future interest expense approximately 51 companys outstanding variablerate borrowings december 31 2002 hedged designation interest rate swap agreements classified cash flow hedges company fixed base rate 2500 notional amount 4869 variablerate borrowings outstanding december 31 2002 average rate 558 interest rate swaps mature various terms ranging september 2003 december 2003 fair value companys interest rate swap agreements represents estimated receipts payments would made terminate agreements upon adoption fasb statement 133 amended january 1 2001 company recognized gain cumulative effect accounting change 35 accumulated comprehensive gain loss related interest rate swap agreements gain 93 loss 220 attributable changes fair value interest rate swap agreements recorded component accumulated comprehensive gain loss 2002 2001 respectively future interest rate swap agreements determined ineffective terminated contractual termination dates became probable hedged variable cash flows associated variablerate borrowings would stop company would required reclassify earnings portion unrealized losses cash flow hedges included accumulated comprehensive gain loss interest rate differentials paid received result interest rate swaps recognized adjustment interest expense related designated borrowings based maturities companys interest rate swap agreements interest expense year ending december 31 2003 expected 92 higher interest cost variablerate borrowings recognition amounts included unrealized losses cash flow hedges december 31 2002 company uses yendenominated floatingrate borrowings protect portion value investment subsidiary japan realized unrealized gains losses hedge included consolidated statements earnings recorded foreign currency translation adjustments within accumulated comprehensive gain loss stockholders equity net gains losses 16 58 77 attributable yendenominated floatingrate borrowings hedge recorded foreign currency translation adjustments 2002 2001 2000 respectively company exposed credit loss event nonperformance counterparties instruments anticipate nonperformance counterparties note 3 inventories summarized follows note 4 business product line acquisitions october 2002 company purchased dekompressor product line pain concepts inc total cost 100 giving company access intellectual property commercial rights relating design manufacture certain medical devices intangible assets acquired amortized 17 years company contingently liable potential future milestone payments 425 primarily based future sales growth next five years october 1 2002 company entered agreement curis inc eliminated royalties payable curis relating future stryker sales osteogenic protein1 op1 terms agreement company made onetime cash payment 140 curis payment allocated existing patents amortized 15 years july 1 2002 company acquired surgical dynamics inc spinal implant business sdi tyco international ltd 1350 cash acquisition expands companys spinal product line adding interbody spinal cages united states market well thoracolumbar cervical spinal fixation devices acquisition funded using existing credit facilities acquisition sdi accounted using purchase method accounting results operations acquired business included companys consolidated financial statements beginning july 1 2002 acquisition sdi added 253 companys sales second half 2002 sdi sales 556 year ended december 31 2001 sales 331 six months ended june 30 2002 purchase price 1350 cash liabilities assumed preliminarily allocated assets acquired liabilities assumed based estimated fair value date acquisition based preliminary purchase price allocation 871 purchase price allocated patent licensing agreements amortized remaining life 8 years 124 inventory 380 deferred tax assets related future tax deductions 51 tangible assets 76 liabilities assumed immediately acquisition consummated management company began implement integration plan combine stryker sdi conjunction integration plan company recorded additional purchase liabilities 36 included preliminary purchase price allocation additional purchase liabilities include 31 severance related costs 05 contractual obligations severance related costs provided workforce reductions covering 37 sdi employees workforce reductions completed fourth quarter 2002 severance payments made third quarter 2003 pro forma consolidated results operations would differ significantly result sdi acquisition november 2001 company acquired business independent italian distributor certain companys products cost approximately euro 282 253 initial cash payment euro 73 65 made november 2001 remaining purchase price paid ratably fiveyear period purchase consolidates distribution substantially companys products italy acquisition accounted using purchase method accounting tangible assets acquired included 51 inventory 08 deferred charges intangible assets acquired principally included customer relationships noncompete agreements approximately 102 purchase price allocated customer relationships amortized 20 years approximately 92 purchase price allocated intangibles principally noncompete agreements amortized weighted average life four years august 2000 company completed acquisition image guided technologies inc igt merger 03 shares stryker common stock value 120 igt manufactured threedimensional optical measurement devices optical localizers anatomical imagedisplay workstations used physicians perform imageguided surgery acquisition accounted using purchase method accounting intangible assets acquired principally patents amortized periods ranging 10 15 years note 5 goodwill intangible assets january 1 2002 company adopted provisions fasb statement 142 goodwill intangible assets related acquisitions completed july 1 2001 statement 142 prohibits amortization goodwill intangible assets indefinite lives requires company evaluate intangibles impairment annual basis accordance statements provisions assembled workforce intangible asset unamortized balance 55 january 1 2002 reclassified intangibles goodwill first quarter 2002 company completed required impairment test goodwill fourth quarter 2002 completed required annual impairment test goodwill prescribed statement 142 determined recorded goodwill impaired goodwill writedown necessary nonamortization provisions statement 142 applied 2001 2000 amortization expense would reduced 181 121 net income taxes 173 115 net income taxes respectively reconciliations reported net earnings adjusted net earnings 2001 2000 presented show net earnings would nonamortization provisions statement 142 applied years reconciliations including related per share amounts follows changes net carrying amount goodwill segment year ended december 31 2002 follows intangibles december 31 2002 consist following amortization expense intangibles totaled 289 year ended december 31 2002 estimated amortization expense five succeeding years follows 346 327 301 note 6 restructuring acquisitionrelated liabilities company recorded restructuring acquisitionrelated pretax charges credits consisting following items restructuring charges credits severance related costs 210 06 13 reorganization distribution channels 07 21 discontinuance product line 04 14 total restructuring charges credits 210 03 02 acquisitionrelated charges credits severance related costs 09 reorganization distribution channels 12 reductions 38 total acquisitionrelated charges credits 38 09 12 total restructuring acquisitionrelated charges credits 172 06 10 2002 restructuring acquisitionrelated items reflect charge 172 115 net income taxes third quarter 2002 items include charge 210 141 net income taxes employmentrelated costs close companys rutherford new jersey manufacturing facility partially offset credit 38 26 net income taxes reverse certain howmedica restructuring acquisitionrelated costs reflect actual final payments required 210 restructuring charge relates shutdown agreement reached company employee bargaining unit close howmedica osteonics implant manufacturing facility rutherford new jersey ratified members iue cwa local 485 august 23 2002 agreement laidoff employees receive significantly benefits would collective bargaining agreement set expire august 31 2002 addition least 80 qualified employees rutherford facility offered employment new howmedica osteonics facility mahwah new jersey charge covers employmentrelated severance costs approximately 400 employees company expects rutherford facility closed next 12 months final severance payments made 2004 howmedica osteonics prepares permanently cease manufacturing rutherford transition production facilities mahwah new jersey well cork limerick ireland 2001 restructuring credits 03 relate various restructuring events fourth quarter 2001 06 credit severance related costs reflects charges 08 offset credits 14 08 charge covers severance costs 10 employees europe planned workforce reductions completed first quarter 2002 14 credit relates reduction expected cost complete headcount reductions associated 2000 1999 reorganizations companys european japanese distribution operations 07 charge related reorganization distribution channels reflects cost terminate distributor latin america cost termination based contractual terms 04 credit related discontinuance product line represents reversal remaining loss reserves established japan discontinued ophthalmology inventories sold contingent basis 1999 2001 acquisitionrelated charges include 09 severance related costs associated reorganization companys sales structure italy accommodate integration business acquired fourth quarter 2001 companys independent italian distributor see note 4 reorganization established direct sales force italy distribute companys full product portfolio 09 charge covers severance costs three employees italy costs cancel contracts discontinued agents reorganization sales structure italy completed first quarter 2002 2000 restructuring charges 02 relate various restructuring events fourth quarter 2000 severance related costs 13 reflect charges 40 partially offset credit 27 40 charge covers severance costs 95 employees primarily europe planned workforce reductions completed 2001 remaining amount reserve reversed 2001 27 credit relates reduction expected cost complete headcount reductions associated 1999 reorganization companys japanese distribution operations credit 21 related reorganization distribution channels reflects charge 06 terminate two small european distributors offset credit 27 reverse reserves distributor reorganization charged operations 1996 delay use 1996 reserves occurred distributor located country howmedica direct sales operation purchase howmedica assets country delayed lengthy regulatory approval process completed 2000 evaluating business country company decided terminate distributor reversed previously recorded reserve 04 credit related discontinuance product line represents reversal portion loss reserves established japan discontinued ophthalmology inventories sold contingent basis 1999 charges 14 represent asset writeoffs primarily goodwill inventory lease commitments associated certain operations principally europe closed fourth quarter 2000 acquisitionrelated credit 12 2000 reflected reduction expected cost complete conversion remaining osteonics distributors united states certain distributors europe pacific region direct sales form branches agents accommodate integration howmedica sales force conversions provided company greater control distribution channels facilitated integration howmedica organization cost conversions based contractual terms following table provides rollforward remaining liabilities associated business acquisition purchase liabilities restructuring acquisitionrelated charges recorded company 2002 2001 prior years facility closures distributor severance contractual conversions related costs obligations balances january 1 2001 70 64 67 47 additions reductions recognized charges credits 2001 consolidated statement earnings 07 03 04 payments 23 34 52 03 reductions 01 foreign currency translation effects 01 05 01 balances december 31 2001 53 27 13 40 additions reductions recognized charges credits 2002 consolidated statement earnings 210 38 additions business acquisitions 31 05 payments 23 47 12 02 foreign currency translation effects 02 balances december 31 2002 30 219 06 00 note 7 borrowings financing arrangements longterm debt follows december 2001 company established 10000 unsecured credit facilities replaced 16500 senior secured credit facilities established 1998 conjunction acquisition howmedica total 7305 initially drawn new credit facilities 6427 prepaid debt outstanding 1998 facilities 878 used terminate companys synthetic lease purchase mahwah new jersey manufacturing distribution facility unsecured credit facilities include 2500 364day revolving credit agreement 7500 fiveyear nonamortizing revolving credit agreement 2500 364day revolving credit agreement bears interest base rate defined plus applicable margin ranging 0245 0800 depending companys debt rating 7500 fiveyear nonamortizing revolving credit agreement 2500 multicurrency sublimit yen euro borrowed fiveyear facility also 500 swing line sublimit 1000 letter credit sublimit fiveyear facility bears interest base rate defined plus applicable margin ranging 0235 0775 depending companys debt rating unsecured credit facilities require commitment fee ranging 0055 0225 aggregate commitment facilities depending companys debt rating addition utilization fee 0125 required sum outstanding amounts exceeds 50 aggregate commitments 2002 weighted average interest rate borrowings unsecured credit facilities considering effects companys interest rate swaps 533 facilities require company comply certain financial covenants december 31 2002 company borrowed yen 48205 multicurrency sublimit available fiveyear revolving credit agreement yen borrowing acts hedge portion companys net investment japan result adjustments made loan balance reflect applicable currency exchange rates december 31 included within accumulated comprehensive gain loss stockholders equity 16500 senior secured credit facilities prepaid december 2001 consisted 11500 term loans sixyear 2500 revolving credit facility sixyear 2500 reducing multicurrency facility senior secured credit facilities weighted average interest rate borrowings considering effects companys interest rate swaps 705 2001 prepayment remaining amounts outstanding senior secured credit facilities december 2001 resulted writeoff related unamortized deferred loan costs 71 reflected extraordinary loss 48 net income taxes 23 02 per basic diluted share consolidated statements earnings company fixed base rate 2500 notional amount variablerate borrowings average rate 558 using interest rate swaps see note 2 maturities debt four years succeeding 2003 2004 02 2005 02 2006 4871 2007 02 carrying amounts companys longterm debt approximate fair values based quoted interest rates similar types amounts borrowing agreements interest paid debt 371 2002 669 2001 943 2000 approximates interest expense note 8 capital stock company key employee director stock option plans options granted price less fair market value date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows weighted average shares exercise price options outstanding january 1 2000 97 1518 granted 28 3245 canceled 02 2341 exercised 11 742 options outstanding december 31 2000 112 2019 granted 20 4686 canceled 02 2678 exercised 08 1306 options outstanding december 31 2001 122 2487 granted 20 5290 canceled 03 3600 exercised 15 1319 options outstanding december 31 2002 124 3043 price range 559 1000 06 610 price range 1001 2000 33 1468 price range 2001 3000 23 2425 price range 3001 4000 24 3241 price range 4001 5000 18 4658 price range 5001 5705 20 5289 options outstanding december 31 2002 124 3043 shares reserved future grants 95 112 december 31 2002 2001 respectively exercise prices options outstanding december 31 2002 ranged 559 5705 summary shares exercisable follows weightedaverage shares exercise price range 559 1000 06 610 price range 1001 2000 30 1441 price range 2001 3000 13 2424 price range 3001 4000 09 3241 price range 4001 5339 04 4682 shares exercisable december 31 2002 62 2044 april 19 2000 companys stockholders approved amendment companys restated articles incorporation increase authorized shares common stock 5000 1500 april 19 2000 companys board directors approved twoforone stock split effective may 12 2000 stockholders record may 1 2000 share per share data adjusted reflect increase authorized shares stock split though occurred beginning periods presented company 05 authorized shares 1 par value preferred stock none outstanding note 9 earnings per share following table sets forth computation basic diluted earnings per share earnings extraordinary item 3456 2718 2210 extraordinary loss net income taxes 48 net earnings 3456 2670 2210 weightedaverage shares outstanding basic earnings per share 1975 1963 1951 effect dilutive employee stock options 63 67 60 adjusted weightedaverage shares outstanding diluted earnings per share 2038 2030 2011 basic earnings per share common stock extraordinary item 175 138 113 extraordinary loss 02 net earnings 175 136 113 diluted earnings per share common stock extraordinary item 170 134 110 extraordinary loss 02 net earnings 170 132 110 note 10 retirement plans certain companys subsidiaries defined benefit plans covering employees defined benefit plans benefit obligations excess plan assets summary information related companys defined benefit plans follows components amounts recognized consolidated balance sheets follows pension plans accumulated benefit obligation excess plan assets projected benefit obligations accumulated benefit obligations fair value plan assets 636 598 299 respectively december 31 2002 components net periodic benefit cost follows service cost 45 39 38 interest cost 42 41 39 expected return plan assets 34 38 39 amortization transition amounts prior service cost 02 03 recognized actuarial gain 02 plan termination loss 05 net periodic benefit cost 55 48 39 subsidiary company terminated defined benefit plan 2001 transferred plan assets related benefit obligations defined contribution retirement plan loss plan termination 05 retirement plan expense companys profit sharing defined contribution retirement plans totaled 452 2002 365 2001 319 2000 portion companys retirement plan expenses funded stryker common stock totaling 41 2002 34 2001 31 2000 use stryker common stock represents noncash investing activity reflected consolidated statements cash flows amount stryker common stock held companys defined contribution retirement plans totaled 515 08 shares 426 07 shares december 31 2002 2001 respectively value stryker common stock percentage total defined contribution retirement plan assets 202 december 31 2002 179 december 31 2001 note 11 income taxes earnings income taxes extraordinary item consist following united states operations 2461 2412 1974 foreign operations 2606 1645 1375 5067 4057 3349 2002 earnings companys puerto ricobased manufacturing operations reported foreign operations due change legal status prior 2002 earnings reported united states operations internal revenue code section 936 election components provision income taxes follow current income tax expense federal 800 514 448 state including puerto rico 2001 69 142 101 foreign 760 392 303 1629 1048 852 deferred income tax expense credit 18 291 287 1611 1339 1139 reconciliation united states statutory income tax rate companys effective income tax rate follows united states statutory income tax rate 350 add deduct state taxes less effect federal deduction 08 15 17 tax benefit relating operations ireland puerto rico 78 71 69 tax benefit relating united states export sales 14 09 22 nondeductible deductible permanent differences 12 13 37 tax benefit relating foreign tax credit 05 01 22 foreign income taxes rates different united states statutory rate 36 67 71 09 08 22 318 330 340 deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes tax effect significant temporary differences comprise companys deferred tax assets liabilities follows net operating loss carryforwards totaling approximately 649 december 31 2002 available reduce future taxable earnings certain foreign subsidiaries significant portion carryforwards may carried forward indefinitely deferred tax assets liabilities included consolidated balance sheets follows provision made united states federal state income taxes foreign taxes may result future remittances undistributed earnings 6607 december 31 2002 foreign subsidiaries expected earnings reinvested overseas indefinitely determination amount unrecognized deferred income tax liability unremitted earnings practicable total income taxes paid net refunds received 1121 2002 630 2001 753 2000 note 12 segment geographic data company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma spinal implants bone cement op1 medsurg equipment segment sells powered surgical instruments endoscopic systems medical video imaging equipment hospital beds stretchers craniomaxillofacial implants imageguided surgical systems includes physical therapy services corporate administration interest expense interest income companys reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies company evaluates performance based net earnings segment identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents investments property plant equipment sales financial information business segment follows companys principal areas operation outside united states europe japan company also operations pacific canada latin america middle east geographic information follows note 13 leases company leases various manufacturing office facilities equipment operating leases future minimum lease commitments leases follows 400 315 227 168 134 thereafter 453 1697 rent expense totaled 613 2002 516 2001 422 2000 note 14 contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor matters subject many uncertainties outcomes predictable assurance company records amounts losses deemed probable subject reasonable estimate however company anticipate material losses result proceedings beyond amounts already provided accompanying financial statements pursuant certain companys credit lease agreements company provided financial guarantees third parties form indemnification provisions indemnify third parties costs including limited adverse judgments lawsuits imposition additional taxes due either change tax law adverse interpretation tax law term guarantee equal term related credit lease agreement company able calculate maximum potential amount future payments could required make guarantees potential payment dependent occurrence future unknown events eg changes united states foreign tax laws summary quarterly data unaudited stryker corporation subsidiaries millions except per share data price quotations reported supplied new york stock exchange fourth quarter 2002 company reduced effective tax rate year 318 330 thereby decreasing income tax expense 61 b excludes net extraordinary loss per share 02 basic 02 diluted report independent auditors board directors stockholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2002 2001 related consolidated statements earnings stockholders equity cash flows three years period ended december 31 2002 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2002 2001 consolidated results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states discussed note 5 financial statements 2002 company changed method accounting goodwill discussed note 1 2001 company changed method accounting derivative financial instruments ernst young llp grand rapids michigan january 28 2003 item 9item 8 financial statements supplementary data 30 31 consolidated statements stockholders equity stryker corporation subsidiaries millions except per share amounts 32 33 notes consolidated financial statements stryker corporation subsidiaries december 31 2003 millions except per share amounts note 1 significant accounting policies business stryker corporation develops manufactures markets specialty surgical medical products sold primarily hospitals throughout world provides outpatient physical therapy services united states principles consolidation consolidated financial statements include accounts company majorityowned subsidiaries elimination significant intercompany accounts transactions revenue recognition significant portion companys orthopaedic implants revenue generated consigned inventory maintained hospitals field representatives products revenue recognized time company receives appropriate notification product used implanted company records revenue medsurg equipment product sales title risk ownership transferred customer typically upon shipment customer physical therapy services line business company records revenue services rendered company records estimated sales returns discounts applicable adjustments reduction net sales period revenue recognized shipping handling products amounts billed customers shipping handling products included net sales costs incurred related shipping handling products included cost sales use estimates preparation consolidated financial statements conformity accounting principles generally accepted united states requires company management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes actual results could differ estimates foreign currency translation functional currencies substantially companys international affiliates local currencies accordingly financial statements international affiliates translated united states dollars using current exchange rates balance sheets average exchange rates statements earnings cash flows unrealized translation adjustments included accumulated comprehensive gain loss stockholders equity transaction gains losses resulting settlement nonfunctional currency receivables payables included net earnings cash equivalents investments cash equivalents highly liquid investments maturity three months less purchased investments include marketable equity securities investments classified assets investments consist mutual funds acquired offset changes certain liabilities related deferred compensation arrangements companys investments stated fair value based quoted market prices interest dividends realized gains losses sale cash equivalents marketable equity securities included expense income adjustments fair value marketable equity securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive gain loss stockholders equity adjustments fair value investments classified trading recorded earnings offsets related changes liabilities deferred compensation arrangements accounts receivable accounts receivable consist trade miscellaneous receivables company maintains allowance doubtful accounts estimated losses collection accounts receivable 34 company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends accounts receivable securitization amended restated april 24 2003 company accounts receivable securitization facility pursuant certain subsidiaries company sell ongoing basis domestic accounts receivable stryker funding corporation sfc wholly owned specialpurpose subsidiary company turn may sell aggregate 2000 limit 1300 december 31 2002 undivided percentage ownership interest receivables bankadministered multiseller commercial paper conduits creditors sfc claim assets equity becomes available company amounts undivided percentage ownership interests accounts receivable sold sfc net companys retained interest totaled 1500 december 31 2003 1300 december 31 2002 reflected balance sheet reductions accounts receivable proceeds sale additional accounts receivable interests used reduce outstanding borrowings companys unsecured credit facilities amount receivables sold subject change monthly based level defined eligible receivables less contractual reserves companys retained interest accounts receivable held sfc form subordinated note represents overcollateralization undivided interest sold retained interest totaled 1071 985 december 31 2003 2002 respectively discount expense associated securitization facility including conduits financing cost issuing commercial paper 26 2003 27 2002 58 2001 included selling general administrative expenses inventories stated lower cost market cost approximately 88 inventories determined using lower firstin firstout fifo cost market cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability cost products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends property plant equipment property plant equipment stated cost depreciation computed either straightline decliningbalance method estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses amounts allocated intangible assets intangible assets include developed technology amortized straightline basis 20 years customer relationships reflect expected continued customer patronage trademarks brand names patents amortized straightline basis 5 40 years weighted average life 15 years intangible assets deferred charges deferred charges represent net book value loaner instruments surgical implants provided customers company instruments amortized straightline basis threeyear period amortization expenses instruments included selling general administrative expenses deferred loan costs deferred loan costs associated companys borrowings amortized terms related borrowings using effectiveinterest method deferred loan costs classified assets net book value 19 25 december 31 2003 2002 respectively amortization expenses deferred loan costs included interest expense 06 2003 06 2002 59 2001 prepayment remaining amounts outstanding companys senior secured credit facilities december 2001 resulted writeoff related unamortized deferred loan costs 71 see note 7 35 income taxes company accounts income taxes using liability method deferred income tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates effect years differences expected reverse deferred income tax expense credit represents change net deferred tax assets liabilities year derivative financial instruments company uses derivative financial instruments manage economic impact fluctuations currency exchange rates company enters currency forward contracts manage economic risks company entered interest rate swap contracts various maturity dates december 2003 manage economic impact fluctuations interest rates company follows provisions financial accounting standards board fasb statement 133 accounting derivative instruments hedging activities amended statements 137 138 accounting derivative financial instruments statements require company recognize derivatives balance sheet fair value derivatives hedges must adjusted fair value earnings derivative hedge depending nature hedge changes fair value derivative either offset change fair value hedged assets liabilities firm commitments earnings recognized accumulated comprehensive gain loss hedged item recognized earnings see note 2 legal contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor matters potential future outcomes matters outside managements complete control generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory relief could result payment significant claims settlements legal matters management sufficient information reasonably estimate companys future obligations liability representing managements best estimate probable cost resolution legal matters recorded estimates based consultation outside counsel previous settlement experience settlement strategies stock options december 31 2003 company key employee director stock option plans described fully note 8 company follows accounting principles board apb opinion 25 accounting stock issued employees accounting stock option plans opinion 25 compensation expense recognized exercise price companys stock options equals market price underlying stock measurement date grant compensation expense companys stockbased compensation plans determined based fair value grant dates awards plans consistent method fasb statement 123 accounting stockbased compensation companys net earnings net earnings per share would follows net earnings reported 4535 3456 2670 deduct compensation expense fair value method 191 171 118 pro forma 4344 3285 2552 basic net earnings per share reported 228 175 136 pro forma 218 166 130 diluted net earnings per share reported 223 170 132 pro forma 214 161 126 36 weightedaverage fair value per share options granted 2003 2002 2001 estimated date grant using blackscholes option pricing model 3038 2294 2176 respectively fair value options granted estimated date grant using following assumptions riskfree interest rate 227 376 499 expected dividend yield 018 015 expected stock price volatility 358 374 380 expected option life 65 years 65 years 66 years comprehensive gain loss components accumulated comprehensive gain loss follows unrealized foreign accumulated unrealized gains losses unfunded currency gains losses cash flow pension translation comprehensive securities hedges losses adjustments gain loss balances january 1 2002 09 185 1480 1674 comprehensive gain loss 2002 02 93 64 794 825 balances december 31 07 92 64 686 849 comprehensive gain loss 2003 03 92 07 1763 1845 balances december 31 10 00 71 1077 996 recently issued accounting standards december 2003 fasb issued revision statement 132 employers disclosures pensions postretirement benefits revision requires additional disclosures company regarding plan assets investment strategies plan obligations cash flows company adopted new disclosure requirements defined benefit plans see note 10 reclassifications certain prior year amounts reclassified conform presentation used 2003 note financial instruments risk management following summary companys investments gross unrealized estimated cost losses fair value december 31 2003 equity securities 26 15 11 investments 181 total 207 15 192 december 31 2002 equity securities 26 11 15 investments 113 total 139 11 128 net realized losses sales companys investments 2003 2002 2001 totaled 01 09 respectively 37 interest income included income totaled 31 2003 24 2002 22 2001 company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures relate principally intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies currency forward contracts crosscurrency swaps markedtomarket period resulting gains losses included expense income consolidated statements earnings december 31 2003 company outstanding forward currency exchange contracts purchase 1239 sell 1549 various currencies principally united states dollars euros maturities ranging principally 30 180 days december 31 2002 company outstanding forward currency exchange contracts purchase 820 sell 977 various currencies principally united states dollars euros maturities ranging principally 30 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points 1998 company entered interest rate swap agreements effectively converted portion variablerate borrowings fixedrate basis 2003 thus reducing impact changes interest rates interest expense period swap agreements fixed companys base rate 2500 variablerate borrowings 2003 average rate 558 interest rate swaps matured various terms ranging september 2003 december 2003 upon adoption fasb statement 133 amended january 1 2001 company recognized gain cumulative effect accounting change 35 accumulated comprehensive gain loss related interest rate swap agreements gains 92 93 loss 220 attributable changes fair value interest rate swap agreements recorded components accumulated comprehensive gain loss 2003 2002 2001 respectively interest rate differentials paid received result interest rate swaps recognized adjustment interest expense related designated borrowings company used yendenominated floatingrate borrowings protect portion value investment subsidiary japan realized unrealized gains losses hedge included consolidated statements earnings recorded foreign currency translation adjustments within accumulated comprehensive gain loss stockholders equity net gains losses 21 million 16 million 58 million attributable yendenominated floatingrate borrowings hedge recorded foreign currency translation adjustments 2003 2002 2001 respectively december 31 2003 company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties 38 note 3 inventories summarized follows note 4 business product line acquisitions october 2002 company purchased dekompressor product line pain concepts inc total cost 100 giving company access intellectual property commercial rights relating design manufacture certain medical devices intangible assets acquired amortized 17 years company contingently liable potential future milestone payments 425 primarily based future sales growth october 1 2002 company entered agreement curis inc eliminated royalties payable curis relating future stryker sales osteogenic protein1 op1 terms agreement company made onetime cash payment 140 curis payment allocated existing patents amortized 15 years july 1 2002 company acquired surgical dynamics inc spinal implant business sdi tyco international ltd 1350 cash acquisition expanded companys spinal product line adding interbody spinal cages united states market well thoracolumbar cervical spinal fixation devices acquisition funded using existing credit facilities acquisition sdi accounted using purchase method accounting results operations acquired business included companys consolidated financial statements beginning july 1 2002 purchase price 1350 cash less contractually required adjustment 66 received third quarter 2003 based decrease sdis working capital april 30 2002 closing liabilities assumed allocated assets acquired liabilities assumed based estimated fair value date acquisition purchase price allocation finalized 2003 based final purchase price allocation adjusted determined working capital adjustment amount 877 purchase price allocated patent licensing agreements amortized remaining life eight years 91 inventory 347 deferred tax assets related future tax deductions 48 tangible assets 79 liabilities assumed immediately acquisition consummated management company began implement integration plan combine stryker sdi conjunction integration plan company recorded additional purchase liabilities 36 included purchase price allocation additional purchase liabilities included 31 severance related costs 05 contractual obligations severance related costs provided workforce reductions covering 37 sdi employees workforce reductions completed fourth quarter 2002 severance payments made third quarter 2003 companys pro forma consolidated financial results differ significantly result sdi acquisition november 2001 company acquired business independent italian distributor certain companys products cost approximately euro 282 253 initial cash payment euro 73 65 made november 2001 remaining purchase price paid ratably fiveyear period 39 purchase consolidates distribution substantially companys products italy acquisition accounted using purchase method accounting tangible assets acquired included 51 inventory 08 deferred charges intangible assets acquired principally included customer relationships noncompete agreements approximately 102 purchase price allocated customer relationships amortized 20 years approximately 92 purchase price allocated intangibles principally noncompete agreements amortized weighted average life four years note goodwill intangible assets fourth quarter 2003 company recorded 65 charge related trademark impairment resulting branding initiative adopted company fourth quarter 2003 branding initiative intended improve companys customers stakeholders overall awareness strykers capabilities charge reduces book value trademark within orthopaedic implants segment fair value determined using discounted cash flow model charge included intangibles amortization consolidated statements earnings january 1 2002 company adopted provisions fasb statement 142 goodwill intangible assets related acquisitions completed july 1 2001 statement 142 prohibits amortization goodwill intangible assets indefinite lives requires company evaluate intangibles impairment annual basis accordance statements provisions assembled workforce intangible asset unamortized balance 55 january 1 2002 reclassified intangibles goodwill first quarter 2002 company completed required initial impairment test goodwill fourth quarters 2002 2003 completed required annual impairment tests goodwill prescribed statement 142 determined instances recorded goodwill impaired goodwill writedown necessary nonamortization provisions statement 142 applied 2001 amortization expense would reduced 181 121 net income taxes reconciliation reported net earnings adjusted net earnings 2001 presented show net earnings would nonamortization provisions statement 142 applied year compared reported net earnings 2003 2002 reconciliation including related per share amounts follows 40 changes net carrying amount goodwill segment year ended december 31 2003 follows intangibles december 31 2003 consist following amortization expense intangibles including 65 trademark impairment charge totaled 454 year ended december 31 2003 estimated amortization expense five succeeding years follows 419 366 357 336 332 note restructuring acquisitionrelated liabilities company recorded restructuring acquisitionrelated pretax charges credits 2002 2001 consisting following items restructuring charges credits severance related costs 210 06 reorganization distribution channels 07 discontinuance product line 04 total restructuring charges credits 210 03 acquisitionrelated charges credits severance related costs 09 reductions 38 total acquisitionrelated charges credits 38 09 total restructuring acquisitionrelated charges credits 172 06 41 2002 restructuring acquisitionrelated items reflect charge 172 115 net income taxes third quarter 2002 items included charge 210 141 net income taxes employmentrelated costs close companys rutherford new jersey manufacturing facility partially offset credit 38 26 net income taxes reverse certain howmedica acquisitionrelated costs reflect actual final payments required 210 restructuring charge related primarily shutdown agreement reached company employee bargaining unit close orthopaedics division implant manufacturing facility rutherford new jersey ratified members iuecwa local 485 august 23 2002 charge covered employmentrelated severance costs 353 employees rutherford facility closed 2003 final severance payments made end 2005 orthopaedics division completed transition production facilities mahwah new jersey well cork limerick ireland 2001 restructuring credits 03 relate various restructuring events fourth quarter 2001 06 credit severance related costs reflects charges 08 offset credits 14 08 charge covers severance costs 10 employees europe planned workforce reductions completed first quarter 2002 14 credit relates reduction expected cost complete headcount reductions associated 2000 1999 reorganizations companys european japanese distribution operations 07 charge related reorganization distribution channels reflects cost terminate distributor latin america cost termination based contractual terms 04 credit related discontinuance product line represents reversal remaining loss reserves established japan discontinued ophthalmology inventories sold contingent basis 1999 2001 acquisitionrelated charges include 09 severance related costs associated reorganization companys sales structure italy accommodate integration business acquired fourth quarter 2001 companys independent italian distributor see note 4 reorganization established direct sales force italy distributes companys full product portfolio 09 charge covers severance costs three employees italy costs cancel contracts discontinued agents reorganization sales structure italy completed first quarter 2002 following table provides rollforward remaining liabilities associated business acquisition purchase liabilities restructuring acquisitionrelated charges recorded company 2002 2001 prior years facility closures distributor severance contractual conversions related costs obligations balances january 1 2002 53 27 13 40 additions reductions recognized charges credits 2002 consolidated statement earnings 210 38 additions business acquisitions 31 05 payments 23 47 12 02 foreign currency translation effects 02 balances december 31 30 219 06 00 transfer defined benefit pension obligation 20 payments 03 149 03 balances december 31 27 50 03 42 note longterm debt longterm debt summarized follows december 2001 company established 10000 unsecured credit facilities replaced 16500 senior secured credit facilities established 1998 conjunction acquisition howmedica total 7305 initially drawn new credit facilities 6427 prepaid debt outstanding 1998 facilities 878 used terminate companys synthetic lease purchase mahwah new jersey manufacturing distribution facility unsecured credit facilities represent 7500 fiveyear nonamortizing revolving credit agreement december 31 2003 2500 multicurrency sublimit yen euro borrowed fiveyear facility also 500 swing line sublimit 1000 letter credit sublimit fiveyear facility bears interest base rate defined plus applicable margin ranging 0235 0775 depending companys debt rating unsecured credit facilities require commitment fee ranging 0065 0225 aggregate commitment facilities depending companys debt rating addition utilization fee 0125 required sum outstanding amounts exceeds 50 aggregate commitments 2003 weighted average interest rate borrowings unsecured credit facilities considering effects companys interest rate swaps see note 2 517 facilities require company comply certain financial covenants unsecured credit facilities previously included 2500 364day revolving credit agreement expired december 2003 company renew revolving credit agreement believes cash hand well anticipated cash flows operations sufficient fund future operating investing activities additional funds required company 8021 million additional borrowing capacity available remaining credit facilities december 31 2003 company borrowed yen 48205 multicurrency sublimit available fiveyear revolving credit agreement borrowing repaid full third quarter 2003 yen borrowing acted hedge companys net investment japan result adjustments made loan balance reflect applicable currency exchange rates 2003 included within accumulated comprehensive gain loss stockholders equity 16500 senior secured credit facilities prepaid december 2001 consisted 11500 term loans sixyear 2500 revolving credit facility sixyear 2500 reducing multicurrency facility prepayment remaining amounts outstanding senior secured credit facilities december 2001 resulted writeoff related unamortized deferred loan costs 71 reflected extraordinary loss 48 net income taxes 23 02 per basic diluted share consolidated statements earnings substantially outstanding debt december 31 2003 matures 2006 upon expiration unsecured credit facilities carrying amounts companys longterm debt approximate fair values based quoted interest rates similar types amounts borrowing agreements 43 interest paid debt 229 2003 371 2002 669 2001 approximates interest expense note 8 capital stock company key employee director stock option plans options granted price less fair market value date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows weightedaverage shares exercise price options outstanding january 1 2001 112 2019 granted 20 4686 canceled 02 2678 exercised 08 1306 options outstanding december 31 2001 122 2487 granted 20 5290 canceled 03 3600 exercised 15 1319 options outstanding december 31 2002 124 3043 granted 19 7765 canceled 02 4231 exercised 18 1555 options outstanding december 31 2003 123 3957 price range 1100 2000 25 1487 price range 2001 3000 20 2425 price range 3001 4000 23 3241 price range 4001 5000 17 4658 price range 5001 6000 19 5289 price range 6001 7765 19 7765 options outstanding december 31 2003 123 3957 shares reserved future grants 79 95 december 31 2003 2002 respectively exercise prices options outstanding december 31 2003 ranged 1100 7765 summary shares exercisable follows weightedaverage shares exercise price range 1100 2000 25 1487 price range 2001 3000 15 2424 price range 3001 4000 13 3241 price range 4001 5000 07 4658 price range 5001 5705 04 5286 shares exercisable december 31 2003 64 2632 company 05 authorized shares 1 par value preferred stock none outstanding 44 second quarter 2003 company issued 005 shares restricted stock newly appointed president chief operating officer stock vests ratably first five anniversary dates grant provided recipient still employed company aggregate market value restricted stock date issuance 34 measured quoted price companys common stock recorded deferred stockbased compensation separate component stockholders equity amortized fiveyear vesting period note 9 earnings per share following table sets forth computation basic diluted earnings per share earnings extraordinary item 4535 3456 2718 extraordinary loss net income taxes 48 net earnings 4535 3456 2670 weightedaverage shares outstanding basic earnings per share 1989 1975 1963 effect dilutive employee stock options 45 63 67 adjusted weightedaverage shares outstanding diluted earnings per share 2034 2038 2030 basic earnings per share common stock extraordinary item 228 175 138 extraordinary loss 02 net earnings 228 175 136 diluted earnings per share common stock extraordinary item 223 170 134 extraordinary loss 02 net earnings 223 170 132 45 note 10 retirement plans certain companys subsidiaries funded unfunded defined benefit plans covering employees defined benefit plans projected benefit obligations excess plan assets company uses december 31 measurement date determination plan obligations funded status plans summary information related companys defined benefit plans follows 46 components amounts recognized consolidated balance sheets follows accumulated benefit obligation defined benefit plans 962 december 31 2003 pension plans accumulated benefit obligation excess plan assets projected benefit obligations accumulated benefit obligations fair value plan assets 956 854 496 respectively december 31 2003 components net periodic benefit cost follows service cost 57 45 39 interest cost 49 42 41 expected return plan assets 30 34 38 amortization transition amounts prior service cost 03 02 03 recognized actuarial loss gain 06 02 plan termination loss 05 net periodic benefit cost 85 55 48 company assumed average longterm expected return defined benefit plan assets 53 december 31 2003 expected return determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns weightedaverage allocation plan assets asset category follows investment strategy companys defined benefit plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances reflected target investment allocation ranges plans december 31 2003 low high equity securities 55 76 debt securities 47 company anticipates contributing approximately 48 defined benefit plans 2004 meet minimum funding requirements subsidiary company terminated defined benefit plan 2001 transferred plan assets related benefit obligations defined contribution retirement plan loss plan termination 05 retirement plan expense companys profit sharing defined contribution retirement plans totaled 555 2003 452 2002 365 2001 portion companys retirement plan expenses funded stryker common stock totaling 48 2003 41 2002 34 2001 use stryker common stock represents noncash investing activity reflected consolidated statements cash flows amount stryker common stock held companys defined contribution retirement plans totaled 686 approximately 08 shares 515 approximately 08 shares december 31 2003 2002 respectively value stryker common stock percentage total defined contribution retirement plan assets 186 december 31 2003 202 december 31 2002 note 11 income taxes earnings income taxes extraordinary item consist following united states operations 2584 2461 2412 foreign operations 3941 2606 1645 6525 5067 4057 2003 2002 earnings companys puerto ricobased manufacturing operations reported foreign operations due change legal status prior 2002 earnings reported united states operations internal revenue code section 936 election components provision income taxes follow current income tax expense federal 998 800 514 state 205 69 142 foreign 1116 760 392 2319 1629 1048 deferred income tax expense credit 329 18 291 1990 1611 1339 48 reconciliation united states statutory income tax rate companys effective income tax rate follows united states statutory income tax rate 350 add deduct state taxes less effect federal deduction 14 08 15 tax benefit relating operations ireland puerto rico 88 78 71 tax benefit relating united states export sales 13 14 09 nondeductible deductible permanent differences 17 12 13 tax benefit relating foreign tax credit 05 01 foreign income taxes rates different united states statutory rate 21 36 67 04 09 08 305 318 330 deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes tax effect significant temporary differences comprise companys deferred income tax assets liabilities follows net operating loss carryforwards totaling approximately 315 december 31 2003 available reduce future taxable earnings certain foreign subsidiaries significant portion carryforwards may carried forward indefinitely 49 deferred tax assets liabilities included consolidated balance sheets follows provision made united states federal state income taxes foreign taxes may result future remittances undistributed earnings 9888 december 31 2003 foreign subsidiaries expected earnings reinvested overseas indefinitely determination amount unrecognized deferred income tax liability unremitted earnings practicable total income taxes paid net refunds received 1895 2003 1121 2002 630 2001 note 12 segment geographic data company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma spinal implants op1 medsurg equipment segment sells powered surgical instruments endoscopic products medical video imaging equipment hospital beds stretchers micro implant surgical navigation systems includes physical therapy services corporate administration interest expense interest income companys reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies company measures financial results reportable segments using internal performance measure excludes restructuring acquisitionrelated items extraordinary items identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents investments property plant equipment 50 sales financial information business segment follows 51 companys principal areas operation outside united states japan europe company also operations pacific canada latin america middle east geographic information follows note leases company leases various manufacturing office facilities equipment operating leases future minimum lease commitments leases follows 437 348 264 205 169 thereafter 493 1916 rent expense totaled 720 2003 613 2002 516 2001 52 note 14 contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor matters subject many uncertainties outcomes predictable assurance company records amounts losses deemed probable subject reasonable estimate however company anticipate material losses result proceedings beyond amounts already provided accompanying financial statements december 2003 company announced subsidiary physiotherapy associates inc stryker received subpoena united states attorneys office boston massachusetts connection department justice investigation physiotherapy associates billing coding practices physiotherapy associates provides physical occupational speech therapy services patients 374 outpatient centers united states represented 6 7 strykers net sales years ended december 31 2003 2002 respectively revenues derived billings us federal healthcare programs approximated 14 physiotherapy associates revenues periods company fully cooperating department justice regarding matter pursuant certain companys credit lease agreements company provided financial guarantees third parties form indemnification provisions indemnify third parties costs including limited adverse judgments lawsuits imposition additional taxes due either change tax law adverse interpretation tax law term guarantee equal term related credit lease agreement company able calculate maximum potential amount future payments could required make guarantees potential payment dependent occurrence future unknown events eg changes united states foreign tax laws 53 summary quarterly data unaudited stryker corporation subsidiaries millions except per share data third quarter 2003 company reduced effective tax rate year 305 310 thereby decreasing income tax expense 23 b fourth quarter 2002 company reduced effective tax rate year 318 330 thereby decreasing income tax expense 61 54 report independent auditors board directors stockholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2003 2002 related consolidated statements earnings stockholders equity cash flows three years period ended december 31 2003 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2003 2002 consolidated results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states discussed note 5 consolidated financial statements company changed method accounting goodwill 2002 ernst young llp grand rapids michigan january 27 2004 55 item 9item 8 financial statements supplementary data report independent registered public accounting firm financial statements board directors stockholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2004 2003 related consolidated statements earnings stockholders equity cash flows three years period ended december 31 2004 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2004 2003 consolidated results operations cash flows three years period ended december 31 2004 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states effectiveness stryker corporations internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 4 2005 expressed unqualified opinion thereon ernst young llp grand rapids michigan february 4 2005 consolidated balance sheets stryker corporation subsidiaries see accompanying notes consolidated financial statements consolidated statements earnings stryker corporation subsidiaries see accompanying notes consolidated financial statements consolidated statements stockholders equity stryker corporation subsidiaries see accompanying notes consolidated financial statements consolidated statements cash flows stryker corporation subsidiaries millions see accompanying notes consolidated financial statements notes consolidated financial statements stryker corporation subsidiaries december 31 2004 millions except per share amounts note 1 significant accounting policies business stryker corporation company stryker develops manufactures markets joint replacements trauma spine micro implant systems orthobiologics powered surgical instruments surgical navigation systems endoscopic products well patient handling emergency medical equipment stryker also provides outpatient physical therapy services united states principles consolidation consolidated financial statements include accounts company majorityowned subsidiaries elimination intercompany accounts transactions revenue recognition significant portion companys orthopaedic implants revenue generated consigned inventory maintained hospitals field representatives products revenue recognized time company receives appropriate notification product used implanted company records revenue medsurg equipment product sales title risk ownership transferred customer typically upon shipment customer physical therapy services line business company records revenue services rendered company records estimated sales returns discounts applicable adjustments reduction net sales period revenue recognized shipping handling products amounts billed customers shipping handling products included net sales costs incurred related shipping handling products included cost sales use estimates preparation consolidated financial statements conformity accounting principles generally accepted united states requires company management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes actual results could differ estimates foreign currency translation functional currencies substantially companys international affiliates local currencies accordingly financial statements international affiliates translated united states dollars using current exchange rates balance sheets average exchange rates statements earnings cash flows unrealized translation adjustments included accumulated comprehensive gain loss stockholders equity transaction gains losses resulting settlement nonfunctional currency receivables payables included net earnings cash equivalents investments cash equivalents highly liquid investments maturity three months less purchased investments include marketable equity securities investments classified assets investments consist primarily mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities companys investments stated fair value based quoted market prices interest dividends realized gains losses sale cash equivalents marketable equity securities included expense income adjustments fair value marketable equity securities investments classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive gain loss stockholders equity adjustments fair value investments classified trading recorded earnings offsets related changes liabilities deferred compensation arrangements accounts receivable accounts receivable consists trade miscellaneous receivables company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends accounts receivable securitization amended restated april 24 2003 company accounts receivable securitization facility pursuant certain subsidiaries company sell ongoing basis domestic accounts receivable stryker funding corporation sfc wholly owned specialpurpose subsidiary company turn may sell aggregate 2000 undivided percentage ownership interest receivables bankadministered multiseller commercial paper conduits creditors sfc claim assets equity becomes available company amounts undivided percentage ownership interests accounts receivable sold sfc facility december 31 2004 1500 net sfcs retained interest december 31 2003 accounts receivable sold reflected consolidated balance sheet december 31 2003 reduction accounts receivable amount receivables sold subject change monthly based level defined eligible receivables less contractual reserves companys retained interest accounts receivable held sfc form subordinated note represents overcollateralization undivided interest sold retained interest totaled 3203 1071 december 31 2004 2003 respectively discount expense associated securitization facility including conduits financing cost issuing commercial paper 13 2004 26 2003 27 2002 included selling general administrative expenses inventories stated lower cost market cost approximately 83 inventories determined using lower firstin firstout fifo cost market cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability cost products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends property plant equipment property plant equipment stated cost depreciation computed either straightline decliningbalance method estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses amounts allocated intangible assets intangible assets include developed technology amortized straightline basis 20 years customer relationships reflect expected continued customer patronage trademarks patents amortized straightline basis 5 40 years weighted average life 14 years intangible assets loaner instrumentation loaner instrumentation represents net book value loaner instruments surgical implants provided customers company loaner instrumentation amortized straightline basis threeyear period amortization expense loaner instrumentation included selling general administrative expenses income taxes company accounts income taxes using liability method deferred income tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates effect years differences expected reverse deferred income tax credit represents change net deferred tax assets liabilities year company operates multiple tax jurisdictions inside outside united states accordingly management must determine appropriate allocation income jurisdictions tax audits associated allocation income complex issues may require extended period time resolve may result income tax adjustments changes income allocation required jurisdictions different tax rates tax adjustments certain jurisdictions significant company records accruals representing managements best estimate probable resolution matters extent additional information becomes available accruals adjusted reflect revised estimated probable outcome derivative financial instruments company uses derivative financial instruments manage economic impact fluctuations currency exchange rates company enters forward currency exchange contracts manage economic risks 1998 december 2003 company entered interest rate swap contracts various maturity dates manage economic impact fluctuations interest rates company follows provisions financial accounting standards board fasb statement 133 accounting derivative instruments hedging activities amended statements 137 138 accounting derivative financial instruments statements require company recognize derivatives balance sheet fair value derivatives hedges must adjusted fair value earnings derivative hedge depending nature hedge changes fair value derivative either offset changes fair value hedged assets liabilities firm commitments earnings recognized accumulated comprehensive gain loss hedged item recognized earnings see note 2 legal contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters potential future outcomes matters outside managements complete control generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory relief could result payment significant claims settlements legal matters management sufficient information reasonably estimate companys future obligations liability representing managements best estimate probable cost resolution legal matters recorded estimates based consultation outside counsel previous settlement experience settlement strategies comprehensive gain loss components accumulated comprehensive gain loss follows unrealized foreign accumulated unrealized gains losses unfunded currency gains losses cash flow pension translation comprehensive securities hedges losses adjustments gain loss balances january 1 2003 07 92 64 686 849 comprehensive gain loss 2003 03 92 07 1763 1845 balances december 31 2003 10 00 71 1077 996 comprehensive gain loss 2004 03 38 1022 987 balances december 31 2004 07 109 2099 1983 stock options december 31 2004 company key employee director stock option plans described fully note 8 company follows accounting principles board apb opinion 25 accounting stock issued employees accounting stock option plans opinion 25 compensation expense recognized exercise price companys stock options equals market price underlying stock measurement date grant compensation expense companys stockbased compensation plans determined based fair value grant dates awards plans consistent method fasb statement 123 accounting stockbased compensation companys net earnings net earnings per share would follows net earnings reported 4657 4535 3456 deduct compensation expense fair value method 257 191 171 pro forma 4400 4344 3285 basic net earnings per share reported 116 114 087 pro forma 110 109 083 diluted net earnings per share reported 114 111 085 pro forma 108 107 082 weightedaverage fair value per share options granted 2004 2003 2002 estimated date grant using blackscholes option pricing model 1683 1519 1147 respectively fair value options granted estimated date grant using following assumptions riskfree interest rate 194 227 376 expected dividend yield 019 018 expected stock price volatility 343 358 374 expected option life 65 years 65 years 65 years recently issued accounting standards december 2004 fasb issued revision statement 123 sharebased payment revision supersedes apb opinion 25 accounting stock issued employees related implementation guidance revision requires companies recognize cost stock options based grantdate fair value granted pursuant employee stock option plans period recipient required provide services exchange options typically vesting period pursuant requirements statement company plans adopt provisions statement third quarter 2005 using modifiedretrospective transition method provided statement method company restate prior periods presented consistent basis pro forma effect adopting statement disclosed expected material impact trend net earnings per share reclassifications certain prior year amounts reclassified conform presentation used 2004 note 2 financial instruments risk management following summary companys investments gross unrealized estimated cost losses fair value december 31 2004 equity securities 26 11 15 investments 253 total 279 11 268 december 31 2003 equity securities 26 15 11 investments 181 total 207 15 192 interest income included income totaled 47 2004 31 2003 24 2002 company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures relate principally intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts markedtomarket period resulting gains losses included expense income consolidated statements earnings december 31 2004 company outstanding forward currency exchange contracts purchase 1377 sell 1731 various currencies principally united states dollars euros maturities ranging principally 30 180 days december 31 2003 company outstanding forward currency exchange contracts purchase 1239 sell 1549 various currencies principally united states dollars euros maturities ranging principally 30 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points recorded component accrued expenses liabilities consolidated balance sheets december 31 2004 company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties 1998 2003 company entered interest rate swap agreements effectively converted portion variablerate borrowings fixedrate basis thus reducing impact changes interest rates interest expense period swap agreements fixed companys base rate 2500 variablerate borrowings 2003 average rate 558 pursuant fasb statement 133 amended company recognized gains 92 93 attributable changes fair value interest rate swap agreements components accumulated comprehensive gain loss 2003 2002 respectively interest rate differentials paid result interest rate swaps recognized adjustment interest expense related designated borrowings prior 2004 company used yendenominated floatingrate borrowings protect portion value investment subsidiary japan yendenominated borrowings previously outstanding fully repaid 2003 realized unrealized gains losses hedge included consolidated statements earnings recorded foreign currency translation adjustments within accumulated comprehensive gain loss stockholders equity net losses 21 16 attributable yendenominated floatingrate borrowings hedge recorded foreign currency translation adjustments 2003 2002 respectively note 3 inventories summarized follows note 4 acquisitions august 12 2004 company completed acquisition merger outstanding stock spinecore inc spinecore upfront payment 1200 cash plus certain transaction costs acquisition spinecore developer artificial lumbar cervical spinal disc implant technologies expected enhance companys presence spinal implant market important growth area within orthopaedic implants segment spinecores operating results included companys consolidated financial statements date acquisition material companys operating results purchase price allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair value date acquisition amount purchase price allocated purchased inprocess research development resulted charge 1208 29 per diluted share companys 2004 operating results date transaction spinal implant technologies acquired preliminary stages clinical studies united states yet reached technological feasibility amount written purchased inprocess research development deductible income tax purposes united states terms transaction also include potential milestone royalty payments additional 2400 upon commercialization spinecores products united states expected occur 2008 potential milestone payments expected capitalized fair values intangible assets time payment amortized remaining useful lives october 2002 company purchased dekompressor product line pain concepts inc total cost 100 giving company access intellectual property commercial rights relating design manufacture certain medical devices intangible assets acquired amortized 17 years company contingently liable potential future milestone payments 375 primarily based future sales growth october 1 2002 company entered agreement curis inc eliminated royalties payable curis relating future stryker sales osteogenic protein1 op1 terms agreement company made onetime cash payment 140 curis payment allocated existing patents amortized 15 years july 1 2002 company acquired surgical dynamics inc spinal implant business sdi tyco international ltd 1350 cash acquisition expanded companys spinal product line adding interbody spinal cages united states market well thoracolumbar cervical spinal fixation devices acquisition funded using existing credit facilities acquisition sdi accounted using purchase method accounting results operations acquired business included companys consolidated financial statements beginning july 1 2002 purchase price 1350 cash less contractually required adjustment 66 received third quarter 2003 based decrease sdis working capital april 30 2002 closing liabilities assumed allocated assets acquired liabilities assumed based estimated fair value date acquisition purchase price allocation finalized 2003 based final purchase price allocation adjusted determined working capital adjustment amount 877 purchase price allocated patent licensing agreements amortized remaining life eight years 91 inventory 347 deferred tax assets related future tax deductions 48 tangible assets 79 liabilities assumed immediately acquisition consummated management company began implement integration plan combine stryker sdi conjunction integration plan company recorded additional purchase liabilities 36 included purchase price allocation additional purchase liabilities included 31 severance related costs 05 contractual obligations severance related costs provided workforce reductions covering 37 sdi employees workforce reductions completed fourth quarter 2002 severance payments made third quarter 2003 companys pro forma consolidated financial results differ significantly result sdi acquisition note 5 goodwill intangible assets changes net carrying amount goodwill segment years ended december 31 2004 2003 follows fourth quarters 2004 2003 2002 company completed required annual impairment tests goodwill prescribed fasb statement 142 goodwill intangible assets determined instances recorded goodwill impaired goodwill writedown necessary following summary companys intangible assets estimated amortization expense five succeeding years follows 381 369 347 346 338 fourth quarter 2003 company recorded 65 charge related trademark impairment resulting branding initiative adopted company period branding initiative intended improve companys customers stakeholders overall awareness strykers capabilities charge reduced book value trademark within orthopaedic implants segment fair value determined using discounted cash flow model charge included intangibles amortization 2003 consolidated statement earnings note 6 restructuring acquisitionrelated liabilities company recorded restructuring acquisitionrelated pretax charges credits 2002 consisting following items restructuring charge severance related costs 210 acquisitionrelated credit reductions liabilities 38 total restructuring acquisitionrelated items 172 restructuring acquisitionrelated items recorded third quarter 2002 represented employmentrelated costs close companys rutherford new jersey manufacturing facility partially offset credit reverse certain howmedica acquisitionrelated costs reflect actual final payments required 210 restructuring charge related primarily shutdown agreement reached company employee bargaining unit close orthopaedics division implant manufacturing facility rutherford new jersey ratified members iuecwa local 485 august 23 2002 charge covered employmentrelated severance costs 353 employees rutherford facility closed 2003 final severance payments made 2004 orthopaedics division completed transition production facilities mahwah new jersey well cork limerick ireland following table provides rollforward remaining liabilities included within accrued expenses liabilities consolidated balance sheets associated business acquisition purchase liabilities restructuring acquisitionrelated charges recorded company 2002 prior years facility closures distributor severance contractual conversions related costs obligations total balances january 1 2003 30 219 06 255 transfer defined benefit pension obligation 20 payments 03 149 03 155 balances december 31 2003 27 50 03 80 payments 02 38 40 adjustments 12 03 15 balances december 31 2004 25 00 25 2004 company reviewed business acquisition purchase liabilities determined certain obligations longer required adjustments reflected reductions intangible assets accordance purchase method accounting note 7 longterm debt longterm debt summarized follows companys unsecured credit facilities represent 7500 fiveyear nonamortizing revolving credit agreement december 31 2004 expires december 2006 2500 multicurrency sublimit yen euro borrowed fiveyear facility also 500 swing line sublimit 1000 letter credit sublimit fiveyear facility bears interest base rate defined plus applicable margin ranging 0235 0775 depending companys debt rating unsecured credit facilities require commitment fee ranging 0065 0225 aggregate commitment facilities depending companys debt rating addition utilization fee 0125 required sum outstanding amounts exceeds 50 aggregate commitments 2004 weighted average interest rate excluding commitment utilization fees borrowings unsecured credit facilities 17 unsecured credit facilities require company comply certain financial covenants company compliance covenants december 31 2004 addition unsecured credit facilities company lines credit issued various financial institutions available fund companys daytoday operating needs unsecured credit facilities previously included 2500 364day revolving credit agreement expired december 2003 company renew revolving credit agreement believes cash hand well anticipated cash flows operations sufficient fund future operating investing activities additional funds required company 8260 additional borrowing capacity available existing credit facilities december 31 2004 2003 company borrowed yen 48205 multicurrency sublimit available fiveyear revolving credit agreement borrowing repaid full third quarter 2003 yen borrowing acted hedge companys net investment japan result adjustments made loan balance reflect applicable currency exchange rates 2003 included within accumulated comprehensive gain loss stockholders equity carrying amounts companys longterm debt approximate fair values based quoted interest rates similar types amounts borrowing agreements interest paid debt including commitment utilization fees 60 2004 229 2003 371 2002 sums approximate interest expense note 8 capital stock april 20 2004 companys stockholders approved amendment section article iii companys restated articles incorporation increase authorized shares common stock one billion 500 million shares april 20 2004 companys board directors approved twoforone stock split effective may 14 2004 stockholders record may 3 2004 share per share data adjusted reflect stock split though occurred beginning periods presented company key employee director stock option plans options granted price less fair market value date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows weightedaverage shares exercise price options outstanding january 1 2002 244 1243 granted 39 2645 canceled 06 1800 exercised 30 659 options outstanding december 31 2002 247 1522 granted 38 3883 canceled 04 2116 exercised 35 778 options outstanding december 31 2003 246 1979 granted 33 4523 canceled 07 2914 exercised 32 1161 options outstanding december 31 2004 240 2417 price range 550 1000 34 755 price range 1001 1500 32 1212 price range 1501 2000 40 1621 price range 2001 2500 31 2330 price range 2501 3000 35 2645 price range 3001 4000 36 3883 price range 4001 4700 32 4523 options outstanding december 31 2004 240 2417 options outstanding december 31 2004 weightedaverage remaining contractual life 63 years shares reserved future grants 131 158 december 31 2004 2003 respectively exercise prices options outstanding december 31 2004 ranged 550 4700 summary shares exercisable follows weightedaverage shares exercise price range 550 1000 34 755 price range 1001 1500 32 1212 price range 1501 2000 31 1621 price range 2001 2500 18 2329 price range 2501 3000 14 2645 price range 3001 3883 07 3883 shares exercisable december 31 2004 136 1628 company 05 authorized shares 1 par value preferred stock none outstanding second quarter 2003 company issued 01 shares restricted stock newly appointed president chief operating officer stock vests ratably first five anniversary dates grant provided recipient still employed company aggregate market value restricted stock date issuance 34 measured quoted price companys common stock recorded deferred stockbased compensation separate component stockholders equity amortized fiveyear vesting period note 9 net earnings per share following table sets forth computation basic diluted net earnings per share net earnings 4657 4535 3456 weightedaverage shares outstanding basic net earnings per share 4012 3978 3951 effect dilutive employee stock options 91 90 126 adjusted weightedaverage shares outstanding diluted net earnings per share 4103 4068 4077 net earnings per share common stock basic 116 114 087 diluted 114 111 085 note 10 retirement plans certain companys subsidiaries funded unfunded defined benefit plans covering employees defined benefit plans projected benefit obligations excess plan assets company uses december 31 measurement date determination plan obligations funded status plans summary information related companys defined benefit plans follows components amounts recognized consolidated balance sheets follows accumulated benefit obligation defined benefit plans 1185 962 december 31 2004 2003 respectively pension plans accumulated benefit obligation excess plan assets projected benefit obligations accumulated benefit obligations fair value plan assets 1189 1041 580 respectively december 31 2004 956 854 496 respectively december 31 2003 components net periodic benefit cost follows service cost 66 57 45 interest cost 56 49 42 expected return plan assets 41 30 34 amortization transition amounts prior service cost 02 03 02 recognized actuarial loss 05 06 net periodic benefit cost 88 85 55 company assumed average longterm expected return defined benefit plan assets 52 december 31 2004 expected return determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns weightedaverage allocation plan assets asset category follows investment strategy companys defined benefit plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances reflected target investment allocation ranges plans december 31 2004 company anticipates contributing approximately 118 defined benefit plans 2005 following estimated future benefit payments reflect expected future service appropriate expected paid years indicated 20102014 expected benefit payments 38 43 47 50 57 364 retirement plan expense companys defined contribution retirement plans totaled 611 2004 555 2003 452 2002 portion companys retirement plan expenses funded stryker common stock totaling 54 2004 48 2003 41 2002 use stryker common stock represents noncash operating activity reflected consolidated statements cash flows amount stryker common stock held companys defined contribution retirement plans totaled 784 approximately 16 shares 686 approximately 16 shares december 31 2004 2003 respectively value stryker common stock percentage total defined contribution retirement plan assets 17 december 31 2004 19 december 31 2003 note 11 income taxes earnings income taxes consist following united states operations 2333 2584 2461 foreign operations 4837 3941 2606 7170 6525 5067 components provision income taxes follow current income tax expense federal 1570 998 800 state 179 205 69 foreign 1419 1116 760 3168 2319 1629 deferred income tax credit 655 329 18 2513 1990 1611 reconciliation united states statutory income tax rate companys effective income tax rate follows united states statutory income tax rate 350 add deduct state taxes less effect federal deduction 16 14 08 tax benefit relating operations ireland puerto rico 114 88 78 tax benefit relating united states export sales 05 13 14 nondeductible purchased inprocess research development 59 nondeductible permanent differences 44 17 12 tax benefit relating foreign tax credit 05 foreign income taxes rates different united states statutory rate 21 36 04 09 350 305 318 deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes tax effect significant temporary differences comprise companys deferred income tax assets liabilities follows net operating loss carryforwards totaling approximately 449 december 31 2004 available reduce future taxable earnings certain foreign subsidiaries deferred income tax assets liabilities included consolidated balance sheets follows october 22 2004 president united states signed american jobs creation act 2004 act creates temporary incentive united states corporations repatriate accumulated income earned foreign jurisdictions providing 85 dividendsreceived deduction certain dividends controlled foreign corporations deduction subject number limitations significant uncertainty remains way interpret numerous provisions act due factors company yet position determine whether extent might repatriate foreign earnings yet remitted united states based current analysis company may repatriate 8000 related income tax expense liability 560 company plans finalize assessment congress treasury department provides additional clarifying language key elements repatriation provision made united states federal state income taxes foreign taxes may result future remittances undistributed earnings 14621 december 31 2004 foreign subsidiaries expected earnings reinvested overseas indefinitely determination amount unrecognized deferred income tax liability unremitted earnings repatriated act described practicable total income taxes paid net refunds received 2358 2004 1895 2003 1121 2002 note 12 segment geographic data company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma spine micro implant systems bone cement bone growth factor op1 medsurg equipment segment sells powered surgical instruments surgical navigation systems endoscopic products medical video imaging equipment hospital beds stretchers category includes physical therapy services corporate administration interest expense interest income effective january 1 2004 company changed business segment reporting include financial results micro implant systems within orthopaedic implants reportable segment rather within medsurg equipment reportable segment company believes products better aggregated orthopaedic implants based similarities manufacturing marketing practices customer base prior year results reclassified correspond change reporting companys reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies company measures financial results reportable segments using internal performance measure excludes purchased inprocess research development charges restructuring acquisitionrelated items identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents investments property plant equipment sales financial information business segment follows companys principal areas operation outside united states japan europe company also operations pacific canada latin america middle east geographic information follows note 13 leases company leases various manufacturing office facilities equipment operating leases future minimum lease commitments leases follows 510 440 374 290 193 thereafter 496 2303 rent expense totaled 799 2004 720 2003 613 2002 note 14 contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters subject many uncertainties outcomes predictable assurance company records amounts losses deemed probable subject reasonable estimate however company anticipate material losses result proceedings beyond amounts already provided accompanying consolidated financial statements december 2003 company announced subsidiary physiotherapy associates inc stryker received subpoena united states attorneys office boston massachusetts connection department justice investigation physiotherapy associates billing coding practices physiotherapy associates provides physical occupational speech therapy services patients 428 outpatient centers united states december 31 2004 represented 6 strykers net sales years ended december 31 2004 2003 7 net sales year ended december 31 2002 revenues derived billings us federal healthcare programs approximated 14 physiotherapy associates revenues periods company fully cooperating department justice regarding matter pursuant certain companys credit lease agreements company provided financial guarantees third parties form indemnification provisions indemnify third parties costs including limited adverse judgments lawsuits imposition additional taxes due either change tax law adverse interpretation tax law terms guarantees equal terms related credit lease agreements company able calculate maximum potential amount future payments could required make guarantees potential payment dependent occurrence future unknown events eg changes united states foreign tax laws summary quarterly data unaudited stryker corporation subsidiaries millions except per share data price quotations reported supplied new york stock exchange third quarter 2003 company reduced effective tax rate year 305 310 thereby decreasing income tax expense 23 item 9item 8 financial statements supplementary data report independent registered public accounting firm financial statements board directors shareholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2006 2005 related consolidated statements earnings shareholders equity cash flows three years period ended december 31 2006 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility stryker corporations management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2006 2005 consolidated results operations cash flows three years period ended december 31 2006 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed notes 1 7 9 consolidated financial statements 2006 stryker corporation changed methods accounting sharebased payments retirement plans connection required adoption statement financial accounting standards nos 123r 158 respectively also audited accordance standards public company accounting oversight board united states effectiveness stryker corporations internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 2 2007 expressed unqualified opinion thereon ernst young llp grand rapids michigan february 2 2007 40 consolidated balance sheets stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements 41 consolidated statements earnings stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements 42 consolidated statements shareholders equity stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements 43 consolidated statements cash flows stryker corporation subsidiaries millions see accompanying notes consolidated financial statements 44 notes consolidated financial statements stryker corporation subsidiaries december 31 2006 note significant accounting policies business stryker corporation company stryker one worlds leading medical technology companies broadly based range products orthopaedics significant presence medical specialties stryker works respected medical professionals help people lead active satisfying lives companys products include implants used joint replacement trauma craniomaxillofacial spinal surgeries biologics surgical neurologic ear nose throat interventional pain equipment endoscopic surgical navigation communications digital imaging systems well patient handling emergency medical equipment stryker also provides outpatient physical therapy services united states principles consolidation consolidated financial statements include accounts company majorityowned subsidiaries elimination intercompany accounts transactions revenue recognition significant portion companys orthopaedic implants revenue generated consigned inventory maintained hospitals field representatives products revenue recognized time company receives appropriate notification product used implanted company records revenue medsurg equipment product sales title risk ownership transferred customer typically upon shipment customer physical therapy services line business company records revenue services rendered company records estimated sales returns discounts applicable adjustments reduction net sales period revenue recognized shipping handling products amounts billed customers shipping handling products included net sales costs incurred related shipping handling products included cost sales use estimates preparation consolidated financial statements conformity accounting principles generally accepted united states requires company management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes actual results could differ estimates foreign currency translation functional currencies substantially companys international affiliates local currencies accordingly financial statements international affiliates translated united states dollars using current exchange rates balance sheets average exchange rates statements earnings cash flows unrealized translation adjustments included accumulated comprehensive gain loss shareholders equity transaction gains losses resulting settlement nonfunctional currency receivables payables included net earnings cash equivalents marketable securities investments cash equivalents highly liquid investments maturity 3 months less purchased marketable securities consist marketable debt securities certificates deposit classified availableforsale investments included within assets consolidated balance sheets consist mutual funds classified trading acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities companys marketable securities investments stated fair value based quoted market prices adjustments fair value marketable securities investments classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive gain loss shareholders equity adjustments fair value investments classified trading recorded earnings offsets related changes liabilities deferred 45 compensation arrangements amortized cost marketable debt securities classified availableforsale adjusted amortization premiums discounts maturity computed effective interest method amortization included income expense along interest realized gains losses cost securities sold determined specific identification method accounts receivable accounts receivable consists trade miscellaneous receivables company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends accounts receivable securitization company accounts receivable securitization facility pursuant certain subsidiaries company sell ongoing basis domestic accounts receivable stryker funding corporation sfc wholly owned specialpurpose subsidiary company turn may sell without recourse aggregate 2000 million undivided percentage ownership interest receivables bankadministered multiseller commercial paper conduits creditors sfc claim assets equity becomes available company amounts undivided percentage ownership interests accounts receivable sold sfc facility december 31 2006 2005 accounts receivable sold would reflected consolidated balance sheet reductions accounts receivable period sold amount receivables available sold subject change monthly based level defined eligible receivables less defined customary reductions servicing dilution loss reserves companys retained interest accounts receivable held sfc form subordinated note represents overcollateralization undivided interest sold retained interest totaled 4362 million 3471 million december 31 2006 2005 respectively inventories stated lower cost market cost approximately 79 inventories determined using firstin firstout fifo cost method cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends property plant equipment property plant equipment stated cost depreciation computed either straightline decliningbalance method estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses amounts allocated intangible assets intangible assets include developed technology amortized straightline basis 20 years customer relationships reflect expected continued customer patronage trademarks patents amortized straightline basis 4 40 years weightedaverage life 14 years intangible assets loaner instrumentation loaner instrumentation represents net book value loaner instruments surgical implants provided customers company loaner instrumentation amortized straightline basis 3year period amortization expense loaner instrumentation included selling general administrative expenses stock options december 31 2006 company key employee director stock option plans described fully note 7 effective january 1 2006 company adopted provisions financial accounting standards board fasb statement 123 revised sharebased payment revised statement 46 requires companies measure cost employee stock options based grantdate fair value recognize cost period recipient required provide services exchange options typically vesting period company adopted provisions revised statement using modifiedretrospective transition method provided revised statement method company restated prior periods presented consistent basis based pro forma expense previously disclosed result adoption revised statement companys operating income years ended december 31 2006 2005 2004 reduced 562 million 487 million 389 million respectively companys net earnings periods reduced 365 million 316 million 257 million respectively basic diluted net earnings per share years ended december 31 2006 2005 2004 reduced 09 08 06 respectively addition prior period balance sheets adjusted reflect cumulative impact stock option compensation expense stock option exercise activity required modifiedretrospective transition method consolidated balance sheet december 31 2005 adjusted reflect decreases retained earnings deferred stockbased compensation 1257 million 16 million respectively increases balances additional paidin capital noncurrent deferred income tax assets 1725 million 484 million respectively prior adoption revised statement company presented income tax benefits resulting exercise stock options cash flows provided operating activities consolidated statements cash flows revised statement requires income tax benefit deductions resulting exercise stock options excess compensation cost recognized excess income tax benefit classified cash flows provided financing activities excess income tax benefit exercise stock options reported cash flows provided financing activities years ended december 31 2006 2005 2004 respectively would classified cash flows provided operating activities company adopted provisions revised statement weightedaverage fair value per share options granted 2006 2005 2004 estimated date grant using blackscholes option pricing model 1716 1745 1683 respectively fair value options granted estimated using following weightedaverage assumptions riskfree interest rate 46 29 19 expected dividend yield 02 expected stock price volatility 248 307 343 expected option life 70 years 65 years 65 years riskfree interest rate periods within expected life options granted based united states treasury yield curve effect time grant expected stock price volatility based historical volatility companys stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data company recognizes cost stock options using straightline method vesting periods income taxes company accounts income taxes using liability method deferred income tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates effect years differences expected reverse deferred income tax expense credit represents change net deferred income tax assets liabilities year company operates multiple tax jurisdictions inside outside united states tax authorities jurisdictions regularly perform audits companys tax filings accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations tax audits associated allocation income complex issues including inventory transfer pricing product royalty arrangements may require extended period time resolve may result income tax adjustments changes income allocation required jurisdictions different tax rates tax adjustments certain jurisdictions significant 47 company records accruals representing managements best estimate probable resolution matters income tax accruals included within income taxes liability consolidated balance sheets extent additional information becomes available accruals adjusted reflect revised estimated probable outcome derivative financial instruments company follows provisions fasb statement 133 accounting derivative instruments hedging activities amended statements 137 138 accounting derivative financial instruments statements require company recognize derivatives balance sheet fair value company uses derivative financial instruments manage economic impact fluctuations currency exchange rates company enters forward currency exchange contracts manage economic risks contracts adjusted fair value earnings legal contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters potential future outcomes matters outside managements complete control generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory relief could result payment significant claims settlements legal matters management sufficient information reasonably estimate companys future obligations liability representing managements best estimate probable cost resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies accumulated comprehensive gain loss components accumulated comprehensive gain loss follows millions unfunded foreign accumulated unrealized pension currency gains losses gains translation comprehensive securities losses adjustments gain loss balances january 1 2005 07 109 2099 1983 comprehensive gain loss 2005 06 08 1929 1931 balances december 31 01 117 170 52 comprehensive gain loss 2006 09 26 1026 1043 adjustments adopt fasb statement 158 net income tax benefit 189 balances december 31 10 280 1196 906 december 31 2006 company adopted provisions fasb statement 158 employers accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r statement requires entity recognize balance sheet asset liability reflecting funded status defined benefit postretirement plans difference projected benefit obligation fair value plan assets changes continuing reflected accumulated comprehensive gain loss component shareholders equity net related income taxes statement change calculation amount net periodic benefit cost included net earnings result adoption statement funded status companys defined benefit pension plans resulted recognition companys december 31 2006 consolidated balance sheet additional 228 million liability corresponding changes accumulated comprehensive gain loss deferred income taxes adoption statement require restatement prior periods additional information regarding adoption statement provided note 9 48 recently issued accounting standards june 2006 fasb issued interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 interpretation clarifies accounting income taxes prescribing minimum recognition threshold tax position required meet recognized companys consolidated financial statements interpretation also provides guidance measurement classification tax positions interest penalties requires additional disclosure annual basis company plans adopt provisions interpretation effective january 1 2007 required company yet determined effect adoption interpretation financial position company anticipate material impact difference amounts recognized companys consolidated financial statements prior adoption interpretation amounts reported adoption accounted cumulativeeffect adjustment recorded beginning balance retained earnings january 1 2007 require restatement prior periods reclassifications certain prior year amounts reclassified conform presentation used 2006 49 note 2 financial instruments risk management following summary companys investments millions gross unrealized estimated cost losses fair value december 31 2006 availableforsale securities corporate assetbacked debt securities 5153 06 5147 us treasury debt securities 2450 07 2443 certificates deposit 1319 01 1318 us agency debt securities 615 municipal debt securities 220 239 total availableforsale securities 9996 14 9982 trading securities mutual funds 297 total investments 10293 14 10279 reported current assets marketable securities 9982 noncurrent assets 297 10279 december 31 2005 availableforsale securities municipal debt securities 4681 01 4680 us treasury debt securities 797 us agency debt securities 96 certificates deposit 80 total availableforsale securities 5654 01 5653 trading securities mutual funds 231 total investments 5885 01 5884 reported current assets marketable securities 5653 noncurrent assets 231 5884 net carrying value estimated fair value availableforsale debt securities december 31 2006 contractual maturity follows millions estimated cost fair value december 31 2006 due one year less 4570 4561 due one year three years 5412 5407 due three years 14 9996 9982 50 interest marketable securities income included income expense totaled 414 million 2006 133 million 2005 47 million 2004 company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures relate principally intercompany receivables payables arising intercompany transactions including purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts markedtomarket period resulting gains losses included income expense consolidated statements earnings december 31 2006 company outstanding forward currency exchange contracts purchase 3879 million sell 2270 million various currencies principally united states dollars euros maturities ranging principally 7 180 days december 31 2005 company outstanding forward currency exchange contracts purchase 2176 million sell 1961 million various currencies principally united states dollars euros maturities ranging principally 7 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points recorded component accrued expenses liabilities consolidated balance sheets december 31 2006 company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties note inventories summarized follows millions note 4 acquisitions first quarter 2006 company acquired outstanding stock sightline technologies ltd sightline private developmentstage company upfront payment 500 million cash plus certain transaction costs assumption certain liabilities acquisition sightline developer flexible endoscopes expected enhance companys presence gastrointestinal markets within medsurg equipment segment sightlines operating results included companys consolidated financial statements date acquisition materially impact companys operating results pro forma consolidated results operations would differ significantly result sightline acquisition purchase price preliminarily allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair value date acquisition amount purchase price allocated purchased inprocess research development resulted charge 527 51 million 13 per diluted share companys operating results date acquisition flexible endoscope technologies acquired yet reached technological feasibility amount written purchased inprocess research development deductible income tax purposes united states terms transaction also include potential milestone payments additional 900 million upon achievement certain operational financial targets related sightlines products first expected occur 2007 potential milestone payments expected capitalized fair values intangible assets time payment amortized remaining useful lives fourth quarter 2005 company acquired merger outstanding stock plasmasol corp plasmasol private developmentstage company plasmasol developer technology allow stryker provide sterilization equipment use certain medsurg equipment products cost transaction totaled 175 million including upfront cash payment plus assumption certain liabilities plasmasols operating results included companys consolidated financial statements date acquisition materially impact companys operating results pro forma consolidated results operations would differ significantly result plasmasol acquisition purchase price allocated assets acquired primarily deferred income tax assets associated acquired net operating losses purchased inprocess research development based estimated fair value date acquisition amount purchase price allocated purchased inprocess research development resulted charge 159 million 04 per diluted share companys 2005 operating results date acquisition sterilization technology acquired yet approved sale united states food drug administration fda therefore yet reached technological feasibility amount written purchased inprocess research development deductible income tax purposes united states first quarter 2005 company acquired merger outstanding stock etraumacom corp etrauma 500 million cash plus certain transaction costs acquisition expanded companys digital imaging equipment product offerings within medsurg equipment segment adding etraumas proprietary picture archive communications systems pacs image management viewing software acquisition etrauma accounted using purchase method accounting results operations acquired business included companys consolidated financial statements date acquisition materially impact companys operating results pro forma consolidated results operations would differ significantly result etrauma acquisition purchase price allocated assets acquired liabilities assumed based estimated fair value date acquisition based purchase price allocation 220 million allocated identifiable intangibles amortized remaining lives 5 8 years 302 million allocated goodwill deductible income tax purposes united states immediately acquisition consummated management company began implement integration plan combine stryker etrauma conjunction integration plan company recorded additional purchase liabilities severance related costs 03 million included purchase price allocation third quarter 2004 company acquired merger outstanding stock spinecore inc spinecore upfront payment 1200 million cash plus certain transaction costs acquisition spinecore developer artificial lumbar cervical spinal disc implant technologies expected enhance companys presence spinal implant market important growth area within orthopaedic implants segment spinecores operating results included companys consolidated financial statements date acquisition materially impact companys operating results pro forma consolidated results operations would differ significantly result spinecore acquisition purchase price allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair value date acquisition amount purchase price allocated purchased inprocess research development resulted charge 1208 million 30 per diluted share companys 2004 operating results date transaction spinal disc implant 52 technologies acquired preliminary stages clinical studies united states yet reached technological feasibility amount written purchased inprocess research development deductible income tax purposes united states terms transaction also include potential milestone royalty payments additional 2400 million upon commercialization spinecores products united states expected occur 2008 potential milestone payments expected capitalized fair values intangible assets time payment amortized remaining useful lives company believes technologies acquired sightline plasmasol spinecore acquisitions result introduction new products additional future sales however factors including regulatory delays safety concerns patent disputes could delay introduction marketing potential new products additionally unanticipated issues may arise current future clinical trials could delay terminate products development prior regulatory approval company may experience unfavorable impact operating results unable capitalize efforts attaining proper fda approval december 31 2006 company encountered significant issues expects completion development initial commercialization flexible endoscope technologies 2007 sterilization technologies spinal disc implant technologies 2008 note goodwill intangible assets changes net carrying amount goodwill segment years ended december 31 2006 2005 follows millions fourth quarters 2006 2005 company completed required annual impairment tests goodwill prescribed fasb statement 142 goodwill intangible assets determined instances recorded goodwill impaired goodwill writedown necessary 53 following summary companys intangible assets millions estimated amortization expense five succeeding years follows millions 397 393 384 313 240 note longterm debt longterm debt summarized follows millions company established 10000 million unsecured credit facility expires november 2010 includes senior 5year nonamortizing revolving credit agreement maximum amount 10000 million company may increase credit facility maximum limit 1000 million increments additional 5000 million upon acceptance existing lender group additional lenders unsecured credit facility requires facility fee ranging 004 015 aggregate commitment credit facility depending companys debt rating credit facility includes 5000 million multicurrency sublimit yen euro borrowed 1000 million swing line sublimit 54 1000 million letter credit sublimit credit facility bears interest base rate defined plus applicable margin ranging 012 0475 depending companys debt rating 2006 weightedaverage interest rate excluding required fees borrowings credit facility 29 unsecured credit facility requires company comply certain financial covenants company compliance covenants december 31 2006 addition unsecured credit facility company lines credit issued various financial institutions available fund companys daytoday operating needs december 31 2006 company 10281 million additional borrowing capacity available existing credit facilities carrying amounts companys longterm debt approximate fair values based quoted interest rates similar types amounts borrowing agreements interest paid debt including required fees 63 million 2006 81 million 2005 60 million 2004 amounts reflected interest expense included income expense note capital stock april 20 2004 companys shareholders approved amendment section article iii companys restated articles incorporation increase authorized shares common stock 1 billion 500 million shares april 20 2004 companys board directors approved twoforone stock split effective may 14 2004 shareholders record may 3 2004 share per share data adjusted reflect stock split though occurred beginning periods presented company 05 million authorized shares 1 par value preferred stock none outstanding company key employee director stock option plans options granted exercise price less fair market value underlying common stock date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows weightedaverage remaining aggregate shares weightedaverage contractual term intrinsic value millions exercise price years millions options outstanding january 1 2006 242 2878 granted 48 4684 exercised 31 1657 cancelled 05 4293 options outstanding december 31 2006 254 3335 61 5519 exercisable december 31 2006 145 2475 46 4390 options expected vest 103 4456 81 1089 aggregate intrinsic value represents cumulative difference fair market value underlying common stock option exercise prices options exercised years ended december 31 2006 2005 2004 1000 million 1005 million 1158 million respectively 55 total grantdate fair value shares vested years ended december 31 2006 2005 2004 464 million 431 million 395 million respectively shares reserved future compensation grants stryker common stock 259 million december 31 2006 option shares reserved future grants 101 million december 31 2005 exercise prices options outstanding december 31 2006 ranged 710 5273 december 31 2006 1360 million unrecognized compensation cost related nonvested stock options granted stock option plans cost expected recognized following 82 years weightedaverage period 19 years note 8 net earnings per share following table sets forth computation basic diluted net earnings per share millions except per share amounts net earnings 7777 6436 4400 weightedaverage shares outstanding basic net earnings per share 4065 4037 4012 effect dilutive employee stock options 53 71 81 adjusted weightedaverage shares outstanding diluted net earnings per share 4118 4108 4093 net earnings per share common stock basic 191 159 110 diluted 189 157 108 options purchase average 45 million 25 million shares common stock years ended december 31 2006 2005 respectively outstanding included computation diluted net earnings per share exercise prices options greater average market price common shares periods 56 note 9 retirement plans certain companys subsidiaries funded unfunded defined benefit pension plans covering employees defined benefit pension plans projected benefit obligations excess plan assets discussed note 1 company adopted provisions fasb statement 158 december 31 2006 adoption statement require restatement prior periods substantially defined benefit pension plans use december 31 measurement date determination plan obligations funded status plans summary companys defined benefit pension plans follows millions components amounts recognized consolidated balance sheets follows millions 57 components amounts recognized accumulated comprehensive gain loss effect income taxes follows millions accumulated benefit obligation defined benefit pension plans 1582 million 1336 million december 31 2006 2005 respectively pension plans accumulated benefit obligation excess plan assets projected benefit obligations accumulated benefit obligations fair value plan assets 1462 million 1295 million 802 million respectively december 31 2006 1291 million 1126 million 684 million respectively december 31 2005 components net periodic benefit cost changes plan assets benefit obligations recognized accumulated comprehensive gain loss effect income taxes follows millions net periodic benefit cost service cost 109 88 66 interest cost 69 63 56 expected return plan assets 60 51 41 amortization prior service cost transition amount 02 recognized actuarial loss 14 09 05 net periodic benefit cost 134 111 88 changes plan assets benefit obligations recognized accumulated comprehensive gain loss net actuarial gain loss 27 29 49 recognized actuarial loss 14 09 05 adjustments adopt fasb statement 158 recognized actuarial loss 216 prior service cost 09 transition amount 03 total recognized accumulated comprehensive gain loss 187 20 44 total recognized net periodic benefit cost accumulated comprehensive gain loss 321 131 132 58 estimated net actuarial loss amortization prior service cost transition amount defined benefit pension plans recognized accumulated comprehensive income net period benefit cost year ended december 31 2007 18 million 02 million respectively company assumed average longterm expected return defined benefit plan assets 63 december 31 2006 expected return determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns weightedaverage allocation plan assets asset category follows investment strategy companys defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances reflected target investment allocation ranges plans december 31 2006 low high equity securities 56 73 debt securities company anticipates contributing approximately 82 million defined benefit pension plans 2007 following estimated future benefit payments reflect expected future service appropriate expected paid years indicated millions 20122016 expected benefit payments 48 50 57 62 60 402 retirement plan expense companys defined contribution retirement plans totaled 734 million 2006 645 million 2005 611 million 2004 portion companys retirement plan expenses funded stryker common stock totaling 70 million 2006 63 million 2005 54 million 2004 use stryker common stock represents noncash operating activity reflected consolidated statements cash flows amount stryker common stock held companys defined contribution retirement plans totaled 862 million approximately 16 million shares 712 million approximately 16 million shares december 31 2006 2005 respectively value stryker common stock percentage total defined contribution retirement plan assets 13 december 31 2006 2005 note 10 income taxes fourth quarter 2004 president united states signed american jobs creation act provided temporary incentive united states companies repatriate accumulated income earned foreign jurisdictions providing 85 dividendsreceived deduction certain dividends controlled corporations 59 third quarter 2005 companys board directors approved plan repatriate 722 million foreign earnings provisions act repatriation plan completed fourth quarter 2005 company recorded charge 274 million 07 per diluted share recognize income tax expense related liability united states associated repatriation repatriated funds invested pursuant approved domestic reinvestment plan conformed act earnings income taxes consist following millions united states operations 5475 3699 2018 foreign operations 5563 5847 4763 11038 9546 6781 components provision income taxes follow millions current income tax expense federal 2354 1730 1510 state 298 273 179 foreign 880 1028 1419 3532 3031 3108 deferred income tax expense credit 271 79 727 3261 3110 2381 reconciliation united states statutory income tax rate companys effective income tax rate follows united states statutory income tax rate 350 add deduct state taxes less effect federal deduction 21 25 19 tax benefit relating operations ireland puerto rico 91 98 nondeductible purchased inprocess research development 17 06 62 nondeductible permanent differences 13 19 30 united states income taxes repatriation foreign earnings 29 foreign income taxes rates different united states statutory rate 03 06 07 12 11 05 295 326 351 60 deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes valuation allowances recorded reduce deferred income tax assets likely tax benefit realized tax effect significant temporary differences comprise companys deferred income tax assets liabilities follows millions net operating loss carryforwards totaling approximately 476 million december 31 2006 available reduce future taxable earnings certain domestic foreign subsidiaries deferred income tax assets liabilities included consolidated balance sheets follows millions december 31 2006 tax authorities several tax jurisdictions inside outside united states conducting routine audits companys income tax returns filed prior years audits generally designed determine individual tax authorities agreement companys interpretations complex income tax regulations regarding allocation income various tax jurisdictions 2006 company reach resolution significant outstanding tax audit therefore increased income tax accruals 197 million companys best estimate probable resolution tax positions provision made united states federal state income taxes foreign income taxes may result future remittances undistributed earnings 17728 million december 31 2006 foreign subsidiaries expected earnings reinvested overseas indefinitely determination amount unrecognized deferred income tax liability unremitted earnings practicable 61 total income taxes paid net refunds received 3256 million 2006 2478 million 2005 2358 million 2004 note 11 segment geographic data company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma spinal craniomaxillofacial implant systems bone cement bone growth factor op1 medsurg equipment segment sells surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment category includes physical therapy services corporate administration interest expense interest marketable securities income effective january 1 2006 company changed business segment reporting include financial results certain products within medsurg equipment segment rather within orthopaedic implants segment company believes products better aggregated medsurg equipment products based similarities manufacturing marketing practices customer base prior year results reclassified correspond change reporting companys reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies company measures financial results reportable segments using internal performance measure excludes purchased inprocess research development charges recognized 2006 2005 2004 additional income taxes repatriation foreign earnings recognized 2005 well effect sharebased compensation includes compensation related employee director stock option plans restricted stock grants identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment 62 sales financial information business segment follows millions 63 companys principal areas operation outside united states europe japan company also operations pacific region canada latin america middle east geographic information follows millions note leases company leases various manufacturing office facilities equipment operating leases future minimum lease commitments leases follows millions 621 513 385 227 133 thereafter 254 2133 rent expense totaled 947 million 2006 853 million 2005 799 million 2004 64 note 13 contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters subject many uncertainties outcomes predictable assurance company records amounts losses deemed probable subject reasonable estimate however company anticipate material losses result proceedings beyond amounts already provided accompanying consolidated financial statements december 2003 company announced subsidiary physiotherapy associates inc stryker received subpoena united states attorneys office boston massachusetts connection united states department justice investigation physiotherapy associates billing coding practices march 2005 company announced received subpoena united states department justice requesting documents period january 2002 present relating consulting contracts professional service agreements remuneration agreements stryker corporation orthopedic surgeon orthopedic surgeon training medical school graduate using considering surgical use hip knee joint replacementreconstruction products manufactured sold stryker corporation june 2006 company announced received subpoena united states department justice antitrust division requesting documents period january 2001 present regarding possible violations federal criminal law including possible violation antitrust laws relating manufacture sale orthopaedic implant devices company fully cooperating department justice regarding matters pursuant certain companys credit lease agreements company provided financial guarantees third parties form indemnification provisions indemnify third parties costs including limited adverse judgments lawsuits imposition additional taxes due either change tax law adverse interpretation tax law terms guarantees equal terms related credit lease agreements company able calculate maximum potential amount future payments could required make guarantees potential payment dependent occurrence future unknown events eg changes united states foreign tax laws 65 summary quarterly data unaudited stryker corporation subsidiaries millions except per share amounts price quotations reported supplied new york stock exchange 66 item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements board directors shareholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2008 2007 related consolidated statements earnings shareholders equity cash flows three years period ended december 31 2008 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2008 2007 consolidated results operations cash flows three years period ended december 31 2008 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 2007 stryker corporation changed method accounting unresolved tax positions connection required adoption financial interpretation 48 also audited accordance standards public company accounting oversight board united states stryker corporations internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 12 2009 expressed unqualified opinion thereon ernst young llp grand rapids michigan february 12 2009 43 see accompanying notes consolidated financial statements 44 consolidated statements earnings stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements 45 consolidated statements shareholders equity stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements 46 see accompanying notes consolidated financial statements 47 notes consolidated financial statements stryker corporation subsidiaries december 31 2008 note 1 significant accounting policies business stryker corporation company stryker one worlds leading medical technology companies broadly based range products orthopaedics significant presence medical specialties stryker works respected medical professionals help people lead active satisfying lives companys products include implants used joint replacement trauma craniomaxillofacial spinal surgeries biologics surgical neurologic ear nose throat interventional pain equipment endoscopic surgical navigation communications digital imaging systems well patient handling emergency medical equipment principles consolidation consolidated financial statements include accounts company subsidiaries elimination intercompany accounts transactions use estimates preparation consolidated financial statements conformity us generally accepted accounting principles gaap requires company management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes actual results could differ estimates revenue recognition significant portion companys orthopaedic implants revenue generated consigned inventory maintained hospitals field representatives company retains title inventory held consignment hospitals field locations company receives appropriate notification product used implanted time revenue recognized company records revenue medsurg equipment product sales title risk ownership transferred customer typically upon shipment customer company records estimated sales returns discounts applicable adjustments reduction net sales period revenue recognized shipping handling products amounts billed customers shipping handling products included net sales costs incurred related shipping handling products included cost sales foreign currency translation functional currencies substantially companys international affiliates local currencies accordingly financial statements international affiliates translated us dollars using current exchange rates balance sheets average exchange rates statements earnings cash flows unrealized translation adjustments included accumulated comprehensive gain loss shareholders equity transaction gains losses resulting settlement nonfunctional currency receivables payables included net earnings financial instruments companys financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts companys estimates fair value financial instruments marketable securities approximate carrying amounts december 31 2008 2007 company adopted provisions financial accounting standard board fasb statement 157 fair value measurements financial assets liabilities measured recurring basis january 1 2008 statement applies financial assets financial liabilities measured reported fair value basis establishes framework measuring fair value assets liabilities expands disclosures fair value measurements impact consolidated financial statements result adoption statement additional disclosure requirements regarding fair value measurements included note 2 consolidated financial statements 48 company adopted provisions fasb statement 159 fair value option financial assets financial liabilities january 1 2008 statement allows companies option measure eligible financial instruments fair value election may applied instrument basis typically irrevocable elected company elected apply fair value option auction rate securities ars rights agreement fully described note 2 consolidated financial statements cash equivalents highly liquid investments maturity three months less purchased marketable securities consist marketable debt securities certificates deposit mutual funds mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities pursuant companys investment policy individual marketable security investments must minimum credit quality single per standard poors a2 per moodys corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double per standard poors aa per moodys corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk companys marketable security investment portfolio december 31 2008 approximately 1 companys investments marketable securities credit quality rating less single per standard poors company follows provisions fasb statement 115 accounting certain investments debt equity securities related interpretations accounting marketable securities classified availableforsale trading securities statement requires company recognize marketable securities consolidated balance sheets fair value companys marketable securities stated fair value based quoted market prices adjustments fair value marketable securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive gain loss shareholders equity adjustments fair value marketable securities classified trading recorded earnings amortized cost marketable debt securities adjusted amortization premiums discounts maturity computed effective interest method amortization included income expense along interest realized gains losses cost securities sold determined specific identification method company reviews declines fair value investments classified availableforsale impairment accordance statement 115 order determine whether decline fair value otherthantemporary impairment otherthantemporary impairments availableforsale marketable securities recorded earnings primary factors considered company recognize declines fair value investments otherthantemporary impairments intent ability company retain investment issuer period time sufficient allow anticipated recovery market value length time extent market value investment less cost financial condition nearterm prospects issuer based publicly available financial information company follows provisions fasb statement 133 accounting derivative instruments hedging activities amended statements 137 138 requires company recognize derivatives consolidated balance sheets fair value company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses included income expense consolidated statements earnings 49 accounts receivable accounts receivable consists trade miscellaneous receivables company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends accounts receivable written reasonable collection efforts exhausted accounts receivable securitization company accounts receivable securitization facility pursuant certain subsidiaries company sell ongoing basis domestic accounts receivable stryker funding corporation sfc wholly owned specialpurpose subsidiary company turn may sell without recourse aggregate 1000 million undivided percentage ownership interest receivables bankadministered multiseller commercial paper conduits creditors sfc claim assets equity becomes available company amounts undivided percentage ownership interests accounts receivable sold sfc facility december 31 2008 2007 accounts receivable sold would reflected consolidated balance sheet reductions accounts receivable inventories stated lower cost market cost approximately 84 inventories determined using firstin firstout fifo cost method cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends property plant equipment property plant equipment stated cost depreciation computed either straightline decliningbalance method estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses amounts allocated intangible assets intangible assets include developed technology amortized straightline basis 20 years customer relationships reflect expected continued customer patronage trademarks patents amortized straightline basis 4 40 years weightedaverage life 15 years intangible assets goodwill longlived assets impairment tests fasb statement 142 goodwill intangible assets requires companies test goodwill possible impairment annual basis company performs annual impairment test fourth quarter year using discounted cash flow analysis requires certain assumptions estimates made regarding market conditions companys future profitability company also performs impairment tests goodwill intangible longlived assets interim periods upon occurrence certain events changes circumstance defined fasb statements 142 144 accounting impairment disposal longlived assets loaner instrumentation loaner instrumentation represents net book value loaner instruments surgical implants provided customers company loaner instrumentation amortized straightline basis 3year period amortization expense loaner instrumentation included selling general administrative expenses stock options december 31 2008 company key employee director stock option plans described fully note 9 consolidated financial statements company measures cost employee stock options based grantdate fair value recognizes cost period recipient required provide services exchange options typically vesting period weighted 50 average fair value per share options granted 2008 2007 2006 estimated date grant using blackscholes option pricing model 1987 2190 1716 respectively fair value options granted estimated using following weightedaverage assumptions riskfree interest rate periods within expected life options granted based us treasury yield curve effect time grant expected stock price volatility based historical volatility companys stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data company recognizes cost stock options using straightline method vesting periods income taxes company accounts income taxes using liability method deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax credit represents change net deferred income tax assets liabilities year company operates multiple income tax jurisdictions inside outside united states income tax authorities jurisdictions regularly perform audits companys income tax filings accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty arrangements may require extended period time resolve may result significant income tax adjustments changes income allocation required jurisdictions different income tax rates company adopted provisions fasb interpretation 48 accounting uncertainty income taxes january 1 2007 interpretation clarified accounting income taxes prescribing minimum recognition threshold income tax position required meet recognized companys consolidated financial statements interpretation also provided guidance measurement classification income tax positions interest expense penalties requires additional disclosure annual basis upon adoption company recognized increase interest expense accrual associated unresolved income tax positions accounted reducing january 1 2007 balance retained earnings 76 million net income taxes subsequent adoption interest expense penalties incurred associated unresolved income tax positions continue included income expense addition upon adoption interpretation company reclassified 1792 million current income taxes liability noncurrent liabilities match anticipated timing future income tax payments legal contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 15 consolidated financial statements potential future outcomes matters outside managements control generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory relief could result payment significant claims settlements legal matters management sufficient information reasonably estimate companys future obligations liability representing managements best estimate probable cost resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies company anticipate material losses result proceedings beyond amounts already provided accompanying consolidated financial statements 51 accumulated comprehensive gain loss components accumulated comprehensive gain loss follows millions recently issued accounting standards 2007 fasb issued statement 141r business combinations replacement fasb statement 141 statement significantly changes principles requirements acquisition recognized measured companys financial statements including identifiable assets acquired liabilities assumed statement also provides guidance recognizing measuring goodwill acquired business combination required disclosures enable users financial statements evaluate nature financial effects business combination statement effective prospectively except certain retrospective adjustments income tax balances company beginning january 1 2009 company yet determined impact adoption statement financial position company anticipate material impact 2007 fasb issued statement 160 noncontrolling interests consolidated financial statements amendment arb 51 statement significantly changes financial accounting reporting noncontrolling minority interests subsidiary consolidated financial statements statement effective prospectively company beginning january 1 2009 company yet determined impact adoption statement financial position company anticipate material impact 2008 fasb issued statement 161 disclosures derivative instruments hedging activities statement requires enhanced disclosures derivative instruments hedging activities enable investors better understand companys use derivative instruments effect companys financial position financial performance cash flows statement effective company beginning january 1 2009 reclassifications certain prior year amounts reclassified conform presentation used 2008 company changed business segment reporting include financial results certain products within orthopaedic implants segment rather within medsurg equipment segment additional details included note 13 consolidated financial statements note financial instruments effective january 1 2008 company adopted provisions fasb statement 157 fair value measurements financial assets liabilities measured fair value recurring basis statement requires fair value measurements classified disclosed one following three categories level 1 financial instruments unadjusted quoted prices listed active market exchanges level 2 financial instruments lacking unadjusted quoted prices active market exchanges including overthecounter traded financial instruments prices financial instruments determined using prices recently traded financial instruments similar 52 underlying terms well directly indirectly observable inputs interest rates yield curves observable commonly quoted intervals level 3 financial instruments actively traded market exchange category includes situations little market activity financial instrument prices determined using significant unobservable inputs valuation techniques companys marketable securities include investments auctionrate securities ars majority triple rated per standard poors collateralized student loans guaranteed us department education interest rates ars investments reset auction process commonly intervals 7 28 35 days auction process designed provide means securities bought sold historically provided liquid market beginning february 2008 liquidity issues global credit markets resulted failure auctions ars investments held company amount securities submitted sale auctions exceeded amount purchase bids date company collected interest receivable outstanding ars due expects continue future auction failures limit companys ability liquidate investments company believes ars failures impact ability fund ongoing operations growth initiatives company continues monitor efforts financial markets find alternative means restoring liquidity investments classified noncurrent assets liquidity restored market december 31 2008 company held 1668 million par value ars investments 2008 company entered ars rights agreement rights ubs financial services inc ubs one investment providers whereby company received right sell ars par value ubs time period june 30 2010 july 2 2012 rights nontransferable securities registered us securities exchange commission result accepting rights company released ubs employeesagents claims except claims consequential damages directly indirectly relating ubss marketing sale ars agreed serve class representative receive benefits class action settlement investor fund company elected measure value rights fair value option fasb statement 159 recorded gain 280 million income expense corresponding noncurrent asset within consolidated balance sheet simultaneously company transferred ars investments fair value 1388 million availableforsale trading marketable securities result transfer company recognized loss 280 million income expense reflecting reversal related temporary valuation allowance previously recorded within accumulated comprehensive gain loss shareholders equity company anticipates future changes fair value rights offset changes fair value related ars adjusted estimated fair value ongoing basis result illiquidity market ars investments company estimated fair value ars rights using level 3 valuation methodology companys level 3 valuations ars rights based income approach specifically discounted cash flow analyses utilize significant inputs based companys estimates assumptions discounted cash flow analyses included following assumptions december 31 2008 current coupon rates expected maturity dates current discount rates current coupon rates reflect maximum rate per ars specifically 91 day us treasury bill trailing average prior oneyear period plus 120 basis points expected maturity dates reflect assumption future liquidity specifically markets normalize five years allow ars issuers access markets obtain alternative sources financing restructure call bonds discount rates reflect base rate credit spread illiquidity premium base rate corresponds 3month libor also base rate matches credit spread credit spread consistent triple rated investments collateralized student loans guaranteed us government federal family education loan program illiquidity premium estimate proxy additional return required holding illiquid assets companys valuation supported broker pricing valuation incorporates 53 transaction details contractual terms maturity timing anticipated amounts future cash flows well assumptions liquidity credit valuation adjustments marketplace participants december 31 2008 adjustments subject future changes underlying market conditions marketplace sources change following table summarizes valuation companys financial instruments aforementioned pricing categories december 31 2008 millions following table presents rollforward assets measured fair value recurring basis using unobservable inputs level 3 december 31 2008 millions 54 following summary companys marketable securities millions 55 net carrying value estimated fair value availableforsale marketable securities december 31 2008 contractual maturity follows millions december 31 2008 approximately 1 companys investments marketable securities held triple rated per standard poors asset backed debt securities majority related investments automobile loans december 31 2008 company investments marketable securities exposed risk loss related subprime mortgage securities market interest marketable securities income included income expense totaled 977 million 2008 855 million 2007 414 million 2006 december 31 2008 company outstanding forward currency exchange contracts purchase 4125 million sell 2884 million various currencies principally us dollars euros maturities ranging 2 110 days december 31 2007 company outstanding forward currency exchange contracts purchase 4279 million sell 2577 million various currencies principally us dollars euros maturities ranging 4 101 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points recorded component accrued expenses liabilities consolidated balance sheets december 31 2008 company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties 56 note 3 inventories summarized follows millions note acquisitions 2006 company acquired outstanding stock sightline technologies ltd sightline private developmentstage company upfront payment 500 million cash plus certain transaction costs assumption certain liabilities sightline developer flexible endoscopes acquired enhance companys presence gastrointestinal markets within medsurg equipment segment purchase price allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair value date acquisition amount purchase price allocated purchased inprocess research development resulted charge 527 million 013 per diluted share companys 2006 operating results date acquisition flexible endoscope technologies acquired yet reached technological feasibility amount written purchased inprocess research development deductible income tax purposes united states terms transaction also included potential milestone payments additional 900 million upon achievement certain operational financial targets related sightlines products potential milestone payments expected capitalized fair values intangible assets time payment unanticipated issues arisen continue delay regulatory approval commercialization efforts new products associated technology acquired sightline acquisition 2008 company substantially reduced development efforts associated products fully described note 6 consolidated financial statements however company believes technology acquired sightline acquisition may result introduction new products additional sales future periods 2005 company acquired merger outstanding stock plasmasol corp plasmasol private developmentstage company plasmasol developer technology allow stryker provide sterilization equipment use certain medsurg equipment products cost transaction totaled 175 million including upfront payment cash plus assumption certain liabilities purchase price allocated assets acquired primarily deferred income tax assets associated acquired net operating losses purchased inprocess research development based estimated fair value date acquisition 2004 company acquired outstanding stock spinecore inc spinecore developer artificial lumbar cervical discs upfront payment 1200 million cash plus certain transaction costs terms transaction also include potential milestone royalty payments additional 2400 million upon commercialization spinecores products united states potential milestone payments expected capitalized fair values intangible assets time payment current products development include flexicore lumbar artificial disc cervicore cervical artificial disc 57 company believes technologies acquired plasmasol spinecore acquisitions result introduction new products additional future sales however unanticipated issues may arise could delay terminate products development prior regulatory approval commercialization could unfavorable impact companys operating results december 31 2008 company encountered significant issues expects completion development initial us commercialization flexicore lumbar artificial disc cervicore cervical artificial disc sterilization technology following receipt required regulatory approvals note 5 discontinued operations 2007 company sold outpatient physical therapy business physiotherapy associates 1500 million cash less certain indebtedness sale physiotherapy associates allowed company focus efforts medical technology market sale physiotherapy associates resulted gain 257 million net 150 million income tax expense 006 per diluted share net sales discontinued operations years ended december 31 2007 2006 1074 million 2584 million respectively net earnings discontinued operations years ended december 31 2007 2006 50 million 63 million respectively note 6 restructuring charges 2008 company recorded restructuring charges consisting following items millions restructuring charges recorded 2008 relate companys decisions simplify structure japanese distribution business substantially reduce development efforts associated sightline product technologies acquired 2006 223 million asset impairment charges represent excess net book value fair market value assets disposed sale primarily related sales offices warehousing distribution facilities japan 85 million charge represents employmentrelated severance costs 84 employees company expects asset disposals completed final severance payments made 2009 note goodwill intangible assets changes net carrying amount goodwill segment years ended december 31 2008 2007 follows millions 58 fourth quarters 2008 2007 company completed required annual impairment tests goodwill prescribed fasb statement 142 goodwill intangible assets determined instances recorded goodwill impaired goodwill write necessary following summary companys intangible assets millions estimated amortization expense five succeeding years follows millions 2007 company recorded 198 million charge 127 million net income taxes write patents associated intervertebral body fusion cage products impairment followed us food drug administration fda decision downgrade certain intervertebral body fusion products class ii devices along weak market sales specific products result company performed discounted cash flow analysis remaining life patented technologies determined charge recognize intangible asset impairment required note debt company current debt outstanding various debt instruments totaling 205 million 168 million december 31 2008 2007 respectively company also 10000 million unsecured credit facility expires november 2010 includes senior 5year nonamortizing revolving credit agreement maximum amount 10000 million company may increase credit facility maximum limit 1000 million increments additional 5000 million upon acceptance existing lender group additional lenders amounts outstanding unsecured credit facility december 31 2008 2007 59 unsecured credit facility requires facility fee ranging 004 015 aggregate commitment credit facility depending companys debt rating credit facility includes 5000 million multicurrency sublimit yen euro borrowed 1000 million swing line sublimit 1000 million letter credit sublimit credit facility bears interest base rate defined plus applicable margin ranging 012 0475 depending companys debt rating 2008 weightedaverage interest rate excluding required fees borrowings 57 unsecured credit facility requires company comply certain financial covenants company compliance covenants december 31 2008 addition unsecured credit facility company lines credit issued various financial institutions available fund companys daytoday operating needs december 31 2008 company 10794 million additional borrowing capacity available existing credit facilities carrying amounts companys debt approximate fair values based quoted interest rates similar types amounts borrowing agreements interest paid debt including required fees 57 million 2008 65 million 2007 63 million 2006 approximates amounts reflected interest expense included income expense note capital stock 2008 company repurchased 174 million shares common stock open market cost 10000 million pursuant repurchase programs authorized companys board directors shares repurchased share repurchase programs available general corporate purposes including offsetting dilution associated stock option equitybased employee benefit plans company 05 million authorized shares 1 par value preferred stock none outstanding company key employee director stock option plans options granted exercise price less fair market value underlying common stock date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows aggregate intrinsic value represents cumulative difference fair market value underlying common stock option exercise prices options exercised years ended december 31 2008 2007 2006 1354 million 1601 million 1000 million respectively shares reserved future compensation grants stryker common stock 197 million december 31 2008 60 229 million december 31 2007 exercise prices options outstanding december 31 2008 ranged 1214 6780 december 31 2008 1389 million unrecognized compensation cost related nonvested stock options granted stock option plans cost expected recognized following 62 years weightedaverage period 17 years note 10 net earnings per share following table sets forth computation basic diluted net earnings per share millions except per share amounts options purchase average 57 million 09 million 45 million shares common stock years ended december 31 2008 2007 2006 respectively outstanding included computation diluted net earnings per share exercise prices options greater average market price common stock periods 61 note 11 retirement plans certain companys subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets summary companys defined benefit pension plans follows millions weightedaverage discount rate used determination projected benefit obligation 49 48 december 31 2008 2007 respectively components amounts recognized consolidated balance sheets follows millions 62 components amounts recognized accumulated comprehensive gain loss effect income taxes follows millions accumulated benefit obligation defined benefit pension plans 2342 million 2061 million december 31 2008 2007 respectively pension plans accumulated benefit obligation excess plan assets projected benefit obligations accumulated benefit obligations fair value plan assets 1875 million 1749 million 861 million respectively december 31 2008 1921 million 1752 million 1373 million respectively december 31 2007 components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive gain loss effect income taxes follows millions estimated net actuarial loss defined benefit pension plans recognized accumulated comprehensive gain loss net periodic benefit cost year ended december 31 2009 23 million company estimates immaterial amount amortization prior service cost transition amount defined benefit pension plans recognized accumulated comprehensive gain loss net periodic benefit cost year ended december 31 2009 company assumed average longterm expected return defined benefit plan assets 55 december 31 2008 expected return determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns 63 weightedaverage allocation plan assets asset category follows investment strategy companys defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances reflected target investment allocation ranges plans december 31 2008 company anticipates contributing 215 million defined benefit pension plans 2009 following estimated future benefit payments reflect expected future service appropriate expected paid years indicated millions retirement plan expense companys defined contribution retirement plans totaled 986 million 2008 823 million 2007 673 million 2006 portion companys retirement plan expense funded stryker common stock totaling 93 million 2008 84 million 2007 70 million 2006 use stryker common stock represents noncash operating activity reflected consolidated statements cash flows amount stryker common stock held companys defined contribution retirement plans totaled 588 million approximately 15 million shares 1082 million approximately 14 million shares december 31 2008 2007 respectively value stryker common stock percentage total defined contribution retirement plan assets 11 15 december 31 2008 2007 respectively note income taxes december 31 2008 income tax authorities several income tax jurisdictions inside outside united states conducting routine audits companys income tax returns filed prior years audits generally designed determine individual income tax authorities agreement companys interpretations complex income tax regulations regarding allocation income various income tax jurisdictions exceptions company longer subject audits income tax authorities tax years prior 2001 income tax years subsequent 2000 open examination many income tax jurisdictions company operates earnings continuing operations income taxes consist following millions 64 components provision income taxes follow millions reconciliation us statutory income tax rate companys effective income tax rate continuing operations follows 65 deferred income taxes reflect net income tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes valuation allowances recorded reduce deferred income tax assets likely income tax benefit realized income tax effects significant temporary differences comprise companys deferred income tax assets liabilities follows millions net operating loss carryforwards totaling 1374 million december 31 2008 available reduce future taxable earnings certain domestic foreign subsidiaries provision made u federal state income taxes foreign income taxes may result future remittances undistributed earnings 30924 million december 31 2008 foreign subsidiaries expected earnings reinvested overseas indefinitely determination amount unrecognized deferred income tax liability unremitted earnings practicable total income taxes paid net refunds received 4785 million 2008 4116 million 2007 3256 million 2006 66 changes amounts recorded unresolved income tax positions follows millions companys income tax expense could reduced 2416 million 2049 million december 31 2008 december 31 2007 respectively upon favorable resolution unresolved income tax positions interest expense penalties included income expense 178 million year ended december 31 2008 accrued interest penalties included accrued expenses liabilities 526 348 million december 31 2008 december 31 2007 respectively reasonably possible amount unrecognized tax benefits significantly change due one following events next twelve months expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject controversy various taxing jurisdictions operate including cost sharing product royalty arrangements changes unrecognized tax benefits may result significant tax adjustments company able reasonably estimate amount future periods changes unrecognized tax benefits required note 13 segment geographic data company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma craniomaxillofacial spinal implant systems bone cement bone growth factor op1 medsurg equipment segment sells surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment category includes corporate administration interest expense interest marketable securities income sharebased compensation includes compensation related employee director stock option restricted stock grants effective january 1 2008 company changed business segment reporting include financial results certain products within orthopaedic implants segment rather within medsurg equipment segment company believes products better aggregated orthopaedic implants products based similarities manufacturing marketing practices customer base companys reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies note 1 consolidated financial statements company measures financial results reportable segments using internal performance measure excludes restructuring charges recorded 2008 intangible asset impairment charge recorded 2007 purchased inprocess research 67 development charge recorded 2006 identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment 2006 assets discontinued operations sales financial information business segment follows millions 68 countries company local revenuegenerating operations combined following geographic areas united states including puerto rico europe middle east africa emea foreign countries comprised japan pacific region canada latin america region sales attributable geographic area based upon customers country domicile longlived assets include net property plant equipment based upon physical location assets geographic information follows millions note leases company leases various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases future minimum lease commitments leases follows millions rent expense totaled 760 million 2008 659 million 2007 560 million 2006 note 15 contingencies 2008 company certain current former employees received subpoenas us department justice office criminal division united states attorney massachusetts requesting documents related false institutional review board approvals ii amount sales op1 one companys humanitarian device exemptions iii offlabel promotion calstrux combination op1 company process responding us department justice regarding matter 69 2008 company received warning letter fda related quality systems compliance issues op1 implant manufacturing facility hopkinton massachusetts 2007 company received two warning letters fda regarding compliance certain quality system specifications reconstructive implant manufacturing facilities one letter facility cork ireland another facility mahwah new jersey company takes matters seriously fully cooperating fda address observations 2007 company announced reached resolution us attorneys office district new jersey connection previously announced investigation relating consulting contracts professional service agreements remuneration agreements stryker corporation orthopedic surgeon orthopedic surgeon training medical school graduate using considering surgical use hip knee joint replacementreconstruction products manufactured sold stryker corporation resolution form nonprosecution agreement 18month period ending march 27 2009 term agreement companys orthopaedics subsidiary subject oversight federal monitor appointed us attorney regarding compliance certain standards procedures connection retention payment orthopaedic surgeon consultants related reconstructive products provision certain benefits surgeons subsequent entering nonprosecution agreement us department health human services office inspector general hhs issued civil subpoena company seeking determine whether company violated various laws paying consulting fees providing things value orthopedic surgeons healthcare educational institutions inducements use strykers orthopedic medical devices procedures paid whole part medicare company produced numerous documents materials hhs response subpoena working hhs attempt narrow scope requested production 2008 us department justice hhs sought judicial enforcement subpoena court agreed enforce january 2009 time us district court district new jersey dismissed companys complaint asked court quash subpoena sought appropriate relief grounds subpoena overbroad oppressive 2007 company disclosed us securities exchange commission made informal inquiry company regarding possible violations foreign corrupt practices act connection sale medical devices certain foreign countries subsequently 2008 company received subpoena us department justice criminal division requesting certain documents period since january 1 2000 connection us securities exchange commission inquiry company fully cooperating us department justice us securities exchange commission regarding matters 2006 company announced received subpoena us department justice antitrust division requesting documents period since january 2001 regarding possible violations federal criminal law including possible violation antitrust laws relating manufacture sale orthopaedic implant devices 2008 company advised us department justice antitrust division department closed grand jury investigation antitrust related offenses orthopaedic implants industry pursuant certain companys credit lease agreements company provided financial guarantees third parties form indemnification provisions indemnify third parties costs including limited adverse judgments lawsuits imposition additional income taxes due either change tax law adverse interpretation tax law terms guarantees equal terms related credit lease agreements company able calculate maximum potential amount future payments could required make guarantees potential payment dependent occurrence future unknown events eg changes us foreign tax laws 70 summary quarterly data unaudited stryker corporation subsidiaries millions except per share amounts price quotations reported supplied new york stock exchange 71 item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements board directors shareholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2009 2008 related consolidated statements earnings shareholders’ equity cash flows three years period ended december 31 2009 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2009 2008 consolidated results operations cash flows three years period ended december 31 2009 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements 2009 company changed method accounting business combinations adoption guidance originally issued fasb statement 141r business combinations codified fasb asc topic 805 business combinations also audited accordance standards public company accounting oversight board united states stryker corporation’s internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 26 2010 expressed unqualified opinion thereon ernst young llp grand rapids michigan february 26 2010 stryker corporation subsidiaries consolidated balance sheets millions except per share amounts see accompanying notes consolidated financial statements stryker corporation subsidiaries consolidated statements earnings millions except per share amounts see accompanying notes consolidated financial statements stryker corporation subsidiaries consolidated statements shareholders’ equity millions except per share amounts see accompanying notes consolidated financial statements stryker corporation subsidiaries consolidated statements cash flows millions see accompanying notes consolidated financial statements stryker corporation subsidiaries notes consolidated financial statements december 31 2009 note 1 significant accounting policies business stryker corporation company stryker one world’s leading medical technology companies broadly based range products orthopaedics significant presence medical specialties stryker works respected medical professionals help people lead active satisfying lives company’s products include implants used joint replacement trauma spinal surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment well medical device products used variety medical specialties principles consolidation consolidated financial statements include accounts company subsidiaries elimination intercompany accounts transactions use estimates preparation consolidated financial statements conformity us generally accepted accounting principles gaap requires company management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes actual results could differ estimates revenue recognition significant portion company’s orthopaedic implants revenue generated consigned inventory maintained hospitals field representatives company retains title inventory held consignment hospitals field locations company receives appropriate notification product used implanted time revenue recognized company records revenue orthopaedic implants held consignment medsurg equipment product sales title risk ownership transferred customer typically upon shipment customer company records estimated sales returns discounts rebates sales incentives reduction net sales period revenue recognized estimates sales returns recorded anticipated product returns based historical sales returns information estimates sales discounts rebates sales incentives recorded based contractual terms historical experience trend analysis shipping handling products amounts billed customers shipping handling products included net sales costs incurred related shipping handling products included cost sales foreign currency translation functional currencies substantially company’s international affiliates local currencies accordingly financial statements international affiliates translated us dollars using current exchange rates balance sheets average exchange rates statements earnings cash flows unrealized translation adjustments included accumulated comprehensive gain loss shareholders’ equity transaction gains losses resulting settlement nonfunctional currency receivables payables included net earnings financial instruments company’s financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts company’s estimates fair value financial instruments approximate carrying amounts december 31 2009 2008 company adopted provisions financial instruments fair value measurements disclosures topics financial accounting standard board fasb accounting standards codification 2008 required disclosures regarding fair value financial instruments included note 2 consolidated financial statements stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 cash equivalents highly liquid investments maturity three months less purchased marketable securities consist marketable debt securities certificates deposit mutual funds mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities pursuant company’s investment policy individual marketable security investments must minimum credit quality single per standard poor’s fitch a2 per moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double per standard poor’s fitch aa per moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk company’s marketable security investment portfolio december 31 2009 approximately 1 company’s investments marketable securities credit quality rating less single per standard poor’s fitch a2 per moody’s corporation company follows provisions investmentsdebt equity securities topic fasb codification accounting marketable securities classified availableforsale trading securities topic requires company recognize marketable securities consolidated balance sheets fair value company’s marketable securities stated fair value pursuant requirements fair value measurements disclosures topic fasb codification adjustments fair value marketable securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive gain loss shareholders’ equity adjustments fair value marketable securities classified trading recorded earnings amortized cost marketable debt securities adjusted amortization premiums discounts maturity computed effective interest method amortization included income expense along interest realized gains losses cost securities sold determined specific identification method company reviews declines fair value investments classified availableforsale impairment accordance provisions investmentsdebt equity securities topic fasb codification order determine whether decline fair value otherthantemporary impairment otherthantemporary impairments availableforsale marketable securities recorded earnings company follows provisions derivatives hedging topic fasb codification requires company recognize derivatives consolidated balance sheets fair value company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses included income expense consolidated statements earnings accounts receivable accounts receivable consists trade miscellaneous receivables company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends accounts receivable written reasonable collection efforts exhausted stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 accounts receivable securitization company extend 100 million accounts receivable securitization facility agreement upon expiration april 24 2009 amounts undivided percentage ownership interests accounts receivable sold stryker funding corporation wholly owned specialpurpose subsidiary company facility december 31 2008 time thereafter inventories stated lower cost market cost approximately 84 inventories determined using firstin firstout fifo cost method cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause company’s products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends property plant equipment property plant equipment stated cost depreciation computed either straightline decliningbalance method estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses amounts allocated intangible assets intangible assets include developed technology amortized straightline basis 20 years customer relationships reflect expected continued customer patronage trademarks patents amortized straightline basis 4 40 years weightedaverage life 15 years intangible assets goodwill longlived assets impairment tests intangiblesgoodwill topic fasb codification requires companies test goodwill possible impairment annual basis company performs annual impairment test fourth quarter year using discounted cash flow analysis requires certain assumptions estimates made regarding market conditions company’s future profitability company also performs impairment tests goodwill intangible longlived assets interim periods upon occurrence certain events changes circumstance defined property plant equipment presentation financial statements topics fasb codification loaner instrumentation loaner instrumentation represents net book value loaner instruments surgical implants provided customers company loaner instrumentation amortized straightline basis 3year period amortization expense loaner instrumentation included selling general administrative expenses stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 stock options december 31 2009 company key employee director stock option plans described fully note 10 consolidated financial statements pursuant provisions compensationstock compensation topic fasb codification company measures cost employee stock options based grantdate fair value recognizes cost period recipient required provide services exchange options typically vesting period weightedaverage fair value per share options granted 2009 2008 2007 estimated date grant using blackscholes option pricing model 1309 1987 2190 respectively fair value options granted estimated using following weightedaverage assumptions riskfree interest rate periods within expected life options granted based us treasury yield curve effect time grant expected stock price volatility based historical volatility company’s stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data company recognizes cost stock options using straightline method vesting periods income taxes company accounts income taxes using liability method pursuant provisions income taxes topic fasb codification method deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax credit represents change net deferred income tax assets liabilities year interest expense penalties incurred associated unresolved income tax positions included income expense pursuant provisions income taxes topic fasb codification company operates multiple income tax jurisdictions inside outside united states income tax authorities jurisdictions regularly perform audits company’s income tax filings accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty arrangements may require extended period time resolve may result significant income tax adjustments changes income allocation required jurisdictions different income tax rates legal contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 16 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory relief could result payment significant claims settlements legal matters management sufficient information reasonably estimate company’s future obligations liability representing management’s best estimate probable cost minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 accumulated comprehensive gain loss components accumulated comprehensive gain loss follows millions recently adopted accounting standards 2009 company adopted provisions fasb statement 168 fasb accounting standards codification hierarchy generally accepted accounting principlesa replacement fasb statement 162 statement establishes fasb codification source authoritative us gaap together rules interpretive releases us securities exchange commission us sec authority federal securities laws existing accounting standards superseded described statement accounting literature included fasb codification nonauthoritative 2009 company adopted provisions business combinations topic fasb codification topic significantly changes principles requirements acquisition recognized measured company’s financial statements including identifiable assets acquired liabilities assumed topic also provides guidance recognizing measuring goodwill acquired business combination required disclosures enable users financial statements evaluate nature financial effects business combination additional disclosure requirements regarding business combinations topic fasb codification included note 5 consolidated financial statements 2009 company adopted provisions derivatives hedging topic fasb codification topic requires enhanced disclosures derivative instruments hedging activities enable investors better understand company’s use derivative instruments effect company’s financial position financial performance cash flows enhanced disclosures regarding derivative instruments hedging activities included note 3 consolidated financial statements 2009 company adopted fasb’s guidance determining fair value volume level activity asset liability significantly decreased identifying transactions orderly included fair value measurement disclosures topic fasb codification recognition presentation otherthantemporary impairments included investmentdebt equity securities topic fasb codification new guidance provides additional application rules enhanced disclosures fair value measurements impairments securities clarifies objective method fair value measurement even significant decrease market activity asset measured addition guidance establishes new model measuring otherthantemporary impairments debt securities including establishing criteria recognize writedown earnings required disclosures regarding fair value financial instruments included note 2 consolidated financial statements stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 company adopted fasb’s guidance employers’ disclosures postretirement benefit plant assets included compensationretirements benefits topic fasb codification guidance requires enhanced employer’s disclosures plan assets defined benefit pension postretirement plan required disclosures plan assets included note 12 consolidated financial statements 2009 company adopted provisions subsequent events topic amended fasb codification topic establishes general standards accounting disclosure events occur balance sheet date financial statements issued available issued required disclosures included note 17 consolidated financial statements recently issued accounting standards 2009 fasb issued improvement financial reporting enterprises involved variable interest entities topic fasb codification topic requires qualitative approach identifying controlling financial interest variable interest entity vie requires ongoing assessment whether entity vie whether interest vie makes holder primary beneficiary vie topic effective company beginning january 1 2010 company expect adoption topic material impact consolidated financial statements 2010 fasb issued update fair value measurements disclosures topic “improving disclosures fair value measurements” fasb codification requires reporting entities make new disclosures recurring nonrecurring fairvalue measurements including significant transfers level 1 level 2 fairvalue measurements information purchases sales issuances settlements gross basis reconciliation level 3 fairvalue measurements update fair value measurements disclosures topic “improving disclosures fair value measurements” fasb codification effective annual reporting periods beginning december 15 2009 except level 3 reconciliation disclosures effective annual periods beginning december 15 2010 company expect adoption update material impact consolidated financial statements reclassifications certain prior year amounts reclassified conform presentation used 2009 company disclosed payments restructuring charges separately consolidated statements cash flows note 2 financial instruments company’s financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts company’s estimates fair value financial instruments approximate carrying amounts december 31 2009 stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 pursuant requirements fair value measurements disclosures topic fasb codification company’s financial assets liabilities measured fair value recurring basis classified disclosed one following three categories level 1 financial instruments unadjusted quoted prices listed active market exchanges level 2 financial instruments lacking unadjusted quoted prices active market exchanges including overthecounter traded financial instruments prices financial instruments determined using prices recently traded financial instruments similar underlying terms well directly indirectly observable inputs interest rates yield curves observable commonly quoted intervals level 3 financial instruments actively traded market exchange category includes situations little market activity financial instrument prices determined using significant unobservable inputs valuation techniques following describes methods company uses estimate fair value company’s financial assets liabilities cash equivalents company considers carrying values financial instruments approximate fair value financial instruments short period time origination instruments expected realization availableforsale marketable securities company’s level 2 availableforsale marketable securities primarily include us government agency securities foreign government debt securities assetbacked debt securities commercial paper corporate debt securities certificates deposit company’s level 2 availableforsale marketable securities values determined using prices recently traded financial instruments similar underlying terms well directly indirectly observable inputs interest rates yield curves observable commonly quoted intervals company’s level 3 availableforsale marketable securities include corporate debt securities company’s level 3 availableforsale marketable securities valuations based income approach specifically discounted cash flow analyses utilize significant inputs based company’s estimates assumptions using approach estimates timing amount cash flows expected holding periods securities used expected future cash flows calculated expected life security discounted single present value using estimated market required rate return trading marketable securities auctionrate securities ars rights company’s level 1 trading marketable securities consist mutual funds valued using market approach based quoted prices specific mutual fund transactions active exchange markets company’s level 3 trading marketable securities include investments auctionrate securities ars majority triple rated per standard poor’s collateralized student loans guaranteed us department education interest rates ars investments reset auction process commonly intervals 7 28 35 days stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 beginning february 2008 liquidity issues global credit markets resulted failure auctions ars investments held company amount securities submitted sale auctions exceeded amount purchase bids december 31 2009 company held 1563 million par value ars investments 2008 company entered ars rights agreement rights ubs financial services inc ubs one investment providers whereby company received right sell ars par value ubs time period june 30 2010 july 2 2012 ars rights nontransferable securities registered us sec company elected apply fair value option ars rights pursuant provisions fair value option financial assets financial liabilities topic fasb codification result election twelvemonth period ended december 31 2009 company recorded loss 110 million income expense recognize change fair value estimate ars rights loss offset corresponding gain fair value estimate related trading marketable securities 2008 company recorded gain 280 million income expense corresponding noncurrent asset within consolidated balance sheet simultaneously company transferred ars investments fair value 1388 million availableforsale trading marketable securities result transfer company recognized loss 280 million income expense reflecting reversal related temporary valuation allowance previously recorded within accumulated comprehensive gain loss shareholders’ equity result illiquidity market ars investments company estimated fair value ars rights using level 3 valuation methodology company’s level 3 valuations ars rights based income approach specifically discounted cash flow analyses utilize significant inputs based company’s estimates assumptions discounted cash flow analyses included following assumptions december 31 2009 current coupon rates expected maturity current discount rates current coupon rates based forecasted interest rates specifically 3 month us treasury bill plus applicable coupon spread generally 120 basis points expected maturity assumption based weighted average remaining term underlying student loans financed trusts issued ars based available information expected maturity reflects 17 year assumption current discount rates reflect base rate credit spread illiquidity premium base rate corresponds 3month libor also base rate matches credit spread credit spread consistent triple rated investments collateralized student loans guaranteed us government federal family education loan program illiquidity premium estimate proxy additional return required holding illiquid assets company’s valuation supported broker pricing valuation incorporates transaction details contractual terms maturity timing anticipated amounts future cash flows well assumptions liquidity credit valuation adjustments marketplace participants december 31 2009 adjustments subject future changes underlying market conditions marketplace sources change foreign currency exchange contracts company values foreign currency exchange contracts using market approach based foreign currency exchange rates obtained active markets estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points december 31 2009 fair value carrying amount company’s forward currency exchange contracts assets liabilities 83 million 62 million respectively stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 following table summarizes valuation company’s financial instruments aforementioned pricing categories millions following table presents rollforward assets measured fair value recurring basis using unobservable inputs level 3 millions stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 following summary company’s marketable securities millions stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 cost estimated fair value availableforsale marketable securities december 31 2009 contractual maturity follows millions gross unrealized losses fair value company’s investments unrealized losses deemed otherthantemporarily impaired aggregated investment category length time individual securities continuous unrealized loss position december 31 2009 follows millions unrealized losses company’s investments corporate asset backed us agency debt securities primarily caused increases interest yields result continued challenging conditions global credit markets many investments downgraded rating agencies since initial purchase less 1 company’s investments corporate assetbacked debt securities credit quality rating less single per standard poor’s fitch company intend sell investments likely company required sell investments recovery amortized cost basis may maturity company consider investments otherthantemporarily impaired december 31 2009 unrealized losses company’s investments foreign government debt securities also caused interest rate increases decline market value attributable changes interest rates company intend sell investments likely company required sell investments recovery amortized cost basis may maturity company consider investments otherthantemporarily impaired december 31 2009 pursuant company’s investment policy individual marketable security investments must minimum credit quality single per standard poor’s fitch a2 per moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double per standard poor’s fitch aa per moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk company’s marketable stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 security investment portfolio december 31 2009 approximately 1 company’s investments marketable securities credit quality rating less single per standard poor’s fitch a2 per moody’s corporation december 31 2009 approximately 1 company’s investments marketable securities held triple rated per standard poor’s fitch asset backed debt securities interest marketable securities income included income expense totaled 539 million 2009 977 million 2008 855 million 2007 note 3 derivative instruments hedging strategies company follows provisions derivatives hedging topic fasb codification requires company recognize derivatives consolidated balance sheets fair value company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products well 2009 intercompany loans associated repatriation foreign earnings duration forward currency exchange contracts correspond anticipated period intercompany receivables payables remain outstanding company designate contracts hedges therefore forward currency exchange contracts recorded fair value period resulting gains losses included income expense consolidated statements earnings offset gains losses recognized intercompany receivables payables twelve months ended december 31 2009 2008 recognized foreign currency transaction losses included income expense consolidated statements earnings 11 million 60 million respectively december 31 2009 company outstanding forward currency exchange contracts purchase 20411 million sell 2805 million various currencies principally us dollars euros original maturities ranging 4 106 days maximum length time company limiting exposure reduction value nonfunctional receivables payables foreign currency exchange contracts march 31 2010 december 31 2008 company outstanding forward currency exchange contracts purchase 4125 million sell 2884 million various currencies principally us dollars euros maturities ranging 2 110 days december 31 2009 fair value carrying amount company’s forward currency exchange contracts asset liabilities 83 million 62 million respectively included component prepaid expenses current assets accrued expenses liabilities respectively consolidated balance sheets estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 note 4 inventories summarized follows millions note 5 acquisitions december 31 2009 company acquired ascent healthcare solutions inc ascent market leader reprocessing remanufacturing medical devices united states cash transaction 5250 million acquisition ascent expected enhance company’s product offerings well provide cost savings opportunities customers medsurg equipment segment ascent acquisition effect company’s consolidated net sales operating income 2009 ascent sales 1339 million year ended december 31 2009 sales 1094 million year ended december 31 2008 2009 company acquired certain additional companies expected enhance company’s product offerings customers within orthopaedic implants medsurg equipment business segments acquisitions material effect company’s consolidated net sales operating income 2009 acquisitions described accounted pursuant requirements business combinations topic fasb codification assets acquired liabilities assumed result acquisitions included company’s consolidated balance sheet december 31 2009 pro forma consolidated results operations would differ significantly result acquisitions purchase price acquisitions described preliminarily allocated tangible intangible assets acquired liabilities assumed based estimated fair values acquisition date fair value assigned identifiable intangible assets acquired determined primarily using income approach excess purchase price value net tangible identifiable intangible assets recorded goodwill purchased identifiable intangible assets goodwill amortized straightline basis respective estimated useful lives respect ascent acquisition estimated useful lives range 11 15 years acquisitions estimated useful lives range 2 11 years acquisitions preliminary allocation purchase price based upon preliminary valuation company’s estimates assumptions subject change within measurement period valuations finalized table represents allocation preliminary purchase price acquired net assets ascent acquisitions completed 2009 millions stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 goodwill associated acquisition ascent 3291 million 584 million acquisitions factors contributed recognition goodwill included securing synergies specific company’s business available market participants expected increase revenues profits acquisition talented workforce cost savings opportunities 2004 company acquired outstanding stock spinecore inc spinecore developer artificial lumbar cervical discs upfront payment 1200 million cash plus certain transaction costs terms transaction also include potential milestone royalty payments additional 2400 million upon commercialization spinecore’s products united states potential milestone payments expected capitalized fair values intangible assets time payment current products development include flexicore lumbar artificial disc cervicore cervical artificial disc company believes technologies acquired spinecore acquisition result introduction new products additional future sales however unanticipated issues may arise could delay terminate product’s development prior regulatory approval commercialization could unfavorable impact company’s operating results december 31 2009 company encountered significant issues expects completion development initial us commercialization flexicore lumbar artificial disc cervicore cervical artificial disc following receipt required regulatory approvals note 6 discontinued operations 2007 company sold outpatient physical therapy business physiotherapy associates 1500 million cash less certain indebtedness sale physiotherapy associates allowed company focus efforts medical technology market sale physiotherapy associates resulted gain 257 million net 150 million income tax expense 006 per diluted share net sales discontinued operations net earnings discontinued operations year ended december 31 2007 1074 million 50 million respectively stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 note 7 restructuring charges 2009 company initiated number restructuring projects focused shifting resources areas company greatest opportunities growth streamlining operations drive operating leverage 2008 company made decisions simplify structure japanese distribution business substantially reduce development efforts associated product technologies purchased sightline technologies ltd acquisition 2006 company recorded restructuring charges 2009 2008 consisting following items millions 2009 charges 303 million agent conversion charges represent costs associated termination certain thirdparty agent agreements company’s europe middle east africa emea division initiative intended provide company greater control distribution channels well improve customer focus selling efficiency 183 million asset impairment charges associated company’s decision discontinue selling certain products within orthopaedic implants medsurg equipment business segments relates primarily identifiable intangible assets discontinued product lines expected material impact company’s future operating results 129 million severance related costs charge represents workforce reduction employmentrelated severance costs approximately 120 employees resulting company’s decision simplify organization structure biotech emea japan canada divisions 55 million contractual obligations charges represent costs associated termination various supplier contracts well incidental costs related discontinued product lines charges 223 million asset impairment charges represent excess net book value fair market value assets disposed sale primarily related sales offices warehousing distribution facilities japan 85 million charge represents employmentrelated severance costs 84 employees 41 million contractual obligations charges represent costs associated termination various supplier contracts well incidental costs stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 following table provides rollforward remaining liabilities included within accrued expenses liabilities consolidated balance sheet related restructuring charges recorded company 2009 2008 millions restructuring projects initiated 2009 2008 substantially complete company expects asset disposals completed final severance payments made 2010 note 8 goodwill intangible assets changes net carrying amount goodwill segment years ended december 31 2009 2008 follows millions fourth quarters 2009 2008 company completed required annual impairment tests goodwill prescribed intangiblesgoodwill topic fasb codification determined instances recorded goodwill impaired goodwill write necessary stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 following summary company’s intangible assets millions estimated amortization expense five succeeding years follows millions note 9 debt company current debt outstanding various debt instruments totaling 180 million 205 million 168 million december 31 2009 2008 2007 respectively company also 10000 million unsecured credit facility expires november 2010 includes senior 5year nonamortizing revolving credit agreement maximum amount 10000 million company may increase facility maximum limit 1000 million increments additional 5000 million upon acceptance existing lender group additional lenders amounts outstanding unsecured credit facility december 31 2009 2008 unsecured credit facility requires facility fee ranging 004 015 aggregate commitment facility depending company’s debt rating facility includes 5000 million multicurrency sublimit yen euro borrowed 1000 million swing line sublimit 1000 million letter credit sublimit facility bears interest base rate defined plus applicable margin ranging 012 0475 depending company’s debt rating stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 weightedaverage interest rate excluding required fees borrowings 43 facility requires company comply certain financial covenants company compliance covenants december 31 2009 addition facility company lines credit issued various financial institutions available fund company’s daytoday operating needs december 31 2009 company 10492 million additional borrowing capacity available existing credit facilities carrying amounts company’s debt approximate fair values based quoted interest rates similar types amounts borrowing agreements interest paid debt including required fees 53 million 2009 57 million 2008 65 million 2007 approximates amounts reflected interest expense included income expense note 10 capital stock december 2009 company’s board directors authorized company repurchase 7500 million common stock manner timing amount purchases determined company’s management based evaluation market conditions stock price factors subject regulatory considerations purchases may made time open market privately negotiated transactions otherwise company made stock repurchases relative 7500 million repurchase program december 31 2009 october 2009 company’s board directors modified company’s dividend policy adopt quarterly payment schedule lieu annual dividend conjunction modification company’s board directors declared cash transition dividend 010 per share transition dividend increased total dividends paid 2009 050 per share 52 033 per share paid 2008 addition december 2009 company’s board directors declared first quarterly dividend 015 per share payable january 29 2010 shareholders record close business december 30 2009 2008 company repurchased 174 million shares common stock open market cost 10000 million pursuant repurchase programs authorized company’s board directors shares repurchased share repurchase programs available general corporate purposes including offsetting dilution associated stock option equitybased employee benefit plans company 05 million authorized shares 1 par value preferred stock none outstanding stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 company key employee director stock option plans options granted exercise price less fair market value underlying common stock date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows aggregate intrinsic value represents cumulative difference fair market value underlying common stock option exercise prices options exercised years ended december 31 2009 2008 2007 375 million 1354 million 1601 million respectively shares reserved future compensation grants stryker common stock 145 million december 31 2009 197 million december 31 2008 exercise prices options outstanding december 31 2009 ranged 1621 6780 december 31 2009 1432 million unrecognized compensation cost related nonvested stock options granted stock option plans cost expected recognized following 52 years weightedaverage period 16 years 2009 company also granted restricted stock units representing 01 million shares common stock weighted average fair value per share 4045 note 11 net earnings per share following table sets forth computation basic diluted net earnings per share millions except per share amounts options purchase average 181 million 57 million 09 million shares common stock years ended december 31 2009 2008 2007 respectively outstanding included computation diluted net earnings per share exercise prices options greater average market price common stock periods stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 note 12 retirement plans certain company’s subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets summary company’s defined benefit pension plans follows millions weightedaverage discount rate used determination projected benefit obligations 49 december 31 2009 2008 components amounts recognized consolidated balance sheets follows millions stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 components amounts recognized accumulated comprehensive gain loss effect income taxes follows millions accumulated benefit obligations defined benefit pension plans 2382 million 2342 million december 31 2009 2008 respectively pension plans accumulated benefit obligation excess plan assets projected benefit obligations accumulated benefit obligations fair value plan assets 2489 million 2298 million 1650 million respectively december 31 2009 1875 million 1749 million 861 million respectively december 31 2008 components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive gain loss effect income taxes follows millions estimated net actuarial loss defined benefit pension plans recognized accumulated comprehensive gain loss net periodic benefit cost year ended december 31 2010 05 million company estimates immaterial amount amortization prior service cost transition stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 amount defined benefit pension plans recognized accumulated comprehensive gain loss net periodic benefit cost year ended december 31 2010 company assumed average longterm expected return defined benefit plan assets 58 december 31 2009 expected return determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns weightedaverage allocation plan assets asset category follows investment strategy company’s defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances reflected weightedaverage target investment allocation ranges plans december 31 2009 following table summarizes valuation company’s pension plan assets pricing categories december 31 2009 millions stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 company’s level 3 assets consist primarily guaranteed investment contracts insurance companies insurance contracts guarantee company principal repayment fixed rate return company’s valuation level 3 assets based third party actuarial valuations estimation surrender value guaranteed investment contract company insurance company surrender value equals actuarial value notional investments underlying guaranteed investment contract using actuarial assumptions stated guaranteed investment contract following table presents rollforward pension plan assets measured fair value recurring basis using unobservable inputs level 3 january 1 2009 december 31 2009 millions company anticipates contributing 190 million defined benefit pension plans 2010 following estimated future benefit payments reflect expected future service appropriate expected paid years indicated millions retirement plan expense company’s defined contribution retirement plans totaled 1007 million 2009 986 million 2008 823 million 2007 portion company’s retirement plan expense funded stryker common stock totaling 108 million 2009 93 million 2008 84 million 2007 use stryker common stock represents noncash operating activity reflected consolidated statements cash flows amount stryker common stock held company’s defined contribution retirement plans totaled 826 million approximately 16 million shares 588 million approximately 15 million shares december 31 2009 2008 respectively value stryker common stock percentage total defined contribution retirement plan assets 11 december 31 2009 2008 note 13 income taxes earnings continuing operations income taxes consist following millions stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 components provision income taxes follow millions reconciliation us statutory income tax rate company’s effective income tax rate continuing operations follows deferred income taxes reflect net income tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes valuation allowances recorded reduce deferred income tax assets likely income tax benefit realized stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 income tax effects significant temporary differences comprise company’s deferred income tax assets liabilities follows millions net operating loss carryforwards totaling 1962 million december 31 2009 available reduce future taxable earnings certain domestic foreign subsidiaries us loss carryforwards 623 million expire 2010 2025 majority company’s foreign loss carryforwards 1339 million expire addition 1084 million foreign loss carryforward subject full valuation allowance fourth quarter 2009 company repatriated 7870 million foreign earnings united states recorded charge 671 million recognize income tax expense related liability associated repatriation repatriated cash used fund acquisition ascent also used previously announced initiatives including share repurchase authorization pursuant requirements accounting income taxesspecial areas included income taxes topic fasb codification provision made u federal state income taxes foreign income taxes may result future remittances undistributed earnings foreign subsidiaries determined reinvested overseas indefinitely 32314 million december 31 2009 determination amount unrecognized deferred income tax liability unremitted earnings practicable total income taxes paid net refunds received 4064 million 2009 4785 million 2008 4116 million 2007 stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 changes amounts recorded unresolved income tax positions follows millions company’s income tax expense could reduced 2743 million 2416 million december 31 2009 december 31 2008 respectively upon favorable resolution unresolved income tax positions december 31 2009 income tax authorities several income tax jurisdictions inside outside united states conducting routine audits company’s income tax returns filed prior years audits generally designed determine individual income tax authorities agreement company’s interpretations complex income tax regulations regarding allocation income various income tax jurisdictions exceptions company longer subject audits income tax authorities tax years prior 2003 income tax years subsequent 2002 open examination many income tax jurisdictions company operates april 2009 us internal revenue service irs proposed adjustments company’s previously filed 2003 2004 2005 income tax returns related income tax positions company taken cost sharing arrangements two wholly owned entities operating ireland company believes followed applicable tax law treasury regulations vigorously defend income tax positions irs ultimately prevail respect proposed adjustments could material unfavorable impact company’s income tax expense net earnings future periods interest expense penalties included income expense 92 million year ended december 31 2009 accrued interest penalties included accrued expenses liabilities 587 million 526 million december 31 2009 december 31 2008 respectively reasonably possible amount unrecognized tax benefits significantly change due one following events next twelve months expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject controversy various taxing jurisdictions operate including cost sharing product royalty arrangements company able reasonably estimate amount future periods changes unrecognized tax benefits may required stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 note 14 segment geographic data company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment includes orthopaedic reconstructive hip knee trauma spinal implant systems related products medsurg equipment segment includes surgical equipment surgical navigation systems endoscopic communications systems well patient handling emergency medical equipment category includes corporate administration interest expense interest marketable securities income sharebased compensation includes compensation related employee director stock option restricted stock grants company’s reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies note 1 consolidated financial statements company measures financial results reportable segments using internal performance measure excludes patent litigation gain income tax expenses associated repatriation foreign earnings recorded 2009 restructuring charges recorded 2009 2008 intangible asset impairment charge recorded 2007 identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment identifiable assets medsurg equipment segment december 31 2009 include acquired assets ascent healthcare solutions inc stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 sales financial information business segment follows millions stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 countries company local revenuegenerating operations combined following geographic areas united states including puerto rico europe middle east africa emea foreign countries comprised japan canada pacific region latin america region sales attributable geographic area based upon customer’s country domicile longlived assets include net property plant equipment based upon physical location assets geographic information follows millions note 15 leases company leases various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases future minimum lease commitments leases follows millions rent expense totaled 751 million 2009 760 million 2008 659 million 2007 stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 note 16 contingencies 2009 company received subpoena attorney general new jersey requesting various documents related financial interests arrangements physicians participating certain clinical trials behalf company evaluating scope subpoena response attorney general new jersey reportedly issued similar subpoenas major medical device manufacturing companies 2009 federal grand jury district massachusetts returned indictment charging stryker biotech llc certain current former employees stryker biotech wire fraud conspiracy defraud us food drug administration fda distribution misbranded device false statements fda company still hopes able reach fair resolution matter conviction charges could result significant monetary fines stryker biotech’s exclusion participating federal state health care programs could material affect stryker biotech’s business however ultimate resolution matters reasonably estimatable time company understands certain former stryker biotech employees pled guilty charges connection matter 2009 company received warning letter us fda related compliance issues one craniomaxillofacial cmf implant products previously sold cmf distribution facility portage michigan 2008 company received warning letter fda related quality systems compliance issues op1 implant manufacturing facility hopkinton massachusetts 2007 company received two warning letters fda regarding compliance certain quality system specifications reconstructive implant manufacturing facilities one letter facility cork ireland another facility mahwah new jersey october 2009 fda informed company warning letter related op1 implant manufacturing facility resolved following productive reinspection earlier 2009 company takes matters seriously continues fully cooperate fda address observations facilities 2007 company announced reached resolution us attorney’s office district new jersey connection previously announced investigation relating “any consulting contracts professional service agreements remuneration agreements stryker corporation orthopedic surgeon orthopedic surgeon training medical school graduate using considering surgical use hip knee joint replacementreconstruction products manufactured sold stryker corporation” resolution form nonprosecution agreement 18month period ended march 27 2009 term agreement company’s orthopaedics subsidiary subject oversight federal monitor appointed us attorney regarding compliance certain standards procedures connection retention payment orthopaedic surgeon consultants related reconstructive products provision certain benefits surgeons subsequent entering nonprosecution agreement us department health human services office inspector general hhs issued civil subpoena company seeking determine whether company violated various laws paying consulting fees providing things value orthopedic surgeons healthcare educational institutions inducements use stryker’s orthopedic medical devices procedures paid whole part medicare company produced numerous documents materials hhs response subpoena working hhs attempt narrow scope requested production 2008 us department justice hhs sought judicial enforcement subpoena court agreed enforce january 2009 time us district court district new jersey dismissed company’s complaint asked court quash subpoena sought appropriate relief grounds subpoena overbroad oppressive stryker corporation subsidiaries notes consolidated financial statementscontinued december 31 2009 2007 company disclosed us sec made informal inquiry company regarding possible violations foreign corrupt practices act connection sale medical devices certain foreign countries subsequently 2008 company received subpoena us department justice criminal division requesting certain documents period since january 1 2000 connection us sec inquiry company fully cooperating us department justice us sec regarding matters pursuant certain company’s credit lease agreements company provided financial guarantees third parties form indemnification provisions indemnify third parties costs including limited adverse judgments lawsuits imposition additional income taxes due either change tax law adverse interpretation tax law terms guarantees equal terms related credit lease agreements company able calculate maximum potential amount future payments could required make guarantees potential payment dependent occurrence future unknown events eg changes us foreign tax laws note 17 subsequent events january 15 2010 company sold 5000 million senior unsecured notes due january 15 2015 “2015 notes” 5000 million senior unsecured notes due january 15 2020 “2020 notes” 2015 notes bear interest 300 per year unless previously redeemed mature january 15 2015 2020 notes bear interest 4375 per year unless previously redeemed mature january 15 2020 company intends use net proceeds offering working capital general corporate purposes including acquisitions stock repurchases business opportunities january 15 2010 class action lawsuit company filed united states district court southern district new york behalf purchased company’s common stock january 25 2007 november 13 2008 inclusive lawsuit seeks remedies securities exchange act 1934 company evaluating scope claim intends defend vigorously pursuant subsequent events topic fasb codification company evaluated subsequent events december 31 2009 concluded material transactions occurred subsequent date provided additional evidence conditions existed december 31 2009 require adjustment consolidated financial statements stryker corporation subsidiaries summary quarterly data unaudited millions except per share amounts price quotations reported supplied new york stock exchange item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements board directors shareholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2010 2009 related consolidated statements earnings shareholders’ equity cash flows three years period ended december 31 2010 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2010 2009 consolidated results operations cash flows three years period ended december 31 2010 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements 2009 company changed method accounting business combinations adoption guidance originally issued fasb statement 141r business combinations codified fasb asc topic 805 business combinations also audited accordance standards public company accounting oversight board united states stryker corporation’s internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 18 2011 expressed unqualified opinion thereon ernst young llp grand rapids michigan february 18 2011 stryker corporation subsidiaries consolidated balance sheets millions except per share amounts see accompanying notes consolidated financial statements stryker corporation subsidiaries consolidated statements earnings millions except per share amounts see accompanying notes consolidated financial statements stryker corporation subsidiaries consolidated statements shareholders’ equity millions except per share amounts see accompanying notes consolidated financial statements stryker corporation subsidiaries consolidated statements cash flows millions see accompanying notes consolidated financial statements stryker corporation subsidiaries notes consolidated financial statements december 31 2010 note 1 significant accounting policies business stryker corporation company stryker one world’s leading medical technology companies dedicated helping healthcare professionals perform jobs efficiently enhancing patient care company provides innovative orthopaedic implants well stateoftheart medical surgical equipment help people lead active satisfying lives company’s products include implants used joint replacement trauma spinal surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment well medical device products used variety medical specialties principles consolidation consolidated financial statements include accounts company subsidiaries elimination intercompany accounts transactions use estimates preparation consolidated financial statements conformity us generally accepted accounting principles gaap requires company management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes actual results could differ estimates revenue recognition significant portion company’s orthopaedic implants revenue generated consigned inventory maintained hospitals field representatives company retains title inventory held consignment hospitals field locations company receives appropriate notification product used implanted time revenue recognized company records revenue orthopaedic implants held consignment medsurg equipment product sales title risk ownership transferred customer typically upon shipment customer company records estimated sales returns discounts rebates sales incentives reduction net sales period revenue recognized estimates sales returns recorded anticipated product returns based historical sales returns information estimates sales discounts rebates sales incentives recorded based contractual terms historical experience trend analysis shipping handling products amounts billed customers shipping handling products included net sales costs incurred related shipping handling products included cost sales foreign currency translation functional currencies substantially company’s international affiliates local currencies accordingly financial statements international affiliates translated us dollars using current exchange rates balance sheets average exchange rates statements earnings cash flows unrealized translation adjustments included accumulated comprehensive gain loss shareholders’ equity transaction gains losses resulting settlement nonfunctional currency receivables payables included net earnings financial instruments company’s financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts company’s estimates fair value financial instruments approximate carrying amounts december 31 2010 2009 cash equivalents highly liquid investments maturity three months less purchased marketable securities consist marketable debt securities certificates deposit mutual funds mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities pursuant company’s investment policy individual marketable security investments must minimum credit quality single per standard poor’s fitch a2 per moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double per standard poor’s fitch aa per moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk company’s marketable security investment portfolio december 31 2010 1 company’s investments marketable securities credit quality rating less single per standard poor’s fitch a2 per moody’s corporation company follows provisions investmentsdebt equity securities topic financial accounting standard board fasb accounting standard codification accounting marketable securities classified availableforsale trading securities topic requires company recognize marketable securities consolidated balance sheets fair value company’s marketable securities stated fair value pursuant requirements fair value measurements disclosures topic fasb codification adjustments fair value marketable securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive gain loss shareholders’ equity adjustments fair value marketable securities classified trading recorded earnings amortized cost marketable debt securities adjusted amortization premiums discounts maturity computed effective interest method amortization included income expense along interest realized gains losses cost securities sold determined specific identification method company reviews declines fair value investments classified availableforsale impairment accordance provisions investmentsdebt equity securities topic fasb codification order determine whether decline fair value otherthantemporary impairment otherthantemporary impairments availableforsale marketable securities recorded earnings company follows provisions derivatives hedging topic fasb codification requires company recognize derivatives consolidated balance sheets fair value company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses included income expense consolidated statements earnings accounts receivable accounts receivable consists trade miscellaneous receivables company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends accounts receivable written reasonable collection efforts exhausted inventories stated lower cost market cost approximately 78 inventories determined using firstin firstout fifo cost method cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause company’s products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends property plant equipment property plant equipment stated cost depreciation computed either straightline decliningbalance method estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses amounts allocated intangible assets intangible assets include developed technology customer relationships reflect expected continued customer patronage trademarks patents amortized straightline basis 4 40 years weightedaverage life 15 years intangible assets goodwill longlived assets impairment tests intangiblesgoodwill topic fasb codification requires companies test goodwill possible impairment annual basis company performs annual impairment test fourth quarter year using discounted cash flow analysis requires certain assumptions estimates made regarding market conditions company’s future profitability company also performs impairment tests goodwill intangible longlived assets interim periods upon occurrence certain events changes circumstance defined property plant equipment presentation financial statements topics fasb codification loaner instrumentation loaner instrumentation represents net book value loaner instruments surgical implants provided customers company loaner instrumentation amortized straightline basis 3year period amortization expense loaner instrumentation included selling general administrative expenses stock options december 31 2010 company key employee director stock option plans described fully note 9 consolidated financial statements pursuant provisions compensationstock compensation topic fasb codification company measures cost employee stock options based grantdate fair value recognizes cost period recipient required provide services exchange options typically vesting period weightedaverage fair value per share options granted 2010 2009 2008 estimated date grant using blackscholes option pricing model 1587 1309 1987 respectively fair value options granted estimated using following weightedaverage assumptions riskfree interest rate periods within expected life options granted based us treasury yield curve effect time grant expected stock price volatility based historical volatility company’s stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data company recognizes cost stock options using straightline method vesting periods income taxes company accounts income taxes pursuant provisions income taxes topic fasb codification deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax credit represents change net deferred income tax assets liabilities year interest expense penalties incurred associated uncertain income tax positions included income expense pursuant provisions income taxes topic fasb codification company operates multiple income tax jurisdictions inside outside united states accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations income tax authorities jurisdictions regularly perform audits company’s income tax filings income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty foreign branch arrangements may require extended period time resolve may result significant income tax adjustments changes income allocation required jurisdictions different income tax rates legal contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 17 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory relief could result payment significant claims settlements legal matters management sufficient information reasonably estimate company’s future obligations liability representing management’s best estimate probable cost minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies accumulated comprehensive gain loss components accumulated comprehensive gain loss follows millions recently adopted accounting standards 2010 company adopted provisions improvement financial reporting enterprises involved variable interest entities topic fasb codification topic requires qualitative approach identifying controlling financial interest variable interest entity vie requires ongoing assessment whether entity vie whether interest vie makes holder primary beneficiary vie impact consolidated financial statements result adoption topic fasb codification 2010 company adopted provisions fair value measurements disclosures topic “improving disclosures fair value measurements” fasb codification topic requires companies make new disclosures recurring nonrecurring fair value measurements including significant transfers level 1 level 2 fair value measurements information purchases sales issuances settlements gross basis reconciliation level 3 fair value measurements enhanced disclosures recurring nonrecurring fair value measurements included note 2 consolidated financial statements 2009 company adopted provisions business combinations topic fasb codification topic significantly changes principles requirements acquisition recognized measured company’s financial statements including identifiable assets acquired liabilities assumed topic also provides guidance recognizing measuring goodwill acquired business combination required disclosures enable users financial statements evaluate nature financial effects business combination additional disclosure requirements regarding business combinations topic fasb codification included note 5 consolidated financial statements recently issued accounting standards 2009 fasb amended provisions revenue recognition multipledeliverable revenue arrangements topic fasb codification topic amends prior guidance requires entity apply relative selling price allocation method order estimate selling price units accounting including delivered items vendorspecific objective evidence acceptable thirdparty evidence exist provisions effective revenue arrangements entered contain material modifications fiscal years beginning june 15 2010 applied prospectively topic effective company beginning january 1 2011 company expect adoption topic material impact consolidated financial statements reclassifications certain prior year amounts reclassified conform presentation used 2010 company separately disclosed gain loss sale property plant equipment consolidated statements cash flows note 2 financial instruments company’s financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts company’s estimates fair value financial instruments approximate carrying amounts december 31 2010 pursuant requirements fair value measurements disclosures topic fasb codification company’s financial assets liabilities measured fair value recurring basis classified disclosed one following three categories level 1 financial instruments unadjusted quoted prices listed active market exchanges level 2 financial instruments lacking unadjusted quoted prices active market exchanges including overthecounter traded financial instruments prices financial instruments determined using prices recently traded financial instruments similar underlying terms well directly indirectly observable inputs interest rates yield curves observable commonly quoted intervals level 3 financial instruments actively traded market exchange category includes situations little market activity financial instrument prices determined using significant unobservable inputs valuation techniques following describes methods company uses estimate fair value company’s financial assets liabilities cash equivalents company considers carrying values financial instruments approximate fair value financial instruments short period time origination instruments expected realization availableforsale marketable securities company’s level 2 availableforsale marketable securities primarily include us agency debt securities foreign government debt securities asset backed debt securities corporate debt securities certificates deposit company’s level 2 availableforsale marketable securities values determined using prices recently traded financial instruments similar underlying terms well directly indirectly observable inputs interest rates yield curves observable commonly quoted intervals company’s level 3 availableforsale marketable securities include corporate foreign government debt securities company’s level 3 availableforsale marketable securities valuations based income approach specifically discounted cash flow analyses utilize significant inputs based company’s estimates assumptions using approach estimates timing amount cash flows expected holding periods securities used expected future cash flows calculated expected life security discounted single present value using estimated market required rate return trading marketable securities company’s level 1 trading marketable securities consist mutual funds valued using market approach based quoted prices specific mutual fund transactions active exchange markets auction rate securities rights june 2010 company exercised ars rights agreement ars rights entered 2008 ubs financial services inc ubs one investment providers whereby company received right sell ars par value ubs time period june 30 2010 july 2 2012 pursuant agreement company redeemed entire remaining outstanding ars investment 1399 million par value prior exercise ars rights company applied fair value option ars rights pursuant provisions fair value option financial assets financial liabilities topic fasb codification result election twelvemonth period ended december 31 2010 company recorded loss 170 million income expense recognize change fair value estimate ars rights loss offset corresponding gains fair value estimate related ars investment twelvemonth period ended december 31 2009 company recorded loss 110 million income expense recognize change fair value estimate ars rights loss offset corresponding gain fair value estimate related trading marketable securities foreign currency exchange contracts company values foreign currency exchange contracts using market approach based foreign currency exchange rates obtained active markets estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points december 31 2010 fair value carrying amount company’s forward currency exchange contracts assets liabilities 24 million 11 million respectively following table summarizes valuation company’s financial instruments aforementioned pricing categories millions following table presents rollforward assets measured fair value recurring basis using unobservable inputs level 3 millions following summary company’s marketable securities millions cost estimated fair value availableforsale marketable securities december 31 2010 contractual maturity follows millions gross unrealized losses fair value company’s investments unrealized losses deemed otherthantemporarily impaired aggregated investment category length time individual securities continuous unrealized loss position december 31 2010 2009 follows millions unrealized losses company’s investments corporate asset backed us agency debt securities primarily caused increases interest yields result continued challenging conditions global credit markets many investments downgraded rating agencies since initial purchase less 1 company’s investments corporate assetbacked debt securities credit quality rating less single per standard poor’s fitch company intend sell investments likely company required sell investments recovery amortized cost basis may maturity company consider investments otherthantemporarily impaired december 31 2010 unrealized losses company’s investments foreign government debt securities also caused interest rate increases decline market value attributable changes interest rates company intend sell investments likely company required sell investments recovery amortized cost basis may maturity company consider investments otherthantemporarily impaired december 31 2010 pursuant company’s investment policy individual marketable security investments must minimum credit quality single per standard poor’s fitch a2 per moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double per standard poor’s fitch aa per moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk company’s marketable security investment portfolio december 31 2010 1 company’s investments marketable securities credit quality rating less single per standard poor’s fitch a2 per moody’s corporation december 31 2010 1 company’s investments marketable securities held asset backed debt securities majority company’s asset backed debt securities relates investments us agencyissued mortgage backed securities recovery full amount investor guaranteed issuing federal agency interest marketable securities income included income expense totaled 487 million 2010 539 million 2009 977 million 2008 note 3 derivative instruments hedging strategies company follows provisions derivatives hedging topic fasb codification requires company recognize derivatives consolidated balance sheets fair value company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products well 2009 intercompany loans associated repatriation foreign earnings duration forward currency exchange contracts correspond anticipated period intercompany receivables payables remain outstanding company designate contracts hedges therefore forward currency exchange contracts recorded fair value period resulting gains losses included income expense consolidated statements earnings offset gains losses recognized intercompany receivables payables twelve months ended december 31 2010 2009 2008 recognized foreign currency transaction gains losses included income expense consolidated statements earnings 70 million 11 million 60 million respectively december 31 2010 company outstanding forward currency exchange contracts purchase 10119 million sell 3669 million various currencies principally us dollars euros original maturities ranging 7 99 days maximum length time company limiting exposure reduction value nonfunctional receivables payables foreign currency exchange contracts march 31 2011 december 31 2009 company outstanding forward currency exchange contracts purchase 20411 million sell 2805 million various currencies principally us dollars euros maturities ranging 4 106 days december 31 2010 fair value carrying amount company’s forward currency exchange contracts asset liabilities 24 million 11 million respectively included component prepaid expenses current assets accrued expenses liabilities respectively consolidated balance sheets estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties note 4 inventories summarized follows millions note 5 acquisitions business product line acquisitions completed year ended december 31 2010 2654 million included acquisition assets used produce sonopet ultrasonic aspirator control consoles handpieces accessories mutoh co ltd synergetics usa inc acquisition gaymar industries inc acquisition bioimplantable porous polyethylene ppe product line related assets porex surgical inc use primarily reconstructive surgery head face sonopet ultrasonic aspirator used fields neurosurgery well orthopedic general laparoscopic plastic surgeries gaymar industries specializes support surfaces pressure ulcer management solutions well temperature management segment healthcare industry acquisitions enhance company’s product offerings within orthopaedic implants medsurg equipment segments material effect company’s consolidated net sales operating income year ended december 31 2010 pro forma consolidated results operations would differ significantly result acquisitions described accounted pursuant requirements business combinations topic fasb codification assets acquired liabilities assumed result acquisitions included company’s consolidated balance sheet acquisition dates material effect company’s consolidated balance sheet dates purchase price acquisitions described primarily allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition dates fair value assigned identifiable intangible assets acquired determined primarily using income approach excess purchase price value net tangible identifiable intangible assets recorded goodwill purchased identifiable intangible assets amortized straightline basis respective estimated useful lives estimated useful lives range 2 11 years purchase price allocation case based upon preliminary valuation company’s estimates assumptions subject change within measurement period valuations finalized table represents allocation purchase price acquired net assets acquisitions completed 2010 millions goodwill associated acquisitions completed 2010 1357 million factors contributed recognition goodwill included securing synergies specific company’s business available market participants expected increase revenues profits acquisition talented workforce cost savings opportunities 2009 company completed several acquisitions including acquisition ascent healthcare solutions inc ascent market leader reprocessing remanufacturing medical devices united states cash transaction 5250 million acquisition ascent enhanced company’s product offerings well provided cost savings opportunities customers medsurg equipment segment ascent’s purchase price valuation completed fourth quarter 2010 differ preliminary valuation table represents allocation purchase price acquired net assets acquisitions completed 2009 millions 2004 company acquired outstanding stock spinecore inc spinecore developer artificial lumbar cervical discs upfront payment 1200 million cash plus certain transaction costs terms transaction also include potential milestone payments 95 million upon commercialization flexicore lumbar artificial disc united states 120 million upon commercialization cervicore cervical artificial disc united states well royalty payments additional 25 million depending level actual commercial sales devices potential milestone payments expected capitalized fair values intangible assets time payment become due october 2010 company made decision withdraw application us food drug administration fda approval flexicore device cervicore cervical artificial disc remains development time however company continues monitor market costs approval process associated cervicore device determine whether device made commercially available result introduction new products additional future sales addition unanticipated issues may arise could delay terminate development cervicore device prior regulatory approval commercialization could unfavorable impact company’s operating results note 6 restructuring charges company incur restructuring charges 2010 2009 company initiated number restructuring projects focused shifting resources areas company greatest opportunities growth streamlining operations drive operating leverage 2008 company made decisions simplify structure japanese distribution business substantially reduce development efforts associated product technologies purchased sightline technologies ltd acquisition 2006 company recorded restructuring charges 2009 2008 consisting following items millions 2009 charges 303 million agent conversion charges represent costs associated termination certain thirdparty agent agreements company’s europe middle east africa emea division initiative intended provide company greater control distribution channels well improve customer focus selling efficiency 183 million asset impairment charges associated company’s decision discontinue selling certain products within orthopaedic implants medsurg equipment business segments relates primarily identifiable intangible assets discontinued product lines expected material impact company’s future operating results 129 million severance related costs charge represents workforce reduction employmentrelated severance costs approximately 120 employees resulting company’s decision simplify organization structure biotech emea japan canada divisions 55 million contractual obligations charges represent costs associated termination various supplier contracts well incidental costs related discontinued product lines 2008 charges 223 million asset impairment charges represent excess net book value fair market value assets disposed sale primarily related sales offices warehousing distribution facilities japan 85 million charge represents employmentrelated severance costs 84 employees 41 million contractual obligations charges represent costs associated termination various supplier contracts well incidental costs following table provides rollforward remaining liabilities included within accrued expenses liabilities consolidated balance sheet related restructuring charges recorded company 2009 2008 millions restructuring projects initiated 2009 2008 substantially complete company expects asset disposals completed final severance payments made 2011 note 7 goodwill intangible assets changes net carrying amount goodwill segment years ended december 31 2010 2009 follows millions fourth quarters 2010 2009 company completed required annual impairment tests goodwill prescribed intangiblesgoodwill topic fasb codification determined instances recorded goodwill impaired goodwill write necessary following summary company’s intangible assets millions estimated amortization expense five succeeding years follows millions note 8 longterm debt credit facilities company’s longterm debt summarized follows millions august 2010 company refinanced credit facility new 10000 million senior unsecured revolving credit facility due august 2013 2010 facility 2010 facility replaced previously outstanding 10000 million unsecured credit facility due november 2010 2005 facility 2010 facility includes increase option permitting company increase size facility additional 5000 million 5000 million multicurrency sublimit euro borrowings 1000 million letter credit sublimit terms conditions covenants substantially 2005 facility 2010 facility annual facility fee ranging 10 45 basis points bears interest libor defined agreement plus applicable margin ranging 65 205 basis points dependent company’s credit rating based company’s current credit ratings 2010 facility annual facility fee 125 basis points interest margin 875 basis points january 2010 company sold 5000 million senior unsecured notes due january 15 2015 notes 5000 million senior unsecured notes due january 15 2020 notes 2015 notes bear interest 300 per year unless previously redeemed mature january 15 2015 2020 notes bear interest 4375 per year unless previously redeemed mature january 15 2020 company received net proceeds 9961 million net offering discount 39 million 2015 notes 2020 notes carry effective interest rates 302 446 respectively net proceeds offering continue available working capital general corporate purposes including acquisitions stock repurchases business opportunities debt issuance costs 105 million incurred connection sale senior unsecured notes costs capitalized amortized interest expense lives related senior unsecured notes december 31 2010 total unamortized debt issuance costs 90 million addition senior unsecured notes company current debt outstanding various debt instruments totaling 253 180 million december 31 2010 2009 respectively weightedaverage interest rate excluding required fees borrowings 37 december 31 2010 facility requires company comply certain financial covenants company compliance covenants december 31 2010 addition 2010 facility company lines credit issued various financial institutions available fund company’s daytoday operating needs december 31 2010 company 10275 million additional borrowing capacity available existing credit facilities carrying amounts company’s debt approximate fair values based quoted interest rates similar types amounts borrowing agreements interest expense including required fees incurred outstanding debt credit facilities included income expense totaled 532 million 2010 140 million 2009 127 million 2008 interest paid debt including required fees 392 million 2010 53 million 2009 57 million 2008 note 9 capital stock december 2010 2009 company announced board directors authorized company purchase 5000 million 7500 million respectively company’s common stock time open market privately negotiated transactions otherwise company made stock repurchase pursuant 5000 million repurchase program december 31 2010 company repurchased 83 million shares total cost 4255 million pursuant 7500 million repurchase program company 05 million authorized shares 1 par value preferred stock none outstanding company’s stock based plans include stock options restricted stock units employee stock purchases following summary company’s significant stock compensation plans stock options company key employee director stock option plans options granted exercise price less fair market value underlying common stock date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows aggregate intrinsic value represents cumulative difference fair market value underlying common stock option exercise prices options exercised years ended december 31 2010 2009 2008 729 million 375 million 1354 million respectively shares reserved future compensation grants stryker common stock 108 million december 31 2010 145 million december 31 2009 exercise prices options outstanding december 31 2010 ranged 2330 6780 december 31 2010 1061 million unrecognized compensation cost related nonvested stock options granted stock option plans cost expected recognized following 49 years weightedaverage period 15 years restricted stock units rsus company grants rsus key employees fair value rsus determined based number shares granted closing quoted price company’s common stock day prior date grant less anticipated dividends rsu generally vest onethird increments threeyear period settled stock summary rsu activity follows december 31 2010 259 million unrecognized compensation cost related nonvested rsus cost expected recognized expense following 29 years weightedaverage period 11 years weighted average grant date fair value per share rsus granted 2010 2009 5106 4045 respectively fair value rsus vested 2010 08 million employee stock purchase plans espp full time part time employees may participate company’s espp provided meet certain eligibility requirements effective january 1 2009 purchase price company’s common stock terms espp defined 95 closing stock price last trading day purchase 2010 2009 company issued 179634 214004 shares respectively espp note 10 net earnings per share following table sets forth computation basic diluted net earnings per share millions except per share amounts options purchase average 75 million 181 million 57 million shares common stock years ended december 31 2010 2009 2008 respectively outstanding included computation diluted net earnings per share exercise prices options greater average market price common stock periods note 11 retirement plans certain company’s subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets summary company’s defined benefit pension plans follows millions weightedaverage discount rate used determination projected benefit obligations 42 december 31 2010 49 december 31 2009 components amounts recognized consolidated balance sheets follows millions components amounts recognized accumulated comprehensive gain loss effect income taxes follows millions accumulated benefit obligations defined benefit pension plans 2927 million 2382 million december 31 2010 2009 respectively pension plans accumulated benefit obligation excess plan assets projected benefit obligations accumulated benefit obligations fair value plan assets 2883 million 2808 million 1864 million respectively december 31 2010 2489 million 2298 million 1650 million respectively december 31 2009 components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive gain loss effect income taxes follows millions estimated net actuarial loss defined benefit pension plans recognized accumulated comprehensive gain loss net periodic benefit cost year ended december 31 2011 19 million company estimates immaterial amount amortization prior service cost transition amount defined benefit pension plans recognized accumulated comprehensive gain loss net periodic benefit cost year ended december 31 2011 company assumed average longterm expected return defined benefit plan assets 52 december 31 2010 expected return determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns weightedaverage allocation plan assets asset category follows investment strategy company’s defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances reflected weightedaverage target investment allocation ranges plans december 31 2010 following table summarizes valuation company’s pension plan assets pricing categories december 31 2010 2009 millions company’s level 3 pension plan assets consist primarily guaranteed investment contracts insurance companies insurance contracts guarantee company principal repayment fixed rate return company’s valuation level 3 assets based third party actuarial valuations estimation surrender value guaranteed investment contract company insurance company surrender value equals actuarial value notional investments underlying guaranteed investment contract using actuarial assumptions stated guaranteed investment contract following table presents rollforward pension plan assets measured fair value recurring basis using unobservable inputs level 3 december 31 2010 2009 millions company anticipates contributing 187 million defined benefit pension plans 2011 following estimated future benefit payments reflect expected future service appropriate expected paid years indicated millions retirement plan expense company’s defined contribution retirement plans totaled 1016 million 2010 1007 million 2009 986 million 2008 portion company’s retirement plan expense funded stryker common stock totaling 113 million 2010 108 million 2009 93 million 2008 use stryker common stock represents noncash operating activity reflected consolidated statements cash flows amount stryker common stock held company’s defined contribution retirement plans totaled 961 million approximately 18 million shares 826 million approximately 16 million shares december 31 2010 2009 respectively value stryker common stock percentage total defined contribution retirement plan assets 10 11 december 31 2010 2009 respectively note 12 income taxes earnings income taxes consist following millions components provision income taxes follow millions reconciliation us statutory income tax rate company’s effective income tax rate continuing operations follows deferred income taxes reflect net income tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes valuation allowances recorded reduce deferred income tax assets likely income tax benefit realized income tax effects significant temporary differences comprise company’s deferred income tax assets liabilities follows millions net operating loss carryforwards totaling 1609 million december 31 2010 available reduce future taxable earnings certain domestic foreign subsidiaries us loss carryforwards 369 million expire 2011 2026 majority company’s foreign loss carryforwards 1240 million expire addition 1021 million foreign loss carryforward subject full valuation allowance fourth quarter 2009 company repatriated 7870 million foreign earnings united states company recorded tax expense 671 million 2009 tax benefit 74 million 2010 recognize tax liability benefit associated repatriation repatriated cash used fund acquisition ascent previously announced initiatives including share repurchase authorization pursuant requirements accounting income taxesspecial areas included income taxes topic fasb codification provision made us federal state income taxes foreign income taxes may result future remittances undistributed earnings foreign subsidiaries determined reinvested overseas indefinitely 42191 million december 31 2010 determination amount unrecognized deferred income tax liability unremitted earnings practicable total income taxes paid net refunds received 5794 million 2010 4064 million 2009 4785 million 2008 changes amounts recorded uncertain income tax positions follows millions company’s income tax expense could reduced 3470 million 2743 million december 31 2010 december 31 2009 respectively upon favorable resolution uncertain income tax positions december 31 2010 income tax authorities several income tax jurisdictions inside outside united states conducting routine audits company’s income tax returns filed prior years audits generally designed determine individual income tax authorities agreement company’s interpretations complex income tax regulations regarding allocation income various income tax jurisdictions exceptions company longer subject audits income tax authorities tax years prior 2003 income tax years subsequent 2002 open examination many income tax jurisdictions company operates july 2010 company received income tax assessment related income tax position company taken allocation profits within europe previously filed 2006 2007 income tax returns company believes followed applicable tax laws regulations vigorously defend income tax position company ultimately lose respect income tax position could material unfavorable impact company’s income tax expense results operations cash flows future periods april 2009 us internal revenue service irs proposed adjustments company’s previously filed 2003 2004 2005 income tax returns related income tax positions company taken cost sharing arrangements two wholly owned entities operating ireland company believes followed applicable tax law treasury regulations vigorously defending income tax positions ultimate resolution respect proposed adjustments could material impact company’s income tax expense results operations cash flows future periods interest expense penalties included income expense 243 million 92 million 178 million year ended december 31 2010 2009 2008 respectively accrued interest penalties included accrued expenses liabilities 830 million 587 million december 31 2010 december 31 2009 respectively reasonably possible amount unrecognized tax benefits significantly change due one following events next twelve months expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject controversy various taxing jurisdictions operate including inventory transfer pricing cost sharing product royalty foreign branch arrangements company able reasonably estimate amount future periods changes unrecognized tax benefits may required note 13 segment geographic data company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment includes orthopaedic reconstructive hip knee trauma spinal implant systems related products medsurg equipment segment includes surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment well medical device products used variety medical specialties category includes corporate administration interest expense interest marketable securities income sharebased compensation includes compensation related employee director stock option restricted stock grants company’s reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies note 1 consolidated financial statements company measures financial results reportable segments using internal performance measure excludes impairment property plant equipment gain sale certain assets recorded 2010 income tax adjustment associated repatriation foreign earnings recorded 2010 2009 patent litigation gain recorded 2009 restructuring charges recorded 2009 2008 identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment sales financial information business segment follows millions countries company local revenuegenerating operations combined following geographic areas united states including puerto rico europe middle east africa emea foreign countries comprised japan canada pacific region latin america region sales attributable geographic area based upon customer’s country domicile longlived assets include net property plant equipment goodwill intangibles net property plant equipment based upon physical location assets geographic information follows millions note 14 leases company leases various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases future minimum lease commitments leases follows millions rent expense totaled 809 million 2010 751 million 2009 760 million 2008 note 15 property plant equipment third quarter 2010 company sold orthopaedics implants manufacturing facility based caen france total consideration 529 million cash transaction recorded gain 134 million net 109 million income tax expense transaction also included 5year supply agreement acquirer volumes commensurate production levels achieved prior sale supply agreement contingent among things acquirer’s ability provide products meet quality standards may terminated stryker material breach occurs note 16 assets held sale fourth quarter 2010 company announced definitive agreement sell op1 product family use orthopaedic bone applications manufacturing facility based lebanon nh result announcement company recorded 766 million net 469 million income tax expense non cash impairment charge reflect reduction carrying amount associated assets fair value december 31 2010 assets held sale included current assets consolidated balance sheet consisted following millions note 17 contingencies third quarter 2010 company received separate subpoenas us department justice related sales marketing regulatory matters related stryker painpump ii sales marketing regulatory matters related otisknee device company process responding subpoenas march 2010 shareholder’s derivative action complaint certain current former directors officers company filed united states district court western district michigan southern division lawsuit brought westchester putnam counties heavy highway laborers local 60 benefit funds laborers local 235 benefit funds complaint alleges claims breach fiduciary duties gross mismanagement connection certain product recalls fda warning letters government investigations relating physician compensation criminal proceeding brought company’s biotech division case stayed special committee board directors evaluates claims january 2010 purported class action lawsuit company filed united states district court southern district new york behalf purchased company’s common stock january 25 2007 november 13 2008 inclusive lawsuit seeks remedies securities exchange act 1934 may 2010 lawsuit transferred united states district court western district michigan southern division company intends defend vigorously 2009 federal grand jury district massachusetts returned indictment charging stryker biotech llc certain current former employees stryker biotech wire fraud conspiracy defraud fda distribution misbranded device false statements fda company still hopes able reach fair resolution matter ultimate resolution matter reasonably estimable time however conviction charges described could result significant monetary fines stryker biotech presently involved sale health care products services see additional information note 18 conviction charges resulting exclusion participating federal state health care programs would expected material effect stryker biotech’s present business operations certain former stryker biotech employees pled guilty charges connection matter 2009 company received warning letter fda related compliance issues one craniomaxillofacial cmf implant products previously sold cmf distribution facility portage michigan 2007 company received two warning letters fda regarding compliance certain quality system specifications reconstructive implant manufacturing facilities one letter facility cork ireland another facility mahwah new jersey march 2010 fda informed company warning letter related mahwah manufacturing facility resolved following reinspection 2009 additional corrective actions may 2010 fda informed company warning letters related cork ireland cmf facilities resolved following fda reinspection cork ireland facility additional corrective actions cork cmf facilities 2007 company announced reached resolution us attorney’s office district new jersey connection investigation relating “any consulting contracts professional service agreements remuneration agreements stryker corporation orthopedic surgeon orthopedic surgeon training medical school graduate using considering surgical use hip knee joint replacementreconstruction products manufactured sold stryker corporation” resolution form nonprosecution agreement included oversight federal monitor 18month period ended march 27 2009 subsequent entering nonprosecution agreement us department health human services office inspector general hhs issued civil subpoena company seeking determine whether company violated various laws paying consulting fees providing things value orthopedic surgeons healthcare educational institutions inducements use stryker’s orthopedic medical devices procedures paid whole part medicare investigation ongoing company produced numerous documents materials hhs response subpoena 2007 company disclosed us securities exchange commission sec made informal inquiry company regarding possible violations foreign corrupt practices act connection sale medical devices certain foreign countries subsequently 2008 company received subpoena us department justice criminal division requesting certain documents period since january 1 2000 connection sec inquiry company fully cooperating us department justice sec regarding matters pursuant certain company’s credit lease agreements company provided financial guarantees third parties form indemnification provisions indemnify third parties costs including limited adverse judgments lawsuits imposition additional income taxes due either change tax law adverse interpretation tax law terms guarantees equal terms related credit lease agreements company able calculate maximum potential amount future payments could required make guarantees potential payment dependent occurrence future unknown events eg changes us foreign tax laws note 18 subsequent events february 1 2011 company completed previously announced sale op1 product family use orthopaedic bone applications manufacturing facility based west lebanon nh total consideration 600 million january 3 2011 company completed previously announced acquisition assets neurovascular division boston scientific corporation neurovascular cash transaction 145 billion additional 500 million payment made upon completion certain milestones acquisition neurovascular expected substantially enhance company’s presence neurovascular market allowing offer comprehensive portfolio products neurosurgical neurovascular devices effect neurovascular acquisition included company’s consolidated results operations prospectively date acquisition company evaluated subsequent events december 31 2010 concluded material transactions occurred subsequent date provided additional evidence conditions existed december 31 2010 require adjustment consolidated financial statements stryker corporation subsidiaries summary quarterly data unaudited millions except per share amounts price quotations reported supplied new york stock exchange item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements board directors shareholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2012 2011 related consolidated statements earnings comprehensive income shareholders equity cash flows three years period ended december 31 2012 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2012 2011 consolidated results operations cash flows three years period ended december 31 2012 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states stryker corporations internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 27 2013 expressed unqualified opinion thereon ernst young llp grand rapids michigan february 27 2013 dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries consolidated statements earnings consolidated statements comprehensive income see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries consolidated statements shareholders’ equity see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries notes consolidated financial statements december 31 2012 note 1 significant accounting policies nature operations stryker corporation company us one worlds leading medical technology companies products include implants used joint replacement trauma surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment neurosurgical neurovascular spinal devices well medical device products used variety medical specialties basis presentation consolidated financial statements include company subsidiaries intercompany transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted united states gaap requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying disclosures estimates based managements best knowledge current events actions company may undertake future estimates used accounting among items pensions stock options valuation acquired intangible assets useful lives depreciation amortization longlived assets future cash flows associated impairment testing goodwill indefinitelived intangible assets longlived assets deferred tax assets liabilities uncertain income tax positions contingencies actual results may ultimately differ estimates revenue recognition sales recognized revenue realized realizable earned policy recognize revenue title product ownership risk loss transfer customer date shipment date receipt customer reconstructive products receive appropriate notification product used implanted provision estimated sales returns discounts rebates sales incentives recorded reduction net sales period revenue recognized shipping handling costs charged customers included net sales cost sales cost sales primarily comprised direct materials supplies consumed manufacture product well manufacturing labor depreciation expense direct overhead expense necessary acquire convert purchased materials supplies finished product cost sales also includes cost distribute products customers inbound freight costs warehousing costs shipping handling activity research development engineering expenses research development costs charged expense incurred costs include expenditures new product manufacturing process innovation improvements existing products processes costs primarily consist salaries wages consulting depreciation maintenance research facilities equipment selling general administrative expenses selling general administrative expense primarily comprised selling expenses marketing expenses administrative indirect overhead costs amortization loaner instrumentation depreciation amortization expense nonmanufacturing assets miscellaneous operating items currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate statements united states dollars recorded comprehensive income oci transactional exchange gains losses included earnings cash equivalents highly liquid investments remaining stated maturities three months less purchased considered cash equivalents recorded cost marketable securities marketable securities consist marketable debt securities certificates deposit mutual funds mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities pursuant investment policy individual marketable security investments must minimum credit quality single per standard poor’s fitch a2 per moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double per standard poor’s fitch aa per moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk marketable security investment portfolio december 31 2012 less 1 investments marketable securities credit quality rating less single per standard poor’s fitch a2 per moody’s corporation marketable securities classified availableforsale trading securities accounts receivable accounts receivable consists trade miscellaneous receivables allowance maintained doubtful accounts estimated losses collection accounts receivable estimates made regarding ability customers make required payments based historical credit experience expected future trends accounts receivable written reasonable collection efforts exhausted dollar amounts millions except per share amounts otherwise specified inventories stated lower cost market cost generally determined using firstin firstout fifo cost method excess obsolete inventory resulting potential inability sell specific products prices excess current carrying costs reserves maintained reduce current carrying cost market prices financial instruments financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts exception longterm debt discussed detail note 7 estimates fair value financial instruments approximate carrying amounts december 31 2012 2011 marketable securities recognized fair value adjustments fair value marketable securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive income shareholders’ equity adjustments fair value marketable securities classified trading recorded earnings amortized cost marketable debt securities adjusted amortization premiums discounts maturity computed effective interest method amortization included income expense along interest realized gains losses cost securities sold determined specific identification method review declines fair value investments classified availableforsale impairment determine whether decline fair value otherthantemporary impairment resulting losses otherthantemporary impairments availableforsale marketable securities included earnings derivatives recognized fair value enter forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses included earnings property plant equipment property plant equipment stated cost depreciation computed either straightline decliningbalance method estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment fourth quarter 2010 announced definitive agreement sell op1 product family use orthopaedic bone applications related manufacturing facility west lebanon nh result announcement recorded 76 net taxes impairment charge reduce carrying value associated assets fair value december 31 2010 assets held sale included current assets consolidated balance sheet totaled 62 29 net property plant equipment 25 inventories 8 february 1 2011 completed sale total consideration 60 material gain loss recorded upon completion transaction goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses acquisition date amounts allocated identifiable intangible assets factors contribute recognition goodwill include securing synergies specific business available market participants expected increase revenues profits acquisition talented workforce cost savings opportunities strategic benefit expanding presence core adjacent markets diversifying product portfolio fair values identifiable intangible assets primarily determined using income approach intangible assets include limited developed technology customer relationships reflect expected continued customer patronage trademarks patents intangible assets determinable useful lives amortized straightline basis estimated useful lives 4 40 years certain acquisitions acquire inprocess research development iprd intangible assets iprd considered indefinitelived intangible asset time research completed time becomes determinablelived intangible asset determined future use time impaired goodwill intangibles longlived asset impairment tests perform annual impairment test goodwill fourth quarter year adopted provisions accounting standards update asu 201108 intangibles goodwill testing goodwill impairment permits us consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability indefinitelived intangible assets also tested least annually impairment comparing individual carrying values fair value review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows undiscounted cash flows expected generated related assets estimated assets useful life based updated projections evaluation dollar amounts millions except per share amounts otherwise specified indicates carrying amount asset may recoverable potential impairment measured based upon fair value related asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell stock options december 31 2012 longterm incentive plans described fully note 8 consolidated financial statements stock options granted key employees nonemployee directors measure cost employee stock options based grantdate fair value recognize cost using straightline method period recipient required provide services exchange options typically vesting period weightedaverage fair value per share options granted 2012 2011 2010 estimated date grant using blackscholes option pricing model 1336 1714 1587 respectively fair value options granted estimated using following weightedaverage assumptions riskfree interest rate periods within expected life options granted based united states treasury yield curve effect time grant expected stock price volatility based historical volatility stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data income taxes deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax benefits generally represent change net deferred income tax assets liabilities year amounts result adjustments related acquisitions appropriate operate multiple income tax jurisdictions within united states internationally accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations income tax authorities jurisdictions regularly perform audits income tax filings income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty foreign branch arrangements may require extended period time resolve may result significant income tax adjustments changes income allocation required jurisdictions different income tax rates legal contingencies involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 6 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing management’s best estimate probable loss minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies accumulated comprehensive income components accumulated comprehensive income follows recently issued accounting standards 2013 fasb issued asu 201302 presentation comprehensive income reclassifications accumulated comprehensive income guidance requires entity present either face statement net income presented notes significant amounts reclassified accumulated comprehensive income respective line items net income amount reclassified net income entirety reporting period amounts required reclassified entirety net income reporting period cross reference disclosures provide additional detail reclassification amounts required provisions effective reporting periods beginning december 15 2012 applied prospectively expect amendment material effect consolidated financial statements dollar amounts millions except per share amounts otherwise specified 2012 fasb issued asu 201202 testing indefinitelived intangible assets impairment update amended procedures testing impairment indefinitelived intangible assets permitting entity first assess qualitative factors determine whether existence events circumstances indicates likely indefinitelived intangible assets impaired entity’s assessment totality events circumstances impact entity’s indefinitelived intangible assets used basis determining whether necessary perform quantitative impairment test described asc 35030 intangibles goodwill general intangibles goodwill asu 201202 effective annual interim impairment tests performed fiscal years beginning september 15 2012 early adoption permitted expect amendment material effect consolidated financial statements reclassifications certain prior year amounts reclassified conform presentation used 2012 primarily respect correct classification noncurrent deferred income taxes note 2 fair value measurements accounting guidance fair value measurements certain financial assets liabilities requires financial assets liabilities carried fair value classified disclosed one following three categories level 1 quoted market prices active markets identical assets liabilities level 2 observable marketbased inputs unobservable inputs corroborated market data level 3 unobservable inputs reflecting reporting entitys assumptions external inputs active markets applying fair value principles valuation assets liabilities required maximize use quoted market prices minimize use unobservable inputs calculate fair value level 1 level 2 instruments based exchange traded price similar identical instruments available based observable inputs significant transfers level 1 level 2 occurred december 31 2011 december 31 2012 fair value level 3 assets liabilities calculated net present value expected cash flows based externally provided obtained inputs certain level 3 assets may also based sale prices similar assets fair value calculations take consideration credit risk counterparties counterparty default maximum exposure loss asset balance instrument change valuation techniques used measuring fair value financial assets liabilities year valuation assets liabilities measured fair value following rollforward assets liabilities measured fair value using unobservable inputs level 3 dollar amounts millions except per share amounts otherwise specified estimated fair value liability contingent consideration represents milestone payments acquisitions fair value liability estimated using discounted cash flow technique significant inputs technique included probability assessments occurrence triggering events appropriately discounted considering uncertainties associated obligation remeasure liability reporting period record changes fair value general administrative expense probability occurrence income expense changes time value money earnings following table presents quantitative information inputs valuation methodologies use material fair value measurements classified level 3 following summary marketable securities unrealized losses availableforsale marketable securities primarily caused increases yields result changing conditions global credit markets investments downgraded rating agencies since initial purchase less 1 investments availableforsale marketable securities credit quality rating less single per standard poors fitch a2 per moodys intend sell investments likely required sell investments recovery amortized cost basis may maturity consider investments otherthantemporarily impaired december 31 2012 cost estimated fair value availableforsale marketable securities december 31 2012 contractual maturity gross unrealized losses fair value investments unrealized losses deemed otherthantemporarily impaired aggregated investment category length time individual securities continuous unrealized loss position december 31 2012 follows interest marketable securities income totaled 47 34 49 2012 2011 2010 respectively included income expense dollar amounts millions except per share amounts otherwise specified note 3 derivative instruments hedging strategies estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties counterparty default maximum exposure loss asset balance instrument years ended december 31 2012 2011 2010 recognized foreign currency transaction gains losses included income expense earnings 7 3 7 respectively outstanding derivative contracts effects consolidated balance sheets december 31 2012 2011 note 4 acquisitions november 2012 acquired surpass medical ltd surpass cash transaction 100 additional 35 paid upon completion certain milestones surpass develops commercializes nextgeneration flow diversion stent technology treat brain aneurysms using unique mesh design delivery system acquisition surpass enhances product offerings within neurotechnology spine segment october 2011 acquired concentric medical inc concentric manufactures markets minimally invasive products treatment acute ischemic stroke cash transaction 135 acquisition concentric enhances product offerings within neurotechnology spine segment july 2011 acquired memometal technologies memometal cash transaction 150 including assumed debt 9 additional 12 paid upon completion certain milestones memometal develops manufactures markets products extremity hand foot indications acquisition memometal enhances product offerings within reconstructive segment june 2011 acquired orthovita inc orthovita developer manufacturer orthobiologic biosurgery products cash transaction 316 acquisition orthovita complements existing product offerings primarily within neurotechnology spine segment january 2011 acquired assets neurovascular division boston scientific corporation neurovascular cash transaction 1450 additional 50 payment made upon completion certain milestones acquisition neurovascular substantially enhances presence neurotechnology market allowing us offer comprehensive portfolio products neurosurgical neurovascular devices effects acquisitions described included consolidated financial statements prospectively date acquisition pro forma consolidated results operations years ended december 31 2012 2011 would differ significantly result acquisitions purchase price allocations based upon preliminary valuations estimates assumptions subject change within measurement period valuations finalized preliminary allocation purchase price acquired net assets acquisitions described follows dollar amounts millions except per share amounts otherwise specified measurement periods 2011 acquisitions finalized 2012 differ materially preliminary allocations note 5 goodwill intangible assets completed annual impairment tests goodwill concluded impairments exist changes net carrying value goodwill segment follows following summary intangible assets estimated amortization expense next five years follows note 6 contingencies commitments involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters outcomes certain matters known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable projected management additional expense may incurred could unfavorably affect future operating results partially mitigate losses arising unfavorable outcomes matters purchase thirdparty insurance coverage subject certain deductibles loss limitations future operating results may unfavorably impacted settlement payments losses beyond amounts insurance carried addition matters may negatively impact ability obtain cost effective thirdparty insurance coverage future periods june 28 2012 voluntarily recalled rejuvenate abg ii modularneck hip stems terminated global distribution hip products notified healthcare professionals regulatory bodies recall undertaken due potential risks associated fretting andor corrosion may lead adverse local tissue reactions product liability lawsuits relating voluntary recall filed us previously announced intend reimburse implanted patients reasonable customary costs testing treatment services including necessary revision surgeries continue work medical community evaluate data understand matter associated costs ultimate total cost respect matter depend many factors difficult predict limited information received date may vary materially based number actual costs patients seeking testing treatment services number actual costs patients requiring revision surgeries number actual costs settle lawsuits filed us amount thirdparty insurance recoveries based information received estimate probable loss resolve matter range approximately 190 390 thirdparty insurance recoveries accordingly december 2012 recorded charge earnings 174 representing excess 190 minimum range previously recorded reserves contingent gain dollar amounts millions except per share amounts otherwise specified thirdparty recoveries recorded december 31 2012 noted final outcome matter dependent many variables difficult predict ultimate cost entirely resolve matter may materially different amount current estimate accruals could material adverse effect financial position results operations cash flows 2010 received subpoena united states department justice doj related sales marketing otisknee device subpoena concerns allegations violations federal laws related sales device cleared united states food drug administration fda entered discussions doj regarding potential resolution matter second quarter 2012 recorded nontax deductible charge 33 matter continue discuss matter doj assurance reach consensual resolution rather seeking resolution courts believe strong arguments defend allegations defense ultimately unsuccessful estimate reasonably possible total cost resolve matter may approximately two times greater amount accrued final outcome matter difficult predict ultimate cost resolve matter may materially different amount current estimate accruals could material adverse effect financial position results operations cash flows 2010 shareholders derivative action complaint certain current former directors officers filed united states district court western district michigan southern division lawsuit brought westchester putnam counties heavy highway laborers local 60 benefit funds laborers local 235 benefit funds complaint alleged claims breach fiduciary duties gross mismanagement connection certain product recalls fda warning letters government investigations relating physician compensation criminal proceeding brought biotech division recently entered settlement agreement requires changes certain strykers corporate governance practices following legal matters final outcome dependent many variables cannot predicted accordingly possible time us estimate material loss range losses however ultimate cost resolve matters could material adverse effect financial position results operations cash flows april 2011 lawsuits brought hillrom company inc affiliated entities hillrom us filed united states district court western district wisconsin united states district court southern district indiana wisconsin lawsuit subsequently transferred united states district court indiana suits allege infringement united states patent laws respect certain patient handling equipment manufactured sold seek damages permanent injunctions first lawsuit involved ten patents related use motorized wheel hospital beds stretchers recently entered agreement settling lawsuit agreement included payment hillrom 375 covenant sue crosslicense second lawsuit involves nine patents related electrical network communications hospital beds case stayed respect six patents currently reexamination united states patent office respect suit three remaining patents continue vigorously defend ultimate resolution second suit may relation resolution first suit cannot predicted however ultimate cost could material adverse effect financial position results operations cash flows 2010 received subpoena doj related sales marketing regulatory matters related stryker painpump doj recently requested certain documents related matter fully cooperating doj regarding matter investigation ongoing 2007 disclosed united states securities exchange commission sec made inquiry us regarding possible violations foreign corrupt practices act connection sale medical devices certain foreign countries subsequently 2008 received subpoena united states doj criminal division requesting certain documents period since january 1 2000 connection sec inquiry fully cooperating doj sec regarding matters 2007 united states department health human services office inspector general hhs issued us civil subpoena seeking determine whether violated various laws paying consulting fees providing things value orthopedic surgeons healthcare educational institutions inducements use strykers orthopedic medical devices procedures paid whole part medicare produced numerous documents materials hhs response subpoena purchase commitments operating leases purchase commitments materials supplies services property plant equipment part normal course business addition lease various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases future commitments obligations minimum lease commitments leases dollar amounts millions except per share amounts otherwise specified rent expense totaled 98 96 81 2012 2011 2010 respectively note 7 longterm debt credit facilities debt summarized follows august 2012 refinanced credit facility new 1000 unsecured revolving credit facility due august 2017 2012 facility 2012 facility replaced previously outstanding 1000 unsecured credit facility due august 2013 2012 facility includes increase option permitting us increase size facility additional 500 multicurrency sublimit euro borrowings 100 letter credit sublimit 2012 facility annual facility fee ranging 5 225 basis points bears interest libor defined 2012 facility agreement plus applicable margin ranging 575 1275 basis points dependent credit ratings 2012 facility requires us comply certain financial covenants compliance covenants december 31 2012 september 2011 sold 750 unsecured notes due september 2016 notes 2016 notes bear interest 200 per year unless previously redeemed mature september 30 2016 received net proceeds 749 net offering discount 1 july 15 2011 entered commercial paper program may issue private placement basis unsecured commercial paper notes maximum aggregate amount outstanding time 500 may issue notes program time net proceeds sale notes used general corporate purposes program contains customary representations warranties covenants indemnification provisions maturities notes vary may exceed 397 days notes must minimum denomination 025 notes sold discount par alternatively sold par bear interest either fixed floating rate vary based upon market conditions time issuance notes interest floating rate note may cd rate b commercial paper rate c federal funds rate libor rate e prime rate f treasury rate g base rate may specified time issuance notes redeemable prior maturity subject voluntary prepayment december 31 2012 notes issued program addition lines credit issued various financial institutions available fund daytoday operating needs december 31 2012 1063 borrowing capacity available existing credit facilities weightedaverage interest rate excluding required fees borrowings 30 december 31 2012 december 31 2012 total unamortized debt issuance costs incurred connection unsecured notes 10 fair value longterm debt including current maturities december 31 2012 december 31 2011 1866 1837 respectively based quoted interest rates similar types amounts borrowing agreements interest expense including required fees incurred outstanding debt credit facilities included income expense totaled 63 56 53 2012 2011 2010 respectively interest paid debt including required fees 55 39 2012 2011 2010 respectively note 8 capital stock december 2012 2011 2010 announced board directors authorized us purchase 405 500 respectively common stock 2012 2011 2010 repurchase programs respectively manner timing amount purchases determined management based evaluation market conditions stock price factors subject regulatory considerations purchases made time open market privately negotiated transactions otherwise 2010 repurchase program repurchased 21 million shares cost 108 2012 december 31 2012 maximum dollar value shares may yet purchased authorized repurchase programs 1000 made repurchases pursuant 2012 2011 repurchase programs december 31 2012 shares repurchased share repurchase programs available general corporate purposes including offsetting dilution associated stock option equitybased employee benefit plans dollar amounts millions except per share amounts otherwise specified shares reserved future compensation grants stryker common stock 29 million december 31 2012 32 million december 31 2011 05 million authorized shares 1 par value preferred stock none outstanding stock options longterm incentive plans grant stock options certain key employees nonemployee directors exercise price less fair market value underlying common stock closing quoted price common stock day prior date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows aggregate intrinsic value represents cumulative difference fair market value underlying common stock option exercise prices options exercised years ended december 31 2012 2011 2010 52 69 73 respectively exercise prices options outstanding december 31 2012 ranged 3786 6780 december 31 2012 64 unrecognized compensation cost related nonvested stock options granted longterm incentive plans cost expected recognized weightedaverage period 15 years restricted stock units rsus performance stock units psus grant rsus key employees nonemployee directors psus key employees longterm incentive plans fair value rsus determined based number shares granted closing quoted price common stock day prior date grant less anticipated dividends rsus generally vest onethird increments threeyear period settled stock psus earned threeyear performance cycle vest march year following end performance cycle number psus ultimately earned based performance relative preestablished goals threeyear performance cycle fair value psus determined based closing quoted price common stock day prior date grant summary rsu psu activity follows december 31 2012 51 unrecognized compensation cost related nonvested rsus cost expected recognized expense weightedaverage period 10 year weightedaverage grant date fair value per share rsus granted 2012 2011 5090 5649 respectively fair value rsus vested 2012 25 december 31 2012 5 unrecognized compensation cost related nonvested psus cost expected recognized expense weightedaverage period 10 year employee stock purchase plans espp fulltime parttime employees may participate espp provided meet certain eligibility requirements purchase price common stock terms espp defined 95 closing stock price last trading day purchase period 2012 2011 issued 196267 185529 shares respectively espp dollar amounts millions except per share amounts otherwise specified note 9 restructuring charges 2012 2011 recorded 40 38 respectively severance related costs connection focused reduction global workforce restructuring activities expected reduce global workforce approximately 5 targeted reductions restructuring activities initiated provide efficiencies realign resources advance medical device excise tax well allow continued investment strategic areas drive growth addition 2012 2011 recorded 7 25 respectively asset impairment 3 6 respectively agent conversion 25 7 respectively contractual obligations certain restructuring actions resulted discontinued use specific assets exit certain lease commitments expect current restructuring actions related cash payments completed end 2013 summary restructuring liability balance fullyear restructuring activity follows note 10 income taxes earnings income taxes consisted income taxes consisted 2011 recorded income tax benefit related favorable settlement united states internal revenue service irs regarding proposed adjustment previously filed 2003 2007 income tax returns related income tax positions taken cost sharing arrangements two whollyowned entities operating ireland recorded charges uncertain tax positions related outcome irs settlements net income tax benefit adjustments 82 reconciliation united states federal statutory income tax rate effective income tax rate dollar amounts millions except per share amounts otherwise specified deferred income tax assets liabilities comprised net operating loss carryforwards totaling 284 december 31 2012 available reduce future taxable earnings certain domestic foreign subsidiaries united states loss carryforwards 146 expire 2012 2021 international loss carryforwards 138 expire beginning 2013 however expiration carryforwards 51 subject full valuation allowance provision made united states federal state income taxes international income taxes may result future remittances undistributed earnings foreign subsidiaries determined indefinitely reinvested 6232 december 31 2012 determination amount unrecognized deferred income tax liability practicable changes amounts recorded uncertain income tax positions follows income tax expense could reduced 216 235 december 31 2012 december 31 2011 respectively uncertain income tax positions favorably resolved reasonably possible amount unrecognized tax benefits significantly change due one following events next twelve months expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject controversy various taxing jurisdictions operate including inventory transfer pricing cost sharing product royalty foreign branch arrangements able reasonably estimate amount future periods changes unrecognized tax benefits may resolved interest expense penalties incurred associated uncertain tax positions included income expense normal course business income tax authorities various income tax jurisdictions within united states internationally conduct routine audits income tax returns filed prior years audits generally designed determine individual income tax authorities agreement interpretations complex income tax regulations regarding allocation income various income tax jurisdictions exceptions longer subject audits income tax authorities tax years prior 2008 income tax years subsequent 2008 open examination many income tax jurisdictions operate dollar amounts millions except per share amounts otherwise specified note 11 retirement plans provide certain employees defined contribution plans portion retirement plan expense defined contribution plans funded stryker common stock use stryker common stock represents noncash operating activity reflected consolidated statements cash flows certain subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets obligations funded status estimated net actuarial loss defined benefit pension plans reclassified accumulated comprehensive income net periodic benefit cost year ended december 31 2013 7 estimate immaterial amount amortization prior service cost transition amount defined benefit pension plans reclassified accumulated comprehensive income net periodic benefit cost year ended december 31 2013 pension plans accumulated benefit obligation excess plan assets projected benefit obligations accumulated benefit obligations fair value plan assets 447 417 254 respectively december 31 2012 298 292 195 respectively december 31 2011 change benefit obligation plan assets dollar amounts millions except per share amounts otherwise specified components net periodic pension cost discount rate discount rates selected using hypothetical portfolio high quality bonds december 31 would provide necessary cash flows match projected benefit payments expected return plan assets expected return plan assets determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns investment strategy investment strategy defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances weightedaverage target actual allocation plan assets asset category follows valuation pension plan assets pricing categories level 3 pension plan assets see note 2 explanation fair value hierarchy consist primarily guaranteed investment contracts insurance companies insurance contracts guarantee us principal repayment fixed rate return valuation level 3 assets based thirdparty actuarial valuations estimation surrender value guaranteed investment contract us insurance company surrender value equals actuarial value notional investments underlying guaranteed investment contract using actuarial assumptions stated guaranteed investment contract dollar amounts millions except per share amounts otherwise specified rollforward level 3 pension plan assets expect contribute 19 defined benefit pension plans 2013 estimated future benefit payments year based expected future service appropriate note 12 segment geographic data segregate operations three reportable business segments reconstructive medsurg neurotechnology spine reconstructive segment includes orthopaedic reconstructive hip knee trauma implant systems well related products medsurg segment includes surgical equipment surgical navigation systems instruments endoscopic communications systems endoscopy patient handling emergency medical equipment medical related products neurotechnology spine segment includes neurovascular products spinal implant systems related products category shown table includes corporate global operations administration central research development initiatives interest expense interest marketable securities income sharebased compensation includes compensation related employee director stock option restricted stock unit performance stock unit grants reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies note 1 consolidated financial statements measure financial results reportable segments using internal performance measure excludes acquisition integrationrelated charges restructuring related charges reserves certain legal matters certain impairments gains property plant equipment certain income tax adjustments associated repatriation foreign earnings identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment countries local revenue generating operations combined following geographic areas united states including puerto rico europe middle east africa emea asia pacific foreign countries include canada countries latin american region sales attributable geographic area based upon customer’s country domicile net property plant equipment based upon physical location assets geographic information follows dollar amounts millions except per share amounts otherwise specified note 13 summary quarterly data unaudited price quotations reported supplied new york stock exchange note 14 subsequent events february 2013 made voluntary general offer acquire shares trauson holdings company limited hk750 per ordinary share total consideration 764 cash transaction acquisition expected close end second quarter 2013 expand presence key emerging market product portfolio pipeline targeted value segment chinese orthopaedic market february 2013 jury verdict 70 lost profits infringement three patents relating pulsed lavage systems patent infringement suit filed western district michigan competitor expected defendant file posttrial motions seeking overturn jury verdict appeal unsuccessful regard record gain related contingencies resolved item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements board directors shareholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2013 2012 related consolidated statements earnings comprehensive income shareholders equity cash flows three years period ended december 31 2013 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2013 2012 consolidated results operations cash flows three years period ended december 31 2013 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states stryker corporations internal control financial reporting december 31 2013 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework report dated february 13 2014 expressed unqualified opinion thereon ernst young llp grand rapids michigan february 13 2014 dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries consolidated statements earnings consolidated statements comprehensive income see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries consolidated statements shareholders’ equity see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries notes consolidated financial statements december 31 2013 note 1 significant accounting policies nature operations stryker corporation company us one worlds leading medical technology companies products include implants used joint replacement trauma surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment neurosurgical neurovascular spinal devices well medical device products used variety medical specialties basis presentation consolidated financial statements include company subsidiaries intercompany transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted united states gaap requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying disclosures estimates based managements best knowledge current events actions company may undertake future estimates used accounting among items pensions stock options valuation acquired intangible assets useful lives depreciation amortization longlived assets future cash flows associated impairment testing goodwill indefinitelived intangible assets longlived assets deferred tax assets liabilities uncertain income tax positions contingencies actual results may ultimately differ estimates revenue recognition sales recognized revenue realized realizable earned policy recognize revenue title product ownership risk loss transfer customer date shipment date receipt customer reconstructive products receive appropriate notification product used implanted provision estimated sales returns discounts rebates sales incentives recorded reduction net sales period revenue recognized shipping handling costs charged customers included net sales cost sales cost sales primarily comprised direct materials supplies consumed manufacture product well manufacturing labor depreciation expense direct overhead expense necessary acquire convert purchased materials supplies finished product cost sales also includes cost distribute products customers inbound freight costs warehousing costs shipping handling activity research development engineering expenses research development costs charged expense incurred costs include research development engineering activities relating development new products improvement existing products technical support products compliance governmental regulations protection customers patients costs primarily consist salaries wages consulting depreciation maintenance research facilities equipment selling general administrative expenses selling general administrative expense primarily comprised selling expenses marketing expenses administrative indirect overhead costs amortization loaner instrumentation depreciation amortization expense nonmanufacturing assets miscellaneous operating items currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate statements united states dollars recorded comprehensive income oci transactional exchange gains losses included earnings cash equivalents highly liquid investments remaining stated maturities three months less purchased considered cash equivalents recorded cost marketable securities marketable securities consist marketable debt securities certificates deposit mutual funds mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities pursuant investment policy individual marketable security investments must minimum credit quality single per standard poor’s fitch a2 per moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double per standard poor’s fitch aa per moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk marketable security investment portfolio marketable securities classified availableforsale trading securities accounts receivable accounts receivable consists trade miscellaneous receivables allowance maintained doubtful accounts estimated losses collection accounts receivable estimates made regarding ability customers make required payments based historical credit experience expected future trends accounts receivable written reasonable collection efforts exhausted inventories stated lower cost market cost generally determined using firstin firstout fifo cost method excess obsolete inventory resulting potential inability sell specific products prices excess current carrying costs reserves maintained reduce current carrying cost market prices financial instruments financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange dollar amounts millions except per share amounts otherwise specified contracts exception longterm debt discussed detail note 8 estimates fair value financial instruments approximate carrying amounts december 31 2013 2012 marketable securities recognized fair value adjustments fair value marketable securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive income aoci shareholders’ equity adjustments fair value marketable securities classified trading recorded earnings amortized cost marketable debt securities adjusted amortization premiums discounts maturity computed effective interest method amortization included income expense along interest realized gains losses cost securities sold determined specific identification method review declines fair value investments classified availableforsale impairment determine whether decline fair value otherthantemporary impairment resulting losses otherthantemporary impairments availableforsale marketable securities included earnings derivatives recognized fair value enter forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses included earnings forward currency exchange contracts designated cash flow hedges designed hedge variability cash flows associated forecasted transactions denominated foreign currency take place future changes value derivatives designated cash flow hedges recorded aoci consolidated balance sheets earnings affected variability underlying cash flows time applicable amount gain loss derivative instrument deferred shareholders’ equity reclassified earnings included income expense cost goods sold consolidated statements earnings depending underlying transaction hedged december 2011 financial accounting standards board fasb issued accounting guidance related disclosures offsetting assets liabilities balance sheet accounting standard requires entity disclose gross net information instruments transactions eligible offset balance sheet well instruments transactions executed master netting similar arrangement enables users financial statements understand effects potential effects arrangements financial position accounting guidance effective company beginning 2013 elected report derivative instruments gross basis property plant equipment property plant equipment stated cost depreciation generally computed straightline method estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses acquisition date amounts allocated identifiable intangible assets factors contribute recognition goodwill include securing synergies specific business available market participants expected increase revenues profits acquisition talented workforce cost savings opportunities strategic benefit expanding presence core adjacent markets diversifying product portfolio fair values identifiable intangible assets primarily determined using income approach intangible assets include limited developed technology customer distributor relationships reflect expected continued customer distributor patronage trademarks patents intangible assets determinable useful lives amortized straightline basis estimated useful lives 4 40 years certain acquired trade names considered indefinite lives amortized assessed annually potential impairment described certain acquisitions acquire inprocess research development iprd intangible assets iprd considered indefinitelived intangible asset time research completed time becomes determinablelived intangible asset determined future use time impaired goodwill intangibles longlived asset impairment tests perform annual impairment test goodwill fourth quarter year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability indefinitelived intangible assets also tested least annually impairment comparing individual carrying values fair value review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows undiscounted cash flows expected generated related assets estimated assets useful life based updated projections evaluation indicates carrying amount asset may recoverable potential impairment measured based upon fair value related asset group determined appropriate market appraisal valuation technique assets dollar amounts millions except per share amounts otherwise specified classified held sale recorded lower carrying amount fair value less costs sell stock options december 31 2013 longterm incentive plans described fully note 9 consolidated financial statements stock options granted key employees nonemployee directors measure cost employee stock options based grantdate fair value recognize cost using straightline method period recipient required provide services exchange options typically vesting period weightedaverage fair value per share options granted 2013 2012 2011 estimated date grant using blackscholes option pricing model 1524 1336 1714 respectively fair value options granted estimated using following weightedaverage assumptions riskfree interest rate periods within expected life options granted based united states treasury yield curve effect time grant expected stock price volatility based historical volatility stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data income taxes deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax benefits generally represent change net deferred income tax assets liabilities year amounts result adjustments related acquisitions appropriate operate multiple income tax jurisdictions within united states internationally accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations income tax authorities jurisdictions regularly perform audits income tax filings income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty foreign branch arrangements may require extended period time resolve may result significant income tax adjustments changes income allocation required jurisdictions different income tax rates legal contingencies involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 7 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing management’s best estimate probable loss minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies note 2 accumulated comprehensive income aoci changes reclassifications aoci net tax years ended december 31 2013 2012 dollar amounts millions except per share amounts otherwise specified items reclassified aoci earnings years ended december 31 2013 2012 note 3 fair value measurements accounting guidance fair value measurements certain financial assets liabilities requires financial assets liabilities carried fair value classified disclosed one following three categories level 1 quoted market prices active markets identical assets liabilities level 2 observable marketbased inputs unobservable inputs corroborated market data level 3 unobservable inputs reflecting reporting entitys assumptions external inputs active markets applying fair value principles valuation assets liabilities required maximize use quoted market prices minimize use unobservable inputs calculate fair value level 1 level 2 instruments based exchange traded price similar identical instruments available based observable inputs significant transfers level 1 level 2 occurred december 31 2012 december 31 2013 fair value level 3 assets liabilities calculated net present value expected cash flows based externally provided obtained inputs certain level 3 assets may also based sale prices similar assets fair value calculations take consideration credit risk counterparties counterparty default maximum exposure loss asset balance instrument change valuation techniques used measuring fair value financial assets liabilities year valuation assets liabilities measured fair value december 31 2013 2012 dollar amounts millions except per share amounts otherwise specified following rollforward assets liabilities measured fair value using unobservable inputs level 3 estimated fair value liability contingent consideration represents milestone payments acquisitions fair value liability estimated using discounted cash flow technique significant inputs technique included probability assessments occurrence triggering events appropriately discounted considering uncertainties associated obligation remeasure liability reporting period record changes fair value general administrative expense probability occurrence income expense changes time value money earnings following presents quantitative information inputs valuation methodologies use material fair value measurements classified level 3 following summary marketable securities unrealized losses availableforsale marketable securities primarily caused increases yields result changing conditions global credit markets investments downgraded rating agencies since initial purchase less 1 investments availableforsale marketable securities credit quality rating less single per standard poors fitch a2 per moodys intend sell investments likely required sell investments recovery amortized cost basis may maturity consider investments otherthantemporarily impaired december 31 2013 cost estimated fair value availableforsale marketable securities december 31 2013 contractual maturity dollar amounts millions except per share amounts otherwise specified gross unrealized losses fair value investments unrealized losses deemed otherthantemporarily impaired aggregated investment category length time individual securities continuous unrealized loss position december 31 2013 follows interest marketable securities income totaled 24 47 34 2013 2012 2011 respectively included income expense note 4 derivative instruments hedging strategies international activities expose us risks related effects changes foreign currency exchange rates use operational economic hedges well foreign currency exchange forward contracts manage impact currency exchange earnings cash flow inception forward contract derivative designated either freestanding derivative cash flow hedge enter currency exchange derivative instruments speculative purposes gross notional amount currency exchange rate derivative instruments outstanding 2344 1352 december 31 2013 2012 respectively aggregate currency exchange rate gains losses 3 7 3 years ended december 31 2013 2012 2011 gains losses represent net impact consolidated statement earnings derivative instruments discussed exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties counterparty default maximum exposure loss asset balance instrument maximum term forward currency exchange contracts december 31 2013 2012 546 days 183 days derivative instruments designated hedges derivative forward contracts used offset exposure change value specific foreign currency denominated assets liabilities derivatives designated hedges therefore changes value forward contracts recognized earnings thereby offsetting current earnings effect related changes value foreign currency denominated assets liabilities estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points gross notional amount nondesignated currency exchange rate derivative instruments outstanding 2000 1352 december 31 2013 2012 respectively years ended december 31 2013 2012 2011 recognized foreign currency transaction gains losses included income expense earnings 6 7 3 respectively derivative instruments designated hedges 2013 implemented layered hedging program hedge select anticipated foreign currency cash flows reduce volatility cash flows reported earnings foreign exchange contracts generally maturities eighteen months derivative instruments designated qualify cash flow hedge effective portion gain loss derivative reported component aoci reclassified income expense cost sales within earnings period hedged transaction affects earnings 2013 gain 9 reclassified aoci earnings relating discontinuance certain cash flow hedges consider probable original forecasted transactions occur gross notional amount designated currency exchange rate derivative instruments outstanding 344 december 31 2013 cash flows associated instruments included cash operations category cash flows items hedged fair value amounts presented gross basis balance sheet segregated derivatives designated qualify hedging instruments years ended december 31 2013 2012 follows dollar amounts millions except per share amounts otherwise specified amount location gains consolidated statements earnings amounts recorded aoci related derivative instruments designated hedges year ended december 31 2013 december 31 2013 deferred pretax gains derivatives designated hedges 12 recorded aoci expected reclassified current earnings next twelve months reclassification primarily due sale inventory includes previously hedged purchases note 5 acquisitions december 2013 announced intent acquire patient safety technologies inc pst aggregate purchase price approximately 120 pst conducts business wholly owned subsidiary surgicount medical inc pst’s proprietary safetysponge® system surgicount 360™ compliance software help prevent retained foreign objects operating room transaction subject customary closing conditions expected close first quarter 2014 acquisition pst expected enhance product offerings within medsurg segment december 2013 acquired mako surgical corp mako aggregate purchase price approximately 1679 acquisition mako combined strong history joint reconstruction capital equipment operating room integration surgical navigation surgical instruments help advance growth robotic assisted surgery combined expertise offers potential simplify joint reconstruction procedures reduce variability enhance surgeon patient experience acquisition mako enhances product offerings within reconstructive segment intangible assets acquired mako amortized weightedaverage life 9 years except trade name deemed indefinite life iprd considered indefinitelived intangible asset time research completed time becomes determinablelived intangible asset determined future use time impaired march 2013 acquired trauson holdings company limited trauson total consideration 751 acquisition trauson enhances product offerings primarily within reconstructive segment broadens presence china enables us expand fast growing value segment emerging markets intangible assets acquired trauson amortized weightedaverage life 15 years except trade name deemed indefinite life iprd considered indefinitelived intangible asset time research completed time becomes determinablelived intangible asset determined future use time impaired purchase price allocations mako trauson acquisitions based upon preliminary valuations estimates assumptions subject change within measurement period valuations finalized management currently process verifying data finalizing information related mako valuation recording identifiable intangible assets deferred income taxes corresponding effect value goodwill trauson acquisition measurement period completed revisions original estimates include increase customer relationship intangible assets 40 increase liabilities 14 reduction goodwill 31 november 2012 acquired surpass medical ltd surpass 100 additional 35 paid upon completion certain milestones surpass develops commercializes nextgeneration flow diversion stent technology treat brain aneurysms using dollar amounts millions except per share amounts otherwise specified unique mesh design delivery system acquisition surpass enhances product offerings within neurotechnology spine segment intangible assets acquired surpass amortized weightedaverage life 15 years iprd considered indefinitelived intangible asset time research completed time becomes determinablelived intangible asset determined future use time impaired measurement period surpass completed fourth quarter 2013 revisions original estimates include reduction developed technology 18 reduction iprd 26 increase goodwill 27 effects acquisitions described included consolidated financial statements prospectively date acquisition pro forma consolidated results operations years ended december 31 2013 2012 would differ significantly result acquisitions allocation purchase price acquired net assets acquisitions described follows note 6 goodwill intangible assets completed annual impairment tests goodwill 2013 2012 concluded year impairments exist changes net carrying value goodwill segment follows measurement period adjustments reflect changes goodwill acquisitions completed previous year included foreign currency translation effects following summary intangible assets dollar amounts millions except per share amounts otherwise specified estimated amortization expense next five years follows note 7 contingencies commitments involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable projected management additional expense may incurred could unfavorably affect future operating results company currently selfinsured product liabilityrelated claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows 2010 received subpoena united states department justice doj related sales marketing otisknee device subpoena concerns allegations violations federal laws related sales device cleared united states food drug administration fda continue discuss settlement matter doj assurance reach consensual resolution rather seeking resolution courts recorded charges totaling 80 related matter including 47 year ended december 31 2013 june 2012 voluntarily recalled rejuvenate abg ii modularneck hip stems terminated global distribution hip products notified healthcare professionals regulatory bodies recall taken due potential risks associated fretting andor corrosion may lead adverse local tissue reactions product liability lawsuits relating voluntary recall filed us previously announced intend reimburse implanted patients reasonable customary costs testing treatment services including necessary revision surgeries continue work medical community evaluate data understand matter associated costs ultimate total cost respect matter depend many factors difficult predict information received date may vary materially based number actual costs patients seeking testing treatment services number actual costs patients requiring revision surgeries number actual costs settle lawsuits filed us amount thirdparty insurance recoveries based information received actuarially determined range probable loss resolve matter estimated approximately 790 1235 thirdparty insurance recoveries year ended december 31 2013 recorded charges earnings 600 representing excess 790 minimum range previously recorded reserves contingent gain thirdparty insurance recoveries recorded december 31 2013 noted final outcome matter dependent many variables difficult predict ultimate cost entirely resolve matter may materially different amount current estimate accruals could material adverse effect financial position results operations cash flows 2010 filed lawsuit federal court zimmer holdings inc zimmer alleging zimmer product infringed three patents rulings issued august september 2013 trial judge upheld february 2013 jury verdict favor issued permanent injunction barring zimmer making selling infringing products ordered zimmer pay us least 228 zimmer appealing ruling ultimate resolution matter may differ materially accordingly recorded contingent gain related matter following legal matters final outcome dependent many variables cannot predicted accordingly possible time us estimate material loss range losses however ultimate cost resolve matters could material adverse effect financial position results operations cash flows april 2011 lawsuits brought hillrom company inc affiliated entities hillrom us filed united states district court western district wisconsin united states district court southern district indiana wisconsin lawsuit subsequently transferred united states district court indiana suits allege infringement united states patent laws respect certain patient handling equipment manufactured sold seek damages permanent injunctions entered agreement settling first lawsuit terms previously disclosed second lawsuit involves nine patents related electrical network communications hospital beds case stayed respect six patents currently reexamination united states patent office respect three remaining patents hillrom appealing trial courts grant summary judgment favor ultimate resolution particular part suit may differ ultimate resolution entire second suit may relation resolution first suit cannot predicted however ultimate result could material adverse effect financial position results operations cash flows dollar amounts millions except per share amounts otherwise specified 2010 received subpoena doj related sales marketing regulatory matters related stryker painpump received requests certain documents connection investigation ongoing fully cooperating doj regarding matter purchase commitments operating leases purchase commitments materials supplies services property plant equipment part normal course business addition lease various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases future commitments obligations minimum lease commitments leases rent expense totaled 100 98 96 2013 2012 2011 respectively note 8 debt credit facilities debt summarized follows march 2013 completed public offering 600 130 notes due april 1 2018 net offering discount 3 2018 notes 400 410 notes due april 1 2043 net offering discount 6 2043 notes together 2018 notes interest notes payable april 1 october 1 year commencing october 1 2013 unless previously redeemed 2018 notes mature april 1 2018 2043 notes mature april 1 2043 intend use net proceeds notes working capital general corporate purposes including acquisitions stock repurchases business opportunities august 2012 refinanced credit facility new 1000 unsecured revolving credit facility due august 2017 2012 facility 2012 facility replaced previously outstanding 1000 unsecured credit facility due august 2013 2012 facility includes increase option permitting us increase size facility additional 500 multicurrency sublimit euro borrowings 100 letter credit sublimit 2012 facility annual facility fee ranging 5 225 basis points bears interest libor defined 2012 facility agreement plus applicable margin ranging 575 1275 basis points dependent credit ratings 2012 facility requires us comply certain financial covenants compliance covenants december 31 2013 september 2011 sold 750 unsecured notes due september 2016 notes 2016 notes bear interest 200 per year unless previously redeemed mature september 30 2016 received net proceeds 749 net offering discount 1 july 15 2011 entered commercial paper program may issue private placement basis unsecured commercial paper notes maximum aggregate amount outstanding time 500 may issue notes program time net proceeds sale notes used general corporate purposes program contains customary representations warranties covenants indemnification provisions maturities notes vary may exceed 397 days notes must minimum denomination 025 notes sold discount par alternatively sold par bear interest either fixed floating rate vary based upon market conditions time issuance notes interest floating rate note may cd rate b commercial paper rate c federal funds rate libor rate e prime rate f treasury rate g base rate may specified time issuance notes redeemable prior maturity subject voluntary prepayment december 31 2013 notes issued program addition lines credit issued various financial institutions available fund daytoday operating needs december 31 2013 1052 borrowing capacity available existing credit facilities weightedaverage interest rate excluding required fees borrowings 29 december 31 2013 december 31 2013 total unamortized debt issuance costs incurred connection unsecured notes 16 fair value debt including current maturities december 31 2013 december 31 2012 2790 1866 respectively based quoted interest rates similar types amounts borrowing agreements interest expense including required fees incurred outstanding debt credit facilities included income expense totaled 83 63 56 2013 2012 2011 respectively cash interest paid debt including required fees 88 55 39 2013 2012 2011 respectively dollar amounts millions except per share amounts otherwise specified note 9 capital stock february 2013 declared quarterly dividend 0265 per share payable april 30 2013 shareholders record close business march 28 2013 april 2013 declared quarterly dividend 0265 per share payable july 31 2013 shareholders record close business june 28 2013 july 2013 declared quarterly dividend 0265 per share payable october 31 2013 shareholders record close business september 30 2013 december 2013 declared quarterly dividend 0305 per share payable january 31 2014 shareholders record close business december 31 2013 december 2012 2011 2010 announced board directors authorized us purchase 405 500 respectively common stock 2012 2011 2010 repurchase programs respectively manner timing amount purchases determined management based evaluation market conditions stock price factors subject regulatory considerations purchases made time open market privately negotiated transactions otherwise year ended december 31 2013 repurchased 14 million shares cost 95 2010 repurchase program 34 million shares cost 222 2011 repurchase program december 31 2013 2010 repurchase program complete maximum dollar value shares may yet purchased 2011 repurchase program 278 made repurchases pursuant 2012 repurchase program december 31 2013 shares repurchased share repurchase programs available general corporate purposes including offsetting dilution associated stock option equitybased employee benefit plans december 31 2013 maximum dollar value shares may purchased authorized repurchase programs 683 shares reserved future compensation grants stryker common stock 23 million 29 million december 31 2013 2012 05 million authorized shares 1 par value preferred stock none outstanding stock options longterm incentive plans grant stock options certain key employees nonemployee directors exercise price less fair market value underlying common stock closing quoted price common stock day prior date grant options granted periods 10 years become exercisable varying installments summary 2013 stock option activity follows aggregate intrinsic value represents cumulative difference fair market value underlying common stock option exercise prices options exercised years ended december 31 2013 2012 2011 97 52 69 respectively exercise prices options outstanding december 31 2013 ranged 3786 6780 december 31 2013 65 unrecognized compensation cost related nonvested stock options granted longterm incentive plans cost expected recognized weightedaverage period 16 years restricted stock units rsus performance stock units psus grant rsus key employees nonemployee directors psus certain key employees longterm incentive plans fair value rsus determined based number shares granted closing quoted price common stock day prior date grant adjusted fact rsus include anticipated dividends rsus generally vest onethird increments threeyear period settled stock psus earned threeyear performance cycle vest march year following end performance cycle number psus ultimately earned based performance relative preestablished goals threeyear performance cycle fair value psus determined based closing quoted price common stock day prior date grant summary 2013 rsu psu activity follows december 31 2013 50 unrecognized compensation cost related nonvested rsus cost expected recognized expense weightedaverage period 10 year weightedaverage grant date fair value per share rsus granted 2013 2012 6081 5090 respectively fair value rsus vested 2013 35 dollar amounts millions except per share amounts otherwise specified december 31 2013 7 unrecognized compensation cost related nonvested psus cost expected recognized expense weightedaverage period 10 year employee stock purchase plans espp fulltime parttime employees may participate espp provided meet certain eligibility requirements purchase price common stock terms espp defined 95 closing stock price last trading day purchase period 2013 2012 issued 163533 196267 shares respectively espp note 10 restructuring charges 2013 2012 2011 recorded 50 2 cost sales 48 selling general administrative expense 75 76 respectively restructuring charges related focused reductions global workforce restructuring initiatives targeted reductions restructuring activities initiated provide efficiencies realign resources well allow continued investment strategic areas drive growth years ended december 31 2013 2012 recorded 22 40 respectively severance related costs 25 32 respectively contractual obligations certain restructuring actions resulted discontinued use specific assets exit certain lease commitments 2013 2012 also recorded 3 agent conversion expense current restructuring actions completed end 2013 expect related cash payments substantially completed end first quarter 2014 summary restructuring liability balance fullyear restructuring activity follows note 11 income taxes earnings income taxes consisted income taxes consisted 2013 recorded income tax benefits related favorable audit resolutions multiple jurisdictions 2011 recorded income tax benefit related favorable settlement united states internal revenue service irs regarding proposed adjustment previously filed 2003 2007 income tax returns related income tax positions taken cost sharing arrangements two whollyowned entities operating ireland recorded charges uncertain tax positions related outcome irs settlements net income tax benefit adjustments 82 reconciliation united states federal statutory income tax rate effective income tax rate dollar amounts millions except per share amounts otherwise specified deferred income tax assets liabilities net operating loss carryforwards totaling 377 december 31 2013 available reduce future taxable earnings certain domestic foreign subsidiaries united states loss carryforwards 270 expire 2013 2032 international loss carryforwards 107 expire beginning 2013 however expiration carryforwards 55 subject full valuation allowance also tax credit carryforward 25 full valuation allowance credits expiration however anticipate generating income tax excess credits foreseeable future provision made united states federal state income taxes international income taxes may result future remittances undistributed earnings foreign subsidiaries determined indefinitely reinvested 7023 december 31 2013 determination amount unrecognized deferred income tax liability practicable changes amounts recorded uncertain income tax positions follows income tax expense could reduced 194 216 december 31 2013 december 31 2012 respectively uncertain income tax positions favorably resolved reasonably possible amount unrecognized tax benefits significantly change due one following events next twelve months expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject controversy various taxing jurisdictions operate including inventory transfer pricing cost sharing product royalty foreign branch arrangements able reasonably estimate amount future periods changes unrecognized tax benefits may resolved however anticipate significant changes within next twelve months interest penalties incurred associated uncertain tax positions included income expense normal course business income tax authorities various income tax jurisdictions within united states internationally conduct routine audits income tax returns filed prior years audits generally designed determine individual income tax authorities agreement interpretations complex income tax regulations regarding allocation income various income tax jurisdictions income tax years open 2010 current year united states federal jurisdiction income tax years open major jurisdictions range 2003 current year note 12 retirement plans provide certain employees defined contribution plans portion retirement plan expense defined contribution plans funded stryker common stock use stryker common stock represents noncash operating activity reflected consolidated statements cash flows dollar amounts millions except per share amounts otherwise specified certain subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets estimated net actuarial loss defined benefit pension plans reclassified aoci net periodic benefit cost year ended 12312014 4 estimate immaterial amount amortization prior service cost transition amount defined benefit pension plans reclassified aoci net periodic benefit cost year ended 12312014 pension plans accumulated benefit obligation excess plan assets projected benefit obligations accumulated benefit obligations fair value plan assets 456 427 281 respectively december 31 2013 447 417 254 respectively december 31 2012 dollar amounts millions except per share amounts otherwise specified components net periodic pension cost discount rate discount rates selected using hypothetical portfolio high quality bonds december 31 would provide necessary cash flows match projected benefit payments expected return plan assets expected return plan assets determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns investment strategy investment strategy defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances weightedaverage target actual allocation plan assets asset category follows valuation pension plan assets pricing categories level 3 pension plan assets see note 3 explanation fair value hierarchy consist primarily guaranteed investment contracts insurance companies insurance contracts guarantee us principal repayment fixed rate return valuation level 3 assets based thirdparty actuarial valuations estimation surrender value guaranteed investment contract us insurance company surrender value equals actuarial value notional investments underlying guaranteed investment contract using actuarial assumptions stated guaranteed investment contract dollar amounts millions except per share amounts otherwise specified rollforward level 3 pension plan assets expect contribute 20 defined benefit pension plans 2014 estimated future benefit payments year based expected future service appropriate note 13 segment geographic data segregate operations three reportable business segments reconstructive medsurg neurotechnology spine reconstructive segment includes orthopaedic reconstructive hip knee trauma implant systems well related products medsurg segment includes surgical equipment surgical navigation systems instruments endoscopic communications systems endoscopy patient handling emergency medical equipment medical related products neurotechnology spine segment includes neurovascular products spinal implant systems related products category shown table includes corporate global operations administration central research development initiatives interest expense interest marketable securities income sharebased compensation includes compensation related employee director stock option restricted stock unit performance stock unit grants reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies note 1 consolidated financial statements measure financial results reportable segments using internal performance measure excludes acquisition integrationrelated charges restructuring related charges reserves certain product recall matters reserves certain legal regulatory matters donation educational institution certain income tax adjustments identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment results reportable segments follows dollar amounts millions except per share amounts otherwise specified countries local revenue generating operations combined following geographic areas united states including puerto rico europe middle east africa emea asia pacific foreign countries include canada countries latin american region sales attributable geographic area based upon customer’s country domicile net property plant equipment based upon physical location assets geographic information follows note 14 summary quarterly data unaudited price quotations reported supplied new york stock exchange dollar amounts millions except per share amounts otherwise specified item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements board directors shareholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2014 2013 related consolidated statements earnings comprehensive income shareholders equity cash flows three years period ended december 31 2014 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2014 2013 consolidated results operations cash flows three years period ended december 31 2014 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states stryker corporations internal control financial reporting december 31 2014 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 12 2015 expressed unqualified opinion thereon ernst young llp grand rapids michigan february 12 2015 stryker corporation 2014 form 10k stryker corporation subsidiaries consolidated statements earnings consolidated statements comprehensive income see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k stryker corporation subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k stryker corporation subsidiaries consolidated statements shareholders’ equity see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k stryker corporation subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k notes consolidated financial statements note 1 significant accounting policies nature operations stryker corporation company us one worlds leading medical technology companies products include implants used joint replacement trauma surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment neurosurgical neurovascular spinal devices well medical device products used variety medical specialties basis presentation consolidation consolidated financial statements include company subsidiaries significant intercompany accounts transactions eliminated consolidation material interests variable interest entities none require consolidation certain prior year amounts reclassified conform presentation consolidated statements earnings 2014 use estimates preparation financial statements conformity accounting principles generally accepted united states gaap requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying disclosures estimates based managements best knowledge current events actions may undertake future estimates used accounting among items pensions stock options valuation acquired intangible assets useful lives depreciation amortization longlived assets future cash flows associated impairment testing goodwill indefinitelived intangible assets longlived assets excess obsolete inventory deferred tax assets liabilities uncertain income tax positions contingencies actual results may ultimately differ estimates revenue recognition sales recognized revenue realized realizable earned policy recognize revenue title product ownership risk loss transfer customer date shipment date receipt customer orthopaedics products receive appropriate notification product used implanted provision estimated sales returns discounts rebates sales incentives recorded reduction net sales period revenue recognized shipping handling costs charged customers included net sales cost sales cost sales primarily comprised direct materials supplies consumed manufacture product well manufacturing labor depreciation expense direct overhead expense necessary acquire convert purchased materials supplies finished product cost sales also includes cost distribute products customers inbound freight costs warehousing costs shipping handling activity research development engineering expenses research development costs charged expense incurred costs include research development engineering activities relating development new products improvement existing products technical support products compliance governmental regulations protection customers patients costs primarily consist salaries wages consulting depreciation maintenance research facilities equipment selling general administrative expenses selling general administrative expense primarily comprised selling expenses marketing expenses administrative indirect overhead costs amortization loaner instrumentation depreciation amortization expense nonmanufacturing assets miscellaneous operating items currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate statements united states dollars recorded comprehensive income oci transactional exchange gains losses included earnings cash equivalents highly liquid investments remaining stated maturities three months less purchased considered cash equivalents recorded cost marketable securities marketable securities consist marketable debt securities certificates deposit mutual funds mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities pursuant investment policy individual marketable security investments must minimum credit quality single per standard poor’s fitch a2 per moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double per standard poor’s fitch aa per moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk marketable security investment portfolio marketable securities classified availableforsale trading securities accounts receivable accounts receivable consists trade miscellaneous receivables allowance maintained doubtful accounts estimated losses collection accounts receivable estimates made regarding ability customers make required payments based historical credit experience expected future trends accounts receivable written reasonable collection efforts exhausted inventories stated lower cost market cost generally determined using firstin firstout fifo cost method excess obsolete inventory resulting potential inability sell specific products prices excess current carrying costs reserves maintained reduce current carrying cost market prices financial instruments financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts exception longterm debt discussed detail note 8 estimates fair value financial instruments approximate carrying amounts december 31 2014 2013 marketable securities recognized fair value adjustments fair value marketable securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive income aoci shareholders’ equity adjustments fair value marketable securities classified trading recorded earnings amortized cost marketable debt securities adjusted amortization premiums discounts maturity computed effective interest method amortization included income expense along interest realized gains losses cost securities sold determined specific identification method dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k review declines fair value investments classified availableforsale impairment determine whether decline fair value otherthantemporary impairment resulting losses otherthantemporary impairments availableforsale marketable securities included earnings derivatives recognized fair value reported gross basis enter forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses included earnings forward currency exchange contracts designated cash flow hedges designed hedge variability cash flows associated forecasted transactions denominated foreign currency take place future changes value derivatives designated cash flow hedges recorded aoci consolidated balance sheets earnings affected variability underlying cash flows time applicable amount gain loss derivative instrument deferred shareholders’ equity reclassified earnings included income expense cost goods sold consolidated statements earnings depending underlying transaction hedged report derivative instruments gross basis interest rate derivative instruments designated fair value hedges used manage exposure interest rate movements reduce borrowing costs converting fixedrate debt floatingrate debt agreements agree exchange specified intervals difference fixed floating interest amounts calculated reference agreedupon notional principal amount property plant equipment property plant equipment stated cost depreciation generally computed straightline method estimated useful lives three 30 years buildings improvements three ten years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses acquisition date amounts allocated identifiable intangible assets factors contribute recognition goodwill include securing synergies specific business available market participants expected increase revenues profits acquisition talented workforce cost savings opportunities strategic benefit expanding presence core adjacent markets diversifying product portfolio fair values identifiable intangible assets primarily determined using income approach intangible assets include limited developed technology customer distributor relationships reflect expected continued customer distributor patronage trademarks patents intangible assets determinable useful lives amortized straightline basis estimated useful lives four 40 years certain acquired trade names considered indefinite lives amortized assessed annually potential impairment described certain acquisitions acquire inprocess research development iprd intangible assets iprd considered indefinitelived intangible asset time research completed time becomes determinablelived intangible asset determined future use time impaired goodwill intangibles longlived asset impairment tests perform annual impairment test goodwill fourth quarter year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability indefinitelived intangible assets also tested least annually impairment comparing individual carrying values fair value review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows undiscounted cash flows expected generated related assets estimated assets useful life based updated projections evaluation indicates carrying amount asset may recoverable potential impairment measured based upon fair value related asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell sharebased compensation utilize share based compensation form stock options restricted stock units rsus performancebased restricted stock units psus compensation expense recognized consolidated statements earnings based estimated fair value awards grant date compensation expense recognized reflects estimate number awards expected vest taking consideration estimate award forfeitures based actual experience recognized straightline basis requisite service period generally period required obtain full vesting management expectations related achievement performance goals associated psu grants assessed regularly assessment used determine whether psu grants expected vest performancebased milestones related psu grants met expected met compensation expense recognized date associated grants expected vest reversed income taxes deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax benefits generally represent change net deferred income tax assets liabilities year amounts result adjustments related acquisitions appropriate operate multiple income tax jurisdictions within united states internationally accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations income tax authorities jurisdictions regularly perform audits income tax filings income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k royalty foreign branch arrangements may require extended period time resolve may result significant income tax adjustments changes income allocation required jurisdictions different income tax rates new accounting pronouncements yet adopted may 2014 fasb issued accounting standard update asu 201409 revenue contracts customers supersedes replaces nearly currentlyexisting united states gaap revenue recognition guidance including related disclosure requirements guidance effective us beginning january 1 2017 yet completed assessment impact adoption guidance financial statements note 2 accumulated comprehensive income aoci changes reclassifications aoci net tax years ended december 31 2014 2013 note 3 fair value measurements financial assets liabilities carried fair value classified disclosed one following three categories applying fair value principles valuation assets liabilities required maximize use quoted market prices minimize use unobservable inputs calculate fair value level 1 level 2 instruments based exchange traded price similar identical instruments available based observable inputs significant transfers level 1 level 2 occurred december 31 2014 december 31 2013 fair value level 3 assets liabilities calculated net present value expected cash flows based externally provided obtained inputs certain level 3 assets may also based sale prices similar assets fair value calculations take consideration credit risk counterparties counterparty default maximum exposure loss asset balance instrument change valuation techniques used measuring fair value financial assets liabilities year valuation assets liabilities measured fair value december 31 2014 2013 dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k cost estimated fair value availableforsale marketable securities december 31 2014 contractual maturity december 31 2014 24 interest receivable related marketable securities portfolio recorded prepaid expenses current assets estimated fair value liability contingent consideration represents milestone payments acquisitions fair value liability estimated using discounted cash flow technique significant unobservable inputs technique included probability assessments occurrence triggering events appropriately discounted considering uncertainties associated obligation remeasure liability reporting period record changes fair value general administrative expense probability occurrence income expense changes time value money earnings fair value probability assessments occurrence triggering events contingent consideration fair value measurements classified level 3 december 31 2014 unrealized losses availableforsale marketable securities primarily caused increases yields result changing conditions global credit markets investments downgraded rating agencies since initial purchase less 1 investments availableforsale marketable securities credit quality rating less single per standard poors fitch a2 per moodys intend sell investments likely required sell investments recovery amortized cost basis may maturity consider investments otherthantemporarily impaired december 31 2014 gross unrealized losses fair value investments unrealized losses deemed otherthantemporarily impaired aggregated investment category length time individual securities continuous unrealized loss position december 31 2014 follows interest marketable securities income totaled 28 24 47 2014 2013 2012 respectively included income expense note 4 derivative instruments use operational economic hedges well foreign currency exchange forward contracts interest rate derivative instruments manage impact currency exchange earnings cash flow inception forward contract derivative designated cash flow hedge free standing derivative enter currency exchange derivative instruments speculative purposes derivative instruments designated hedges derivative forward contracts used offset exposure change value specific foreign currency denominated assets liabilities derivatives designated hedges therefore changes value forward contracts recognized earnings thereby offsetting current earnings effect related changes value foreign currency denominated assets liabilities estimated fair value forward currency exchange contracts represents measurement dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k contracts monthend spot rates adjusted current forward points cash flow hedges use layered hedging program hedge select anticipated foreign currency cash flows reduce volatility cash flows reported earnings foreign exchange contracts generally maturities eighteen months derivative instruments designated qualify cash flow hedge effective portion gain loss derivative reported component aoci reclassified income expense cost sales within earnings period hedged transaction affects earnings 2013 gain 9 reclassified aoci earnings relating discontinuance certain cash flow hedges considered probable original forecasted transactions would occur cash flows associated hedges included cash operations category cash flows items hedged gross notional maximum term gross fair value amounts foreign exchange forward contract derivatives designated nondesignated hedging instruments exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties counterparty default maximum exposure loss asset balance instrument recognized foreign currency transaction gains losses included earnings december 31 2014 december 31 2013 pretax gains derivatives designated hedges 15 12 recorded aoci expected reclassified earnings next 12 months reclassification primarily due sale inventory includes previously hedged purchases fair value hedges interest rate derivative instruments designated fair value hedges used manage exposure interest rate movements reduce borrowing costs converting fixedrate debt floatingrate debt agreements agree exchange specified intervals difference fixed floating interest amounts calculated reference agreedupon notional principal amount december 31 2014 interest rate swaps gross notional amounts 500 designated fair value hedges underlying fixed rate obligations representing portion 600 senior unsecured notes due 2024 market value outstanding interest rate swap agreements december 31 2014 recognized gain 10 recorded longterm assets offsetting recognized loss 10 fair value underlying fixed rate obligation recorded longterm debt consolidated balance sheet hedge ineffectiveness recorded result fair value hedges 2014 note 5 acquisitions 2014 acquisitions september 2014 acquired assets small bone innovations inc sbi aggregate purchase price approximately 358 sbi products designed promoted upper lower extremity small bone indications focus small joint replacement acquisition assets sbi enhances product offerings within orthopaedics segment intangible assets acquired sbi amortized weightedaverage life 12 years april 2014 acquired berchtold holding ag berchtold privatelyheld business operations germany united states aggregate purchase price approximately 184 berchtold sells surgical tables equipment booms surgical lighting systems march 2014 acquired patient safety technologies inc pst aggregate purchase price approximately 120 pst conducts business wholly owned subsidiary surgicount medical inc pst’s proprietary safetysponge® system surgicount 360™ compliance software help prevent retained foreign objects operating room addition acquisition pivot medical inc develops sells innovative products hip arthroscopy acquisitions included acquisitions enhance product offerings within medsurg segment purchase price allocations 2014 acquisitions based upon preliminary valuations estimates assumptions subject change within measurement period management currently process verifying data finalizing information related 2014 acquisitions valuation recording identifiable intangible assets deferred income taxes corresponding effect value goodwill 2013 acquisitions december 2013 acquired mako surgical corp mako aggregate purchase price approximately 1677 acquisition mako combined strong history joint reconstruction capital equipment operating room integration surgical navigation surgical instruments help advance growth robotic assisted surgery combined expertise offers potential simplify joint reconstruction procedures reduce variability enhance surgeon patient experience acquisition mako enhances product offerings within orthopaedics segment intangible assets acquired mako amortized weightedaverage life 9 years dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k march 2013 acquired trauson holdings company limited trauson aggregate purchase price approximately 751 acquisition trauson enhances product offerings primarily within orthopaedics segment broadens presence china enables us expand fast growing value segment emerging markets intangible assets acquired trauson amortized weightedaverage life 15 years except trade name deemed indefinite life mako trauson acquisitions measurement periods completed revisions original estimates included table effects acquisitions described included consolidated financial statements prospectively date acquisition pro forma consolidated results operations 2014 2013 would differ significantly result acquisitions allocation purchase price acquired net assets acquisitions described follows goodwill acquired associated sbi acquisition 2014 deductible tax purposes note 6 goodwill intangible assets completed annual impairment tests goodwill 2014 2013 concluded year impairments exist changes net carrying value goodwill segment follows measurement period adjustments reflect changes goodwill acquisitions completed previous year included foreign currency translation effects following summary intangible assets amortization expense related intangible assets 188 138 123 2014 2013 2012 respectively estimated amortization expense next five years note 7 contingencies commitments involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable estimated management additional expense may incurred could unfavorably affect future operating results currently selfinsured product liabilityrelated claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows june 2012 voluntarily recalled rejuvenate abg ii modularneck hip stems terminated global distribution hip products product liability lawsuits relating voluntary recall filed us november 3 2014 announced entered settlement agreement compensate eligible united states patients revision surgery replace rejuvenate andor abg ii modularneck hip stem prior date continue offer support recallrelated care reimburse patients eligible enroll settlement program testing treatment services including necessary revision surgeries addition lawsuits remain continue defend based information received actuarially determined range probable loss resolve entire matter global basis estimated approximately 1534 1713 179 thirdparty insurance recoveries 2453 2014 recorded charges earnings net insurance recoveries 748 representing excess minimum range previously recorded reserves final outcome matter dependent many factors difficult predict including number enrollees settlement program total awards number costs patients eligible settlement program seek testing treatment services require revision surgery number actual costs resolve remaining lawsuits accordingly ultimate cost resolve entire matter globally may materially different amount current estimate accruals could material adverse effect financial position results operations cash flows 2010 filed lawsuit federal court zimmer holdings inc zimmer alleging zimmer product infringed three patents 2013 following jury trial favorable us trial judge entered final judgment among things awarded us damages 76 ordered zimmer pay us enhanced damages zimmer appealed ruling december 2014 federal circuit affirmed damages awarded us reversed order enhanced damages remanded issue attorney fees trial court filed petition rehearing en banc issue enhanced damages following conclusion proceedings federal circuit party may seek supreme court review recorded contingent gain related matter april 2011 hillrom company inc affiliated entities hillrom brought lawsuit us alleging infringement united states patent laws respect nine patents related electrical network communications hospital beds case stayed respect six patents currently reexamination united states patent office respect three remaining patents hillrom appealed trial courts grant summary judgment favor federal circuit reversed trial courts decision remanded matter additional proceedings ultimate resolution suit cannot predicted possible time us estimate probable loss range probable losses however ultimate result could material adverse effect financial position results operations cash flows purchase commitments operating leases purchase commitments materials supplies services property plant equipment part normal course business addition lease various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases future commitments obligations minimum lease commitments leases rent expense totaled 103 100 98 2014 2013 2012 respectively note 8 debt credit facilities august 2014 amended restated senior unsecured revolving credit facility principal changes increase aggregate principal amount commitments 1250 extend maturity date august 22 2019 revise definition consolidated earnings interest taxes depreciation amortization ebitda 2014 issued commercial paper commercial paper program allows us maximum 1250 commercial paper outstanding maturities 397 days date issuance december 31 2014 outstanding commercial paper totaled 200 weighted average original maturity commercial paper outstanding approximately 62 days weighted average interest rate 02 may 2014 sold 600 senior unsecured notes due 2024 notes 400 senior unsecured notes due 2044 notes 2024 notes bear interest 3375 per year unless previously redeemed mature may 15 2024 2044 notes bear interest 4375 per year unless previously redeemed mature may 15 2044 certain credit facilities require us comply financial covenants compliance covenants december 31 2014 lines credit issued various financial institutions available fund daytoday operating needs december 31 2014 1289 borrowing capacity available existing credit facilitiesthe weighted dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k average interest rate excluding required fees borrowings 29 december 31 2014 december 31 2014 total unamortized debt issuance costs incurred connection outstanding notes 21 fair value longterm debt including current maturities excluding interest rate hedge december 31 2014 december 31 2013 3811 2790 respectively substantially longterm debt classified within level 1 fair value hierarchy fair value debt estimated based rates currently offered us identical terms maturities using quoted active market prices yields taking account underlying terms debt instruments interest expense including required fees incurred outstanding debt credit facilities included income expense totaled 113 83 63 2014 2013 2012 respectively cash interest paid debt including required fees 102 88 55 2014 2013 2012 respectively note 9 capital stock december 2013 declared quarterly dividend 0305 per share payable january 31 2014 shareholders record close business december 31 2013 february 2014 declared quarterly dividend 0305 per share payable april 30 2014 shareholders record close business march 28 2014 april 2014 declared quarterly dividend 0305 per share payable july 31 2014 shareholders record close business june 28 2014 july 2014 declared quarterly dividend 0305 per share payable october 31 2014 shareholders record close business september 30 2013 december 2014 declared quarterly dividend 0345 per share payable january 31 2015 shareholders record close business december 31 2014 december 2012 2011 announced board directors authorized us purchase 405 500 respectively common stock 2012 2011 repurchase programs respectively manner timing amount purchases determined management based evaluation market conditions stock price factors subject regulatory considerations purchases made time open market privately negotiated transactions otherwise 2014 repurchased 13 million shares cost 100 2011 repurchase program made repurchases pursuant 2012 repurchase program december 31 2014 shares repurchased share repurchase programs available general corporate purposes including offsetting dilution associated stock option equitybased employee benefit plans december 31 2014 maximum dollar value shares may purchased authorized repurchase programs 583 shares reserved future compensation grants stryker common stock 19 million 23 million december 31 2014 2013 05 million authorized shares 1 par value preferred stock none outstanding stock options longterm incentive plans grant stock options certain key employees nonemployee directors exercise price less fair market value underlying common stock closing quoted price common stock day prior date grant options granted periods 10 years become exercisable varying installments measure cost employee stock options based grantdate fair value recognize cost using straightline method period recipient required provide services exchange options typically vesting period weightedaverage fair value per share options granted 2014 2013 2012 estimated date grant using blackscholes option pricing model 1580 1524 1336 respectively fair value options granted estimated using following weightedaverage assumptions riskfree interest rate periods within expected life options granted based united states treasury yield curve effect time grant expected stock price volatility based historical volatility stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data summary 2014 stock option activity follows aggregate intrinsic value represents cumulative difference fair market value underlying common stock option exercise prices options exercised years ended december 31 2014 2013 2012 113 97 52 respectively exercise prices options outstanding december 31 2014 ranged 3871 8114 december 31 2014 64 unrecognized compensation cost related nonvested stock options granted longterm incentive plans cost expected recognized weightedaverage period 15 years restricted stock units rsus performance stock units psus grant rsus key employees nonemployee directors psus certain key employees longterm incentive plans fair value rsus determined based number shares granted closing quoted price common stock day prior date grant adjusted fact rsus include anticipated dividends rsus generally vest onethird increments threeyear period settled stock psus earned threeyear performance cycle vest march year following end performance cycle number psus ultimately earned based performance relative preestablished goals threeyear performance cycle fair value psus determined based closing quoted price common stock day prior date grant summary 2014 rsu psu activity follows dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k december 31 2014 45 unrecognized compensation cost related nonvested rsus cost expected recognized expense weightedaverage period 09 years weightedaverage grant date fair value per share rsus granted 2014 2013 7661 6081 respectively fair value rsus vested 2014 39 december 31 2014 9 unrecognized compensation cost related nonvested psus cost expected recognized expense weightedaverage period one year employee stock purchase plans espp full time parttime employees may participate espp provided meet certain eligibility requirements purchase price common stock terms espp defined 95 closing stock price last trading day purchase period 2014 2013 issued 150167 163533 shares respectively espp note 10 income taxes earnings income taxes consisted income taxes consisted 2014 recorded income tax impacts establishment european regional headquarters cash repatriation united states planned 2015 2013 recorded income tax benefits related favorable audit resolutions multiple jurisdictions 2014 2013 2012 united states federal deferred income tax expense benefit includes utilization net operating loss carryforwards 78 16 respectively reconciliation united states federal statutory income tax rate effective income tax rate deferred income tax assets liabilities net operating loss carryforwards totaling 376 december 31 2014 available reduce future taxable earnings certain domestic foreign subsidiaries united states loss carryforwards 288 expire 2014 2033 international loss carryforwards 88 expire beginning 2014 however expiration carryforwards 43 subject full valuation allowance also tax credit carryforward 31 full valuation allowance credits expiration however anticipate generating income tax excess credits foreseeable future provision made united states federal state income taxes international income taxes may result future remittances undistributed earnings foreign subsidiaries determined indefinitely reinvested 5878 december 31 2014 determination amount unrecognized deferred income tax liability practicable dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k changes amounts recorded uncertain income tax positions income tax expense could reduced 307 194 december 31 2014 2013 respectively uncertain income tax positions favorably resolved reasonably possible amount unrecognized tax benefits significantly change due one following events next twelve months expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject controversy various taxing jurisdictions operate including inventory transfer pricing cost sharing product royalty foreign branch arrangements able reasonably estimate amount future periods changes unrecognized tax benefits may resolved however anticipate significant changes within next twelve months interest penalties incurred associated uncertain tax positions included income expense normal course business income tax authorities various income tax jurisdictions within united states internationally conduct routine audits income tax returns filed prior years audits generally designed determine individual income tax authorities agreement interpretations complex income tax regulations regarding allocation income various income tax jurisdictions income tax years open 2010 current year united states federal jurisdiction income tax years open major jurisdictions range 2005 current year note 11 retirement plans defined contribution plans provide certain employees defined contribution plans portion retirement plan expense defined contribution plans funded stryker common stock use stryker common stock represents noncash operating activity reflected consolidated statements cash flows defined benefit plans certain subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets estimated net actuarial loss defined benefit pension plans reclassified aoci net periodic benefit cost 2015 9 estimate immaterial amount amortization prior service cost transition amount defined benefit pension plans reclassified aoci net periodic benefit cost 2014 pension plans accumulated benefit obligation excess plan assets projected benefit obligations accumulated benefit obligations fair value plan assets 570 533 310 respectively december 31 2014 456 427 281 respectively december 31 2013 dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k components net periodic pension cost discount rate discount rates selected using hypothetical portfolio high quality bonds december 31 would provide necessary cash flows match projected benefit payments expected return plan assets expected return plan assets determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns investment strategy investment strategy defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances weightedaverage target actual allocation plan assets asset category follows valuation pension plan assets pricing categories level 3 pension plan assets see note 3 explanation fair value hierarchy consist primarily guaranteed investment contracts insurance companies insurance contracts guarantee us principal repayment fixed rate return valuation level 3 assets based thirdparty actuarial valuations estimation surrender value guaranteed investment contract us insurance company surrender value equals actuarial value notional investments underlying guaranteed investment contract using actuarial assumptions stated guaranteed investment contract rollforward level 3 pension plan assets expect contribute 19 defined benefit pension plans 2015 estimated future benefit payments year based expected future service appropriate note 12 segment geographic data 2014 changed name reconstructive business segment orthopaedics name change composition business segments financial impact segregate operations three reportable business segments orthopaedics medsurg neurotechnology spine orthopaedics segment includes reconstructive hip knee trauma implant systems well related products medsurg segment includes surgical equipment surgical navigation systems instruments endoscopic communications systems endoscopy patient handling emergency medical equipment medical reprocessed remanufactured medical devices sustainability well products neurotechnology spine segment includes neurovascular products spinal implant systems related products category shown table includes corporate global operations administration central research development initiatives interest expense interest marketable securities income sharebased compensation includes compensation related employee director stock option dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k restricted stock unit performance stock unit grants certain prior year amounts reclassified conform current year presentation segments results reportable segments total assets capital spending reportable segments reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies note 1 consolidated financial statements measure financial results reportable segments using internal performance measure excludes acquisition integrationrelated charges restructuring related charges reserves certain product recall matters reserves certain legal regulatory matters donation educational institution certain income tax adjustments identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment countries local revenue generating operations combined following geographic areas united states including puerto rico europe middle east africa emea asia pacific foreign countries include canada countries latin american region sales attributable geographic area based upon customer’s country domicile net property plant equipment based upon physical location assets geographic information follows note 13 summary quarterly data unaudited price quotations reported supplied new york stock exchange dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements board directors shareholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2015 2014 related consolidated statements earnings comprehensive income shareholders equity cash flows three years period ended december 31 2015 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2015 2014 consolidated results operations cash flows three years period ended december 31 2015 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states stryker corporations internal control financial reporting december 31 2015 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 11 2016 expressed unqualified opinion thereon ernst young llp grand rapids michigan february 11 2016 stryker corporation 2015 form 10k stryker corporation subsidiaries consolidated statements earnings consolidated statements comprehensive income see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k stryker corporation subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k stryker corporation subsidiaries consolidated statements shareholders’ equity see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k stryker corporation subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k notes consolidated financial statements note 1 significant accounting policies nature operations stryker corporation company us global leader medical technology products include implants used joint replacement trauma surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment neurosurgical neurovascular spinal devices well medical device products used variety medical specialties basis presentation consolidation consolidated financial statements include company subsidiaries significant intercompany accounts transactions eliminated consolidation material interests variable interest entities none require consolidation certain prior year amounts reclassified conform presentation consolidated financial statements note 13 2015 use estimates preparation financial statements conformity accounting principles generally accepted united states gaap requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates revenue recognition sales recognized revenue realized realizable earned policy recognize revenue title product ownership risk loss transfer customer date shipment date receipt customer orthopaedics products receive appropriate notification product used implanted provision estimated sales returns discounts rebates sales incentives recorded reduction net sales period revenue recognized shipping handling costs charged customers included net sales cost sales cost sales primarily comprised direct materials supplies consumed manufacture product well manufacturing labor depreciation expense direct overhead expense necessary acquire convert purchased materials supplies finished product cost sales also includes cost distribute products customers inbound freight costs warehousing costs shipping handling activity research development engineering expenses research development costs charged expense incurred costs include research development engineering activities relating development new products improvement existing products technical support products compliance governmental regulations protection customers patients costs primarily consist salaries wages consulting depreciation maintenance research facilities equipment selling general administrative expenses selling general administrative expense primarily comprised selling expenses marketing expenses administrative indirect overhead costs amortization loaner instrumentation depreciation amortization expense nonmanufacturing assets miscellaneous operating items currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate statements united states dollars recorded comprehensive income oci transactional exchange gains losses included earnings cash equivalents highly liquid investments remaining stated maturities three months less purchased considered cash equivalents recorded cost marketable securities marketable securities consist marketable debt securities certificates deposit mutual funds mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities pursuant investment policy individual marketable security investments must minimum credit quality single standard poor’s fitch a2 moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double standard poor’s fitch aa moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk marketable security investment portfolio marketable securities classified availableforsale trading securities accounts receivable accounts receivable consists trade miscellaneous receivables allowance maintained doubtful accounts estimated losses collection accounts receivable estimates made regarding ability customers make required payments based historical credit experience expected future trends accounts receivable written reasonable collection efforts exhausted inventories stated lower cost market cost generally determined using firstin firstout fifo cost method excess obsolete inventory resulting potential inability sell specific products prices excess current carrying costs reserves maintained reduce current carrying cost market prices financial instruments financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts exception longterm debt discussed detail note 9 estimates fair value financial instruments approximate carrying amounts december 31 2015 2014 marketable securities recognized fair value adjustments fair value marketable securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive income aoci shareholders’ equity adjustments fair value marketable securities classified trading recorded earnings amortized cost marketable debt securities adjusted amortization premiums discounts maturity computed effective interest method amortization interest realized gains loses included income expense net cost securities sold determined specific identification method review declines fair value investments classified availableforsale determine whether decline fair value otherthantemporary impairment resulting losses otherthantemporary impairments availableforsale marketable securities included earnings dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k derivatives recognized fair value reported gross basis enter forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses included earnings forward currency exchange contracts designated cash flow hedges designed hedge variability cash flows associated forecasted transactions denominated foreign currency take place future changes value derivatives designated cash flow hedges recorded aoci consolidated balance sheets earnings affected variability underlying cash flows time applicable amount gain loss derivative instrument deferred shareholders’ equity reclassified earnings included income expense net cost goods sold consolidated statements earnings depending underlying transaction hedged report derivative instruments gross basis interest rate derivative instruments designated fair value hedges used manage exposure interest rate movements reduce borrowing costs converting fixedrate debt floatingrate debt agreements agree exchange specified intervals difference fixed floating interest amounts calculated reference agreedupon notional principal amount derivative instruments designated net investment hedges foreign operations gain loss recorded cumulative translation adjustment within aoci together offsetting loss gain hedged exposure underlying foreign operations ineffective portion net investment hedges reported earnings period change hedge effectiveness equity forward contracts foreign exchange net investment hedge forward contracts assessed comparing changes fair value due changes spot rates derivative hedged item property plant equipment property plant equipment stated cost depreciation generally computed straightline method estimated useful lives three 30 years buildings improvements three ten years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses acquisition date amounts allocated identifiable intangible assets factors contribute recognition goodwill include synergies specific business available market participants expected increase revenues profits acquisition talented workforce cost savings opportunities strategic benefit expanding presence core adjacent markets diversifying product portfolio fair values identifiable intangible assets primarily determined using income approach intangible assets include limited developed technology customer distributor relationships reflect expected continued customer distributor patronage trademarks patents intangible assets determinable useful lives amortized straightline basis estimated useful lives four 40 years certain acquired trade names considered indefinite lives amortized assessed annually potential impairment described certain acquisitions acquire inprocess research development iprd indefinitelived intangible assets iprd research completed becomes determinablelived intangible asset iprd determined future use becomes impaired goodwill intangibles longlived asset impairment tests perform annual impairment test goodwill fourth quarter year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability indefinitelived intangible assets also tested least annually impairment comparing individual carrying values fair value review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows undiscounted cash flows expected generated related assets estimated assets useful life based updated projections evaluation indicates carrying amount asset may recoverable potential impairment measured based upon fair value related asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell sharebased compensation use share based compensation form stock options restricted stock units rsus performancebased restricted stock units psus compensation expense recognized consolidated statements earnings based estimated fair value awards grant date compensation expense recognized reflects estimate number awards expected vest taking consideration estimate award forfeitures based actual experience recognized straightline basis requisite service period generally period required obtain full vesting management expectations related achievement performance goals associated psu grants assessed regularly assessment used determine whether psu grants expected vest performancebased milestones related psu grants met expected met compensation expense recognized date associated grants expected vest reversed income taxes deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax benefits generally represent change net deferred income tax assets liabilities year amounts result adjustments related acquisitions foreign currency appropriate operate multiple income tax jurisdictions within united states internationally accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k regulations income tax authorities jurisdictions regularly perform audits income tax filings income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty foreign branch arrangements may require extended period time resolve may result significant income tax adjustments changes income allocation required jurisdictions different income tax rates new accounting pronouncements yet adopted april 2015 fasb issued asu 201503 interest imputation interest simplifying presentation debt issuance costs update requires entity present debt issuance costs related recognized debt liability direct deduction carrying amount debt liability consistent debt discounts effective financial statements issued fiscal years beginning december 15 2015 interim periods within fiscal years adopted standard january 1 2016 expect material impact consolidated financial statements may 2014 fasb issued asu 201409 revenue contracts customers guidance effective financial statements issued fiscal years beginning december 15 2017 outlines single comprehensive model accounting revenue contracts customers plan adopt standard january 1 2018 still evaluating impact standard financial statements note 2 subsequent event february 1 2016 entered definitive agreement acquire sage products llc sage cash transaction 2775 sage develops manufactures distributes disposable products targeted reducing never events primarily intensive care unit medsurg hospital unit setting sage’s products include solutions oral care skin preparation protection patient cleaning hygiene turning positioning devices heel care boots transaction expected close second quarter 2016 note 3 changes accumulated comprehensive income note 4 fair value measurements financial assets liabilities carried fair value classified disclosed one following three categories applying fair value principles valuation assets liabilities required maximize use quoted market prices minimize use unobservable inputs calculate fair value level 1 level 2 instruments based exchange traded price similar identical instruments available based observable inputs taking account credit risk counterparties foreign currency exchange contracts interest rate hedges included level 2 use inputs quoted prices observable asset liability level 2 derivative instruments primarily valued using standard calculations models use readily observable market data basis level 3 liabilities represent milestone payments acquisitions fair value liability estimated using discounted cash flow technique significant unobservable inputs technique included probability assessments occurrence triggering events appropriately discounted considering uncertainties associated obligation remeasure assets liabilities reporting period record changes fair value within selling general administrative expense changes time value money within income expense net dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k fair value available sale securities contractual maturity december 31 2015 aggregate difference cost fair value availableforsale marketable securities material interest receivable 2 related marketable securities portfolio recorded prepaid expenses current assets investments downgraded rating agencies since initial purchase less 1 investments availableforsale marketable securities credit quality rating less a2 moodys standard poors fitch intend sell investments likely required sell investments recovery amortized cost basis may maturity consider investments otherthantemporarily impairment december 31 2015 securities continuous unrealized loss position december 31 2015 substantially investments unrealized losses deemed otherthantemporarily impaired continuous unrealized loss position less twelve months losses considered material total interest marketable securities income 14 28 24 2015 2014 2013 amounts included income expense net note 5 derivative instruments use operational economic hedges foreign currency exchange forward contracts net investment hedges interest rate derivative instruments manage impact currency exchange interest rate fluctuations earnings cash flow inception derivative designated cash flow hedge fair value hedge free standing derivative enter derivative instruments speculative purposes nondesignated foreign exchange forward contract derivatives derivative forward contracts used offset exposure change value specific foreign currency denominated assets liabilities derivatives designated hedges therefore changes value forward contracts recognized earnings thereby offsetting current earnings effect related changes value foreign currency denominated assets liabilities estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points designated foreign exchange forward contract derivatives use layered hedging program hedge select anticipated foreign currency cash flows reduce volatility cash flows reported earnings foreign exchange contracts generally maturities eighteen months derivative instruments designated qualify cash flow hedge effective portion gain loss derivative reported component aoci reclassified income expense net cost sales within earnings period hedged transaction affects earnings cash flows associated hedges included cash operations category cash flows items hedged designated net investment hedges designated certain longterm intercompany loans payable forward exchange contracts net investment hedges investments certain international subsidiaries use euro functional currency effective portion derivatives designated net investment hedges recorded fair value balance sheet date change fair value recorded component aoci december 31 2015 total aftertax amount aoci related designated net investment hedges 21 derivative instruments designated qualify net investment hedge effective portion derivatives gain loss reported component oci recorded aoci use forward method measure ineffectiveness method reporting period change carrying value eurodenominated amounts due remeasurement effective portion reported component aoci remaining change carrying value ineffective portion recognized income expense net gain loss related settled net investment hedges subsequently reclassified net earnings hedged net investment either sold substantially liquidated evaluate effectiveness net investment hedges quarterly record ineffectiveness 2015 dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties counterparty default maximum exposure loss asset balance instrument net currency exchange rate gains losses december 31 2015 2014 pretax gains derivatives designated hedges 17 15 recorded aoci expected reclassified earnings next 12 months reclassification primarily due sale inventory includes previously hedged purchases ineffective portions derivatives resulted gains losses periods presented interest rate risk future debt issuance forward starting interest rate derivative instruments designated cash flow hedges used manage exposure interest rate volatility regard future issuance refinancing debt effective portion gains losses forward starting interest rate derivative instruments designated qualify cash flow hedges reported component aoci beginning period debt refinancing occurs related derivative instruments terminated effective portion gains losses reclassified interest expense term related debt december 31 2015 interest rate swaps notional amounts 375 designated forward starting interest rate swaps anticipation future debt issuances market value outstanding interest rate swap agreements december 31 2015 4 recorded accrued expenses liabilities offsetting amount recorded aoci upon probable issuance debt amounts released interest expense term debt cash flow effect hedge recorded cash flow operations fair value hedges interest rate derivative instruments designated fair value hedges used manage exposure interest rate movements reduce borrowing costs converting fixedrate debt floatingrate debt agreements agree exchange specified intervals difference fixed floating interest amounts calculated reference agreedupon notional principal amount december 31 2015 interest rate swaps gross notional amounts 500 designated fair value hedges underlying fixed rate obligations representing portion 600 senior unsecured notes due 2024 hedge ineffectiveness recorded result fair value hedges fair value interest rate hedge instruments exposed credit loss event nonperformance counterparties outstanding derivative instruments anticipate nonperformance counterparties counterparty default maximum exposure loss asset balance instrument note 6 acquisitions 2015 acquisitions january 2015 acquired certain assets chg hospital beds inc chg designs manufactures markets lowheight hospital beds related accessories acquisition enhances product offerings within medsurg segment included 2015 column table goodwill acquired associated chg acquisition deductible tax purposes 2014 acquisitions september 2014 acquired certain assets small bone innovations inc sbi aggregate purchase price 365 sbi products designed promoted upper lower extremity small bone indications focus small joint replacement acquisition assets sbi enhances product offerings within orthopaedics segment goodwill acquired associated sbi acquisition deductible tax purposes april 2014 acquired berchtold holding ag berchtold aggregate purchase price 184 berchtold sells surgical tables equipment booms surgical lighting systems march 2014 acquired patient safety technologies inc pst aggregate purchase price 120 pst’s proprietary safetysponge® system surgicount 360™ compliance software help prevent retained foreign objects operating room addition acquisition pivot medical inc develops sells innovative products hip arthroscopy 2014 acquisitions included 2014 column table acquisitions enhance product offerings within medsurg segment measurement periods acquisitions 2014 completed revisions original purchase price allocation material purchase price allocations 2015 acquisitions based upon preliminary valuations estimates assumptions subject change within measurement period december 31 2015 management process verifying data finalizing information related 2015 acquisitions valuation recording identifiable intangible assets deferred income taxes corresponding effect value goodwill dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k purchase price allocation acquired net assets note 7 goodwill intangible assets completed annual impairment tests goodwill 2015 2014 concluded year impairments exist summary intangible assets changes net carrying value goodwill segment amortization expense related intangible assets 210 188 138 2015 2014 2013 estimated amortization expense 2015 placed certain process research development assets service result food drug administrations fda clearance mako total knee application note 8 contingencies commitments involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable estimated management additional expense may incurred could unfavorably affect future operating results selfinsured product liabilityrelated claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows june 2012 voluntarily recalled rejuvenate abg ii modularneck hip stems terminated global distribution hip products product liability lawsuits relating voluntary recall filed us november 3 2014 announced entered settlement agreement compensate eligible united states patients revision surgery replace rejuvenate andor abg ii modularneck hip stem prior date continue offer support recallrelated care reimburse patients eligible enroll settlement program testing treatment services including necessary revision surgeries addition lawsuits remain continue defend based information received actuarially determined range probable loss resolve matter globally estimated approximately 1824 2056 232 thirdparty insurance recoveries 2416 2015 recorded additional charges earnings 295 net insurance recoveries representing excess minimum range previously recorded reserves 2015 made recallrelated payments totaling 1202 united states rejuvenate abg ii settlement agreement final outcome matter dependent many factors difficult predict including number enrollees settlement program total awards number costs patients eligible settlement program seek testing treatment services require revision surgery number actual costs resolve remaining lawsuits accordingly ultimate cost resolve entire matter globally may materially different amount current estimate accruals could material adverse effect financial position results operations cash flows dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k 2010 filed lawsuit federal court zimmer biomet holdings inc zimmer alleging zimmer product infringed three patents 2013 following jury trial favorable us trial judge entered final judgment among things awarded us damages 76 ordered zimmer pay us enhanced damages zimmer appealed ruling december 2014 federal circuit affirmed damages awarded us reversed order enhanced damages remanded issue attorney fees trial court federal circuit denied petition rehearing en banc issue enhanced damages october 19 2015 united states supreme court agreed hear appeal issue may 2015 trial court entered stipulated final judgment among things required zimmer pay us base amount damages interest issues enhanced damages attorney fees continue pursued 2015 received payment 54 net legal costs recorded within selling general administrative expenses april 2011 hillrom company inc affiliated entities hillrom brought lawsuit us alleging infringement united states patent laws respect nine patents related electrical network communications hospital beds march 31 2015 court granted parties’ joint motion dismiss prejudice claims counterclaims associated three patents case stayed respect remaining six patents currently reexamination united states patent office ultimate resolution matter cannot predicted possible time us estimate probable loss range probable losses however ultimate result could material adverse effect financial position results operations cash flows purchase commitments operating leases purchase commitments materials supplies services property plant equipment part normal course business addition lease various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases rent expense totaled 101 103 100 2015 2014 2013 future commitments purchase obligations leases note 9 debt credit facilities october 2015 sold 750 senior unsecured notes due 2025 notes 2025 notes bear interest 3375 per year unless previously redeemed mature november 1 2025 2015 repaid 500 senior unsecured notes due january 15 2015 commercial paper program allows us maximum 1250 commercial paper outstanding maturities 397 days date issuance december 31 2015 amounts outstanding commercial paper program summary total debt certain credit facilities require us comply financial covenants compliance covenants december 31 2015 lines credit issued various financial institutions available fund daytoday operating needs december 31 2015 1236 borrowing capacity available existing credit facilities december 31 2015 total unamortized debt issuance costs incurred connection outstanding notes 24 fair value longterm debt including current maturities excluding interest rate hedge december 31 2015 2014 4009 3811 substantially longterm debt classified within level 1 fair value hierarchy fair value debt estimated based rates identical terms maturities using quoted active market prices yields taking account underlying terms debt instruments interest expense including required fees incurred outstanding debt credit facilities included expense totaled 108 113 83 2015 2014 2013 note 10 capital stock dividends declared per share common stock share repurchases 2015 repurchased 74 million shares cost 700 repurchase programs manner timing amount purchases determined management based evaluation market conditions stock price factors subject regulatory considerations purchases made timetotime open market privately negotiated transactions otherwise december 31 2015 total dollar value shares could purchased authorized repurchase programs 1883 capital stock information shares reserved future compensation grants common stock 15 million 19 million december 31 2015 2014 05 million authorized shares 1 par value preferred stock none outstanding stock options longterm incentive plans grant stock options certain key employees nonemployee directors exercise price less fair market value underlying dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k common stock closing quoted price common stock day prior date grant options granted periods 10 years become exercisable varying installments measure cost employee stock options based grantdate fair value recognize cost using straightline method period recipient required provide services exchange options typically vesting period weightedaverage fair value per share options estimated date grant using blackscholes option pricing model option value assumptions riskfree interest rate periods within expected life options granted based united states treasury yield curve effect time grant expected stock price volatility based historical volatility stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data summary 2015 stock option activity aggregate intrinsic value represents cumulative difference fair market value underlying common stock option exercise prices options exercised 98 113 97 2015 2014 2013 exercise prices options outstanding ranged 3871 10227 december 31 2015 december 31 2015 79 unrecognized compensation cost related nonvested stock options granted longterm incentive plans cost expected recognized weightedaverage period approximately 16 years restricted stock units rsus performance stock units psus grant rsus key employees nonemployee directors psus certain key employees longterm incentive plans fair value rsus determined based number shares granted closing quoted price common stock day prior date grant adjusted fact rsus include anticipated dividends rsus generally vest onethird increments threeyear period settled stock psus earned threeyear performance cycle vest march year following end performance cycle number psus ultimately earned based performance relative preestablished goals threeyear performance cycle fair value psus determined based closing quoted price common stock day prior date grant summary 2015 rsu psu activity december 31 2015 53 unrecognized compensation cost related nonvested rsus cost expected recognized expense weightedaverage period approximately 10 year weightedaverage grant date fair value per share rsus granted 8847 7661 2015 2014 fair value rsus vested 2015 43 december 31 2015 18 unrecognized compensation cost related nonvested psus cost expected recognized expense weightedaverage period approximately 13 years employee stock purchase plans espp full parttime employees may participate espp provided meet certain eligibility requirements purchase price common stock terms espp defined 95 closing stock price last trading day purchase period issued 157931 150167 shares espp 2015 2014 note 11 retirement plans defined contribution plans provide certain employees defined contribution plans portion retirement plan expense defined contribution plans funded stryker common stock use stryker common stock represents noncash operating activity reflected consolidated statements cash flows defined benefit plans certain subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets discount rate discount rates selected using hypothetical portfolio high quality bonds december 31 would provide necessary cash flows match projected benefit payments expected return plan assets expected return plan assets determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k components net periodic pension cost investment strategy investment strategy defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances estimated net actuarial loss defined benefit pension plans reclassified aoci net periodic benefit cost 7 2016 estimate immaterial amount amortization prior service cost transition amount defined benefit pension plans reclassified aoci net periodic benefit cost 2016 change benefit obligations change plan assets weightedaverage target actual allocation plan assets asset category valuation pension plan assets pricing categories level 3 pension plan assets see note 4 explanation fair value hierarchy consist primarily guaranteed investment contracts insurance companies insurance contracts guarantee us principal repayment fixed rate return valuation level 3 assets based thirdparty actuarial valuations estimation surrender value guaranteed investment contract us insurance company surrender value equals actuarial value notional investments underlying guaranteed investment contract using actuarial assumptions stated guaranteed investment contract dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k rollforward level 3 pension plan assets estimated future benefit payments expect contribute 18 defined benefit pension plans 2016 note 12 income taxes effective tax rate 171 556 170 2015 2014 2013 effective income tax rate 2014 includes tax impacts establishment european regional headquarters cash repatriation executed 2015 retroactively adopted asu 201517 income taxes topic 740 balance sheet classification deferred taxes amends balance sheet classification deferred taxes earnings income taxes components income tax expense interest penalties included income expense net 4 8 12 2015 2014 2013 recorded income tax benefits related favorable audit resolutions multiple jurisdictions united states federal deferred income tax expense benefit includes utilization net operating loss carryforwards 79 78 16 2015 2014 2013 reconciliation united states federal statutory income tax rate effective income tax rate deferred income tax assets liabilities accrued interest penalties 30 26 reported accrued expenses liabilities current noncurrent december 31 2015 2014 net operating loss carryforwards totaling 152 december 31 2015 available reduce future taxable earnings certain domestic foreign subsidiaries united states loss carryforwards 81 expire 2028 international loss carryforwards 71 began expire 2015 however expiration carryforwards 43 subject full valuation allowance also tax credit carryforward 36 full valuation allowance credits expiration however anticipate generating income tax excess credits foreseeable future provision made united states federal state income taxes international income taxes may result future remittances undistributed earnings foreign subsidiaries determined indefinitely reinvested 7166 december 31 2015 determination amount unrecognized deferred income tax liability practicable changes amounts recorded uncertain income tax positions dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k income tax expense could reduced 304 307 december 31 2015 2014 uncertain income tax positions favorably resolved reasonably possible amount unrecognized tax benefits significantly change due one following events next twelve months expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject controversy various taxing jurisdictions operate including inventory transfer pricing cost sharing product royalty foreign branch arrangements able reasonably estimate amount future periods changes unrecognized tax benefits may resolved however anticipate certain unrecognized tax benefits related examinations resolved within next twelve months result reasonably possible gross unrecognized tax benefits could decrease amounts 55 potential resolved examinations interest penalties incurred associated uncertain tax positions included income expense net normal course business income tax authorities various income tax jurisdictions within united states internationally conduct routine audits income tax returns filed prior years audits generally designed determine individual income tax authorities agreement interpretations complex income tax regulations regarding allocation income various income tax jurisdictions income tax years open 2010 current year united states federal jurisdiction income tax years open major jurisdictions range 2005 current year note 13 segment geographic data segregate operations three reportable business segments orthopaedics medsurg neurotechnology spine orthopaedics segment includes reconstructive hip knee trauma implant systems related products medsurg segment includes surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment reprocessed remanufactured medical devices related products neurotechnology spine segment includes neurovascular products spinal implant systems related products corporate category shown table includes corporate global manufacturing operations administration central research development initiatives interest expense interest marketable securities income sharebased compensation includes compensation related employee director stock option restricted stock unit performance stock unit grants certain prior year amounts reclassified conform current year presentation segments results reportable segments total assets capital spending reportable segments reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies note 1 consolidated financial statements measure financial results reportable segments using internal performance measure excludes acquisition integrationrelated charges restructuring related charges reserves certain product recall matters reserves certain legal regulatory matters donation educational institution income expense net income taxes identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment countries local revenue generating operations combined following geographic areas united states including puerto rico europe middle east africa emea asia pacific foreign countries include canada countries latin american region net sales attributable geographic area based upon customer’s country domicile dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k net property plant equipment based geographic physical location note 14 summary quarterly data unaudited price quotations reported supplied new york stock exchange dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements board directors shareholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2016 2015 related consolidated statements earnings comprehensive income shareholders equity cash flows three years period ended december 31 2016 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2016 2015 consolidated results operations cash flows three years period ended december 31 2016 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states stryker corporations internal control financial reporting december 31 2016 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 9 2017 expressed unqualified opinion thereon ernst young llp grand rapids michigan february 9 2017 stryker corporation 2016 form 10k stryker corporation subsidiaries consolidated statements earnings antidilutive shares excluded calculation dilutive employee stock options de minimis periods consolidated statements comprehensive income see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k stryker corporation subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k stryker corporation subsidiaries consolidated statements shareholders’ equity see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k stryker corporation subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k notes consolidated financial statements note 1 significant accounting policies nature operations stryker corporation company us global leader medical technology products include implants used joint replacement trauma surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment intensive care disposable products neurosurgical neurovascular spinal devices well medical device products used variety medical specialties basis presentation consolidation consolidated financial statements include company subsidiaries significant intercompany accounts transactions eliminated consolidation material interests variable interest entities none require consolidation certain prior year amounts reclassified conform presentation consolidated financial statements 2016 use estimates preparation financial statements conformity accounting principles generally accepted united states gaap requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts net sales expenses reporting period actual results could differ estimates revenue recognition sales recognized revenue realized realizable earned policy recognize revenue title product ownership risk loss transfer customer date shipment date receipt customer orthopaedics products receive appropriate notification product used implanted provision estimated sales returns discounts rebates sales incentives recorded reduction net sales period revenue recognized shipping handling costs charged customers included net sales cost sales cost sales primarily comprised direct materials supplies consumed manufacture product well manufacturing labor depreciation expense direct overhead expense necessary acquire convert purchased materials supplies finished product cost sales also includes cost distribute products customers inbound freight costs warehousing costs shipping handling activity research development engineering expenses research development costs charged expense incurred costs include research development engineering activities relating development new products improvement existing products technical support products compliance governmental regulations protection customers patients costs primarily consist salaries wages consulting depreciation maintenance research facilities equipment selling general administrative expenses selling general administrative expense primarily comprised selling expenses marketing expenses administrative indirect overhead costs amortization loaner instrumentation depreciation amortization expense nonmanufacturing assets miscellaneous operating items currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate statements united states dollars recorded comprehensive income oci transactional exchange gains losses included earnings cash equivalents highly liquid investments remaining stated maturities three months less purchased considered cash equivalents recorded cost marketable securities marketable securities consist marketable debt securities certificates deposit mutual funds mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities pursuant investment policy individual marketable security investments must minimum credit quality single standard poor’s fitch a2 moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double standard poor’s fitch aa moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk marketable security investment portfolio marketable securities classified availableforsale trading securities investments trading securities represent participantdirected investments deferred employee compensation accounts receivable accounts receivable consists trade miscellaneous receivables allowance maintained doubtful accounts estimated losses collection accounts receivable estimates made regarding ability customers make required payments based historical credit experience expected future trends accounts receivable written reasonable collection efforts exhausted inventories stated lower cost market cost generally determined using firstin firstout fifo cost method excess obsolete inventory resulting potential inability sell specific products prices excess current carrying costs reserves maintained reduce current carrying cost market prices financial instruments financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts exception longterm debt discussed detail notes 2 9 estimates fair value financial instruments approximate carrying amounts december 31 2016 2015 marketable securities recognized fair value adjustments fair value marketable securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive income aoci shareholders’ equity adjustments fair value marketable securities classified trading recorded earnings amortized cost marketable debt securities adjusted amortization premiums discounts maturity computed effective interest method amortization interest realized gains losses included income expense net cost securities sold determined specific identification method review declines fair value investments classified availableforsale determine whether decline fair value otherthantemporary impairment resulting losses otherthantemporary impairments availableforsale marketable securities included earnings derivatives recognized fair value reported gross basis enter forward currency exchange contracts mitigate impact currency fluctuations dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period forward currency exchange contracts designated cash flow hedges designed hedge variability cash flows associated forecasted transactions denominated foreign currency take place future nonfunctional currency exposures principally relate forecasted intercompany purchases manufactured products generally maturities eighteen months changes value derivatives designated cash flow hedges recorded aoci consolidated balance sheets earnings affected variability underlying cash flows time applicable amount gain loss derivative instrument deferred shareholders’ equity reclassified earnings included income expense net cost goods sold consolidated statements earnings depending underlying transaction hedged cash flows associated hedges included cash operations category cash flows items hedged derivative forward contracts used offset exposure change value specific foreign currency denominated assets liabilities primarily intercompany payables receivables derivatives designated hedges therefore changes value forward contracts recognized earnings thereby offsetting current earnings effect related changes value foreign currency denominated assets liabilities estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points designated certain longterm intercompany loans payable forward exchange contracts net investment hedges investments certain international subsidiaries use euro functional currency derivative instruments designated qualify net investment hedge effective portion derivatives gain loss recognized oci reported component aoci use forward method measure ineffectiveness method change carrying value eurodenominated amounts due remeasurement effective portion reported component aoci remaining change carrying value ineffective portion recognized income expense net gain loss related settled net investment hedges subsequently reclassified net earnings hedged net investment either sold substantially liquidated forward starting interest rate derivative instruments designated cash flow hedges used manage exposure interest rate volatility regard future issuance refinancing debt effective portion gain loss forward starting interest rate derivative instrument designated qualifies cash flow hedge reported component aoci beginning period debt refinancing occurs related derivative instruments terminated effective portion gains losses reclassified interest expense term related debt interest rate derivative instruments designated fair value hedges used manage exposure interest rate movements reduce borrowing costs converting fixedrate debt floatingrate debt agreements agree exchange specified intervals difference fixed floating interest amounts calculated reference agreedupon notional principal amount property plant equipment property plant equipment stated cost depreciation generally computed straightline method estimated useful lives three 30 years buildings improvements three 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses acquisition date amounts allocated identifiable intangible assets factors contribute recognition goodwill include synergies specific business available market participants expected increase net sales profits acquisition talented workforce cost savings opportunities strategic benefit expanding presence core adjacent markets diversifying product portfolio fair values identifiable intangible assets primarily determined using income approach intangible assets include limited developed technology customer distributor relationships reflect expected continued customer distributor patronage trademarks patents intangible assets determinable useful lives amortized straightline basis estimated useful lives four 40 years certain acquired trade names considered indefinite lives amortized assessed annually potential impairment described certain acquisitions acquire inprocess research development iprd indefinitelived intangible asset iprd research completed becomes determinablelived intangible asset iprd determined future use becomes impaired goodwill intangibles longlived asset impairment tests perform annual impairment test goodwill fourth quarter year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability indefinitelived intangible assets also tested least annually impairment comparing individual carrying values fair value review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows undiscounted cash flows expected generated related assets estimated assets useful life based updated projections evaluation indicates carrying amount asset may recoverable potential impairment measured based upon fair value related asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell sharebased compensation use share based compensation form stock options restricted stock units rsus performancebased restricted stock units psus stock options granted longterm incentive plans certain key employees nonemployee directors exercise price less fair market value underlying common stock quoted closing price common stock day prior dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k date grant options granted periods 10 years become exercisable varying installments grant rsus key employees nonemployee directors psus certain key employees longterm incentive plans fair value rsus determined based number shares granted quoted closing price common stock date grant adjusted fact rsus include anticipated dividends rsus generally vest onethird increments threeyear period settled stock psus earned threeyear performance cycle vest march year following end performance cycle number psus ultimately earned based performance relative preestablished goals threeyear performance cycle fair value psus determined based quoted closing price common stock day grant compensation expense recognized consolidated statements earnings based estimated fair value awards grant date compensation expense recognized reflects estimate number awards expected vest taking consideration estimate award forfeitures based actual experience recognized straightline basis requisite service period generally period required obtain full vesting management expectations related achievement performance goals associated psu grants assessed regularly assessment used determine whether psu grants expected vest performancebased milestones related psu grants met expected met compensation expense recognized associated grants reversed income taxes deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax benefits generally represent change net deferred income tax assets liabilities year amounts result adjustments related acquisitions foreign currency appropriate operate multiple income tax jurisdictions within united states internationally accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations income tax authorities jurisdictions regularly perform audits income tax filings income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty foreign branch arrangements may require extended period time resolve may result significant income tax adjustments changes income allocation required jurisdictions different income tax rates new accounting pronouncements yet adopted january 2017 financial accounting standards board fasb issued accounting standards update asu 201701 business combinations clarifying definition business revises definition business accounting standards codification asc 805 providing robust framework use determining set acquired assets activities constitutes business plan adopt update january 1 2018 still evaluating impact update consolidated financial statements august 2016 fasb issued asu 201615 statement cash flows classification certain cash receipts cash payments eliminates diversity practice related certain cash receipts cash payments presented classified consolidated statement cash flows adopted update january 1 2017 adoption update material impact consolidated financial statements march 2016 fasb issued asu 201609 compensationstock compensation improvements employee sharebased payment accounting update simplifies accounting employee sharebased payment transactions including accounting income taxes forfeitures statutory tax withholding requirements well simplifying classification consolidated statements cash flow adopted update january 1 2017 adopted update january 1 2016 impact consolidated statements earnings would tax benefit 36 2016 impact adopting update 2017 consolidated financial statements depend market factors timing intrinsic value future sharebased compensation award vests exercises february 2016 fasb issued asu 201602 leases update requires entity recognize assets liabilities balance sheet leases lease terms greater 12 months balance sheet plan adopt update january 1 2019 still evaluating impact update consolidated financial statements may 2014 fasb issued asu 201409 revenue contracts customers update outlines single comprehensive model accounting revenue contracts customers plan adopt update january 1 2018 guidance permits two methods adoption retrospectively prior reporting period presented full retrospective method retrospectively cumulative effect initially applying guidance recognized date initial application modified retrospective method anticipate adopting standard using modified retrospective method may differences timing revenue recognition new standard compared recognition asc 605 revenue recognition new accounting pronouncements issued became effective period expected material impact consolidated financial statements note 2 fair value measurements financial assets liabilities carried fair value classified disclosed one following three categories applying fair value principles valuation assets liabilities required maximize use quoted market prices minimize use unobservable inputs calculate fair value level 1 level 2 instruments based exchange traded price identical similar instruments available based observable inputs taking account credit risk counterparties foreign currency exchange contracts interest rate hedges included level 2 use inputs quoted prices observable asset liability level 2 derivative instruments primarily valued using standard calculations models use readily observable market data basis level 3 liabilities represent milestone payments acquisitions certain level 3 liabilities blackscholes option pricing model used value liabilities fair value liabilities estimated using discounted cash flow technique significant unobservable inputs technique included probability assessments dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k related occurrence certain triggering events appropriately discounted considering uncertainties associated obligation estimate near 100 remeasure fair value assets liabilities reporting period record changes fair value within selling general administrative expense changes time value money within income expense net december 31 2016 aggregate difference cost fair value availableforsale marketable securities nominal interest receivable less 1 2 2016 2015 related marketable security portfolio total interest marketable securities income 29 14 28 2016 2015 2014 amounts included income expense net less 1 investments availableforsale marketable securities credit quality rating less a2 moodys standard poors fitch plan sell investments likely required sell investments recovery amortized cost basis may maturity consider investments otherthantemporarily impaired december 31 2016 december 31 2016 substantially investments unrealized losses deemed otherthantemporarily impaired continuous unrealized loss position less twelve months losses nominal note 3 derivative instruments foreign currency hedges use operational economic hedges foreign currency exchange forward contracts net investment hedges longterm intercompany loans payable forward exchange contracts interest rate derivative instruments manage impact currency exchange interest rate fluctuations earnings cash flow enter derivative instruments speculative purposes december 31 2016 total aftertax amount aoci related designated net investment hedges 48 evaluate effectiveness net investment hedges quarterly recognize ineffectiveness 2016 exposed credit loss event nonperformance counterparties outstanding derivative instruments anticipate nonperformance counterparties counterparty default maximum exposure loss asset balance instrument december 31 2016 pretax gains derivatives designated hedges recorded aoci expected reclassified earnings next 12 months less 1 compared 17 december 31 2015 reclassification primarily due sale inventory includes previously hedged purchases ineffective portions derivatives resulted gains losses periods presented dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k interest rate hedges december 31 2016 interest rate swaps notional amounts 600 designated forward starting interest rate swaps anticipation future debt issuances market value outstanding interest rate swap agreements december 31 2016 48 recorded long term assets offsetting amount recorded aoci upon probable issuance debt amounts released interest expense term debt cash flow effect hedge recorded cash flow operations 2016 terminated multiple designated interest rate cash flow hedges recognized 7 oci related hedges debt issuances recognized nominal amount ineffectiveness interest expense remaining amounts aoci reclassified interest expense term debt cash flow effect hedges recognized cash flow operations december 31 2016 interest rate swaps gross notional amounts 500 designated fair value hedges underlying fixed rate obligations representing portion 600 senior unsecured notes due 2024 hedge ineffectiveness recorded result fair value hedges note 4 accumulated comprehensive loss income note 5 acquisitions april 2016 completed acquisition sage products llc sage total consideration approximately 2875 sage develops manufactures distributes intensive care disposable products acquisition enhanced product offerings within medsurg segment purchase price allocations acquisition based preliminary valuations estimates assumptions subject change within measurement period april 2016 completed acquisition physiocontrol international inc physio total net consideration approximately 1299 physio develops manufactures markets monitorsdefibrillators aeds cprassist devices along data management support services acquisition enhances product offerings within medsurg segment purchase price allocations acquisition based preliminary valuations estimates assumptions subject change within measurement period acquisitions 2016 include acquisition synergetics neuro portfolio synergetics acquisition enhances product offerings within medsurg segment purchase price allocations acquisitions based preliminary valuations estimates assumptions subject change within measurement period acquisitions 2015 include acquisition certain assets chg hospital beds inc chg acquisition enhances product offerings within medsurg segment measurement period chg complete revisions original purchase price allocation nominal goodwill acquired sage synergetics chg acquisitions deductible tax purposes supplemental pro forma combined statements earnings presented sage physio acquisitions impact results operations material consolidated statements earnings note 6 contingencies commitments involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known recorded estimates based dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable estimated management additional expense may incurred could unfavorably affect future operating results selfinsured product liability claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows june 2012 voluntarily recalled rejuvenate abg ii modularneck hip stems terminated global distribution hip products product liability lawsuits relating voluntary recall filed us november 3 2014 announced entered settlement agreement compensate eligible united states patients revision surgery replace rejuvenate andor abg ii modularneck hip stem prior date december 2016 settlement program extended patients revision surgery prior december 19 2016 continue offer support recallrelated care reimburse patients eligible enroll settlement program testing treatment services including necessary revision surgeries addition lawsuits remain continue defend based information received actuarially determined range probable loss resolve matter globally currently estimated approximately 1968 2224 2200 2456 232 thirdparty insurance recoveries 2016 recorded additional charges earnings 144 representing excess minimum range previously recorded reserves final outcome matter dependent many factors difficult predict including number enrollees settlement program total awards number costs patients eligible settlement program seek testing treatment services require revision surgery number actual costs resolve remaining lawsuits accordingly ultimate cost resolve entire matter globally may materially different amount current estimate accruals could material adverse effect financial position results operations cash flows 2010 filed lawsuit federal court zimmer biomet holdings inc zimmer alleging zimmer product infringed three patents 2013 following jury trial favorable us trial judge entered final judgment among things awarded us damages 76 ordered zimmer pay us enhanced damages zimmer appealed ruling december 2014 federal circuit affirmed damages awarded us reversed order enhanced damages remanded issue attorney fees trial court may 2015 trial court entered stipulated judgment among things required zimmer pay us base amount damages interest issues enhanced damages attorney fees continue pursued june 2015 recorded 54 gain net legal costs recorded within selling general administrative expenses june 13 2016 united states supreme court vacated decision federal circuit reversed judgment enhanced damages remanded case federal circuit reconsider issue september 12 2016 federal circuit issued opinion among things remanded issue enhanced damages trial court april 2011 hillrom company inc affiliated entities hillrom brought lawsuit us alleging infringement united states patent laws respect nine patents related electrical network communications hospital beds march 31 2015 court granted parties’ joint motion dismiss prejudice claims counterclaims associated three patents case stayed respect remaining six patents currently reexamination united states patent office ultimate resolution matter cannot predicted possible time us estimate probable loss range probable losses however ultimate result could material adverse effect financial position results operations cash flows future obligations purchase commitments materials supplies services property plant equipment part normal course business addition lease various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases rent expense totaled 112 101 103 2016 2015 2014 refer note 9 information debt obligations note 7 goodwill intangible assets completed annual impairment tests goodwill 2016 2015 concluded year impairments exist dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k note 8 capital stock 2016 shares repurchased end 2015 totaling 135 thousand settled cost 13 manner timing amount repurchases determined management based evaluation market conditions stock price factors subject regulatory considerations purchases made timetotime open market privately negotiated transactions otherwise december 31 2016 total dollar value shares could purchased authorized repurchase programs 1870 shares reserved future compensation grants common stock 11 million 15 million december 31 2016 2015 05 million authorized shares 1 par value preferred stock none outstanding december 31 2016 stock options measure cost employee stock options based grantdate fair value recognize cost using straightline method period recipient required provide services exchange options typically vesting period weightedaverage fair value per share options estimated date grant using blackscholes option pricing model riskfree interest rate periods within expected life options granted based united states treasury yield curve effect time grant expected stock price volatility based historical volatility stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data aggregate intrinsic value options represents cumulative difference fair market value underlying common stock option exercise prices exercised 128 98 113 2016 2015 2014 exercise prices options outstanding ranged 3871 11535 december 31 2016 december 31 2016 84 unrecognized compensation cost related nonvested stock options granted longterm incentive plans cost expected recognized weightedaverage period approximately 16 years december 31 2016 53 unrecognized compensation cost related nonvested rsus cost expected recognized expense weightedaverage period approximately one year weightedaverage grant date fair value per share rsus granted 9470 8847 2016 2015 fair value rsus psus vested 2016 40 5 december 31 2016 12 unrecognized compensation cost related nonvested psus cost expected recognized expense weightedaverage period approximately one year employee stock purchase plans espp full parttime employees may participate espp provided meet certain eligibility requirements purchase price common stock terms espp defined 95 closing stock price last trading day purchase period issued 159329 157931 shares espp 2016 2015 note 9 debt credit facilities january 2017 sold 500 senior unsecured notes interest rate 1800 due january 15 2019 september 2016 repaid 750 senior unsecured notes due september 30 2016 march 2016 sold 3500 senior unsecured notes september 2016 increased amount commercial paper issuable commercial paper program 250 maximum 1500 outstanding maturities 397 days date issuance december 31 2016 outstanding commercial paper totaled 200 weightedaverage original maturity commercial paper outstanding approximately 60 days weighted average annualized interest rate shortterm debt approximately 09 lines credit issued various financial institutions available fund daytoday operating needs august 2016 entered new senior unsecured revolving credit facility replaced previous agreement dated august 29 2014 primary changes increase aggregate principal amount commitments 250 1500 extend maturity date august 19 2021 certain credit facilities require us comply financial covenants compliance covenants december 31 2016 dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k fair value debt excluding interest rate hedge based quoted interest rates similar types amounts borrowings substantially debt classified within level 1 fair value hierarchy fair value debt estimated using rates identical terms maturities based quoted active market prices yields took account underlying terms debt instruments january 1 2016 retrospectively adopted asu 201503 interest imputation interest simplifying presentation debt issuance costs adoption update resulted reclassification 24 unamortized debt issuance costs principally noncurrent assets reduction longterm debt consolidated balance sheet december 31 2015 interest expense including required fees incurred outstanding debt credit facilities included expense totaled 228 108 113 2016 2015 2014 note 10 income taxes effective tax rate 143 171 556 2016 2015 2014 effective income tax rate 2014 includes tax impacts establishment european regional headquarters cash repatriation affected 2014 executed 2015 establishment european regional headquarters contributed lower effective income tax rates 2015 2016 interest penalties included income expense net 1 4 8 2016 2015 2014 united states federal deferred income tax expense benefit includes utilization net operating loss carryforwards 28 79 78 2016 2015 2014 accrued interest penalties 34 30 reported accrued expenses liabilities current noncurrent december 31 2016 2015 net operating loss carryforwards totaling 185 december 31 2016 available reduce future taxable earnings certain domestic foreign subsidiaries united states loss carryforwards 160 expire 2028 international loss carryforwards 25 began expire 2016 however expiration carryforwards 45 subject full valuation allowance also tax credit carryforward 40 full valuation allowance credits expiration however anticipate generating income tax excess credits foreseeable future provision made united states federal state income taxes international income taxes may result future remittances undistributed earnings foreign subsidiaries determined indefinitely reinvested 8391 december 31 2016 determination amount unrecognized deferred income tax liability practicable dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k income tax expense would reduced 281 304 december 31 2016 2015 uncertain income tax positions favorably resolved reasonably possible amount unrecognized tax benefits significantly change due one following events next twelve months expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject controversy various taxing jurisdictions operate including inventory transfer pricing cost sharing product royalty foreign branch arrangements able reasonably estimate amount future periods changes unrecognized tax benefits may resolved interest penalties incurred associated uncertain tax positions included income expense net normal course business income tax authorities various income tax jurisdictions within united states internationally conduct routine audits income tax returns filed prior years audits generally designed determine individual income tax authorities agreement interpretations complex income tax regulations regarding allocation income various income tax jurisdictions income tax years open 2012 current year united states federal jurisdiction income tax years open major jurisdictions range 2005 current year note 11 retirement plans defined contribution plans provide certain employees defined contribution plans types retirement plans portion retirement plan expense defined contribution plans funded stryker common stock use stryker common stock represents noncash operating activity reflected consolidated statements cash flows defined benefit plans certain subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets discount rate discount rates selected using hypothetical portfolio high quality bonds december 31 would provide necessary cash flows match projected benefit payments effective january 1 2017 countries possible elected change method calculate service cost interest cost components net periodic benefit costs defined benefit plans measure costs applying specific spot rates along yield curve projected cash flows respective plans defined benefit plans previously utilized yield curve approach establish discount rates believe new approach provides precise measurement service interest costs improving correlation projected cash flows corresponding spot yield curve rates change affect measurement total benefit obligations plans accounted change accounting estimate inseparable change accounting principle applied prospectively reductions service interest costs 2017 associated change estimate nominal expected return plan assets expected return plan assets determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns investment strategy investment strategy defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances estimated net actuarial loss defined benefit pension plans reclassified aoci net periodic benefit cost 8 2017 estimate immaterial amount amortization prior service cost transition amount defined benefit dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k pension plans reclassified aoci net periodic benefit cost 2017 level 3 pension plan assets refer note 2 explanation fair value hierarchy consist primarily guaranteed investment contracts insurance companies insurance contracts guarantee us principal repayment fixed rate return 7 increase level 3 pension plan assets primarily related actual returns acquired assets expect contribute 20 defined benefit pension plans 2017 note 12 summary quarterly data unaudited price quotations supplied new york stock exchange note 13 segment geographic data segregate operations three reportable business segments orthopaedics medsurg neurotechnology spine orthopaedics segment includes reconstructive hip knee trauma implant systems related products medsurg segment includes surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment intensive care disposable products reprocessed remanufactured medical devices related products neurotechnology spine segment includes neurovascular products spinal implant systems related products corporate category shown table includes corporate administration central initiatives sharebased compensation includes compensation related employee director stock option restricted stock unit performance stock unit grants dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies note 1 consolidated financial statements measure financial results reportable segments using internal performance measure excludes acquisition integrationrelated charges restructuring related charges reserves certain product recall matters reserves certain legal regulatory matters donation educational institution identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment countries local revenue generating operations combined following geographic areas united states including puerto rico europe middle east africa asia pacific foreign countries include canada countries latin american region net sales attributable geographic area based upon customer’s country domicile dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k item 9item 8 financial statements supplementary data report independent registered public accounting firm shareholders board directors stryker corporation opinion financial statements audited accompanying consolidated balance sheets stryker corporation subsidiaries company december 31 2017 2016 related consolidated statements earnings comprehensive income shareholder’s equity cash flows three years period ended december 31 2017 related notes financial statement schedule listed index item 15a collectively referred financial statements opinion financial statements present fairly material respects consolidated financial position company december 31 2017 2016 consolidated results operations cash flows three years period ended december 31 2017 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob companys internal control financial reporting december 31 2017 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 8 2018 expressed unqualified opinion thereon basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion ernst young llp served companys auditor since 1974 grand rapids michigan february 8 2018 stryker corporation 2017 form 10k stryker corporation subsidiaries consolidated statements earnings antidilutive shares excluded calculation dilutive employee stock options de minimis periods consolidated statements comprehensive income see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k stryker corporation subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k stryker corporation subsidiaries consolidated statements shareholders’ equity see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k stryker corporation subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k notes consolidated financial statements note 1 significant accounting policies nature operations stryker corporation company us one worlds leading medical technology companies together customers driven make healthcare better company offers innovative products services orthopaedics medical surgical neurotechnology spine improve patient hospital outcomes products include implants used joint replacement trauma surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment intensive care disposable products neurosurgical neurovascular spinal devices well products used variety medical specialties basis presentation consolidation consolidated financial statements include company subsidiaries significant intercompany accounts transactions eliminated consolidation material interests variable interest entities none require consolidation certain prior year amounts reclassified conform presentation consolidated financial statements 2017 use estimates preparation financial statements conformity accounting principles generally accepted united states gaap requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts net sales expenses reporting period actual results could differ estimates revenue recognition sales recognized revenue realized realizable earned policy recognize revenue title product ownership risk loss transfer customer date shipment date receipt customer orthopaedics products receive appropriate notification product used implanted provision estimated sales returns discounts rebates sales incentives recorded reduction net sales period revenue recognized shipping handling costs charged customers included net sales cost sales cost sales primarily comprised direct materials supplies consumed manufacture product well manufacturing labor depreciation expense direct overhead expense necessary acquire convert purchased materials supplies finished product cost sales also includes cost distribute products customers inbound freight costs warehousing costs shipping handling activity research development engineering expenses research development costs charged expense incurred costs include research development engineering activities relating development new products improvement existing products technical support products compliance governmental regulations protection customers patients costs primarily consist salaries wages consulting depreciation maintenance research facilities equipment selling general administrative expenses selling general administrative expense primarily comprised selling expenses marketing expenses administrative indirect overhead costs amortization loaner instrumentation depreciation amortization expense nonmanufacturing assets miscellaneous operating items currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate statements united states dollars recorded comprehensive income oci transactional exchange gains losses included earnings cash equivalents highly liquid investments remaining stated maturities three months less purchased considered cash equivalents recorded cost marketable securities marketable securities consist marketable debt securities certificates deposit mutual funds mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities pursuant investment policy individual marketable security investments must minimum credit quality single standard poor’s fitch a2 moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double standard poor’s fitch aa moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk marketable security investment portfolio marketable securities classified availableforsale trading securities investments trading securities represent participantdirected investments deferred employee compensation accounts receivable accounts receivable consists trade miscellaneous receivables allowance maintained doubtful accounts estimated losses collection accounts receivable estimates made regarding ability customers make required payments based historical credit experience expected future trends accounts receivable written reasonable collection efforts exhausted inventories stated lower cost market cost generally determined using firstin firstout fifo cost method excess obsolete inventory resulting potential inability sell specific products prices excess current carrying costs reserves maintained reduce current carrying cost market prices financial instruments financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts carrying value financial instruments exception senior unsecured notes approximates fair value december 31 2017 2016 refer note 2 9 details marketable securities recognized fair value adjustments fair value marketable securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive income aoci shareholders’ equity adjustments fair value marketable securities classified trading recorded earnings amortized cost marketable debt securities adjusted amortization premiums discounts maturity computed effective interest method amortization interest realized gains losses included income expense net cost securities sold determined specific identification method review declines fair value investments classified availableforsale determine whether decline fair value otherthantemporary impairment resulting losses dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k otherthantemporary impairments availableforsale marketable securities included earnings derivatives recognized fair value reported gross basis enter forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period forward currency exchange contracts designated cash flow hedges designed hedge variability cash flows associated forecasted transactions denominated foreign currency take place future nonfunctional currency exposures principally relate forecasted intercompany purchases manufactured products generally maturities eighteen months changes value derivatives designated cash flow hedges recorded aoci consolidated balance sheets earnings affected variability underlying cash flows time applicable amount gain loss derivative instrument deferred shareholders’ equity reclassified earnings included income expense net cost goods sold consolidated statements earnings depending underlying transaction hedged cash flows associated hedges included cash operations category cash flows items hedged derivative forward contracts used offset exposure change value specific foreign currency denominated assets liabilities primarily intercompany payables receivables derivatives designated hedges therefore changes value forward contracts recognized earnings thereby offsetting current earnings effect related changes value foreign currency denominated assets liabilities estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points designated certain longterm intercompany loans payable forward exchange contracts net investment hedges investments certain international subsidiaries use euro functional currency derivative instruments designated qualify net investment hedge effective portion derivatives gain loss recognized oci reported component aoci use forward method measure ineffectiveness method change carrying value eurodenominated amounts due remeasurement effective portion reported component aoci remaining change carrying value ineffective portion recognized income expense net gain loss related settled net investment hedges subsequently reclassified net earnings hedged net investment either sold substantially liquidated forward starting interest rate derivative instruments designated cash flow hedges used manage exposure interest rate volatility regard future issuance refinancing debt effective portion gain loss forward starting interest rate derivative instrument designated qualifies cash flow hedge reported component aoci beginning period debt refinancing occurs related derivative instruments terminated effective portion gains losses reclassified interest expense term related debt interest rate derivative instruments designated fair value hedges used manage exposure interest rate movements reduce borrowing costs converting fixedrate debt floatingrate debt agreements agree exchange specified intervals difference fixed floating interest amounts calculated reference agreedupon notional principal amount property plant equipment property plant equipment stated cost depreciation generally computed straightline method estimated useful lives three 30 years buildings improvements three 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses acquisition date amounts allocated identifiable intangible assets factors contribute recognition goodwill include synergies specific business available market participants expected increase net sales profits acquisition talented workforce cost savings opportunities strategic benefit expanding presence core adjacent markets diversifying product portfolio fair values identifiable intangible assets primarily determined using income approach intangible assets include limited developed technology customer distributor relationships reflect expected continued customer distributor patronage trademarks patents intangible assets determinable useful lives amortized straightline basis estimated useful lives four 40 years certain acquired trade names considered indefinite lives amortized assessed annually potential impairment described acquisitions acquire inprocess research development iprd indefinitelived intangible asset iprd research completed becomes determinablelived intangible asset iprd determined future use becomes impaired goodwill intangibles longlived asset impairment tests perform annual impairment test goodwill fourth quarter year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability indefinitelived intangible assets also tested least annually impairment comparing individual carrying values fair value review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows undiscounted cash flows expected generated related assets estimated assets useful life based updated projections evaluation indicates carrying amount asset may recoverable potential impairment measured based upon fair value related asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k sharebased compensation use share based compensation form stock options restricted stock units rsus performancebased restricted stock units psus stock options granted longterm incentive plans certain key employees nonemployee directors exercise price less fair market value underlying common stock quoted closing price common stock day prior date grant options granted periods 10 years become exercisable varying installments grant rsus key employees nonemployee directors psus certain key employees longterm incentive plans fair value rsus determined based number shares granted quoted closing price common stock date grant adjusted fact rsus include anticipated dividends rsus generally vest onethird increments threeyear period settled stock psus earned threeyear performance cycle vest march year following end performance cycle number psus ultimately earned based performance relative preestablished goals threeyear performance cycle fair value psus determined based quoted closing price common stock day grant compensation expense recognized consolidated statements earnings based estimated fair value awards grant date compensation expense recognized reflects estimate number awards expected vest taking consideration estimate award forfeitures based actual experience recognized straightline basis requisite service period generally period required obtain full vesting management expectations related achievement performance goals associated psu grants assessed regularly assessment used determine whether psu grants expected vest performancebased milestones related psu grants met expected met compensation expense recognized associated grants reversed income taxes deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax benefits generally represent change net deferred income tax assets liabilities year amounts result adjustments related acquisitions foreign currency appropriate operate multiple income tax jurisdictions within united states internationally accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations income tax authorities jurisdictions regularly perform audits income tax filings income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty foreign branch arrangements may require extended period time resolve may result significant income tax adjustments changes income allocation required jurisdictions different income tax rates new accounting pronouncements yet adopted august 2017 financial accounting standards board fasb issued accounting standards update asu 201712 derivatives hedging targeted improvements accounting hedging activities amends simplifies hedge accounting guidance well improves presentation disclosure align economic effects risk management strategies financial statements update effective fiscal years beginning december 15 2018 including interim periods within fiscal years early adoption permitted performed preliminary assessment impact update expect adoption standard material impact consolidated financial statements currently evaluating timing adopting standard may 2017 fasb issued asu 201709 compensation stock compensation revises guidance related changes terms conditions sharebased payment award plan adopt update january 1 2018 expect adoption material impact consolidated financial statements march 2017 fasb issued asu 201707 compensation retirement benefits revises recognition presentation elements net pension benefit costs plan adopt update january 1 2018 expect adoption material impact consolidated financial statements february 2016 fasb issued asu 201602 leases update requires entity recognize assets liabilities balance sheet leases terms greater 12 months process evaluating impact consolidated financial statements anticipate current operating leases well service contracts result recognition right use assets corresponding lease liabilities consolidated balance sheets also anticipate changes classification financial statement line items consolidated statements earnings consolidated statements cash flows anticipate adoption update material impact net earnings cash flows plan adopt update january 1 2019 october 2016 fasb issued asu 201616 income taxes intraentity transfers assets inventory requires companies account income tax effect intercompany sales transfers assets inventory transfer occurs current guidance defer income tax effects intercompany transfers assets asset sold outside party otherwise recognized adopt update january 1 2018 finalized assessment impact update recorded cumulativeeffect adjustment decrease retained earnings amount approximately 696 january 1 2018 may 2014 fasb issued asu 201409 revenue contracts customers update outlines single comprehensive model accounting revenue contracts customers guidance permits two methods adoption retrospectively prior reporting period presented full retrospective method retrospectively cumulative effect initially applying guidance recognized date initial application modified retrospective method plan adopt update january 1 2018 using modified retrospective approach recognizing cumulative effect initially applying standard adjustment opening balance retained earnings 2018 finalized assessment impact update recorded cumulativeeffect adjustment decrease retained earnings amount 55 january 1 2018 expect impact adoption standard recognized consolidated statements earnings 2018 accounting pronouncements recently adopted january 1 2017 adopted asu 201609 compensationstock compensation improvements employee sharebased payment accounting impact consolidated statements earnings 2017 tax benefit 57 prior year dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k consolidated statements cash flow reclassified 36 financing income taxes within operating activities conform current year presentation january 1 2017 adopted asu 201615 statement cash flows classification certain cash receipts cash payments adoption update material impact consolidated financial statements new accounting pronouncements issued became effective period expected material impact consolidated financial statements note 2 fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date financial assets liabilities carried fair value classified entirety based lowest level input disclosed one following three categories level 1 quoted market prices active markets identical assets liabilities level 2 observable marketbased inputs unobservable inputs corroborated market data level 3 unobservable inputs reflecting assumptions external inputs active markets use observable market data available required making fair value measurements inputs used fall within different levels hierarchy level within fair value measurement categorized based lowest level input significant fair value measurement determine fair value level 1 instruments using exchangetraded prices identical instruments determine fair value level 2 instruments using exchangetraded prices similar instruments available utilizing observable inputs take account credit risk counterparties foreign currency exchange contracts interest rate hedges included level 2 use inputs quoted prices observable asset liability level 2 derivative instruments primarily valued using standard calculations models use readily observable market data basis level 3 liabilities comprised contingent consideration arising recently completed acquisitions determine fair value level 3 liabilities using discounted cash flow technique blackscholes option pricing model significant unobservable inputs used assessment fair value including assumptions regarding future business results discount rates discount periods probability assessments based likelihood reaching various targets remeasure fair value assets liabilities reporting period record changes fair value within selling general administrative expense changes time value money within income expense net december 31 2017 aggregate difference cost fair value availableforsale marketable securities nominal interest receivable 1 less 1 2017 2016 related marketable security portfolio interest marketable securities income 60 29 14 2017 2016 2015 recorded income expense net investments availableforsale marketable securities minimum credit quality rating a2 moodys standard poors fitch plan sell investments likely required sell investments recovery amortized cost basis may maturity consider investments otherthantemporarily impaired december 31 2017 december 31 2017 substantially investments unrealized losses deemed otherthantemporarily impaired continuous unrealized loss position less twelve months losses nominal note 3 derivative instruments foreign currency hedges use operational economic hedges foreign currency exchange forward contracts net investment hedges longterm dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k intercompany loans payable forward exchange contracts interest rate derivative instruments manage impact currency exchange interest rate fluctuations earnings cash flow enter derivative instruments speculative purposes exposed credit loss event nonperformance counterparties outstanding derivative instruments anticipate nonperformance counterparties counterparty default maximum exposure loss asset balance instrument december 31 2017 total aftertax amount aoci related designated net investment hedges 30 evaluate effectiveness net investment hedges quarterly recognized ineffectiveness 2017 december 31 2017 pretax gains recorded aoci derivatives designated hedges expected reclassified earnings within 12 months balance sheet date 7 compared less 1 december 31 2016 reclassification primarily due sale inventory includes previously hedged purchases de minimis ineffective portions derivatives included table interest rate hedges december 31 2017 interest rate swaps notional amounts 600 designated forward starting interest rate swaps anticipation future debt issuances market value outstanding interest rate swap agreements december 31 2017 44 recorded current assets offsetting amount recorded aoci upon probable issuance debt amounts released interest expense term debt cash flow effect hedge recorded cash flow operations december 31 2017 interest rate swaps gross notional amounts 500 designated fair value hedges underlying fixed rate obligations representing portion 600 senior unsecured notes due 2024 hedge ineffectiveness recorded result fair value hedges 2017 note 4 accumulated comprehensive loss income aoci note 5 acquisitions 2017 2016 total cash paid acquisitions 831 4332 acquired stock companies various assets continue support capital deployment product development strategies december 2017 announced definitive merger agreement acquire entellus medical inc entellus highgrowth global medical technology company focused delivering superior patient physician experiences products designed minimally invasive treatment various ear nose throat ent disease states 2400 per share total consideration approximately 662 entellus net sales approximately 75 2016 integrated instruments business within medsurg expect acquisition close february 2018 september 2017 completed acquisition novadaq technologies inc novadaq total consideration approximately 716 novadaq leading developer fluorescence imaging technology provides surgeons visualization blood flow vessels related tissue perfusion cardiac cardiovascular gastrointestinal plastic microsurgical reconstructive procedures acquisition enhances product offerings within medsurg segment goodwill related novadaq acquisition deductible tax purposes dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k purchase price allocations novadaq acquisitions 2017 2016 based preliminary valuations estimates assumptions subject change within measurement period purchase price allocation acquisitions sage products llc sage physiocontrol international inc physio finalized 2017 goodwill related sage acquisition deductible tax purposes note 6 contingencies commitments involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable estimated management additional expense may incurred could unfavorably affect future operating results selfinsured product liability claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows june 2012 voluntarily recalled rejuvenate abg ii modularneck hip stems terminated global distribution hip products product liability lawsuits relating voluntary recall filed us november 3 2014 announced entered settlement agreement compensate eligible united states patients revision surgery replace rejuvenate andor abg ii modularneck hip stem prior date december 2016 settlement program extended patients revision surgery prior december 19 2016 continue offer support recallrelated care reimburse patients eligible enroll settlement program testing treatment services including necessary revision surgeries addition lawsuits remain continue defend based information received actuarially determined range probable loss resolve matter globally currently estimated approximately 2072 2307 2304 2539 232 thirdparty insurance recoveries recorded additional charges earnings 104 2017 representing excess minimum range previously recorded reserves final outcome matter dependent many factors difficult predict including number enrollees settlement program total awards number costs patients eligible settlement program seek testing treatment services require revision surgery number actual costs resolve remaining lawsuits accordingly ultimate cost resolve entire matter globally may materially different amount current estimate accruals could material adverse effect financial position results operations cash flows 2010 filed lawsuit federal court zimmer biomet holdings inc zimmer alleging zimmer product infringed three patents 2013 following jury trial favorable us trial judge entered final judgment among things awarded us damages 76 ordered zimmer pay us enhanced damages zimmer appealed ruling december 2014 federal circuit affirmed damages awarded us reversed order enhanced damages remanded issue attorney fees trial court may 2015 trial court entered stipulated judgment among things required zimmer pay us base amount damages interest issues enhanced damages attorney fees continue pursued june 2015 recorded 54 gain net legal costs recorded within selling general administrative expenses june 13 2016 united states supreme court vacated decision federal circuit reversed judgment enhanced damages remanded case federal circuit reconsider issue september 12 2016 federal circuit issued opinion among things remanded issue enhanced damages trial court july 12 2017 trial court reaffirmed award enhanced damages entered judgment 164 favor july 24 2017 zimmer filed notice appeal decision future obligations purchase commitments materials supplies services property plant equipment part normal course business addition lease various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases rent expense totaled 125 112 101 2017 2016 2015 refer note 9 information debt obligations note 7 goodwill intangible assets completed annual impairment tests goodwill 2017 2016 concluded year impairments exist dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k note 8 capital stock aggregate number shares classes stock authorized issue 1000500000 divided two classes consisting 500000 shares 1 par value preferred stock 1000000000 shares common stock par value 010 shares preferred stock outstanding december 31 2017 repurchased 19 million shares cost 230 manner timing amount repurchases determined management based evaluation market conditions stock price factors subject regulatory considerations purchases made timetotime open market privately negotiated transactions otherwise december 31 2017 total dollar value shares could purchased authorized repurchase program 1640 shares reserved future compensation grants common stock 37 million 11 million december 31 2017 2016 stock options measure cost employee stock options based grantdate fair value recognize cost using straightline method period recipient required provide services exchange options typically vesting period weightedaverage fair value per share options estimated date grant using blackscholes option pricing model riskfree interest rate periods within expected life options granted based united states treasury yield curve effect time grant expected stock price volatility based historical volatility stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data aggregate intrinsic value options represents cumulative difference fair market value underlying common stock option exercise prices exercised 184 128 98 2017 2016 2015 exercise prices options outstanding ranged 3871 15487 december 31 2017 december 31 2017 90 unrecognized compensation cost related nonvested stock options granted longterm incentive plans cost expected recognized weightedaverage period approximately 16 years december 31 2017 56 unrecognized compensation cost related nonvested rsus cost expected recognized expense weightedaverage period approximately one year weightedaverage grant date fair value per share rsus granted 11744 9470 2017 2016 fair value rsus psus vested 2017 44 7 december 31 2017 13 unrecognized compensation cost related nonvested psus cost expected recognized expense weightedaverage period approximately one year dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k employee stock purchase plans espp full parttime employees may participate espp provided meet certain eligibility requirements purchase price common stock terms espp defined 95 closing stock price last trading day purchase period issued 163415 159329 shares espp 2017 2016 note 9 debt credit facilities january 2017 issued 500 senior unsecured notes fixed interest rate 1800 due january 15 2019 commercial paper program allows us maximum 1500 commercial paper outstanding maturities 397 days date issuance december 31 2017 amounts outstanding commercial paper program lines credit issued various financial institutions available fund daytoday operating needs certain credit facilities require us comply financial covenants compliance covenants december 31 2017 fair value senior unsecured notes estimated using quoted interest rates maturities amounts borrowings based quoted active market prices yields took account underlying terms debt instruments substantially debt classified within level 2 fair value hierarchy interest expense including required fees incurred outstanding debt credit facilities included expense totaled 247 228 108 2017 2016 2015 note 10 income taxes effective tax rate 506 143 171 2017 2016 2015 effective income tax rate 2017 reflects impact complying tax cuts jobs act 2017 signed law december 2017 partially offset benefits adoption asu 201609 compensationstock compensation improvements employee sharebased payment accounting january 1 2017 continued lower effective income tax rates result european headquarters establishment european regional headquarters contributed lower effective income tax rates 2016 2015 december 2017 tax cuts jobs act 2017 act signed law united states law includes significant changes united states corporate income tax system including federal corporate rate reduction limitations deductibility certain expenses transition united states international taxation worldwide tax system territorial tax system part transition territorial tax system act requires taxpayers calculate onetime transition tax based undistributed earnings foreign subsidiaries recorded transition tax current year results significantly impacted effective tax rate additionally recorded additional tax expense adjust certain deferred tax accounts new corporate tax rate amounts best estimate based current information guidance available time represent provisional estimates transition tax related charge change deferred tax accounts charge associated act finalized 2018 interest penalties included income expense net expense 28 1 4 2017 2016 2015 united states federal deferred income tax expense benefit includes utilization net operating loss carryforwards 32 28 79 2017 2016 2015 dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k accrued interest penalties 60 34 december 31 2017 2016 reported current noncurrent accrued expenses liabilities net operating loss carryforwards totaling 219 december 31 2017 available reduce future taxable earnings certain domestic foreign subsidiaries united states loss carryforwards 106 expire 2028 international loss carryforwards 113 began expire 2017 however expiration carryforwards 36 subject full valuation allowance also tax credit carryforward 43 40 subject full valuation allowance credits full valuation allowance expiration however anticipate generating income tax excess credits foreseeable future recorded transition tax undistributed foreign earnings required act provision made income taxes may result future remittances undistributed earnings foreign subsidiaries determined indefinitely reinvested 8484 december 31 2017 determination total amount unrecognized deferred income tax undistributed earnings foreign subsidiaries practicable income tax expense would reduced 232 209 december 31 2017 2016 uncertain income tax positions favorably resolved reasonably possible amount unrecognized tax benefits significantly change due one following events next twelve months expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject controversy various taxing jurisdictions operate including inventory transfer pricing cost sharing product royalty foreign branch arrangements able reasonably estimate amount future periods changes unrecognized tax benefits may resolved interest penalties incurred associated uncertain tax positions included income expense net normal course business income tax authorities various income tax jurisdictions within united states internationally conduct routine audits income tax returns filed prior years audits generally designed determine individual income tax authorities agreement interpretations complex income tax regulations regarding allocation income various income tax jurisdictions income tax years open 2012 current year united states federal jurisdiction income tax years open major jurisdictions range 2005 current year note 11 retirement plans defined contribution plans provide certain employees defined contribution plans types retirement plans portion retirement plan expense defined contribution plans funded stryker common stock use stryker common stock represents noncash operating activity reflected consolidated statements cash flows defined benefit plans certain subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets discount rate discount rates selected using hypothetical portfolio high quality bonds december 31 would provide necessary cash flows match projected benefit payments effective january 1 2017 countries possible elected change method calculate service cost interest cost components net periodic benefit costs defined benefit plans measure costs applying specific spot rates along yield curve projected cash flows respective plans defined benefit plans previously utilized yield curve approach establish discount rates believe new approach provides precise measurement service interest costs improving correlation projected cash flows corresponding spot yield curve rates change affect measurement total benefit obligations plans accounted change accounting estimate inseparable change accounting principle applied prospectively reductions service interest costs 2017 associated change estimate nominal expected return plan assets expected return plan assets determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k investment strategy investment strategy defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances estimated net actuarial loss defined benefit pension plans reclassified aoci net periodic benefit cost 9 2018the total estimated amortization prior service credit transition asset defined benefit pension plans reclassified aoci net periodic benefit credit 1 2018 level 3 pension plan assets consist primarily guaranteed investment contracts insurance companies insurance contracts guarantee us principal repayment fixed rate return 11 increase level 3 pension plan assets primarily related actual returns acquired assets expect contribute 24 defined benefit pension plans 2018 dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k note 12 summary quarterly data unaudited note 13 segment geographic data segregate operations three reportable business segments orthopaedics medsurg neurotechnology spine corporate category shown table includes corporate administration corporate initiatives sharebased compensation includes compensation related employee stock options restricted stock units performance stock unit grants director stock options restricted stock unit grants measure financial results reportable segments using internal performance measure excludes acquisition integrationrelated charges restructuringrelated charges reserves certain product recall matters reserves certain legal regulatory matters donation educational institution identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment countries local revenue generating operations combined following geographic areas united states including puerto rico europe middle east africa asia pacific foreign countries include canada countries latin american region net sales reported based geographic area stryker location sales customer originated item 9item 8 financial statements supplementary data report independent registered public accounting firm shareholders board directors stryker corporation opinion financial statements audited accompanying consolidated balance sheets stryker corporation subsidiaries company december 31 2018 2017 related consolidated statements earnings comprehensive income shareholder’s equity cash flows three years period ended december 31 2018 related notes financial statement schedule listed index item 15a collectively referred “consolidated financial statements“ opinion consolidated financial statements present fairly material respects consolidated financial position company december 31 2018 2017 consolidated results operations cash flows three years period ended december 31 2018 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob companys internal control financial reporting december 31 2018 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 7 2019 expressed unqualified opinion thereon adoption asu 201616 discussed note 1 consolidated financial statements company changed method accounting income tax consequences intercompany transfers assets inventory 2018 due adoption accounting standards update asu 201616 income taxes topic 740 intraentity transfers assets inventory basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion ernst young llp served companys auditor since 1974 grand rapids michigan february 7 2019 stryker corporation 2018 form 10k stryker corporation subsidiaries consolidated statements earnings antidilutive shares excluded calculation dilutive employee stock options de minimis periods consolidated statements comprehensive income see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k stryker corporation subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k stryker corporation subsidiaries consolidated statements shareholders’ equity see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k stryker corporation subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k notes consolidated financial statements note 1 significant accounting policies nature operations stryker company us one worlds leading medical technology companies together customers driven make healthcare better company offers innovative products services orthopaedics medical surgical neurotechnology spine improve patient hospital outcomes products include implants used joint replacement trauma surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment intensive care disposable products neurosurgical neurovascular spinal devices well products used variety medical specialties basis presentation consolidation consolidated financial statements include company subsidiaries significant intercompany accounts transactions eliminated consolidation material interests variable interest entities none require consolidation certain prior year amounts reclassified conform presentation consolidated financial statements 2018 use estimates preparation financial statements conformity accounting principles generally accepted united states gaap requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts net sales expenses reporting period actual results could differ estimates revenue recognition sales recognized performance obligations deliver products services satisfied recorded based amount consideration expect receive exchange satisfying performance obligations sales continue recognized primarily transfer control customer date shipment date receipt customer orthopaedics products received purchase order appropriate notification product used implanted products services primarily transferred customers point time transfers services taking place time provision estimated sales returns discounts rebates recognized reduction sales period sales recognized estimate provision sales returns established based contract terms customers historical business practices current trends shipping handling costs charged customers included net sales cost sales cost sales primarily comprised direct materials supplies consumed manufacture product well manufacturing labor depreciation expense direct overhead expense necessary acquire convert purchased materials supplies finished product cost sales also includes cost distribute products customers inbound freight costs warehousing costs shipping handling activity research development engineering expenses research development costs charged expense incurred costs include research development engineering activities relating development new products improvement existing products technical support products compliance governmental regulations protection customers patients costs primarily consist salaries wages consulting depreciation maintenance research facilities equipment selling general administrative expenses selling general administrative expense primarily comprised selling expenses marketing expenses administrative indirect overhead costs amortization loaner instrumentation depreciation amortization expense nonmanufacturing assets miscellaneous operating items currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate statements united states dollars recorded comprehensive income oci transactional exchange gains losses included earnings cash equivalents highly liquid investments remaining stated maturities three months less purchased considered cash equivalents recorded cost marketable securities marketable securities consist marketable debt securities certificates deposit mutual funds mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities pursuant investment policy individual marketable security investments must minimum credit quality single standard poor’s fitch a2 moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double standard poor’s fitch aa moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk marketable security investment portfolio marketable securities classified availableforsale trading securities investments trading securities represent participantdirected investments deferred employee compensation accounts receivable accounts receivable consists trade miscellaneous receivables allowance maintained doubtful accounts estimated losses collection accounts receivable estimates made regarding ability customers make required payments based historical credit experience expected future trends accounts receivable written reasonable collection efforts exhausted inventories stated lower cost market cost generally determined using firstin firstout fifo cost method excess obsolete inventory resulting potential inability sell specific products prices excess current carrying costs reserves maintained reduce current carrying cost market prices financial instruments financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts carrying value financial instruments exception senior unsecured notes approximates fair value december 31 2018 2017 refer notes 3 10 details marketable securities recognized fair value adjustments fair value marketable securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive income aoci shareholders’ equity adjustments fair value marketable securities classified trading recorded earnings amortized cost marketable debt securities adjusted amortization premiums discounts maturity computed effective interest method amortization interest realized gains losses included dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k income expense net cost securities sold determined specific identification method review declines fair value investments classified availableforsale determine whether decline fair value otherthantemporary resulting losses otherthantemporary impairments availableforsale marketable securities included earnings derivatives recognized fair value reported gross basis enter forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period forward currency exchange contracts designated cash flow hedges designed hedge variability cash flows associated forecasted transactions denominated foreign currency take place future nonfunctional currency exposures principally relate forecasted intercompany sales purchases manufactured products generally maturities eighteen months changes value derivatives designated cash flow hedges recorded aoci consolidated balance sheets earnings affected variability underlying cash flows time applicable amount gain loss derivative instrument deferred shareholders’ equity reclassified earnings included cost goods sold consolidated statements earnings cash flows associated hedges included cash operations category cash flows items hedged derivative forward contracts used offset exposure change value specific foreign currency denominated assets liabilities primarily intercompany payables receivables derivatives designated hedges therefore changes value forward contracts recognized earnings thereby offsetting current earnings effect related changes value foreign currency denominated assets liabilities estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points time designate derivative nonderivative financial instruments net investment hedges investments certain international subsidiaries derivative instruments designated qualify net investment hedge effective portion derivatives gain loss recognized oci reported component aoci use forward method measure ineffectiveness method change carrying value related effective portion derivative instrument due remeasurement reported component aoci remaining change carrying value considered ineffective recognized income expense net gain loss related settled net investment hedges subsequently reclassified net earnings hedged net investment either sold substantially liquidated time designate forward starting interest rate derivative instruments cash flow hedges manage exposure interest rate volatility regard future issuance refinancing debt effective portion gain loss forward starting interest rate derivative instrument designated qualifies cash flow hedge reported component aoci beginning period debt refinancing occurs related derivative instruments terminated effective portion gains losses reclassified interest expense term related debt interest rate derivative instruments designated fair value hedges used past manage exposure interest rate movements reduce borrowing costs converting fixedrate debt floatingrate debt agreements agree exchange specified intervals difference fixed floating interest amounts calculated reference agreedupon notional principal amount december 31 2018 open cash flow fair value interest rate hedges property plant equipment property plant equipment stated cost depreciation generally computed straightline method estimated useful lives three 30 years buildings improvements three 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses acquisition date amounts allocated identifiable intangible assets factors contribute recognition goodwill include synergies specific business available market participants expected increase net sales profits acquisition talented workforce cost savings opportunities strategic benefit expanding presence core adjacent markets diversifying product portfolio fair values identifiable intangible assets primarily determined using income approach intangible assets include limited developed technology customer distributor relationships reflect expected continued customer distributor patronage trademarks patents intangible assets determinable useful lives amortized straightline basis estimated useful lives four 40 years certain acquired trade names considered indefinite lives amortized assessed annually potential impairment described acquisitions acquire inprocess research development iprd intangible assets acquisitions accounted business combinations iprd considered indefinitelived intangible asset research completed becomes determinablelived intangible asset determined future use impaired asset acquisitions iprd expensed immediately unless alternative future use goodwill intangibles longlived asset impairment tests perform annual impairment test goodwill fourth quarter year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability indefinitelived intangible assets also tested least annually impairment comparing individual carrying values fair value review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows undiscounted cash flows expected generated related assets estimated assets useful life based updated projections evaluation indicates carrying amount asset may recoverable potential impairment measured based upon dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k fair value related asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell sharebased compensation use share based compensation form stock options restricted stock units rsus performancebased restricted stock units psus stock options granted longterm incentive plans certain key employees nonemployee directors exercise price less fair market value underlying common stock quoted closing price common stock day prior date grant options granted periods 10 years become exercisable varying installments grant rsus key employees nonemployee directors psus certain key employees longterm incentive plans fair value rsus determined based number shares granted quoted closing price common stock date grant adjusted fact rsus include anticipated dividends rsus generally vest onethird increments threeyear period settled stock psus earned threeyear performance cycle vest march year following end performance cycle number psus ultimately earned based performance relative preestablished goals threeyear performance cycle fair value psus determined based quoted closing price common stock day grant compensation expense recognized consolidated statements earnings based estimated fair value awards grant date compensation expense recognized reflects estimate number awards expected vest taking consideration estimate award forfeitures based actual experience recognized straightline basis requisite service period generally period required obtain full vesting management expectations related achievement performance goals associated psu grants assessed regularly assessment used determine whether psu grants expected vest performancebased milestones related psu grants met expected met compensation expense recognized associated grants reversed income taxes deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax benefits generally represent change net deferred income tax assets liabilities year amounts result adjustments related acquisitions foreign currency appropriate operate multiple income tax jurisdictions within united states internationally accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations income tax authorities jurisdictions regularly perform audits income tax filings income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty foreign branch arrangements may require extended period time resolve may result significant income tax adjustments changes income allocation required jurisdictions different income tax rates new accounting pronouncements yet adopted evaluate accounting standards updates asus issued financial accounting standards board fasb consideration applicability asus included disclosures assessed determined either applicable expected material impact consolidated financial statements august 2018 fasb issued asu 201815 intangibles goodwill internal use software customers accounting implementation costs incurred cloud computing arrangement service contract amends requirements capitalizing implementation costs incurred hosting arrangement service contract align requirements capitalizing implementation costs incurred develop obtain internaluse software update effective fiscal years beginning december 15 2020 including interim periods within fiscal years early adoption permitted process evaluating impact consolidated financial statements timing adoption update august 2017 fasb issued asu 201712 derivatives hedging targeted improvements accounting hedging activities amends simplifies hedge accounting guidance well improves presentation disclosure align economic effects risk management strategies financial statements update effective fiscal years beginning december 15 2018 including interim periods within fiscal years early adoption permitted performed preliminary assessment impact update expect adoption standard material impact consolidated financial statements plan adopt update january 1 2019 february 2016 fasb issued asu 201602 leases topic 842 requires lease assets liabilities recorded balance sheet leases terms greater twelve months adopt asu related amendments january 1 2019 expect elect certain practical expedients permitted transition guidance additionally elect optional transition method allows cumulativeeffect adjustment period adoption restate prior periods substantially complete assessing transitional impact adopting standard however still assessing lessor provisions standard expect material adjustments estimated right use asset andor lease liability currently estimate impact adoption result recognition right use assets lease liabilities approximately 350 january 1 2019 believe adoption material impact net earnings cash flows accounting pronouncements recently adopted january 1 2018 adopted asu 201409 revenue contracts customers refer note 2 information january 1 2018 adopted asu 201616 income taxes intraentity transfers assets inventory requires companies account income tax effect intercompany sales transfers assets inventory transfer occurs previous guidance deferred income tax effects intercompany transfers assets asset sold outside party otherwise recognized recorded 695 cumulativeeffect adjustment decrease opening balance retained earnings january 1 2018 january 1 2018 adopted asu 201707 compensation retirement benefits revises presentation elements net pension benefit costs retrospectively applied change presentation nonservice cost components net periodic pension cost reclassifying amounts income expense net within consolidated statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k earnings adoption update material impact consolidated financial statements january 1 2018 adopted asu 201709 compensation stock compensation revises guidance related changes terms conditions sharebased payment award adoption update material impact consolidated financial statements january 1 2018 adopted asu 201802 income statements reporting comprehensive income reclassification certain tax effects accumulated comprehensive income issued february 2018 provides guidance allowing reclassification stranded tax effects resulting tax cuts jobs act 2017 accumulated comprehensive income retained earnings adoption update material impact consolidated financial statements new accounting pronouncements issued became effective period expected material impact consolidated financial statements note 2 revenue recognition january 1 2018 adopted asu 201409 revenue contracts customers asc 606 using modified retrospective method contracts completed january 1 2018 cumulative effect initially applying asc 606 adjustment decrease opening balance retained earnings 64 january 1 2018 adoption asc 606 elected apply certain permitted practical expedients evaluating cumulativeeffect adjustment retained earnings adopted standard contracts complete date adoption contracts containing elements variable consideration elected use transaction price date contract deemed complete contracts modified prior adoption date elected present aggregate effect contract modifications determining transaction price allocation satisfied unsatisfied performance obligations impact asc 606 results operations 2018 material related primarily reclassification certain costs previously presented selling general administrative expenses net sales recognized performance obligations deliver products services satisfied recorded based amount consideration expect receive exchange satisfying performance obligations united states products services marketed directly doctors hospitals healthcare facilities companyowned subsidiaries branches products also sold 80 countries companyowned subsidiaries branches well thirdparty dealers distributors sales represent amount consideration expect receive customers exchange transferring products services net sales exclude sales value added taxes collect customers costs obtain fulfill contracts expensed incurred due shortterm nature sales extend terms payment customers based commercially reasonable terms markets customers also considering credit quality provision estimated sales returns discounts rebates recognized reduction sales period sales recognized estimate provision sales returns established based contract terms customers historical business practices shipping handling costs charged customers included net sales continue recognized primarily title product ownership risk loss transfer customer date shipment date receipt customer orthopaedics products received purchase order appropriate notification product used implanted products services primarily transferred customers point time transfers services taking place time 2018 less 10 sales recognized services transferred time disaggregate net sales product line geographic location segments believe best depicts nature amount timing certainty net sales cash flows affected economic factors dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k orthopaedics products consist primarily implants used hip knee joint replacements trauma extremity surgeries substantially orthopaedics sales recognized received purchase order appropriate notification product used implanted certain orthopaedic products category recognize sales point time well time performance obligations may include obligation complete installation provide training ongoing services performance obligations satisfied within one year medsurg products include surgical equipment surgical navigation systems instruments endoscopic communications systems endoscopy patient handling emergency medical equipment intensive care disposable products medical reprocessed remanufactured medical devices sustainability medical device products used variety medical specialties substantially medsurg sales recognized purchase order received control transferred certain endoscopy instruments medical services may recognize sales time satisfy performance obligations may include obligation complete installation provide training perform ongoing services generally performed within one year neurotechnology spine neurotechnology spine products include neurosurgical neurovascular devices spinal implant products include cervical thoracolumbar interbody systems used spinal injury deformity degenerative therapies substantially neurotechnology spine sales recognized purchase order received control transferred contract assets liabilities nature products services generally give rise contract assets typically incur costs fulfill contract product service provided customer costs obtain contracts typically form sales commissions paid employees stryker thirdparty agents elected expense sales commissions associated obtaining contract incurred amortization period generally less one year costs presented within selling general administrative expenses december 31 2018 contract assets recorded consolidated balance sheets contract liabilities arise result unearned revenue received customers inception contracts certain businesses timing billing services precedes satisfaction performance obligations generally satisfy performance obligations within one year contract inception date january 1 2018 contract liabilities 381 reported accrued expenses liabilities noncurrent liabilities consolidated balance sheets 333 recognized sales 2018 december 31 2018 contract liabilities 327 note 3 fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date financial assets liabilities carried fair value classified entirety based lowest level input disclosed one following three categories level 1 quoted market prices active markets identical assets liabilities level 2 observable marketbased inputs unobservable inputs corroborated market data level 3 unobservable inputs reflecting assumptions external inputs active markets use observable market data available required making fair value measurements inputs used fall within different levels hierarchy level within fair value measurement categorized based lowest level input significant fair value measurement determine fair value level 1 instruments using exchangetraded prices identical instruments determine fair value level 2 instruments using exchangetraded prices similar instruments available utilizing observable inputs take account credit risk counterparties foreign currency exchange contracts interest rate hedges included level 2 use inputs quoted prices observable asset liability level 2 derivative instruments primarily valued using standard calculations models use readily observable market data basis level 3 liabilities comprised contingent consideration arising recently completed acquisitions determine fair value level 3 liabilities using discounted cash flow technique significant unobservable inputs used assessment fair value including assumptions regarding future business results discount rates discount periods probability assessments based likelihood reaching various targets remeasure fair value assets liabilities reporting period record changes fair value within selling general administrative expense changes time value money within income expense net dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k december 31 2018 aggregate difference cost fair value availableforsale marketable securities nominal interest receivable 1 2018 2017 related marketable security portfolio interest marketable securities income 119 60 29 2018 2017 2016 recorded income expense net investments availableforsale marketable securities minimum credit quality rating a2 moodys standard poors fitch plan sell investments likely required sell investments recovery amortized cost basis may maturity consider investments otherthantemporarily impaired december 31 2018 december 31 2018 majority investments unrealized losses deemed otherthantemporarily impaired continuous unrealized loss position less twelve months losses material note 4 derivative instruments foreign currency hedges use operational economic hedges foreign currency exchange forward contracts net investment hedges derivative nonderivative financial instruments interest rate derivative instruments manage impact currency exchange interest rate fluctuations earnings cash flow equity enter derivative instruments speculative purposes exposed potential credit loss event nonperformance counterparties outstanding derivative instruments anticipate nonperformance counterparties counterparty default maximum exposure loss asset balance instrument november 2018 designated issuance €2250 senior unsecured notes net investment hedge selectively hedge portions investment certain international subsidiaries currency effects eurodenominated senior unsecured notes reflected aoci within shareholders equity offset gains losses recorded net investment international subsidiaries december 31 2018 total aftertax loss aoci related designated net investment hedges 19 evaluate effectiveness net investment hedges quarterly recognized ineffectiveness 2018 december 31 2018 pretax gains recorded aoci derivatives designated hedges expected reclassified earnings within 12 months balance sheet date 13 compared 7 december 31 2017 reclassification primarily due sale inventory includes previously hedged purchases 1 gain 2018 due ineffective portions derivatives included table interest rate hedges conjunction offering senior unsecured notes march 2018 terminated cash flow hedges gross notional amounts 600 designated hedges interest rates impact recognized time benefit within interest expense also elected terminate interest rate swaps gross notional amounts 500 designated fair value hedges underlying fixed rate obligations representing portion 600 unsecured notes due 2024 remaining fair value presented longterm dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k debt reclassified interest expense term debt hedge ineffectiveness recorded result fair value hedges 2018 december 31 2018 open cash flow fair value interest rate hedges note 5 accumulated comprehensive loss income aoci note 6 acquisitions 2018 2017 2016 total cash paid acquisitions net cash acquired 2451 831 4332 acquired stock companies various assets continue support capital deployment product development strategies november 2018 completed acquisition k2m group holdings inc k2m 2750 per share aggregate purchase price approximately 1380 k2m global leader complex spine minimally invasive solutions focused achieving threedimensional total body balance k2m part spine business within neurotechnology spine goodwill attributable acquisition k2m deductible tax purposes february 2018 completed acquisition entellus medical inc entellus 2400 per share aggregate purchase price 697 net cash acquired entellus focused delivering superior patient physician experiences products designed minimally invasive treatment various ear nose throat ent disease states entellus part neurotechnology business within neurotechnology spine goodwill attributable acquisition entellus deductible tax purposes september 2017 completed acquisition novadaq technologies inc novadaq aggregate purchase price 674 net cash acquired novadaq leading developer fluorescence imaging technology provides surgeons visualization blood flow vessels related tissue perfusion cardiac cardiovascular gastrointestinal plastic microsurgical reconstructive procedures novadaq part endoscopy business within medsurg segment goodwill attributable acquisition novadaq deductible tax purposes purchase price allocations k2m entellus acquisitions 2018 2017 based preliminary valuations primarily related intangible assets inventory estimates assumptions subject change within measurement period purchase price allocation acquisition novadaq finalized 2018 note 7 contingencies commitments involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable estimated management additional expense may incurred could unfavorably affect future operating results selfinsured product liability claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows 2010 filed lawsuit federal court zimmer biomet holdings inc zimmer alleging zimmer product infringed three patents 2013 following jury trial favorable us trial judge entered final judgment among things awarded us damages 76 ordered zimmer pay us enhanced damages zimmer appealed ruling december 2014 federal circuit affirmed damages awarded us reversed order enhanced damages remanded issue attorney fees trial court may 2015 trial court entered stipulated judgment among things required zimmer pay us base amount damages interest issues enhanced damages attorney fees continue pursued june 2015 recorded 54 gain net legal costs recorded within selling general administrative expenses june 13 2016 united states supreme court vacated decision federal circuit reversed judgment dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k enhanced damages remanded case federal circuit reconsider issue september 12 2016 federal circuit issued opinion among things remanded issue enhanced damages trial court july 12 2017 trial court reaffirmed award enhanced damages entered judgment 164 favor zimmer appealed december 10 2018 federal circuit affirmed decision zimmer filed petition january 23 2019 seek rehearing ruling entire federal circuit recall matters june 2012 voluntarily recalled rejuvenate abg ii modularneck hip stems terminated global distribution hip products product liability lawsuits relating voluntary recall filed us november 2014 entered settlement agreement compensate eligible united states patients revision surgery prior november 3 2014 december 2016 settlement program extended patients revision surgery prior december 19 2016 continue offer support recallrelated care reimburse patients eligible enroll settlement program testing treatment services including necessary revision surgeries addition remaining lawsuits continue defend august 2016 may 2018 voluntarily recalled certain lotspecific sizes offsets lfit anatomic cocr v40 femoral heads product liability lawsuits claims relating voluntary recall filed us november 2018 entered settlement agreement resolve significant number claims lawsuits related recalls specific terms settlement agreement including financial terms confidential incurred expect incur future costs associated settlement matters based information received estimated remaining range probable loss resolve matters globally approximately 255 400 recorded charges earnings representing minimum range probable loss final outcomes matters dependent many factors difficult predict accordingly ultimate cost entirely resolve matters globally may materially different amount current estimate accruals could material adverse effect results operations cash flows future obligations purchase commitments materials supplies services property plant equipment part normal course business addition lease various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases rent expense totaled 138 125 112 2018 2017 2016 refer note 10 information debt obligations note 8 goodwill intangible assets completed annual impairment tests goodwill 2018 2017 concluded year impairments exist note 9 capital stock aggregate number shares classes stock authorized issue 1000500000 divided two classes consisting 500000 shares 1 par value preferred stock 1000000000 shares common stock par value 010 shares preferred stock outstanding december 31 2018 repurchased 19 million shares cost 300 manner timing amount repurchases determined management based evaluation market conditions stock price factors subject regulatory considerations purchases made timetotime open market privately negotiated transactions otherwise december 31 2018 total dollar value shares could purchased authorized repurchase program 1340 shares reserved future compensation grants common stock 33 million 37 million december 31 2018 2017 stock options measure cost employee stock options based grantdate fair value recognize cost using straightline method period recipient required provide services exchange options typically vesting period dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k weightedaverage fair value per share options estimated date grant using blackscholes option pricing model riskfree interest rate periods within expected life options granted based united states treasury yield curve effect time grant expected stock price volatility based historical volatility stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data aggregate intrinsic value options represents cumulative difference fair market value underlying common stock option exercise prices exercised 247 184 128 2018 2017 2016 exercise prices options outstanding ranged 3888 16942 december 31 2018 december 31 2018 99 unrecognized compensation cost related nonvested stock options granted longterm incentive plans cost expected recognized weightedaverage period approximately 15 years december 31 2018 63 unrecognized compensation cost related nonvested rsus cost expected recognized expense weightedaverage period approximately one year weightedaverage grant date fair value per share rsus granted 15023 11744 2018 2017 fair value rsus psus vested 2018 47 8 december 31 2018 15 unrecognized compensation cost related nonvested psus cost expected recognized expense weightedaverage period approximately one year employee stock purchase plans espp full parttime employees may participate espp provided meet certain eligibility requirements purchase price common stock terms espp defined 95 closing stock price last trading day purchase period issued 168626 163415 shares espp 2018 2017 note 10 debt credit facilities march 2018 issued 600 senior unsecured notes fixed interest rate 3650 due march 7 2028 annual interest expense arising issuance notes reduced benefit cash flow hedges terminated conjunction issuance refer note 4 information april 2018 repaid 600 senior unsecured notes coupon 1300 november 2018 issued €300 senior unsecured notes floating interest rate three month euribor plus 28 bps due november 30 2020 €550 senior unsecured notes fixed interest rate 1125 due november 30 2023 €750 senior unsecured notes fixed interest rate 2125 due november 30 2027 €650 senior unsecured notes fixed interest rate 2625 due november 30 2030 january 2019 repaid 500 senior unsecured notes coupon 1800 due january 15 2019 commercial paper program allows us maximum 1500 commercial paper outstanding maturities 397 days date issuance december 31 2018 amounts outstanding commercial paper program lines credit issued various financial institutions available fund daytoday operating needs certain credit facilities require us comply financial covenants compliance covenants december 31 2018 dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k fair value senior unsecured notes estimated using quoted interest rates maturities amounts borrowings based quoted active market prices yields took account underlying terms debt instruments substantially debt classified within level 2 fair value hierarchy interest expense including required fees incurred outstanding debt credit facilities included expense totaled 264 247 228 2018 2017 2016 note 11 income taxes effective tax rate 508 506 143 2018 2017 2016 effective income tax rate 2018 reflects tax effect related transfer intellectual properties tax jurisdictions continuing impact complying tax cuts jobs act 2017 tax act continued lower effective income tax rates result european operations effective income tax rate 2017 reflects compliance tax act offset lower effective income tax rates result european operations effective income tax rate 2016 reflects lower effective income tax rates result european operations december 2017 tax act signed law united states law includes significant changes united states corporate income tax system including federal corporate rate reduction limitations deductibility certain expenses transition united states international taxation worldwide tax system territorial tax system part transition territorial tax system tax act requires taxpayers calculate onetime transition tax based undistributed earnings foreign subsidiaries 2017 2018 recorded provisional amounts certain enactmentdate effects tax act applying guidance sab 118 yet completed enactmentdate accounting effects applied guidance sab 118 accounting enactment date effects tax act 2017 throughout 2018 december 31 2017 completed accounting enactmentdate income tax effects tax act following aspects remeasurement deferred tax assets liabilities transition tax global intangible lowtaxed income gilti upon analysis tax act notices regulations issued proposed united states department treasury internal revenue service finalized calculations completed accounting enactmentdate income tax effects tax act december 2018 elected pay transition tax eightyear period provided tax act adjusted december 2017 provisional estimate adjusted december 2017 transition tax provision 51 increased effective income tax rate 22 also adjusted december 2017 provisional estimate remeasuring deferred tax assets liabilities 13 deferred tax assets liabilities adjustment decreased effective income tax rate 06 tax act subjects united states shareholder tax gilti earned certain foreign subsidiaries fasb staff qa topic 740 5 states entity make accounting policy election either recognize deferred taxes related gilti provide tax expense related gilti year tax incurred period expense elected account gilti tax year tax incurred interest penalties included income expense net expense 9 28 1 2018 2017 2016 united states federal deferred income tax benefit expense includes utilization net operating loss carryforwards 31 32 28 2018 2017 2016 accrued interest penalties 85 60 december 31 2018 2017 reported current noncurrent accrued expenses liabilities net operating loss carryforwards totaling 606 december 31 2018 available reduce future taxable earnings certain domestic foreign subsidiaries united states loss carryforwards 489 expire 2028 international loss carryforwards 117 began expire 2018 however expiration carryforwards 56 subject full valuation allowance dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k also tax credit carryforward 55 52 subject full valuation allowance credits full valuation allowance expiration however anticipate generating income tax excess credits foreseeable future recorded transition tax undistributed foreign earnings required tax act provision made income taxes may result future remittances undistributed earnings foreign subsidiaries determined indefinitely reinvested determination total amount unrecognized deferred income tax undistributed earnings foreign subsidiaries practicable income tax expense would reduced 521 232 december 31 2018 2017 uncertain income tax positions favorably resolved reasonably possible amount unrecognized tax benefits significantly change due one following events next 12 months expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject controversy various taxing jurisdictions operate including inventory transfer pricing cost sharing product royalty foreign branch arrangements able reasonably estimate amount future periods changes unrecognized tax benefits may resolved interest penalties incurred associated uncertain tax positions included income expense net normal course business income tax authorities various income tax jurisdictions within united states internationally conduct routine audits income tax returns filed prior years audits generally designed determine individual income tax authorities agreement interpretations complex income tax regulations regarding allocation income various income tax jurisdictions income tax years open 2012 current year united states federal jurisdiction income tax years open major jurisdictions range 2005 current year note 12 retirement plans defined contribution plans provide certain employees defined contribution plans types retirement plans portion retirement plan expense defined contribution plans funded stryker common stock use stryker common stock represents noncash operating activity reflected consolidated statements cash flows defined benefit plans certain subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets discount rate discount rates selected using hypothetical portfolio high quality bonds december 31 would provide necessary cash flows match projected benefit payments effective january 1 2017 countries possible elected change method calculate service cost interest cost components net periodic benefit costs defined benefit plans measure costs applying specific spot rates along yield curve projected cash flows respective plans defined benefit plans previously utilized yield curve approach establish discount rates believe new approach provides precise measurement service interest costs improving correlation projected cash flows corresponding spot yield curve rates change affect measurement total benefit obligations plans accounted change accounting estimate inseparable change accounting principle applied prospectively reductions service interest costs 2017 associated change estimate nominal expected return plan assets expected return plan assets determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns investment strategy investment strategy defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k estimated net actuarial loss defined benefit pension plans reclassified aoci net periodic benefit cost 7 2019 total estimated amortization prior service credit transition asset defined benefit pension plans reclassified aoci net periodic benefit credit 1 2019 level 3 pension plan assets consist primarily guaranteed investment contracts insurance companies insurance contracts guarantee us principal repayment fixed rate return 7 increase level 3 pension plan assets primarily related actual returns acquired assets expect contribute 25 defined benefit pension plans 2019 note 13 summary quarterly data unaudited note 14 segment geographic data segregate operations three reportable business segments orthopaedics medsurg neurotechnology spine corporate category shown table includes corporate administration corporate initiatives sharebased compensation includes compensation related employee stock options restricted stock units performance stock unit grants director stock options restricted stock unit grants dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k measure financial results reportable segments using internal performance measure excludes acquisition integrationrelated charges restructuringrelated charges reserves certain product recall matters reserves certain legal regulatory matters donation educational institution identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment countries local revenue generating operations combined following geographic areas united states including puerto rico europe middle east africa asia pacific foreign countries include canada countries latin american region net sales reported based geographic area stryker location sales customer originated item 9item 8 financial statements supplementary data report independent registered public accounting firm shareholders board directors stryker corporation opinion financial statements audited accompanying consolidated balance sheets stryker corporation subsidiaries company december 31 2019 2018 related consolidated statements earnings comprehensive income shareholders equity cash flows three years period ended december 31 2019 related notes financial statement schedule listed index item 15a collectively referred consolidated financial statements opinion consolidated financial statements present fairly material respects consolidated financial position company december 31 2019 2018 consolidated results operations cash flows three years period ended december 31 2019 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob companys internal control financial reporting december 31 2019 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 6 2020 expressed unqualified opinion thereon basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit financial statements communicated required communicated audit committee 1 relate accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate business combinations description matter described note 6 consolidated financial statements company completed business combinations 2019 total consideration net cash acquired 1096 million significant 1 acquisition outstanding equity orthospace ltd total consideration net cash acquired 208 million 2 acquisition outstanding equity mobius imaging cardan robotics total consideration net cash acquired 473 million acquisitions accounted business combinations recognition measurement disclosure company’s business combinations 2019 consolidated financial statements considered especially challenging required significant auditor judgment due complex determination management appropriate assumptions discount rates revenue growth rates projected profit margins valuation acquired assets expected probabilities key outcomes valuation assumed liabilities including limited developed technology contingent consideration company used discounted cash flow model measure developed technology probability weighted discounted cash flow approach measure contingent consideration dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k addressed matter audit tested effectiveness controls accounting business combinations including testing controls estimation process supporting recognition measurement consideration transferred developed technology contingent consideration also tested management’s review assumptions used valuation models test valuation acquired assets expected probabilities key outcomes valuation assumed liabilities performed audit procedures included among others evaluating management’s identification assets acquired liabilities assumed assessing fair value measurements prepared management thirdparty valuation specialists including discount rates revenue growth rates projected profit margins used valuing developed technology well inputs used valuing contingent consideration expected probabilities key outcomes involved valuation specialists assist evaluation methodologies used company significant assumptions included fair value estimates example evaluate revenue growth rates projected profit margins compared amounts historical results company’s business current industry market trends company operates performed sensitivity analyses key assumptions also evaluated adequacy company’s disclosures included note 6 related acquisitions product recall liabilities description matter described note 7 consolidated financial statements company recorded 275 million liabilities december 31 2019 product recall matters relating rejuvenate abg ii modularneck hip stems lfit anatomic cocr v40 femoral heads settlements company establishes liabilities product recall claims extent probable future losses estimable based quantitative qualitative information various sources company engages required external specialists perform actuarial analysis estimate outstanding liabilities auditing management’s estimate product recall liabilities especially challenging due significant measurement uncertainty associated product recall liabilities estimate involved management’s significant judgment actuarial analysis product recall liability sensitive significant management assumptions including average costs per claim number future claims including resulting revision surgery addressed matter audit obtained understanding evaluated management’s design tested operating effectiveness controls company’s product recall liability estimation process including managements assessment assumptions completeness accuracy data underlying product recall liabilities evaluate liabilities product recall claims performed audit procedures included among others testing completeness accuracy underlying claims average cost per claim data provided managements actuarial specialist obtaining legal confirmation letters evaluate reserves recorded involved actuarial specialists evaluation methodologies applied company determining actuarially calculated range loss assessment significant assumptions including number future claims revision surgeries factored resulting estimated product recall liabilities also evaluated adequacy company’s disclosures included note 7 related liabilities uncertain tax positions description matter described note 11 consolidated financial statements company operates multiple jurisdictions complex tax policy regulatory environments establishes reserves uncertain tax positions accordance accounting guidance governing uncertainty income taxes uncertainty tax position may arise tax laws subject interpretation company uses significant judgment 1 determine whether based technical merits tax position likely sustained 2 measure amount tax benefit qualifies recognition december 31 2019 company accrued liabilities 472 million relating uncertain tax positions auditing management’s analysis company’s uncertain tax positions related unrecognized tax benefits especially challenging analysis involved significant auditor judgment due complex interpretations tax laws legal rulings determination arm’s length pricing intercompany transactions addressed matter audit obtained understanding evaluated design tested operating effectiveness controls company’s accounting process uncertain tax positions example tested controls management’s identification uncertain tax positions application recognition measurement principles including management’s review inputs calculations unrecognized income tax benefits audit procedures included among others evaluating assumptions company used develop uncertain tax positions related unrecognized income tax benefit amounts jurisdiction also tested completeness accuracy underlying data used company calculate uncertain tax positions example compared estimated liabilities unrecognized income tax benefits similar positions prior periods assessed management’s consideration current tax controversy litigation trends similar positions challenged tax authorities also assessed historical accuracy management’s estimates unrecognized income tax benefits comparing estimates resolution positions involved tax professionals evaluate tax technical merits included certain intercompany transactions assessing company’s assumptions pricing methodology determine arm’s length complied local jurisdictional laws regulations also evaluated adequacy company’s disclosures included note 11 related tax matters ernst young llp served companys auditor since 1974 grand rapids michigan february 6 2020 stryker corporation 2019 form 10k stryker corporation subsidiaries consolidated statements earnings antidilutive shares excluded calculation dilutive employee stock compensation de minimis periods consolidated statements comprehensive income see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k stryker corporation subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k stryker corporation subsidiaries consolidated statements shareholders’ equity see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k stryker corporation subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k notes consolidated financial statements note 1 significant accounting policies nature operations stryker company us one worlds leading medical technology companies together customers driven make healthcare better company offers innovative products services orthopaedics medical surgical neurotechnology spine improve patient hospital outcomes products include implants used joint replacement trauma surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment intensive care disposable products neurosurgical neurovascular spinal devices well products used variety medical specialties basis presentation consolidation consolidated financial statements include company subsidiaries significant intercompany accounts transactions eliminated consolidation material interests variable interest entities none require consolidation certain prior year amounts reclassified conform current year presentation consolidated financial statements use estimates preparation financial statements conformity accounting principles generally accepted united states gaap requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts net sales expenses reporting period actual results could differ estimates revenue recognition sales recognized performance obligations deliver products services satisfied recorded based amount consideration expect receive exchange satisfying performance obligations sales continue recognized primarily transfer control customer date shipment date receipt customer orthopaedics products received purchase order appropriate notification product used implanted products services primarily transferred customers point time transfers services taking place time sales represent amount consideration expect receive customers exchange transferring products services net sales exclude sales value added taxes collect customers costs obtain fulfill contracts expensed incurred due shortterm nature sales extend terms payment customers based commercially reasonable terms markets customers also considering credit quality provision estimated sales returns discounts rebates recognized reduction sales period sales recognized estimate provision sales returns established based contract terms customers historical business practices current trends shipping handling costs charged customers included net sales cost sales cost sales primarily comprised direct materials supplies consumed manufacture product well manufacturing labor depreciation expense direct overhead expense necessary acquire convert purchased materials supplies finished product cost sales also includes cost distribute products customers inbound freight costs warehousing costs shipping handling activity research development engineering expenses research development costs charged expense incurred costs include research development engineering activities relating development new products improvement existing products technical support products compliance governmental regulations protection customers patients costs primarily consist salaries wages consulting depreciation maintenance research facilities equipment selling general administrative expenses selling general administrative expense primarily comprised selling expenses marketing expenses administrative indirect overhead costs amortization loaner instrumentation depreciation amortization expense nonmanufacturing assets miscellaneous operating items currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate statements united states dollars recorded comprehensive income oci transactional exchange gains losses included earnings cash equivalents highly liquid investments remaining stated maturities three months less purchased considered cash equivalents recorded cost marketable securities marketable securities consist marketable debt securities certificates deposit mutual funds mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities pursuant investment policy individual marketable security investments must minimum credit quality single standard poor’s fitch a2 moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double standard poor’s fitch aa moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk marketable security investment portfolio marketable securities classified availableforsale trading securities investments trading securities represent participantdirected investments deferred employee compensation accounts receivable accounts receivable consists trade miscellaneous receivables allowance maintained doubtful accounts estimated losses collection accounts receivable estimates made regarding ability customers make required payments based historical credit experience expected future trends accounts receivable written reasonable collection efforts exhausted inventories stated lower cost net realizable value cost generally determined using firstin firstout fifo cost method excess obsolete inventory resulting potential inability sell specific products prices excess current carrying costs reserves maintained reduce current carrying cost market prices financial instruments financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts carrying value financial instruments exception senior unsecured notes approximates fair value december 31 2019 2018 refer notes 3 10 details marketable securities recognized fair value adjustments fair value marketable securities classified dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k availableforsale recorded increases decreases net income taxes within accumulated comprehensive income aoci shareholders’ equity adjustments fair value marketable securities classified trading recorded earnings amortized cost marketable debt securities adjusted amortization premiums discounts maturity computed effective interest method amortization interest realized gains losses included income expense net cost securities sold determined specific identification method review declines fair value investments classified availableforsale determine whether decline fair value otherthantemporary resulting losses otherthantemporary impairments availableforsale marketable debt securities included earnings derivatives recognized fair value reported gross basis enter forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period forward currency exchange contracts designated cash flow hedges designed hedge variability cash flows associated forecasted transactions denominated foreign currency take place future nonfunctional currency exposures principally relate forecasted intercompany sales purchases manufactured products generally maturities eighteen months changes value derivatives designated cash flow hedges recorded aoci consolidated balance sheets earnings affected variability underlying cash flows time applicable amount gain loss derivative instrument deferred shareholders’ equity reclassified earnings included cost goods sold consolidated statements earnings cash flows associated hedges included cash operations category cash flows items hedged forward currency exchange contracts used offset exposure change value specific foreign currency denominated assets liabilities primarily intercompany payables receivables derivatives designated hedges therefore changes value forward contracts recognized earnings thereby offsetting current earnings effect related changes value foreign currency denominated assets liabilities estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points time designate derivative nonderivative financial instruments net investment hedges investments certain international subsidiaries derivative instruments designated qualify net investment hedge effective portion derivatives gain loss recognized oci reported component aoci elected use spot method assess effectiveness derivatives designated net investment hedges accordingly change fair value attributable changes spot rate recorded aoci exclude spotforward difference assessment hedge effectiveness amortize amount separately straightline basis term forward contracts amortization recorded income expense net consolidated statements earnings time designate forward starting interest rate derivative instruments cash flow hedges manage exposure interest rate volatility regard future issuance refinancing debt effective portion gain loss forward starting interest rate derivative instrument designated qualifies cash flow hedge reported component aoci beginning period debt refinancing occurs related derivative instruments terminated effective portion gains losses reclassified interest expense term related debt interest rate derivative instruments designated fair value hedges used past manage exposure interest rate movements reduce borrowing costs converting fixedrate debt floatingrate debt agreements agree exchange specified intervals difference fixed floating interest amounts calculated reference agreedupon notional principal amount property plant equipment property plant equipment stated cost depreciation generally computed straightline method estimated useful lives three 30 years buildings improvements three 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses acquisition date amounts allocated identifiable intangible assets factors contribute recognition goodwill include synergies specific business available market participants expected increase net sales profits acquisition talented workforce cost savings opportunities strategic benefit expanding presence core adjacent markets diversifying product portfolio fair values identifiable intangible assets acquired business combination primarily determined using income approach intangible assets include limited developed technology customer distributor relationships reflect expected continued customer distributor patronage trademarks patents intangible assets determinable useful lives amortized straightline basis estimated useful lives four 40 years certain acquired trade names considered indefinite lives amortized assessed annually potential impairment described acquisitions acquire inprocess research development iprd intangible assets acquisitions accounted business combinations iprd considered indefinitelived intangible asset research completed becomes determinablelived intangible asset determined future use impaired asset acquisitions iprd expensed immediately unless alternative future use goodwill intangibles longlived asset impairment tests perform annual impairment test goodwill fourth quarter year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability indefinitelived intangible assets also tested least dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k annually impairment comparing individual carrying values fair value review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows undiscounted cash flows expected generated related assets estimated assets useful life based updated projections evaluation indicates carrying amount asset may recoverable potential impairment measured based upon fair value related asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell sharebased compensation use share based compensation form stock options restricted stock units rsus performance stock units psus stock options granted longterm incentive plans certain key employees nonemployee directors exercise price less fair market value underlying common stock quoted closing price common stock day prior date grant options granted periods 10 years become exercisable varying installments grant rsus key employees nonemployee directors psus certain key employees longterm incentive plans fair value rsus determined based number shares granted quoted closing price common stock date grant adjusted fact rsus include anticipated dividends rsus generally vest onethird increments threeyear period settled stock psus earned threeyear performance cycle vest march year following end performance cycle number psus ultimately earned based performance relative preestablished goals threeyear performance cycle fair value psus determined based quoted closing price common stock day grant compensation expense recognized consolidated statements earnings based estimated fair value awards grant date compensation expense recognized reflects estimate number awards expected vest taking consideration estimate award forfeitures based actual experience recognized straightline basis requisite service period generally period required obtain full vesting management expectations related achievement performance goals associated psu grants assessed regularly assessment used determine whether psu grants expected vest performancebased milestones related psu grants met expected met compensation expense recognized associated grants reversed income taxes deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax benefits generally represent change net deferred income tax assets liabilities year amounts result adjustments related acquisitions foreign currency appropriate operate multiple income tax jurisdictions within united states internationally accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations income tax authorities jurisdictions regularly perform audits income tax filings income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty foreign branch arrangements may require extended period time resolve may result significant income tax adjustments changes income allocation required jurisdictions different income tax rates new accounting pronouncements yet adopted evaluate accounting standards updates asus issued financial accounting standards board fasb consideration applicability asus included disclosures assessed determined either applicable expected material impact consolidated financial statements june 2016 fasb issued asu 201613 financial instruments credit losses topic 326 measurement credit losses financial instruments new standard effective reporting periods beginning december 15 2019 standard replaces incurred loss impairment methodology reflects expected credit losses accounts receivables loans financial instruments standard expected material impact consolidated financial statements accounting pronouncements recently adopted january 1 2019 adopted asu 201602 leases related amendments asc 842 require lease assets liabilities recorded balance sheet leases terms greater twelve months adoption update material impact consolidated financial statements refer note 7 information january 1 2019 adopted asu 201712 derivatives hedging targeted improvements accounting hedging activities amends simplifies hedge accounting guidance well improves presentation disclosure align economic effects risk management strategies financial statements adoption update material impact consolidated financial statements new accounting pronouncements issued became effective period expected material impact consolidated financial statements note 2 revenue recognition disaggregate net sales product line geographic location segments believe best depicts nature amount timing certainty net sales cash flows affected economic factors products services primarily transferred customers point time transfers services taking place time 2019 less 10 sales recognized services transferred time refer note 1 discussion revenue recognition policies dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k orthopaedics products consist primarily implants used hip knee joint replacements trauma extremity surgeries substantially orthopaedics sales recognized received purchase order appropriate notification product used implanted certain orthopaedic products category recognize sales point time well time performance obligations may include obligation complete installation provide training ongoing services performance obligations satisfied within one year medsurg products include surgical equipment navigation systems instruments endoscopic communications systems endoscopy patient handling emergency medical equipment intensive care disposable products medical reprocessed remanufactured medical devices sustainability medical device products used variety medical specialties substantially medsurg sales recognized purchase order received control transferred certain endoscopy instruments medical services may recognize sales time satisfy performance obligations may include obligation complete installation provide training perform ongoing services generally performed within one year neurotechnology spine neurotechnology spine products include neurosurgical neurovascular spinal implant devices neurotechnology offering includes products used minimally invasive endovascular techniques comprehensive line products traditional brain open skull based surgical procedures orthobiologic biosurgery products including synthetic bone grafts vertebral augmentation products minimally invasive products treatment acute ischemic hemorrhagic stroke spinal implant offering includes cervical thoracolumbar interbody systems used spinal injury deformity degenerative therapies substantially neurotechnology spine sales recognized purchase order received control transferred contract assets liabilities nature products services generally give rise contract assets typically incur costs fulfill contract product service provided customer costs obtain contracts typically form sales commissions paid employees stryker thirdparty agents elected expense sales commissions associated obtaining contract incurred amortization period generally less one year costs presented within selling general administrative expenses december 31 2019 contract assets recorded consolidated balance sheets contract liabilities arise result consideration received customers inception contracts certain businesses timing billing services precedes satisfaction performance obligations generally satisfy performance obligations within one year contract inception date contract liabilities 313 327 december 31 2019 december 31 2018 note 3 fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date financial assets liabilities carried fair value classified entirety based lowest level input disclosed one following three categories level 1 quoted market prices active markets identical assets liabilities level 2 observable marketbased inputs unobservable inputs corroborated market data level 3 unobservable inputs reflecting assumptions external inputs active markets dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k use observable market data available required making fair value measurements inputs used fall within different levels hierarchy level within fair value measurement categorized based lowest level input significant fair value measurement determine fair value level 1 instruments using exchangetraded prices identical instruments determine fair value level 2 instruments using exchangetraded prices similar instruments available utilizing observable inputs take account credit risk counterparties foreign currency exchange contracts interest rate hedges included level 2 use inputs quoted prices observable asset liability level 2 derivative instruments primarily valued using standard calculations models use readily observable market data basis level 3 liabilities comprised contingent consideration arising recently completed acquisitions determine fair value level 3 liabilities using discounted cash flow technique significant unobservable inputs used assessment fair value including assumptions regarding future business results discount rates discount periods probability assessments based likelihood reaching various targets remeasure fair value assets liabilities reporting period record changes fair value within selling general administrative expense changes time value money within income expense net december 31 2019 aggregate difference cost fair value availableforsale marketable securities nominal interest marketable securities income 155 119 60 2019 2018 2017 recorded income expense net investments availableforsale marketable securities minimum credit quality rating a2 moodys standard poors fitch plan sell investments likely required sell investments recovery amortized cost basis may maturity consider investments otherthantemporarily impaired december 31 2019 december 31 2019 majority investments unrealized losses deemed otherthantemporarily impaired continuous unrealized loss position less twelve months losses material note 4 derivative instruments foreign currency hedges use operational economic hedges foreign currency exchange forward contracts net investment hedges derivative nonderivative financial instruments interest rate derivative instruments manage impact currency exchange interest rate fluctuations earnings cash flow equity enter derivative instruments speculative purposes exposed potential credit loss event nonperformance counterparties outstanding derivative instruments anticipate nonperformance counterparties counterparty default maximum exposure loss asset balance instrument december 2019 november 2018 designated issuance €2400 €2250 senior unsecured notes net investment hedge selectively hedge portions investment certain international subsidiaries currency effects eurodenominated senior unsecured notes reflected aoci within shareholders equity offset gains losses recorded net investment international subsidiaries december 31 2019 total aftertax gain aoci related designated net investment hedges 17 evaluate effectiveness net investment hedges quarterly recognized ineffectiveness 2019 dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k july 2019 entered €10 billion certain forward currency contracts designated net investment hedges hedge portion investments certain entities functional currencies denominated euros evaluate effectiveness net investment hedges quarterly pretax gains losses derivatives designated cash flow 6 net investment hedges 27 recorded aoci expected reclassified cost sales income expense earnings within 12 months december 31 2019 cash flow hedge reclassification primarily due sale inventory includes previously hedged purchases component aoci amounts related net investment hedges reclassified life hedge instruments elected exclude initial value component related spotforward difference effectiveness assessment interest rate hedges conjunction offering senior unsecured notes november 2019 terminated cash flow hedges gross notional amounts €600 designated forward starting interest rate swaps interest rates impact recognized time benefit within interest expense pretax gains recorded aoci related closed interest rate hedges 6 expected reclassified income expense earnings within 12 months december 31 2019 december 31 2019 interest rate swap agreements notional amounts 750 designated forward starting interest rate swaps anticipation future debt issuances pretax gains 17 recorded aoci december 31 2019 upon probable issuance debt amounts released interest expense term debt cash flow effect hedges recorded cash flow operations note 5 accumulated comprehensive loss income aoci note 6 acquisitions aggregate purchase price acquisitions net cash acquired 1096 2451 2019 2018 acquired stock companies various assets continue support capital deployment product development strategies october 2019 completed acquisition mobius imaging cardan robotics net cash consideration 360 future regulatory commercial milestone payments 130 mobius imaging leader pointofcare imaging technology focused integrating advanced imaging technologies medical workflow cardan robotics working develop innovative robotics navigation technology systems surgical interventional radiology procedures mobius imaging cardan robotics mobius part spine business within neurotechnology spine income tax purposes acquisition treated asset purchase goodwill attributable acquisition deductible tax purposes march 2019 completed acquisition orthospace ltd orthospace net cash consideration 110 future regulatory milestone payments 110 orthospace medical device company specializing orthopaedic biodegradable technology treatment irreparable rotator cuff tears orthospace part endoscopy business within medsurg goodwill attributable acquisition deductible tax purposes november 2018 completed acquisition k2m group holdings inc k2m 2750 per share aggregate purchase price 1380 net cash acquired k2m global leader complex spine minimally invasive solutions focused achieving threedimensional total body balance k2m part spine business within neurotechnology spine goodwill attributable acquisition deductible tax purposes february 2018 completed acquisition entellus medical inc entellus 2400 per share aggregate purchase price 697 net cash acquired entellus focused delivering superior patient physician experiences products designed minimally invasive treatment various ear nose throat ent disease states entellus part neurotechnology business within neurotechnology spine goodwill attributable acquisition deductible tax purposes november 2019 announced definitive agreement acquire issued outstanding ordinary shares wright medical group nv wright 3075 per share aggregate purchase price approximately 54 billion including convertible notes pursuant agreement december 13 2019 wholly owned subsidiary stryker bv commenced tender offer purchase outstanding ordinary shares par value €003 per share wright price 3075 per share without interest subject applicable withholding taxes expect acquisition close second half 2020 subject expiration waiting period extension thereof hartscottrodino antitrust improvements act 1976 amended receipt required approvals clearances applicable antitrust laws adoption certain resolutions wright’s shareholders extraordinary general meeting wright’s shareholders customary conditions wright global medical device company focused extremities biologics following closing plan integrate wright trauma extremities business within orthopaedics dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k purchase price allocations significant acquisitions presented purchase price allocations mobius orthospace 2019 acquisitions based preliminary valuations primarily related intangible assets inventory estimates assumptions subject change within measurement period purchase price allocations k2m entellus 2018 acquisitions finalized 2019 note 7 contingencies commitments involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable estimated management additional expense may incurred could unfavorably affect future operating results selfinsured product liability claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows 2010 filed lawsuit federal court zimmer biomet holdings inc zimmer alleging zimmer product infringed three patents 2013 following jury trial favorable us trial judge entered final judgment among things awarded us damages 76 ordered zimmer pay us enhanced damages zimmer appealed ruling december 2014 federal circuit affirmed damages awarded us reversed order enhanced damages remanded issue attorney fees trial court may 2015 trial court entered stipulated judgment among things required zimmer pay us base amount damages interest issues enhanced damages attorney fees continue pursued june 2015 recorded 54 gain net legal costs recorded within selling general administrative expenses june 13 2016 united states supreme court vacated decision federal circuit reversed judgment enhanced damages remanded case federal circuit reconsider issue september 12 2016 federal circuit issued opinion among things remanded issue enhanced damages trial court july 12 2017 trial court reaffirmed award enhanced damages entered judgment 164 favor zimmer appealed december 10 2018 federal circuit affirmed decision zimmer filed petition january 23 2019 seek rehearing ruling entire federal circuit march 19 2019 federal circuit denied zimmer’s petition rehearing zimmer conditionally paid us 167 pursued review decision supreme court october 7 2019 supreme court denied zimmer’s petition review decision concluded case accordingly november 2019 recorded 100 gain net legal costs recorded within selling general administrative expenses recall matters june 2012 voluntarily recalled rejuvenate abg ii modularneck hip stems terminated global distribution hip products product liability lawsuits relating voluntary recall filed us november 2014 entered settlement agreement compensate eligible united states patients revision surgery prior november 3 2014 december 2016 settlement program extended patients revision surgery prior december 19 2016 continue offer support recallrelated care reimburse patients eligible enroll settlement program testing treatment services including necessary revision surgeries addition remaining lawsuits continue defend august 2016 may 2018 voluntarily recalled certain lotspecific sizes offsets lfit anatomic cocr v40 femoral heads product liability lawsuits claims relating voluntary recall filed us november 2018 entered settlement agreement resolve significant number claims lawsuits related recalls specific terms settlement agreement including financial terms confidential incurred expect incur future costs associated defense settlement matters based information received estimated remaining range probable loss related matters globally approximately 275 520 recorded charges earnings representing minimum range probable loss final outcomes matters dependent many factors difficult predict accordingly ultimate cost related dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k matters globally may materially different amount current estimate accruals could material adverse effect results operations cash flows leases lease various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases evaluate contracts identify leases generally identified asset right direct use obtain substantially economic benefit use identified asset certain lease agreements contain rent escalation clauses including indexbased escalations rent holidays capital improvement funding lease concessions recognize minimum rental expense straightline basis term lease beginning date initial control asset adoption asc 842 recognized leases terms greater twelve months duration consolidated balance sheets rightofuse assets lease liabilities approximately 350 january 1 2019 adopted standard using prospective approach retrospectively apply prior periods rightofuse assets recorded noncurrent assets consolidated balance sheets current noncurrent lease liabilities recorded accrued expenses liabilities noncurrent liabilities respectively consolidated balance sheets made certain assumptions judgments applying asc 842 significant • elected package practical expedients available transition allow us reassess whether expired existing contracts contain leases new definition lease classification expired existing leases whether previously capitalized initial direct costs would qualify capitalization asc 842 • elect use hindsight considering judgments estimates assessments lessee options extend terminate lease purchase underlying asset • asset classes elected recognize rightofuse asset lease liability shortterm leases • asset classes elected separate nonlease components lease components relate accounted combined lease nonlease components single lease component • determination discount rate used lease incremental borrowing rate based would normally pay borrow collateralized basis similar term amount equal lease payments lease expense totaled 133 138 125 2019 2018 2017 future obligations purchase commitments materials supplies services property plant equipment part normal course business addition lease various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases refer note 10 information debt obligations note 8 goodwill intangible assets completed annual impairment tests goodwill 2019 2018 concluded year impairments exist note 9 capital stock aggregate number shares classes stock authorized issue 1000500000 divided two classes consisting 500000 shares 1 par value preferred stock 1000000000 shares common stock par value 010 shares preferred stock outstanding december 31 2019 dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k 2019 repurchased 19 million shares cost 307 manner timing amount repurchases determined management based evaluation market conditions stock price factors subject regulatory considerations purchases made timetotime open market privately negotiated transactions otherwise december 31 2019 total dollar value shares could purchased authorized repurchase program 1033 shares reserved future compensation grants common stock 31 million 33 million december 31 2019 2018 stock options measure cost employee stock options based grantdate fair value recognize cost using straightline method period recipient required provide services exchange options typically vesting period weightedaverage fair value per share options estimated date grant using blackscholes option pricing model riskfree interest rate periods within expected life options granted based united states treasury yield curve effect time grant expected stock price volatility based historical volatility stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data aggregate intrinsic value options represents cumulative difference fair market value underlying common stock option exercise prices exercised 294 247 184 2019 2018 2017 exercise prices options outstanding ranged 5182 20978 december 31 2019 december 31 2019 101 unrecognized compensation cost related nonvested stock options granted longterm incentive plans cost expected recognized weightedaverage period approximately 15 years december 31 2019 67 unrecognized compensation cost related nonvested rsus cost expected recognized expense weightedaverage period approximately one year weightedaverage grant date fair value per share rsus granted 17596 15023 2019 2018 fair value rsus psus vested 2019 52 10 december 31 2019 15 unrecognized compensation cost related nonvested psus cost expected recognized expense weightedaverage period approximately one year employee stock purchase plans espp full parttime employees may participate espp provided meet certain eligibility requirements purchase price common stock terms espp defined 95 closing stock price last trading day purchase period issued 166758 168626 shares espp 2019 2018 note 10 debt credit facilities lines credit issued various financial institutions available fund daytoday operating needs certain credit facilities require us comply financial covenants compliance covenants december 31 2019 commercial paper program allows us maximum 1500 commercial paper outstanding maturities 397 days date issuance december 31 2019 amounts outstanding commercial paper program dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k fair value senior unsecured notes estimated using quoted interest rates maturities amounts borrowings based quoted active market prices yields took account underlying terms debt instruments substantially debt classified within level 2 fair value hierarchy january 2019 repaid 500 senior unsecured notes coupon 1800 due january 15 2019 march 2019 repaid 750 senior unsecured notes coupon 2000 due march 8 2019 december 2019 issued €850 senior unsecured notes fixed interest rate 0250 due december 3 2024 €800 senior unsecured notes fixed interest rate 0750 due march 1 2029 €750 senior unsecured notes fixed interest rate 1000 due december 3 2031 annual interest expense arising issuance 2029 notes reduced benefit cash flow hedges terminated conjunction issuance refer note 4 information 2024 2031 notes subject special mandatory redemption required redeem notes whole price equal 101 aggregate principal amount plus accrued unpaid interest consummate wright tender offer february 4 2021 january 2020 repaid 500 senior unsecured notes coupon 4375 due january 15 2020 interest expense including required fees incurred outstanding debt credit facilities included expense totaled 287 264 247 2019 2018 2017 note 11 income taxes effective tax rate 187 508 506 2019 2018 2017 effective income tax rate 2019 reflects tax related transfer intellectual properties tax jurisdictions continued lower effective income tax rates result european operations effective income tax rate 2018 reflects tax effect related transfer intellectual properties tax jurisdictions continuing impact complying tax cuts jobs act 2017 tax act continued lower effective income tax rates result european operations effective income tax rate 2017 reflects compliance tax act offset lower effective income tax rates result european operations december 2017 tax act signed law united states law includes significant changes united states corporate income tax system including federal corporate rate reduction limitations deductibility certain expenses transition united states international taxation worldwide tax system territorial tax system part transition territorial tax system tax act requires taxpayers calculate onetime transition tax based undistributed earnings foreign subsidiaries tax act subjects united states shareholder tax global intangible lowtaxed income gilti earned certain foreign subsidiaries elected account gilti tax year tax incurred interest penalties included income expense net expense 9 28 2019 2018 2017 united states federal deferred income tax benefit expense includes utilization net operating loss carryforwards 50 31 32 2019 2018 2017 accrued interest penalties 94 85 december 31 2019 2018 reported current noncurrent accrued expenses liabilities net operating loss carryforwards totaling 378 december 31 2019 available reduce future taxable earnings certain domestic foreign subsidiaries united states loss carryforwards 358 expire 2045 international loss carryforwards 20 begin expire 2037 however expiration also tax credit carryforward 65 63 subject full valuation allowance credits full valuation allowance dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k expiration however anticipate generating income tax excess credits foreseeable future recorded transition tax undistributed foreign earnings required tax act provision made united states income taxes may result future remittances undistributed earnings foreign subsidiaries determined indefinitely reinvested determination total amount unrecognized deferred income tax undistributed earnings foreign subsidiaries practicable income tax expense would reduced 468 521 december 31 2019 2018 uncertain income tax positions favorably resolved reasonably possible amount unrecognized tax benefits significantly change due one following events next 12 months expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject controversy various taxing jurisdictions operate including inventory transfer pricing cost sharing product royalty foreign branch arrangements able reasonably estimate amount future periods changes unrecognized tax benefits may resolved interest penalties incurred associated uncertain tax positions included income expense net normal course business income tax authorities various income tax jurisdictions within united states internationally conduct routine audits income tax returns filed prior years audits generally designed determine individual income tax authorities agreement interpretations complex income tax regulations regarding allocation income various income tax jurisdictions income tax years open 2014 current year united states federal jurisdiction income tax years open major jurisdictions range 2005 current year note 12 retirement plans defined contribution plans provide certain employees defined contribution plans types retirement plans portion retirement plan expense defined contribution plans funded stryker common stock use stryker common stock represents noncash operating activity reflected consolidated statements cash flows defined benefit plans certain subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets discount rate discount rates selected using hypothetical portfolio high quality bonds december 31 would provide necessary cash flows match projected benefit payments effective january 1 2017 countries possible elected change method calculate service cost interest cost components net periodic benefit costs defined benefit plans measure costs applying specific spot rates along yield curve projected cash flows respective plans defined benefit plans previously utilized yield curve approach establish discount rates believe new approach provides precise measurement service interest costs improving correlation projected cash flows corresponding spot yield curve rates change affect measurement total benefit obligations plans accounted change accounting estimate inseparable change accounting principle applied prospectively reductions service interest costs 2017 associated change estimate nominal expected return plan assets expected return plan assets determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns investment strategy investment strategy defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k estimated net actuarial loss defined benefit pension plans reclassified aoci net periodic benefit cost 12 2020 total estimated amortization prior service credit transition asset defined benefit pension plans reclassified aoci net periodic benefit credit 1 2020 level 3 pension plan assets consist primarily guaranteed investment contracts insurance companies insurance contracts guarantee us principal repayment fixed rate return 24 increase level 3 pension plan assets primarily related actual returns acquired assets expect contribute 24 defined benefit pension plans 2020 note 13 summary quarterly data unaudited note 14 segment geographic data segregate operations three reportable business segments orthopaedics medsurg neurotechnology spine corporate category shown table includes corporate administration corporate initiatives sharebased compensation includes compensation related employee stock options restricted stock units performance stock unit grants director stock options restricted stock unit grants dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k measure financial results reportable segments using internal performance measure excludes acquisition integrationrelated charges restructuringrelated charges reserves certain product recall matters reserves certain legal regulatory matters identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment countries local revenue generating operations combined following geographic areas united states including puerto rico europe middle east africa asia pacific foreign countries include canada countries latin american region net sales reported based geographic area stryker location sales customer originated dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k item 9item 8financial statements supplementary data report independent registered public accounting firm shareholders board directors stryker corporation opinion financial statements audited accompanying consolidated balance sheets stryker corporation subsidiaries company december 31 2020 2019 related consolidated statements earnings comprehensive income shareholders equity cash flows three years period ended december 31 2020 related notes financial statement schedule listed index item 15a collectively referred consolidated financial statements opinion consolidated financial statements present fairly material respects consolidated financial position company december 31 2020 2019 consolidated results operations cash flows three years period ended december 31 2020 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob companys internal control financial reporting december 31 2020 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 11 2021 expressed unqualified opinion thereon basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit financial statements communicated required communicated audit committee 1 relate accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate business combinations description matter described note 6 consolidated financial statements 2020 company completed acquisition outstanding equity wright medical group nv wright total consideration net cash acquired 4081 million acquisition accounted business combination recognition measurement disclosure company’s business combination 2020 consolidated financial statements related footnote preliminary considered especially challenging required significant auditor judgment due complex determination management appropriate assumptions discount rates revenue growth rates profit margins valuation acquired assets including developed technologies company used discounted cash flow model measure developed technologies addressed matter audit tested effectiveness controls accounting business combination including testing controls estimation process supporting recognition measurement consideration transferred developed technology also tested management’s review assumptions used valuation models test valuation acquired assets performed audit procedures included among others evaluating management’s identification assets acquired liabilities assumed assessing fair value measurements prepared management thirdparty valuation specialists including discount rates revenue growth rates projected profit margins used valuing developed technology involved valuation specialists assist evaluation methodologies used company significant assumptions included fair value estimates example evaluate revenue growth rates projected profit margins compared amounts historical results company’s business well acquired business historical results current industry market trends company operates performed sensitivity analyses key assumptions also evaluated adequacy company’s disclosures included note 6 related acquisitions dollar amounts millions except per share amounts otherwise specified19 stryker corporation 2020 form 10k product liabilities description matter described note 7 consolidated financial statements company recorded 470 million liabilities including 192 million assumed connection acquisition accounting wright december 31 2020 product matters relating rejuvenate abg ii modularneck hip stems lfit anatomic cocr v40 femoral heads wright hip product future settlements company establishes liabilities product claims extent probable future losses estimable based quantitative qualitative information various sources company engages required external specialists perform actuarial analysis estimate outstanding liabilities auditing management’s estimate product liabilities especially challenging due significant measurement uncertainty associated product liabilities estimate involved management’s significant judgment actuarial analysis product liability sensitive significant management assumptions including average costs per claim number future claims including resulting revision surgery addressed matter audit obtained understanding evaluated management’s design tested operating effectiveness controls company’s product liability estimation process including managements assessment assumptions completeness accuracy data underlying product liabilities evaluate liabilities product claims performed audit procedures included among others testing completeness accuracy underlying claims average cost per claim data provided managements actuarial specialist obtaining legal confirmation letters evaluate reserves recorded involved actuarial specialists evaluation methodologies applied company determining actuarially calculated range loss assessment significant assumptions including number future claims revision surgeries factored resulting estimated product liabilities also evaluated adequacy company’s disclosures included note 7 related liabilities uncertain tax positions description matter described note 11 consolidated financial statements company operates multiple jurisdictions complex tax policy regulatory environments establishes reserves uncertain tax positions accordance accounting guidance governing uncertainty income taxes uncertainty tax position may arise tax laws subject interpretation company uses significant judgment 1 determine whether based technical merits tax position likely sustained 2 measure amount tax benefit qualifies recognition december 31 2020 company accrued liabilities 457 million relating uncertain tax positions auditing management’s analysis company’s uncertain tax positions related unrecognized tax benefits especially challenging analysis involved significant auditor judgment due complex interpretations tax laws legal rulings determination arm’s length pricing intercompany transactions addressed matter audit obtained understanding evaluated design tested operating effectiveness controls company’s accounting process uncertain tax positions example tested controls management’s identification uncertain tax positions application recognition measurement principles including management’s review inputs calculations unrecognized income tax benefits audit procedures included among others evaluating assumptions company used develop uncertain tax positions related unrecognized income tax benefit amounts jurisdiction also tested completeness accuracy underlying data used company calculate uncertain tax positions example compared estimated liabilities unrecognized income tax benefits similar positions prior periods assessed management’s consideration current tax controversy litigation trends similar positions challenged tax authorities also assessed historical accuracy management’s estimates unrecognized income tax benefits comparing estimates resolution positions involved tax professionals evaluate tax technical merits included certain intercompany transactions assessing company’s assumptions pricing methodology determine arm’s length complied local jurisdictional laws regulations also evaluated adequacy company’s disclosures included note 11 related tax matters ernst young llp served companys auditor since 1974 grand rapids michigan february 11 2021 dollar amounts millions except per share amounts otherwise specified20 stryker corporation 2020 form 10k stryker corporation subsidiaries consolidated statements earnings antidilutive shares excluded calculation dilutive employee stock compensation de minimis periods consolidated statements comprehensive income see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified21 stryker corporation 2020 form 10k stryker corporation subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified22 stryker corporation 2020 form 10k stryker corporation subsidiaries consolidated statements shareholders’ equity see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified23 stryker corporation 2020 form 10k stryker corporation subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified24 stryker corporation 2020 form 10k notes consolidated financial statements note 1 significant accounting policies nature operations stryker company us one worlds leading medical technology companies together customers driven make healthcare better company offers innovative products services orthopaedics medical surgical neurotechnology spine improve patient hospital outcomes products include implants used joint replacement trauma surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment intensive care disposable products neurosurgical neurovascular spinal devices well products used variety medical specialties basis presentation consolidation consolidated financial statements include company subsidiaries significant intercompany accounts transactions eliminated consolidation material interests variable interest entities none require consolidation certain prior year amounts reclassified conform current year presentation consolidated financial statements including immaterial reclassifications segment results 302 loaner instrumentation intended sold reclassified inventories noncurrent assets use estimates preparation financial statements conformity accounting principles generally accepted united states gaap requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts net sales expenses reporting period actual results could differ estimates revenue recognition sales recognized performance obligations deliver products services satisfied recorded based amount consideration expect receive exchange satisfying performance obligations sales recognized primarily transfer control customer date shipment date receipt customer orthopaedics products received purchase order appropriate notification product used implanted products services primarily transferred customers point time transfers services taking place time sales represent amount consideration expect receive customers exchange transferring products services net sales exclude sales value added taxes collect customers costs obtain fulfill contracts generally expensed incurred due shortterm nature sales extend terms payment customers based commercially reasonable terms markets customers also considering credit quality provision estimated sales returns discounts rebates recognized reduction sales period sales recognized estimate provision sales returns established based contract terms customers historical business practices current trends shipping handling costs charged customers included net sales cost sales cost sales primarily comprised direct materials supplies consumed manufacture product well manufacturing labor depreciation expense direct overhead expense necessary acquire convert purchased materials supplies finished product cost sales also includes cost distribute products customers inbound freight costs warehousing costs shipping handling activity research development engineering expenses research development costs charged expense incurred costs include research development engineering activities relating development new products improvement existing products technical support products compliance governmental regulations protection customers patients costs primarily consist salaries wages consulting depreciation maintenance research facilities equipment selling general administrative expenses selling general administrative expense primarily comprised selling expenses marketing expenses administrative indirect overhead costs amortization loaner instrumentation depreciation amortization expense nonmanufacturing assets miscellaneous operating items currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate statements united states dollars recorded comprehensive income oci transactional exchange gains losses included income expense net cash equivalents highly liquid investments remaining stated maturities three months less purchased money market instruments redeemable upon demand considered cash equivalents recorded cost marketable securities marketable securities consist marketable debt securities certificates deposit mutual funds mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities recorded noncurrent assets pursuant investment policy individual marketable security investments must minimum credit quality single standard poor’s fitch a2 moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double standard poor’s fitch aa moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk marketable security investment portfolio marketable securities classified availableforsale trading securities investments trading securities represent participantdirected investments deferred employee compensation accounts receivable accounts receivable consists trade miscellaneous receivables allowance maintained doubtful accounts estimated losses collection accounts receivable estimates made regarding ability customers make required payments based historical credit experience current market conditions expected credit losses accounts receivable written reasonable collection efforts exhausted inventories stated lower cost net realizable value cost generally determined using firstin firstout fifo cost method excess obsolete inventory resulting potential inability sell specific products dollar amounts millions except per share amounts otherwise specified25 stryker corporation 2020 form 10k prices excess current carrying costs reserves maintained reduce current carrying cost net realizable value financial instruments financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts carrying value financial instruments exception senior unsecured notes approximates fair value december 31 2020 2019 refer notes 3 10 details marketable securities recognized fair value adjustments fair value marketable securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive income aoci shareholders’ equity adjustments fair value marketable securities classified trading recorded earnings amortized cost marketable debt securities adjusted amortization premiums discounts maturity computed effective interest method amortization interest realized gains losses included income expense net cost securities sold determined specific identification method review declines fair value investments classified availableforsale determine whether decline fair value result credit loss factors impairments availableforsale marketable debt securities related credit loss included earnings impairments related factors recognized within aoci derivatives recognized fair value reported gross basis enter forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period forward currency exchange contracts designated cash flow hedges designed hedge variability cash flows associated forecasted transactions denominated foreign currency take place future nonfunctional currency exposures principally relate forecasted intercompany sales purchases manufactured products generally maturities eighteen months changes value derivatives designated cash flow hedges recorded aoci consolidated balance sheets earnings affected variability underlying cash flows time applicable amount gain loss derivative instrument deferred shareholders’ equity reclassified earnings included cost goods sold consolidated statements earnings cash flows associated hedges included cash operations category cash flows items hedged forward currency exchange contracts used offset exposure change value specific foreign currency denominated assets liabilities primarily intercompany payables receivables derivatives designated hedges therefore changes value forward contracts recognized earnings thereby offsetting current earnings effect related changes value foreign currency denominated assets liabilities estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points time designate derivative nonderivative financial instruments net investment hedges investments certain international subsidiaries derivative instruments designated qualify net investment hedge effective portion derivatives gain loss recognized oci reported component aoci elected use spot method assess effectiveness derivatives designated net investment hedges accordingly change fair value attributable changes spot rate recorded aoci exclude spotforward difference assessment hedge effectiveness amortize amount separately straightline basis term forward contracts amortization recognized income expense time designate forward starting interest rate derivative instruments cash flow hedges manage exposure interest rate volatility regard future issuance refinancing debt changes value derivatives designated cash flow hedges recorded aoci consolidated balance sheets earnings affected variability underlying cash flows time applicable amount gain loss derivative instrument deferred shareholders’ equity reclassified earnings included interest expense consolidated statements earnings interest rate derivative instruments designated fair value hedges used past manage exposure interest rate movements reduce borrowing costs converting fixedrate debt floatingrate debt agreements agree exchange specified intervals difference fixed floating interest amounts calculated reference agreedupon notional principal amount property plant equipment property plant equipment stated cost depreciation generally computed straightline method estimated useful lives three 30 years buildings improvements three 15 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses acquisition date amounts allocated identifiable intangible assets factors contribute recognition goodwill include synergies specific business available market participants expected increase net sales profits acquisition talented workforce cost savings opportunities strategic benefit expanding presence core adjacent markets diversifying product portfolio fair values identifiable intangible assets acquired business combination primarily determined using income approach intangible assets include limited developed technology customer distributor relationships reflect expected continued customer distributor patronage trademarks patents intangible assets determinable useful lives amortized straightline basis estimated useful lives four 40 years certain acquired trade names considered indefinite lives amortized assessed annually potential impairment described acquisitions acquire inprocess research development iprd intangible assets acquisitions dollar amounts millions except per share amounts otherwise specified26 stryker corporation 2020 form 10k accounted business combinations iprd considered indefinitelived intangible asset research completed becomes determinablelived intangible asset determined future use impaired asset acquisitions iprd expensed immediately unless alternative future use goodwill intangibles longlived asset impairment tests perform annual impairment test goodwill fourth quarter year consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires certain assumptions estimates made regarding market conditions future profitability indefinitelived intangible assets also tested least annually impairment comparing individual carrying values fair value review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows undiscounted cash flows expected generated related assets estimated assets useful life based updated projections evaluation indicates carrying amount asset may recoverable potential impairment measured based upon fair value related asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell sharebased compensation sharebased compensation form stock options restricted stock units rsus performance stock units psus stock options granted longterm incentive plans certain key employees nonemployee directors exercise price less fair market value underlying common stock quoted closing price common stock day prior date grant options granted periods 10 years become exercisable varying installments grant rsus key employees nonemployee directors psus certain key employees longterm incentive plans fair value rsus determined based number shares granted quoted closing price common stock date grant adjusted fact rsus include anticipated dividends rsus generally vest onethird increments threeyear period settled stock psus earned threeyear performance cycle vest march year following end performance cycle number psus ultimately earned based performance relative preestablished goals threeyear performance cycle fair value psus determined based quoted closing price common stock day grant compensation expense recognized consolidated statements earnings based estimated fair value awards grant date compensation expense recognized reflects estimate number awards expected vest taking consideration estimate award forfeitures based actual experience recognized straightline basis requisite service period generally period required obtain full vesting management expectations related achievement performance goals associated psu grants assessed regularly assessment used determine whether psu grants expected vest performancebased milestones related psu grants met expected met compensation expense recognized associated grants reversed income taxes deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax benefits generally represent change net deferred income tax assets liabilities year amounts result adjustments related acquisitions foreign currency appropriate operate multiple income tax jurisdictions within united states internationally accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations income tax authorities jurisdictions regularly perform audits income tax filings income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty foreign branch arrangements may require extended period time resolve may result significant income tax adjustments changes income allocation required jurisdictions different income tax rates new accounting pronouncements yet adopted evaluate accounting standards updates asus issued financial accounting standards board fasb consideration applicability asus included disclosures assessed determined either applicable expected material impact consolidated financial statements accounting pronouncements recently adopted january 1 2020 adopted asu 201613 financial instruments credit losses topic 326 measurement credit losses financial instruments standard replaces incurred loss impairment methodology reflects expected credit losses accounts receivables loans adoption update material impact consolidated financial statements new accounting pronouncements issued became effective period expected material impact consolidated financial statements note 2 revenue recognition disaggregate net sales product line geographic location segments believe best depicts nature amount timing certainty net sales cash flows affected economic factors products services primarily transferred customers point time transfers services taking place time 2020 less 10 sales recognized services transferred time refer note 1 discussion revenue recognition policies dollar amounts millions except per share amounts otherwise specified27 stryker corporation 2020 form 10k orthopaedics products consist primarily implants used hip knee joint replacements trauma extremity surgeries substantially orthopaedics sales recognized received purchase order appropriate notification product used implanted certain orthopaedic products category recognize sales point time well time performance obligations may include obligation complete installation provide training ongoing services performance obligations satisfied within one year medsurg products include surgical equipment navigation systems instruments endoscopic communications systems endoscopy patient handling emergency medical equipment intensive care disposable products medical reprocessed remanufactured medical devices sustainability medical device products used variety medical specialties substantially medsurg sales recognized purchase order received control transferred certain endoscopy instruments medical services may recognize sales time satisfy performance obligations may include obligation complete installation provide training perform ongoing services generally performed within one year neurotechnology spine neurotechnology spine products include neurosurgical neurovascular spinal implant devices neurotechnology offering includes products used minimally invasive endovascular techniques comprehensive line products traditional brain open skull based surgical procedures orthobiologic biosurgery products including synthetic bone grafts vertebral augmentation products minimally invasive products treatment acute ischemic hemorrhagic stroke spinal implant offering includes cervical thoracolumbar interbody systems used spinal injury deformity degenerative therapies substantially neurotechnology spine sales recognized purchase order received control transferred contract assets liabilities nature products services generally give rise contract assets typically incur costs fulfill contract product service provided customer costs obtain contracts typically form sales commissions paid employees thirdparty agents certain sales commissions paid employees prior recognition sales recorded contract assets expense sales commissions associated obtaining contract time sale incurred amortization period generally less one year costs presented within selling general administrative expenses december 31 2020 contract assets recorded consolidated balance sheets significant contract liabilities arise result consideration received customers inception contracts certain businesses timing billing services precedes satisfaction performance obligations generally satisfy performance obligations within one year contract inception date contract liabilities 416 313 december 31 2020 december 31 2019 note 3 fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date financial assets liabilities carried fair value classified entirety based lowest level input disclosed one following three categories dollar amounts millions except per share amounts otherwise specified28 stryker corporation 2020 form 10k level 1quoted market prices active markets identical assets liabilities level 2observable marketbased inputs unobservable inputs corroborated market data level 3unobservable inputs reflecting assumptions external inputs active markets use observable market data available required making fair value measurements inputs used fall within different levels hierarchy level within fair value measurement categorized based lowest level input significant fair value measurement determine fair value level 1 instruments using exchangetraded prices identical instruments determine fair value level 2 instruments using exchangetraded prices similar instruments available utilizing observable inputs take account credit risk counterparties foreign currency exchange contracts interest rate hedges included level 2 use inputs quoted prices observable asset liability level 2 derivative instruments primarily valued using standard calculations models use readily observable market data basis level 3 liabilities comprised contingent consideration arising recently completed acquisitions determine fair value level 3 liabilities using discounted cash flow technique significant unobservable inputs used assessment fair value including assumptions regarding future business results discount rates discount periods probability assessments based likelihood reaching various targets remeasure fair value assets liabilities reporting period record changes fair value within selling general administrative expense changes time value money within income expense net december 31 2020 aggregate difference cost fair value availableforsale marketable securities nominal interest marketable securities income 102 155 119 2020 2019 2018 recorded income expense net investments availableforsale marketable securities minimum credit quality rating a2 moodys standard poors fitch plan sell investments likely required sell investments recovery amortized cost basis may maturity note 4 derivative instruments use operational economic hedges foreign currency exchange forward contracts net investment hedges derivative nonderivative financial instruments interest rate derivative instruments manage impact currency exchange interest rate fluctuations earnings cash flow equity enter derivative instruments speculative purposes exposed potential credit loss event nonperformance counterparties outstanding derivative instruments anticipate nonperformance counterparties counterparty default maximum loss exposure asset balance instrument foreign currency hedges december 2019 november 2018 designated issuance €2400 €2250 senior unsecured notes net investment hedges selectively hedge portions investment certain international subsidiaries november 2020 €300 debt maturity paid dedesignated net investment hedge currency effects eurodenominated senior unsecured notes reflected aoci within shareholders equity offset gains losses recorded net investment international subsidiaries july 2019 november 2020 entered €10 billion €500 certain forward currency contracts designated net investment hedges hedge portion investments certain entities functional currencies denominated euros december 31 2020 total aftertax gain loss aoci related designated net investment hedges 386 dollar amounts millions except per share amounts otherwise specified29 stryker corporation 2020 form 10k pretax gains losses derivatives designated cash flow hedges 2 net investment hedges 33 recorded aoci expected reclassified cost sales income expense earnings within 12 months december 31 2020 cash flow hedge reclassification primarily due sale inventory includes previously hedged purchases component aoci amounts related net investment hedges reclassified life hedge instruments elected exclude initial value component related spotforward difference effectiveness assessment interest rate hedges conjunction offerings senior unsecured notes december 2019 june 2020 terminated certain interest rate derivative contracts gross notional amounts €600 500 designated cash flow hedges impact recognized life underlying issued debt within interest expense pretax gains recorded aoci related closed interest rate hedges 6 expected reclassified income expense earnings within 12 months december 31 2020 december 31 2020 forward starting interest rate swap agreements notional amounts 750 designated cash flow hedges anticipation future debt issuances pretax losses 53 recorded aoci december 31 2020 upon probable issuance debt amounts released interest expense term debt cash flow effect hedges recorded cash flow operations note 5 accumulated comprehensive loss income aoci note 6 acquisitions acquire stock companies various assets continue support capital deployment product development strategies aggregate purchase price acquisitions net cash acquired 4304 1096 2020 2019 november 2020 completed acquisition wright medical group nv wright 3075 per share aggregate purchase price 41 billion 56 billion including convertible notes wright global medical device company focused extremities biologics wright part trauma extremities business within orthopaedics goodwill attributable acquisition deductible tax purposes november december 2020 note holders elected redeem 1625 225 convertible notes assumed wright acquisition 864 576 repayments classified financing activities december 2020 completed acquisition orthosensor inc orthosensor leader digital evolution musculoskeletal care sensor technology total joint replacement orthosensor part joint replacement business within orthopaedics goodwill attributable acquisition deductible tax purposes october 2019 completed acquisition mobius imaging cardan robotics net cash consideration 360 future regulatory commercial milestone payments 130 mobius imaging leader pointofcare imaging technology focused integrating advanced imaging technologies medical workflow cardan robotics working develop innovative robotics navigation technology systems surgical interventional radiology procedures mobius imaging cardan robotics mobius part spine business within neurotechnology spine income tax purposes acquisition treated asset purchase goodwill attributable acquisition deductible tax purposes march 2019 completed acquisition orthospace ltd orthospace net cash consideration 110 future regulatory milestone payments 110 orthospace medical device company specializing orthopaedic biodegradable technology treatment irreparable rotator cuff tears orthospace part endoscopy business within medsurg goodwill attributable acquisition deductible tax purposes acquisitions taken place beginning comparable prior year consolidated financial results operations aggregate would materially different accordingly disclosed pro forma financial information purchase price allocations significant acquisitions dollar amounts millions except per share amounts otherwise specified30 stryker corporation 2020 form 10k purchase price allocations wright 2020 acquisitions based preliminary valuations primarily related intangible assets product liabilities deferred income taxes estimates assumptions subject change within measurement period purchase price allocations mobius orthospace 2019 acquisitions finalized 2020 without material adjustments note 7 contingencies commitments involved various ongoing proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters significant fully described outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable loss minimum range probable losses best estimate within range known recorded estimates based consultation legal counsel previous settlement experience settlement strategies actual outcomes less favorable estimated management additional expense may incurred could unfavorably affect future operating results selfinsured certain claims expenses ultimate cost us respect product liability claims could materially different amount current estimates accruals could material adverse effect financial position results operations cash flows recall matters june 2012 voluntarily recalled rejuvenate abg ii modularneck hip stems terminated global distribution hip products product liability lawsuits relating voluntary recall filed us november 2014 entered settlement agreement compensate eligible united states patients revision surgery prior november 3 2014 december 2016 settlement program extended patients revision surgery prior december 19 2016 september 2020 entered second settlement agreement compensate eligible united states patients revision surgery prior september 9 2020 continue offer support recallrelated care reimburse patients eligible enroll settlement program testing treatment services including necessary revision surgeries addition remaining lawsuits continue defend august 2016 may 2018 voluntarily recalled certain lotspecific sizes offsets lfit anatomic cocr v40 femoral heads product liability lawsuits claims relating voluntary recall filed us november 2018 entered settlement agreement resolve significant number claims lawsuits related recalls specific terms settlement agreement including financial terms confidential acquisition wright fully described note 6 responsible certain product liability claims primarily related certain hip products sold wright prior 2014 divestiture orthorecon business continue evaluate claim possible loss may incur incurred expect incur future costs associated defense settlement matters based information received estimated remaining range probable loss related matters globally approximately 470 720 recorded reserves representing remaining minimum range probable loss final outcomes matters dependent many factors difficult predict accordingly ultimate cost related matters may materially different amount current estimate accruals could material adverse effect results operations cash flows leases lease various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases evaluate contracts identify leases generally identified asset right direct use obtain substantially economic benefit use identified asset certain lease agreements contain rent escalation clauses including indexbased escalations rent holidays capital improvement funding lease incentives recognize minimum rental expense straightline basis term lease beginning date initial control asset rightofuse assets recorded noncurrent assets consolidated balance sheets current noncurrent lease liabilities recorded accrued expenses liabilities noncurrent liabilities respectively made certain significant assumptions judgments recording leases asset classes elected recognize rightofuse asset lease liability shortterm leases separate nonlease components lease components relate accounted combined lease nonlease components single lease component determination discount rate used lease incremental borrowing rate based would normally pay borrow collateralized basis similar term amount equal lease payments operating lease expense totaled 130 133 138 2020 2019 2018 dollar amounts millions except per share amounts otherwise specified31 stryker corporation 2020 form 10k future obligations purchase commitments materials supplies services property plant equipment part normal course business addition lease various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases refer note 10 information debt obligations note 8 goodwill intangible assets completed annual impairment tests goodwill 2020 2019 concluded year impairments exist note 9 capital stock aggregate number shares classes stock authorized issue 1000500000 divided two classes consisting 500000 shares 1 par value preferred stock 1000000000 shares common stock par value 010 shares preferred stock outstanding december 31 2020 made repurchases shares 2020 manner timing amount repurchases determined management based evaluation market conditions stock price factors subject regulatory considerations purchases made timetotime open market privately negotiated transactions otherwise december 31 2020 total dollar value shares could purchased authorized repurchase program 1033 shares reserved future compensation grants common stock 28 million 31 million december 31 2020 2019 stock options measure cost employee stock options based grantdate fair value recognize cost using straightline method period recipient required provide services exchange options typically vesting period weightedaverage fair value per share options estimated date grant using blackscholes option pricing model riskfree interest rate periods within expected life options granted based united states treasury yield curve effect time grant expected stock price volatility based historical volatility stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data aggregate intrinsic value options represents cumulative difference fair market value underlying common stock option exercise prices exercised 258 294 247 2020 2019 2018 exercise prices options outstanding ranged 5360 21635 december 31 2020 december 31 2020 99 unrecognized compensation cost related nonvested stock options granted longterm incentive plans cost expected recognized weightedaverage period approximately 14 years dollar amounts millions except per share amounts otherwise specified32 stryker corporation 2020 form 10k december 31 2020 68 unrecognized compensation cost related nonvested rsus cost expected recognized expense weightedaverage period approximately one year weightedaverage grant date fair value per share rsus granted 20896 17596 2020 2019 fair value rsus psus vested 2020 55 9 december 31 2020 16 unrecognized compensation cost related nonvested psus cost expected recognized expense weightedaverage period approximately one year employee stock purchase plans espp full parttime employees may participate espp provided meet certain eligibility requirements purchase price common stock terms espp defined 95 closing stock price last trading day purchase period issued 209837 166758 shares espp 2020 2019 note 10 debt credit facilities lines credit issued various financial institutions available fund daytoday operating needs certain credit facilities require us comply financial covenants compliance covenants december 31 2020 commercial paper program allows us maximum 1500 commercial paper outstanding maturities 397 days date issuance december 31 2020 amounts outstanding commercial paper program fair value senior unsecured notes estimated using quoted interest rates maturities amounts borrowings based quoted active market prices yields took account underlying terms debt instruments substantially debt classified within level 2 fair value hierarchy january 2020 repaid 500 senior unsecured notes coupon 4375 due january 15 2020 april 30 2020 amended primary credit facility principal change increase leverage ratio financial covenant 351 451 end fiscal quarter ending prior june 30 2021 exercised right acquisition clause agreement increase maximum permitted leverage 501 effective december 31 2020 april 30 2020 entered credit agreement provides 1500 borrowings united states dollars pursuant 364day revolving credit facility matures april 29 2021 available working capital general corporate purposes june 2020 issued 650 senior unsecured notes fixed interest rate 1150 due june 15 2025 1000 senior unsecured notes fixed interest rate 1950 due june 15 2030 650 senior unsecured notes fixed interest rate 2900 due june 15 2050 november 2020 issued 600 senior unsecured notes fixed interest rate 0600 due december 1 2023 november 2020 entered 400 term loan agreement matures november 10 2023 bears interest libor plus 1125 bps november 2020 repaid €300 senior unsecured notes floating interest rate due november 30 2020 november december 2020 settled convertible notes assumed wright acquisition refer note 6 information interest expense including required fees incurred outstanding debt credit facilities included expense totaled 315 287 264 2020 2019 2018 note 11 income taxes effective tax rate 182 187 508 2020 2019 2018 effective income tax rate 2020 reflects continued lower effective income tax rates result european operations tax effect related transfer intellectual property tax jurisdictions tax effect future remittances undistributed earnings foreign subsidiaries effective income tax rate 2019 reflects tax effect related transfer intellectual properties tax jurisdictions effective income tax rates result european operations effective income tax rate 2018 reflects tax effect related transfer intellectual properties tax jurisdictions continued impact complying tax cuts jobs act 2017 tax act continued lower effective tax rates result european operations dollar amounts millions except per share amounts otherwise specified33 stryker corporation 2020 form 10k december 2017 tax act signed law united states law includes significant changes united states corporate income tax system including federal corporate rate reduction limitations deductibility certain expenses transition united states international taxation worldwide tax system territorial tax system part transition territorial tax system tax act required taxpayers calculate onetime transition tax based undistributed earnings foreign subsidiaries tax act subjects united states shareholder tax global intangible lowtaxed income gilti earned certain foreign subsidiaries elected account gilti tax year tax incurred interest penalties included income expense net expense 35 9 2020 2019 2018 united states federal deferred income tax benefit expense includes utilization net operating loss carryforwards 41 50 31 2020 2019 2018 accrued interest penalties 133 94 december 31 2020 2019 reported current noncurrent accrued expenses liabilities net operating loss carryforwards totaling 1642 410 subject full valuation allowance 1409 405 related wright acquisition december 31 2020 available reduce future taxable earnings certain domestic foreign subsidiaries united states loss carryforwards 1509 expire 2045 international loss carryforwards 132 begin expire 2022 however expiration also tax credit carryforwards 97 93 subject full valuation allowance credits full valuation allowance begin expire 2025 however expiration anticipate generating income tax excess nonexpiring credits foreseeable future recorded transition tax undistributed foreign earnings required tax act provision made united states income taxes may result future remittances undistributed earnings foreign subsidiaries determined indefinitely reinvested recorded deferred income tax undistributed earnings foreign subsidiaries determined indefinitely reinvested determination total amount unrecognized deferred income tax undistributed earnings foreign subsidiaries practicable income tax expense would reduced 456 468 2020 2019 uncertain income tax positions favorably resolved reasonably possible amount unrecognized tax benefits significantly change due one following events next 12 months expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject controversy various taxing jurisdictions operate including inventory transfer pricing cost sharing product royalty foreign branch arrangements able reasonably estimate amount future periods changes unrecognized tax benefits may resolved interest penalties incurred associated uncertain tax positions included income expense net normal course business income tax authorities various income tax jurisdictions within united states internationally conduct routine audits income tax returns dollar amounts millions except per share amounts otherwise specified34 stryker corporation 2020 form 10k filed prior years audits generally designed determine individual income tax authorities agreement interpretations complex income tax regulations regarding allocation income various income tax jurisdictions income tax years open 2014 current year united states federal jurisdiction income tax years open major jurisdictions range 2006 current year note 12 retirement plans defined contribution plans provide certain employees defined contribution plans types retirement plans portion retirement plan expense defined contribution plans funded stryker common stock use stryker common stock represents noncash operating activity reflected consolidated statements cash flows defined benefit plans certain subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets discount rate discount rates selected using hypothetical portfolio high quality bonds december 31 would provide necessary cash flows match projected benefit payments expected return plan assets expected return plan assets determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns actuarial gain loss pension plans 2020 2019 primarily related change discount rate used measure benefit obligations plans investment strategy investment strategy defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances level 3 pension plan assets consist primarily guaranteed investment contracts insurance companies insurance contracts guarantee us principal repayment fixed rate return 24 increase level 3 pension plan assets primarily related actual returns acquired assets expect contribute 30 defined benefit pension plans 2021 dollar amounts millions except per share amounts otherwise specified35 stryker corporation 2020 form 10k note 13 summary quarterly data unaudited note 14 segment geographic data segregate operations three reportable business segments orthopaedics medsurg neurotechnology spine corporate category shown table includes corporate administration corporate initiatives sharebased compensation includes compensation related employee stock options restricted stock units performance stock unit grants director stock options restricted stock unit grants measure financial results reportable segments using internal performance measure excludes acquisition integrationrelated charges restructuringrelated charges reserves certain product recall matters reserves certain legal regulatory matters identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment countries local revenue generating operations combined following geographic areas united states including puerto rico europe middle east africa asia pacific foreign countries include canada countries latin american region net sales reported based geographic area stryker location sales customer originated note 15 asset impairments due significant negative impact covid19 pandemic operations financial results suspended certain inprocess investments resulting charges 195 impair certain longlived assets primarily portion investment new global erp system inprocess developed future deployment product line exit costs 2020 charges included cost sales selling general administrative expenses dollar amounts millions except per share amounts otherwise specified36 stryker corporation 2020 form 10k item 9item 8 financial statements supplementary data consolidated financial statements company subsidiaries report independent auditors included pages 28 41 1994 annual report pages 41 56 edgar filing incorporated herein reference quarterly results operations appearing caption summary quarterly data page 40 1994 annual report page 55 edgar filing incorporated herein reference item 9nanitem 8 financial statements supplementary data report independent registered public accounting firm financial statements board directors shareholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2005 2004 related consolidated statements earnings shareholders equity cash flows three years period ended december 31 2005 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2005 2004 consolidated results operations cash flows three years period ended december 31 2005 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness stryker corporations internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 3 2006 expressed unqualified opinion thereon ernst young llp grand rapids michigan february 3 2006 consolidated balance sheets stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements earnings stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements shareholders equity stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements consolidated statements cash flows stryker corporation subsidiaries millions see accompanying notes consolidated financial statements notes consolidated financial statements stryker corporation subsidiaries december 31 2005 note 1 significant accounting policies business stryker corporation company stryker develops manufactures markets implants used joint replacement trauma craniomaxillofacial spinal surgeries biologics surgical neurologic ear nose throat interventional pain equipment endoscopic surgical navigation communications digital imaging systems well patient handling emergency medical equipment stryker also provides outpatient physical therapy services united states principles consolidation consolidated financial statements include accounts company majorityowned subsidiaries elimination intercompany accounts transactions revenue recognition significant portion companys orthopaedic implants revenue generated consigned inventory maintained hospitals field representatives products revenue recognized time company receives appropriate notification product used implanted company records revenue medsurg equipment product sales title risk ownership transferred customer typically upon shipment customer physical therapy services line business company records revenue services rendered company records estimated sales returns discounts applicable adjustments reduction net sales period revenue recognized shipping handling products amounts billed customers shipping handling products included net sales costs incurred related shipping handling products included cost sales use estimates preparation consolidated financial statements conformity accounting principles generally accepted united states requires company management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes actual results could differ estimates foreign currency translation functional currencies substantially companys international affiliates local currencies accordingly financial statements international affiliates translated united states dollars using current exchange rates balance sheets average exchange rates statements earnings cash flows unrealized translation adjustments included accumulated comprehensive gain loss shareholders equity transaction gains losses resulting settlement nonfunctional currency receivables payables included net earnings cash equivalents marketable securities investments cash equivalents highly liquid investments maturity 3 months less purchased marketable securities consist marketable debt securities certificates deposit classified availableforsale investments included within assets consolidated balance sheets consist mutual funds classified trading acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities 2004 investments also included marketable equity securities classified availableforsale companys marketable securities investments stated fair value based quoted market prices adjustments fair value marketable securities investments classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive gain loss shareholders equity adjustments fair value investments classified trading recorded earnings offsets related changes liabilities deferred compensation arrangements amortized cost marketable debt securities classified availableforsale adjusted amortization premiums discounts maturity computed effective interest method amortization included income expense addition interest realized gains losses included income expense cost securities sold based specific identification method accounts receivable accounts receivable consists trade miscellaneous receivables company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends accounts receivable securitization company accounts receivable securitization facility pursuant certain subsidiaries company sell ongoing basis domestic accounts receivable stryker funding corporation sfc wholly owned specialpurpose subsidiary company turn may sell without recourse aggregate 2000 million undivided percentage ownership interest receivables bankadministered multiseller commercial paper conduits creditors sfc claim assets equity becomes available company amounts undivided percentage ownership interests accounts receivable sold sfc facility december 31 2005 2004 accounts receivable sold reflected consolidated balance sheet reductions accounts receivable period sold amount receivables available sold subject change monthly based level defined eligible receivables less defined customary reductions servicing dilution loss reserves companys retained interest accounts receivable held sfc form subordinated note represents overcollateralization undivided interest sold retained interest totaled 3471 million 3203 million december 31 2005 2004 respectively discount expense associated securitization facility including conduits financing cost issuing commercial paper 07 million 2005 13 million 2004 26 million 2003 included selling general administrative expenses inventories stated lower cost market cost approximately 80 inventories determined using firstin firstout fifo cost method cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability cost products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends property plant equipment property plant equipment stated cost depreciation computed either straightline decliningbalance method estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses amounts allocated intangible assets intangible assets include developed technology amortized straightline basis 20 years customer relationships reflect expected continued customer patronage trademarks patents amortized straightline basis 4 40 years weighted average life 14 years intangible assets loaner instrumentation loaner instrumentation represents net book value loaner instruments surgical implants provided customers company loaner instrumentation amortized straightline basis 3year period amortization expense loaner instrumentation included selling general administrative expenses income taxes company accounts income taxes using liability method deferred income tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates effect years differences expected reverse deferred income tax expense credit represents change net deferred tax assets liabilities year company operates multiple tax jurisdictions inside outside united states tax authorities jurisdictions regularly perform audits companys tax filings accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations tax audits associated allocation income complex issues including inventory transfer pricing product royalty arrangements may require extended period time resolve may result income tax adjustments changes income allocation required jurisdictions different tax rates tax adjustments certain jurisdictions significant company records accruals representing managements best estimate probable resolution matters income tax accruals included within income taxes liability consolidated balance sheets extent additional information becomes available accruals adjusted reflect revised estimated probable outcome derivative financial instruments company uses derivative financial instruments manage economic impact fluctuations currency exchange rates company enters forward currency exchange contracts manage economic risks 1998 december 2003 company entered interest rate swap contracts various maturity dates manage economic impact fluctuations interest rates company follows provisions financial accounting standards board fasb statement 133 accounting derivative instruments hedging activities amended statements 137 138 accounting derivative financial instruments statements require company recognize derivatives balance sheet fair value derivatives hedges must adjusted fair value earnings derivative hedge depending nature hedge changes fair value derivative either offset changes fair value hedged assets liabilities firm commitments earnings recognized accumulated comprehensive gain loss hedged item recognized earnings see note 2 legal contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters potential future outcomes matters outside managements complete control generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory relief could result payment significant claims settlements legal matters management sufficient information reasonably estimate companys future obligations liability representing managements best estimate probable cost resolution legal matters recorded estimates based consultation outside counsel previous settlement experience settlement strategies accumulated comprehensive gain loss components accumulated comprehensive gain loss follows millions foreign accumulated unrealized unfunded currency gains losses pension translation comprehensive securities losses adjustments gain loss balances january 1 2004 10 71 1077 996 comprehensive gain loss 2004 03 38 1022 987 balances december 31 07 109 2099 1983 comprehensive gain loss 2005 06 08 1929 1931 balances december 31 01 117 170 52 stock options december 31 2005 company key employee director stock option plans described fully note 8 company follows accounting principles board apb opinion 25 accounting stock issued employees accounting stock option plans opinion 25 compensation expense recognized exercise price companys stock options equals market price underlying stock measurement date grant compensation expense companys stockbased compensation plans determined based fair value grant dates awards plans consistent method fasb statement 123 accounting stockbased compensation companys net earnings net earnings per share would follows millions net earnings reported 6752 4657 4535 deduct compensation expense fair value method 316 257 191 pro forma 6436 4400 4344 basic net earnings per share reported 167 116 114 pro forma 159 110 109 diluted net earnings per share reported 164 114 111 pro forma 157 108 107 weightedaverage fair value per share options granted 2005 2004 2003 estimated date grant using blackscholes option pricing model 1745 1683 1519 respectively fair value options granted estimated date grant using following assumptions riskfree interest rate 287 194 227 expected dividend yield 019 018 expected stock price volatility 307 343 358 expected option life 65 years 65 years 65 years december 2004 fasb issued revision statement 123 sharebased payment revision supersedes apb opinion 25 related implementation guidance april 14 2005 united states securities exchange commission adopted new rule allowing companies delay required adoption date revised statement first fiscal year beginning june 15 2005 based ruling company adopt provisions revised statement effective january 1 2006 rather july 1 2005 initially required revised statement revised statement requires companies recognize cost stock options based grantdate fair value determined employee stock option plans period recipient required provide services exchange options typically vesting period company plans adopt provisions revised statement using modifiedretrospective transition method provided revised statement method company restate prior periods presented consistent basis based pro forma expense previously disclosed statement 123 pro forma effect adopting statement disclosed expected material impact trend net earnings net earnings per share reclassifications certain prior year amounts reclassified conform presentation used 2005 note financial instruments risk management following summary companys investments millions gross unrealized estimated cost losses fair value december 31 2005 availableforsale securities marketable securities municipal debt securities 4681 01 4680 us government agency debt securities 893 certificates deposit 80 total availableforsale securities 5654 01 5653 trading securities mutual funds 261 total investments 5915 01 5914 december 31 2004 availableforsale securities equity securities 26 11 15 trading securities mutual funds 253 total investments 279 11 268 net carrying value estimated fair value availableforsale debt securities december 31 2005 contractual maturity follows millions estimated cost fair value december 31 2005 due one year less 749 due year three years 1876 1875 due three years 2949 5574 5573 interest income included income expense totaled 133 million 2005 47 million 2004 31 million 2003 company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures relate principally intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts markedtomarket period resulting gains losses included income expense consolidated statements earnings december 31 2005 company outstanding forward currency exchange contracts purchase 1316 million sell 921 million various currencies principally united states dollars euros maturities ranging 30 180 days december 31 2004 company outstanding forward currency exchange contracts purchase 1377 million sell 1731 million various currencies principally united states dollars euros maturities ranging principally 30 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points recorded component accrued expenses liabilities consolidated balance sheets december 31 2005 company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties 1998 2003 company entered interest rate swap agreements effectively converted portion variablerate borrowings fixedrate basis thus reducing impact changes interest rates interest expense period swap agreements fixed companys base rate 2500 million variablerate borrowings 2003 average rate 558 pursuant fasb statement 133 amended company recognized gain 92 million attributable changes fair value interest rate swap agreements component accumulated comprehensive gain loss 2003 interest rate differentials paid result interest rate swaps recognized adjustment interest expense related designated borrowings prior 2004 company used yendenominated floatingrate borrowings protect portion value investment subsidiary japan yendenominated borrowings previously outstanding fully repaid 2003 realized unrealized gains losses hedge included consolidated statements earnings recorded foreign currency translation adjustments within accumulated comprehensive gain loss shareholders equity net loss 21 million attributable yendenominated floatingrate borrowings hedge recorded foreign currency translation adjustment 2003 note inventories summarized follows millions note 4 acquisitions fourth quarter 2005 company acquired merger outstanding stock plasmasol corp plasmasol private developmentstage company plasmasol developer technology allow stryker provide sterilization equipment use certain medsurg equipment products cost transaction totaled approximately 175 million including upfront cash payment plus assumption certain liabilities results operations plasmasol included companys consolidated financial statements date acquisition materially impact companys reported operating results pro forma consolidated results operations would differ significantly result plasmasol acquisition purchase price allocated assets acquired primarily deferred tax assets associated acquired net operating losses purchased inprocess research development based estimated fair value date acquisition amount purchase price allocated purchased inprocess research development resulted charge 159 million 04 per diluted share companys 2005 operating results date acquisition sterilization technology acquired yet approved sale us food drug administration fda therefore yet reached technological feasibility amount written purchased inprocess research development deductible income tax purposes united states first quarter 2005 company acquired etraumacom corp etrauma approximately 500 million cash plus certain transaction costs acquisition expanded companys digital imaging equipment product offerings within medsurg equipment segment adding etraumas proprietary picture archive communications systems pacs image management viewing software acquisition etrauma accounted using purchase method accounting results operations acquired business included companys consolidated financial statements date acquisition materially impact companys reported operating results pro forma consolidated results operations would differ significantly result etrauma acquisition purchase price preliminarily allocated assets acquired liabilities assumed based estimated fair value date acquisition based preliminary purchase price allocation 220 million allocated identifiable intangibles amortized remaining lives 5 8 years 316 million allocated goodwill deductible income tax purposes united states immediately acquisition consummated management company began implement integration plan combine stryker etrauma conjunction integration plan company recorded additional purchase liabilities severance related costs 03 million included purchase price allocation third quarter 2004 company completed acquisition merger outstanding stock spinecore inc spinecore upfront payment 1200 million cash plus certain transaction costs acquisition spinecore developer artificial lumbar cervical spinal disc implant technologies expected enhance companys presence spinal implant market important growth area within orthopaedic implants segment spinecores operating results included companys consolidated financial statements date acquisition material companys operating results pro forma consolidated results operations would differ significantly result spinecore acquisition purchase price allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair value date acquisition amount purchase price allocated purchased inprocess research development resulted charge 1208 million 29 per diluted share companys 2004 operating results date transaction spinal implant technologies acquired preliminary stages clinical studies united states yet reached technological feasibility amount written purchased inprocess research development deductible income tax purposes united states terms transaction also include potential milestone royalty payments additional 2400 million upon commercialization spinecores products united states expected occur 2008 note goodwill intangible assets changes net carrying amount goodwill segment years ended december 31 2005 2004 follows millions fourth quarters 2005 2004 2003 company completed required annual impairment tests goodwill prescribed fasb statement 142 goodwill intangible assets determined instances recorded goodwill impaired goodwill writedown necessary following summary companys intangible assets millions estimated amortization expense five succeeding years follows millions 398 390 382 374 304 2003 company recorded 65 million charge related trademark impairment resulting branding initiative adopted company period branding initiative intended improve companys customers stakeholders overall awareness strykers capabilities charge reduced book value trademark within orthopaedic implants segment fair value determined using discounted cash flow model charge included intangibles amortization 2003 consolidated statement earnings note restructuring acquisitionrelated liabilities following table provides rollforward remaining liabilities included within accrued expenses liabilities consolidated balance sheets associated business acquisition purchase liabilities restructuring acquisitionrelated charges recorded company prior years millions facility closures distributor severance contractual conversions related costs obligations total balances january 1 2004 27 50 03 80 payments 02 38 40 adjustments 12 03 15 balances december 31 25 00 25 additions business acquisition 03 payments 13 03 16 balances december 31 12 00 12 2004 company reviewed business acquisition purchase liabilities determined certain obligations longer required adjustments reflected reductions intangible assets accordance purchase method accounting note longterm debt longterm debt summarized follows millions november 2005 company established 10000 million unsecured credit facility replaced previously outstanding 7500 million unsecured credit facility new facility expires november 2010 includes senior term loan principal amount €1900 million senior 5year nonamortizing revolving credit agreement maximum amount 10000 million less outstanding amount senior term loan company may increase credit facility maximum limit 1000 million increments additional 5000 million upon acceptance existing lender group additional lenders total €1900 million drawn senior term loan facilitate repatriation foreign earnings remains outstanding december 31 2005 unsecured credit facility requires facility fee ranging 004 015 aggregate commitment credit facility depending companys debt rating credit facility includes 5000 million multicurrency sublimit yen euro borrowed 1000 million swing line sublimit 1000 million letter credit sublimit credit facility bears interest base rate defined plus applicable margin ranging 012 0475 depending companys debt rating senior term loan bears interest base rate defined plus applicable margin ranging 016 0625 depending companys debt rating 2005 weighted average interest rate excluding required fees borrowings current previously existing credit term loan facilities 27 unsecured credit facility requires company comply certain financial covenants company compliance covenants december 31 2005 addition unsecured credit facility company lines credit issued various financial institutions available fund companys daytoday operating needs maturities debt five years succeeding 2005 2006 474 million 2007 482 million 2008 473 million 2009 473 million 2010 414 million carrying amounts companys longterm debt approximate fair values based quoted interest rates similar types amounts borrowing agreements interest paid debt including required fees 81 million 2005 60 million 2004 229 million 2003 amounts approximate interest expense included income expense note capital stock april 20 2004 companys shareholders approved amendment section article iii companys restated articles incorporation increase authorized shares common stock 1 billion 500 million shares april 20 2004 companys board directors approved twoforone stock split effective may 14 2004 shareholders record may 3 2004 share per share data adjusted reflect stock split though occurred beginning periods presented company key employee director stock option plans options granted exercise price less fair market value underlying common stock date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows millions except per share amounts weightedaverage shares exercise price options outstanding january 1 2003 247 1522 granted 38 3883 canceled 04 2116 exercised 35 778 options outstanding december 31 2003 246 1979 granted 33 4523 canceled 07 2914 exercised 32 1161 options outstanding december 31 2004 240 2417 granted 34 4827 canceled 04 3737 exercised 28 1133 options outstanding december 31 2005 242 2878 price range 550 1000 18 746 price range 1001 1500 25 1214 price range 1501 2000 37 1621 price range 2001 2500 29 2330 price range 2501 3000 34 2645 price range 3001 4000 34 3883 price range 4001 4827 65 4680 options outstanding december 31 2005 242 2878 options outstanding december 31 2005 weightedaverage remaining contractual life 61 years options reserved future grants 101 million 131 million december 31 2005 2004 respectively exercise prices options outstanding december 31 2005 ranged 550 4827 summary shares exercisable follows millions except per share amounts weightedaverage shares exercise price range 550 1000 18 746 price range 1001 1500 25 1214 price range 1501 2000 37 1621 price range 2001 2500 24 2329 price range 2501 3000 20 2645 price range 3001 4000 14 3883 price range 4001 4827 06 4528 shares exercisable december 31 2005 144 2045 company 05 million authorized shares 1 par value preferred stock none outstanding second quarter 2003 company issued 01 million shares restricted stock newly appointed president chief operating officer stock vests ratably first five anniversary dates grant provided recipient still employed company aggregate market value restricted stock date issuance 34 million measured quoted price companys common stock recorded deferred stockbased compensation separate component shareholders equity amortized 5year vesting period note 9 net earnings per share following table sets forth computation basic diluted net earnings per share millions except per share amounts net earnings 6752 4657 4535 weightedaverage shares outstanding basic net earnings per share 4037 4012 3978 effect dilutive employee stock options 79 91 90 adjusted weightedaverage shares outstanding diluted net earnings per share 4116 4103 4068 net earnings per share common stock basic 167 116 114 diluted 164 114 111 options purchase 34 million shares common stock outstanding second quarter 2005 65 million fourth quarter 2005 included computation diluted net earnings per share exercise prices options greater average market price common shares periods note 10 retirement plans certain companys subsidiaries funded unfunded defined benefit plans covering employees defined benefit plans projected benefit obligations excess plan assets company uses december 31 measurement date determination plan obligations funded status plans summary information related companys defined benefit plans follows millions components amounts recognized consolidated balance sheets follows millions accumulated benefit obligation defined benefit plans 1336 million 1242 million december 31 2005 2004 respectively pension plans accumulated benefit obligation excess plan assets projected benefit obligations accumulated benefit obligations fair value plan assets 1291 million 1126 million 684 million respectively december 31 2005 1189 million 1041 million 580 million respectively december 31 2004 components net periodic benefit cost follows millions service cost 88 66 57 interest cost 63 56 49 expected return plan assets 51 41 30 amortization transition amounts prior service cost 02 03 recognized actuarial loss 09 05 06 net periodic benefit cost 111 88 85 company assumed average longterm expected return defined benefit plan assets 63 december 31 2005 expected return determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns weightedaverage allocation plan assets asset category follows investment strategy companys defined benefit plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances reflected target investment allocation ranges plans december 31 2005 low high equity securities 51 72 debt securities company anticipates contributing approximately 92 million defined benefit plans 2006 following estimated future benefit payments reflect expected future service appropriate expected paid years indicated millions 20112015 expected benefit payments 39 41 44 51 55 337 retirement plan expense companys defined contribution retirement plans totaled 645 million 2005 611 million 2004 555 million 2003 portion companys retirement plan expenses funded stryker common stock totaling 63 million 2005 54 million 2004 48 million 2003 use stryker common stock represents noncash operating activity reflected consolidated statements cash flows amount stryker common stock held companys defined contribution retirement plans totaled 712 million approximately 16 million shares 784 million approximately 16 million shares december 31 2005 2004 respectively value stryker common stock percentage total defined contribution retirement plan assets 13 december 31 2005 17 december 31 2004 note 11 income taxes fourth quarter 2004 president united states signed american jobs creation act provided temporary incentive united states companies repatriate accumulated income earned foreign jurisdictions providing 85 dividendsreceived deduction certain dividends controlled corporations third quarter 2005 companys board directors approved plan repatriate 722 million foreign earnings provisions act repatriation plan completed fourth quarter 2005 company recorded charge 274 million 07 per diluted share recognize income tax expense related liability united states associated repatriation repatriated funds invested pursuant approved domestic reinvestment plan conforms act earnings income taxes consist following millions united states operations 4093 2333 2584 foreign operations 5940 4837 3941 10033 7170 6525 components provision income taxes follow millions current income tax expense federal 1776 1570 998 state 273 179 205 foreign 1028 1419 1116 3077 3168 2319 deferred income tax expense credit 204 655 329 3281 2513 1990 reconciliation united states statutory income tax rate companys effective income tax rate follows united states statutory income tax rate 350 add deduct state taxes less effect federal deduction 24 18 14 tax benefit relating operations ireland puerto rico 93 82 nondeductible purchased inprocess research development 06 59 nondeductible permanent differences 18 28 13 united states income taxes repatriation foreign earnings 27 foreign income taxes rates different united states statutory rate 05 07 19 10 05 09 327 350 305 deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes valuation allowances recorded reduce deferred tax assets likely tax benefit realized tax effect significant temporary differences comprise companys deferred income tax assets liabilities follows millions net operating loss carryforwards totaling approximately 397 million december 31 2005 available reduce future taxable earnings certain domestic foreign subsidiaries deferred income tax assets liabilities included consolidated balance sheets follows millions december 31 2005 tax authorities several tax jurisdictions inside outside united states conducting routine audits companys income tax returns filed prior years audits generally designed determine individual tax authorities agreement companys interpretations complex income tax regulations regarding allocation income various tax jurisdictions 2005 company reach resolution significant outstanding tax audit therefore increased income tax accruals related companys best estimate probable resolution tax positions approximately 650 million provision made united states federal state income taxes foreign taxes may result future remittances undistributed earnings 11650 million december 31 2005 foreign subsidiaries expected earnings reinvested overseas indefinitely determination amount unrecognized deferred income tax liability unremitted earnings practicable total income taxes paid net refunds received 2478 million 2005 2358 million 2004 1895 million 2003 note 12 segment geographic data company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma spinal micro implant systems bone cement bone growth factor op1 medsurg equipment segment sells surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment category includes physical therapy services corporate administration interest expense interest income effective january 1 2004 company changed business segment reporting include financial results micro implant systems within orthopaedic implants reportable segment rather within medsurg equipment reportable segment company believes products better aggregated orthopaedic implants based similarities manufacturing marketing practices customer base prior year results reclassified correspond change reporting companys reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies company measures financial results reportable segments using internal performance measure excludes additional income taxes repatriation foreign earnings recognized 2005 purchased inprocess research development charges recognized 2005 2004 identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment sales financial information business segment follows millions companys principal areas operation outside united states japan europe company also operations pacific region canada latin america middle east geographic information follows millions note leases company leases various manufacturing office facilities equipment operating leases future minimum lease commitments leases follows millions 512 429 354 260 171 thereafter 484 2210 rent expense totaled 853 million 2005 799 million 2004 720 million 2003 note 14 contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters subject many uncertainties outcomes predictable assurance company records amounts losses deemed probable subject reasonable estimate however company anticipate material losses result proceedings beyond amounts already provided accompanying consolidated financial statements december 2003 company announced subsidiary physiotherapy associates inc stryker received subpoena united states attorneys office boston massachusetts connection department justice investigation physiotherapy associates billing coding practices march 2005 company announced received subpoena united states department justice requesting documents relating consulting contracts professional service agreements remuneration agreements stryker corporation orthopedic surgeon orthopedic surgeon training medical school graduate using considering surgical use hip knee joint replacementreconstruction products manufactured sold stryker corporation company fully cooperating department justice regarding matters pursuant certain companys credit lease agreements company provided financial guarantees third parties form indemnification provisions indemnify third parties costs including limited adverse judgments lawsuits imposition additional taxes due either change tax law adverse interpretation tax law terms guarantees equal terms related credit lease agreements company able calculate maximum potential amount future payments could required make guarantees potential payment dependent occurrence future unknown events eg changes united states foreign tax laws summary quarterly data unaudited stryker corporation subsidiaries millions except per share data price quotations reported supplied new york stock exchange item 9item 8 financial statements supplementary data report independent registered public accounting firm financial statements board directors shareholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2007 2006 related consolidated statements earnings shareholders equity cash flows three years period ended december 31 2007 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2007 2006 consolidated results operations cash flows three years period ended december 31 2007 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements 2007 stryker corporation changed method accounting unresolved tax positions connection required adoption financial interpretation 48 2006 stryker corporation also changed methods accounting retirement plans connection required adoption statement financial accounting standard 158 also audited accordance standards public company accounting oversight board united states stryker corporations internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 13 2008 expressed unqualified opinion thereon ernst young llp grand rapids michigan february 13 2008 42 see accompanying notes consolidated financial statements 43 consolidated statements earnings stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements 44 consolidated statements shareholders equity stryker corporation subsidiaries millions except per share amounts see accompanying notes consolidated financial statements 45 consolidated statements cash flows stryker corporation subsidiaries see accompanying notes consolidated financial statements 46 notes consolidated financial statements stryker corporation subsidiaries december 31 2007 note 1 significant accounting policies business stryker corporation company stryker one worlds leading medical technology companies broadly based range products orthopaedics significant presence medical specialties stryker works respected medical professionals help people lead active satisfying lives companys products include implants used joint replacement trauma spinal craniomaxillofacial surgeries biologics surgical neurologic ear nose throat interventional pain equipment endoscopic surgical navigation communications digital imaging systems well patient handling emergency medical equipment principles consolidation consolidated financial statements include accounts company majorityowned subsidiaries elimination intercompany accounts transactions revenue recognition significant portion companys orthopaedic implants revenue generated consigned inventory maintained hospitals field representatives products revenue recognized time company receives appropriate notification product used implanted company records revenue medsurg equipment product sales title risk ownership transferred customer typically upon shipment customer company records estimated sales returns discounts applicable adjustments reduction net sales period revenue recognized shipping handling products amounts billed customers shipping handling products included net sales costs incurred related shipping handling products included cost sales use estimates preparation consolidated financial statements conformity us generally accepted accounting principles gaap requires company management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes actual results could differ estimates foreign currency translation functional currencies substantially companys international affiliates local currencies accordingly financial statements international affiliates translated us dollars using current exchange rates balance sheets average exchange rates statements earnings cash flows unrealized translation adjustments included accumulated comprehensive gain loss shareholders equity transaction gains losses resulting settlement nonfunctional currency receivables payables included net earnings financial instruments companys financial instruments consist cash equivalents marketable securities accounts receivable accounts payable debt foreign currency exchange contracts companys estimates fair value approximate carrying amounts financial instruments december 31 2007 2006 cash equivalents marketable securities investments cash equivalents highly liquid investments maturity three months less purchased marketable securities consist marketable debt securities certificates deposit classified availableforsale investments included within assets consolidated balance sheets consist mutual funds classified trading acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities 47 companys marketable securities investments stated fair value based quoted market prices adjustments fair value marketable securities investments classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive gain loss shareholders equity adjustments fair value investments classified trading recorded earnings offsets related changes liabilities deferred compensation arrangements amortized cost marketable debt securities classified availableforsale adjusted amortization premiums discounts maturity computed effective interest method amortization included income expense along interest realized gains losses cost securities sold determined specific identification method pursuant companys investment policy individual marketable security investments must maintain minimum credit quality single per standard poors a2 per moodys corporation overall portfolio marketable securities must maintain minimum average credit quality double per standard poors aa per moodys corporation accounts receivable accounts receivable consists trade miscellaneous receivables company maintains allowance doubtful accounts estimated losses collection accounts receivable company makes estimates regarding future ability customers make required payments based historical credit experience expected future trends accounts receivable securitization company accounts receivable securitization facility pursuant certain subsidiaries company sell ongoing basis domestic accounts receivable stryker funding corporation sfc wholly owned specialpurpose subsidiary company turn may sell without recourse aggregate 2000 million undivided percentage ownership interest receivables bankadministered multiseller commercial paper conduits creditors sfc claim assets equity becomes available company amounts undivided percentage ownership interests accounts receivable sold sfc facility december 31 2007 2006 accounts receivable sold would reflected consolidated balance sheet reductions accounts receivable period sold amount receivables available sold subject change monthly based level defined eligible receivables less defined customary reductions servicing dilution loss reserves inventories stated lower cost market cost approximately 84 inventories determined using firstin firstout fifo cost method cost certain domestic inventories determined using lastin firstout lifo cost method fifo cost inventories approximates replacement cost company maintains reserves excess obsolete inventory resulting potential inability sell products prices excess current carrying costs markets company operates highly competitive new products surgical procedures introduced ongoing basis marketplace changes may cause companys products become obsolete company makes estimates regarding future recoverability costs products records provision excess obsolete inventories based historical experience expiration sterilization dates expected future trends property plant equipment property plant equipment stated cost depreciation computed either straightline decliningbalance method estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses amounts allocated intangible assets intangible assets include developed technology amortized straightline basis 20 years customer relationships reflect expected continued customer patronage trademarks patents amortized straightline basis 4 40 years weightedaverage life 15 years intangible assets 48 goodwill longlived assets impairment tests financial accounting standards board fasb statement 142 goodwill intangible assets requires companies test goodwill possible impairment annual basis company performs annual impairment test fourth quarter year using discounted cash flow analysis requires certain assumptions estimates made regarding market conditions companys future profitability company also performs impairment tests goodwill intangible longlived assets interim periods upon occurrence certain events changes circumstance defined fasb statements 142 144 accounting impairment disposal longlived assets loaner instrumentation loaner instrumentation represents net book value loaner instruments surgical implants provided customers company loaner instrumentation amortized straightline basis 3year period amortization expense loaner instrumentation included selling general administrative expenses stock options december 31 2007 company key employee director stock option plans described fully note 8 company measures cost employee stock options based grantdate fair value recognizes cost period recipient required provide services exchange options typically vesting period weightedaverage fair value per share options granted 2007 2006 2005 estimated date grant using blackscholes option pricing model 2190 1716 1745 respectively fair value options granted estimated using following weightedaverage assumptions riskfree interest rate 48 46 29 expected dividend yield 05 02 expected stock price volatility 242 248 307 expected option life 67 years 70 years 65 years riskfree interest rate periods within expected life options granted based us treasury yield curve effect time grant expected stock price volatility based historical volatility companys stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data company recognizes cost stock options using straightline method vesting periods income taxes company accounts income taxes using liability method deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax expense credit represents change net deferred income tax assets liabilities year company operates multiple income tax jurisdictions inside outside united states income tax authorities jurisdictions regularly perform audits companys income tax filings accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations income tax audits associated allocation income complex issues including inventory transfer pricing product royalty arrangements may require extended period time resolve may result income tax adjustments changes income allocation required jurisdictions different income tax rates company adopted provisions fasb interpretation 48 accounting uncertainty income taxes january 1 2007 interpretation clarified accounting income taxes prescribing minimum recognition threshold income tax position required meet recognized companys consolidated financial statements interpretation also provided guidance measurement classification income tax positions interest expense penalties requires additional disclosure annual basis upon adoption company recognized increase interest expense accrual associated unresolved income tax positions accounted reducing january 1 2007 balance retained 49 earnings 76 million net income taxes subsequent adoption interest expense penalties incurred associated unresolved income tax positions continue included income expense addition upon adoption interpretation company reclassified 1792 million current income taxes liability noncurrent liabilities match anticipated timing future income tax payments derivative financial instruments company follows provisions fasb statement 133 accounting derivative instruments hedging activities amended statements 137 138 accounting derivative financial instruments statements require company recognize derivatives balance sheet fair value company uses derivative financial instruments manage economic impact fluctuations currency exchange rates company enters forward currency exchange contracts manage economic risks contracts adjusted fair value earnings legal contingencies company involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 14 potential future outcomes matters outside managements complete control generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory relief could result payment significant claims settlements legal matters management sufficient information reasonably estimate companys future obligations liability representing managements best estimate probable cost resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies company anticipate material losses result proceedings beyond amounts already provided accompanying consolidated financial statements accumulated comprehensive gain loss components accumulated comprehensive gain loss follows millions unfunded foreign accumulated unrealized pension currency gains losses gains translation comprehensive securities losses adjustments gain loss balances january 1 2006 01 117 170 52 comprehensive gain loss 2006 09 26 1026 1043 adjustments adopt fasb statement 158 net income tax benefit 189 balances december 31 10 280 1196 906 comprehensive gain loss 2007 11 164 1527 1702 balances december 31 01 116 2723 2608 recently issued accounting standards 2006 fasb issued statement 157 fair value measurements statement defines fair value establishes framework measuring fair value assets liabilities expands disclosures fair value measurements company subject provisions statement beginning january 1 2008 company yet determined impact adoption statement financial position company anticipate material impact however company believes likely required provide additional disclosures part future financial statements beginning first quarter 2008 2007 fasb issued statement 159 fair value option financial assets financial liabilities statement allows companies option measure eligible financial instruments fair value election may applied instrument basis typically irrevocable elected company adopt statement effective january 1 2008 required anticipates apply fair value option financial instruments 2007 fasb issued statement 141r business combinations replacement fasb statement 141 statement significantly changes principles requirements acquisition recognized measured companys financial statements including identifiable assets acquired 50 liabilities assumed statement also provides guidance recognizing measuring goodwill acquired business combination required disclosures enable users financial statements evaluate nature financial effects business combination statement effective prospectively except certain retrospective adjustments deferred income tax balances company beginning january 1 2009 company yet determined impact adoption statement financial position company reclassifications certain prior year amounts reclassified conform presentation used 2007 company reclassified consolidated financial statements reflect discontinued operations note financial instruments risk management following summary companys investments millions gross unrealized amortized gains estimated cost losses fair value december 31 2007 availableforsale securities corporate assetbacked debt securities 11039 foreign government debt securities 4318 09 4309 us agency debt securities 1826 05 1831 municipal debt securities 1642 01 1643 certificates deposit 1104 02 1106 us treasury debt securities 969 06 975 300 total availableforsale securities 21198 05 21203 trading securities mutual funds 367 total investments 21565 05 21570 reported current assets marketable securities 21203 noncurrent assets 367 21570 51 december 31 2006 availableforsale securities corporate assetbacked debt securities 5153 06 5147 us treasury debt securities 2450 07 2443 certificates deposit 1319 01 1318 us agency debt securities 615 municipal debt securities 220 239 total availableforsale securities 9996 14 9982 trading securities mutual funds 297 total investments 10293 14 10279 reported current assets marketable securities 9982 noncurrent assets 297 10279 net carrying value estimated fair value availableforsale securities december 31 2007 contractual maturity follows millions estimated cost fair value december 31 2007 due one year less 7169 7161 due one year three years 12184 12200 due three years 1845 1842 21198 21203 december 31 2007 approximately 9 companys investments availableforsale securities held triple rated per standard poors assetbacked debt securities majority related investments automobile loans december 31 2007 less 1 companys investments marketable securities exposed risk loss related declining value subprimemortgage securities market interest marketable securities income included income expense totaled 855 million 2007 414 million 2006 133 million 2005 company enters forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk company would otherwise result changes exchange rates nonfunctional currency exposures relate principally intercompany receivables payables arising intercompany transactions including purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts marked market period resulting gains losses included income expense consolidated statements earnings offset recognized gains losses exposed transactions net realized gains losses result transactions material companys results operations 2007 2006 2005 december 31 2007 company outstanding forward currency exchange contracts purchase 4279 million sell 2577 million various currencies principally us dollars euros maturities 52 ranging principally 4 101 days december 31 2006 company outstanding forward currency exchange contracts purchase 3879 million sell 2270 million various currencies principally us dollars euros maturities ranging principally 7 180 days estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points recorded component accrued expenses liabilities consolidated balance sheets december 31 2007 company exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties note inventories summarized follows millions note acquisitions 2006 company acquired outstanding stock sightline technologies ltd sightline private developmentstage company upfront payment 500 million cash plus certain transaction costs assumption certain liabilities acquisition sightline developer flexible endoscopes expected enhance companys presence gastrointestinal markets within medsurg equipment segment sightlines operating results included companys consolidated financial statements date acquisition materially impact companys operating results pro forma consolidated results operations would differ significantly result sightline acquisition purchase price allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair value date acquisition amount purchase price allocated purchased inprocess research development resulted charge 527 million 13 per diluted share companys 2006 operating results date acquisition flexible endoscope technologies acquired yet reached technological feasibility amount written purchased inprocess research development deductible income tax purposes united states terms transaction also include potential milestone payments additional 900 million upon achievement certain operational financial targets related sightlines products first expected occur 2008 potential milestone payments expected capitalized fair values intangible assets time payment amortized remaining useful lives 2005 company acquired merger outstanding stock plasmasol corp plasmasol private developmentstage company plasmasol developer technology allow stryker provide sterilization equipment use certain medsurg equipment products cost transaction totaled 175 million including upfront cash payment plus assumption certain liabilities plasmasols operating results included companys consolidated financial statements date acquisition materially impact companys operating results pro forma consolidated results operations would differ significantly result plasmasol acquisition 53 purchase price allocated assets acquired primarily deferred income tax assets associated acquired net operating losses purchased inprocess research development based estimated fair value date acquisition amount purchase price allocated purchased inprocess research development resulted charge 159 million 04 per diluted share companys 2005 operating results date acquisition sterilization technology acquired yet approved sale us food drug administration fda therefore yet reached technological feasibility amount written purchased inprocess research development deductible income tax purposes united states company believes technologies acquired sightline plasmasol acquisitions result introduction new products additional future sales however unanticipated issues may arise could delay terminate products development prior regulatory approval commercialization could unfavorable impact companys operating results december 31 2007 company must refine certain product specifications highlighted customer preference trials validate manufacturing processes order achieve plan initial commercialization flexible endoscope technologies 2008 december 31 2007 company encountered significant issues expects completion development initial commercialization sterilization technology 2010 2005 company acquired merger outstanding stock etraumacom corp etrauma 500 million cash plus certain transaction costs acquisition expanded companys digital imaging equipment product offerings within medsurg equipment segment adding etraumas proprietary picture archive communications systems image management viewing software acquisition etrauma accounted using purchase method accounting etraumas operating results included companys consolidated financial statements date acquisition materially impact companys operating results pro forma consolidated results operations would differ significantly result etrauma acquisition purchase price allocated assets acquired liabilities assumed based estimated fair value date acquisition based purchase price allocation 220 million allocated identifiable intangibles amortized remaining lives 5 8 years 302 million allocated goodwill deductible income tax purposes united states immediately acquisition consummated management company began implement integration plan combine stryker etrauma conjunction integration plan company recorded additional purchase liabilities severance related costs 03 million included purchase price allocation note 5 discontinued operations 2007 company sold outpatient physical therapy business physiotherapy associates water street healthcare partners 1500 million cash less certain indebtedness sale physiotherapy allows company focus efforts medical technology market sale physiotherapy resulted gain 257 million net 150 million income tax expense 06 per diluted share net sales discontinued operations years ended december 31 2007 2006 2005 1074 million 2584 million 2626 million respectively net earnings discontinued operations years ended december 31 2007 2006 2005 50 million 63 million 111 million respectively terms sale agreement company retained responsibility certain cash damages paid connection investigation physiotherapy associates billing coding practices us department justice announced 2003 companys liability damages fixed sale agreement interest expense accrued date payment occurred 2007 liabilities previously recorded company sufficient cover obligations 54 assets liabilities classified discontinued operations december 31 2006 follows millions accounts receivable less allowance 83 398 prepaid expenses current assets 44 current assets discontinued operations 442 property plant equipment less allowance depreciation 396 368 goodwill 203 intangibles less accumulated amortization 43 19 noncurrent assets discontinued operations 590 accounts payable 43 accrued compensation 139 accrued expenses liabilities 43 current liabilities discontinued operations 225 noncurrent liabilities discontinued operations 56 note goodwill intangible assets changes net carrying amount goodwill segment years ended december 31 2007 2006 follows millions fourth quarters 2007 2006 company completed required annual impairment tests goodwill prescribed fasb statement 142 goodwill intangible assets determined instances recorded goodwill impaired goodwill write necessary following summary companys intangible assets millions 55 estimated amortization expense five succeeding years follows millions 370 341 312 303 276 2007 company recorded 198 million charge 127 million net income taxes write patents associated intervertebral body fusion cage products impairment followed fda decision downgrade certain intervertebral body fusion products class ii devices along weak market sales specific products result company performed discounted cash flow analysis remaining life patented technologies determined charge recognize intangible asset impairment required note debt company current debt outstanding various debt instruments totaling 168 million 148 million december 31 2007 2006 respectively company also 10000 million unsecured credit facility expires november 2010 includes senior 5year nonamortizing revolving credit agreement maximum amount 10000 million company may increase credit facility maximum limit 1000 million increments additional 5000 million upon acceptance existing lender group additional lenders amounts outstanding unsecured credit facility december 31 2007 2006 unsecured credit facility requires facility fee ranging 004 015 aggregate commitment credit facility depending companys debt rating credit facility includes 5000 million multicurrency sublimit yen euro borrowed 1000 million swing line sublimit 1000 million letter credit sublimit credit facility bears interest base rate defined plus applicable margin ranging 012 0475 depending companys debt rating 2007 weightedaverage interest rate excluding required fees borrowings made credit facility 53 unsecured credit facility requires company comply certain financial covenants company compliance covenants december 31 2007 addition unsecured credit facility company lines credit issued various financial institutions available fund companys daytoday operating needs december 31 2007 company 10473 million additional borrowing capacity available existing credit facilities carrying amounts companys longterm debt approximate fair values based quoted interest rates similar types amounts borrowing agreements 56 interest paid debt including required fees 65 million 2007 63 million 2006 81 million 2005 approximates amounts reflected interest expense included income expense note capital stock company 05 million authorized shares 1 par value preferred stock none outstanding company key employee director stock option plans options granted exercise price less fair market value underlying common stock date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows weightedaverage remaining aggregate shares weightedaverage contractual term intrinsic value millions exercise price years millions options outstanding january 1 2007 254 3335 granted 35 6267 exercised 36 2091 cancelled 05 4861 options outstanding december 31 2007 248 3898 59 8875 exercisable december 31 2007 144 2985 45 6459 options expected vest 100 5126 79 2354 aggregate intrinsic value represents cumulative difference fair market value underlying common stock option exercise prices options exercised years ended december 31 2007 2006 2005 1601 million 1000 million 1005 million respectively shares reserved future compensation grants stryker common stock 229 million december 31 2007 259 million december 31 2006 exercise prices options outstanding december 31 2007 ranged 842 6494 december 31 2007 1458 million unrecognized compensation cost related nonvested stock options granted stock option plans cost expected recognized following 72 years weightedaverage period 18 years february 2008 companys board directors authorized company purchase 750 million common stock purchases may made time open market privately negotiated transactions otherwise manner timing amount purchases determined companys management based evaluation market conditions stock price factors subject regulatory conditions 57 note 9 net earnings per share following table sets forth computation basic diluted net earnings per share millions except per share amounts net earnings 10174 7777 6436 weightedaverage shares outstanding basic net earnings per share 4097 4065 4037 effect dilutive employee stock options 75 53 71 adjusted weightedaverage shares outstanding diluted net earnings per share 4172 4118 4108 net earnings per share common stock basic 248 191 159 diluted 244 189 157 options purchase average 09 million 45 million 25 million shares common stock years ended december 31 2007 2006 2005 respectively outstanding included computation diluted net earnings per share exercise prices options greater average market price common shares periods 58 note 10 retirement plans certain companys subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets use december 31 measurement date determination plan obligations funded status plans summary companys defined benefit pension plans follows millions discount rate used determination projected benefit obligation 48 43 december 31 2007 2006 respectively components amounts recognized consolidated balance sheets follows millions 59 components amounts recognized accumulated comprehensive gain loss effect income taxes follows millions accumulated benefit obligation defined benefit pension plans 2061 million 1968 million december 31 2007 2006 respectively pension plans accumulated benefit obligation excess plan assets projected benefit obligations accumulated benefit obligations fair value plan assets 1921 million 1752 million 1373 million respectively december 31 2007 1847 million 1680 million 1187 million respectively december 31 2006 components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive gain loss effect income taxes follows millions net periodic benefit cost service cost 172 157 127 interest cost 94 80 72 expected return plan assets 89 77 65 amortization prior service cost transition amount 02 recognized actuarial loss 10 14 09 net periodic benefit cost 189 176 145 changes plan assets benefit obligations recognized comprehensive gain loss net actuarial gain loss 208 27 29 recognized net actuarial loss 10 14 09 transition amount 01 total recognized comprehensive gain loss 219 41 20 total recognized net periodic benefit cost comprehensive gain loss 30 135 165 60 estimated net actuarial loss defined benefit pension plans recognized accumulated comprehensive gain loss net periodic benefit cost year ended december 31 2008 03 million company estimates immaterial amount amortization prior service cost transition amount defined benefit pension plans recognized accumulated comprehensive gain loss net periodic benefit cost year ended december 31 2008 company assumed average longterm expected return defined benefit plan assets 58 december 31 2007 expected return determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns weightedaverage allocation plan assets asset category follows investment strategy companys defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances reflected target investment allocation ranges plans december 31 2007 low high equity securities 49 64 debt securities company anticipates contributing approximately 125 million defined benefit pension plans 2008 following estimated future benefit payments reflect expected future service appropriate expected paid years indicated millions 20132017 expected benefit payments 82 88 87 96 569 retirement plan expense companys defined contribution retirement plans totaled 823 million 2007 673 million 2006 597 million 2005 portion companys retirement plan expenses funded stryker common stock totaling 84 million 2007 70 million 2006 63 million 2005 use stryker common stock represents noncash operating activity reflected consolidated statements cash flows amount stryker common stock held companys defined contribution retirement plans totaled 1082 million approximately 14 million shares 862 million approximately 16 million shares december 31 2007 2006 respectively value stryker common stock percentage total defined contribution retirement plan assets 15 13 december 31 2007 2006 respectively 61 note income taxes 2005 companys board directors approved plan repatriate 722 million foreign earnings provisions american jobs creation act enacted united states provide temporary incentive us companies repatriate accumulated income earned foreign jurisdictions repatriation plan completed 2005 company recorded charge 274 million 07 per diluted share recognize income tax expense related liability united states associated repatriation repatriated funds invested pursuant approved domestic reinvestment plan conformed act december 31 2007 income tax authorities several income tax jurisdictions inside outside united states conducting routine audits companys income tax returns filed prior years audits generally designed determine individual income tax authorities agreement companys interpretations complex income tax regulations regarding allocation income various income tax jurisdictions exceptions company longer subject audits income tax authorities tax years prior 2001 income tax years subsequent 2000 open examination many income tax jurisdictions company operates earnings continuing operations income taxes consist following millions us operations 6668 5375 3523 foreign operations 7033 5563 5847 13701 10938 9370 components provision income taxes follow millions current income tax expense federal 2909 2319 1669 state 495 296 269 foreign 1901 880 1028 5305 3495 2966 deferred income tax expense credit 1471 271 79 3834 3224 3045 reconciliation us statutory income tax rate companys effective income tax rate continuing operations follows us statutory income tax rate 350 add deduct state income taxes less effect federal deduction 24 21 24 income tax benefit relating operations ireland puerto rico 94 91 98 nondeductible purchased inprocess research development 17 06 nondeductible permanent differences 06 13 19 us income taxes repatriation foreign earnings 29 foreign income taxes rates different us statutory income tax rate 01 03 06 05 12 11 280 295 325 62 deferred income taxes reflect net income tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes valuation allowances recorded reduce deferred income tax assets likely income tax benefit realized income tax effect significant temporary differences comprise companys deferred income tax assets liabilities follows millions net operating loss carryforwards totaling approximately 616 million december 31 2007 available reduce future taxable earnings certain domestic foreign subsidiaries provision made u federal state income taxes foreign income taxes may result future remittances undistributed earnings 25159 million december 31 2007 foreign subsidiaries expected earnings reinvested overseas indefinitely determination amount unrecognized deferred income tax liability unremitted earnings practicable total income taxes paid net refunds received 4116 million 2007 3256 million 2006 2478 million 2005 63 changes amounts recorded unresolved income tax positions year ended december 31 2007 follows millions companys income tax expense could reduced 2049 million 1688 million december 31 2007 january 1 2007 respectively upon favorable resolution unresolved income tax positions interest expense penalties included income expense 131 million year ended december 31 2007 accrued interest penalties included accrued expenses liabilities 348 million december 31 2007 company expect significant increases decreases amount unrecognized income tax benefits next twelve months note segment geographic data company segregates operations two reportable business segments orthopaedic implants medsurg equipment orthopaedic implants segment sells orthopaedic reconstructive hip knee shoulder trauma spinal craniomaxillofacial implant systems bone cement bone growth factor op1 medsurg equipment segment sells surgical equipment surgical navigation systems endoscopic communications digital imaging systems well patient handling emergency medical equipment category includes corporate administration interest expense interest marketable securities income companys reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies company measures financial results reportable segments using internal performance measure excludes intangible asset impairment charge recorded 2007 purchased inprocess research development charges recorded 2006 2005 additional income taxes repatriation foreign earnings recorded 2005 well effect sharebased compensation includes compensation related employee director stock option plans identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment 2006 2005 assets discontinued operations 64 sales financial information business segment follows millions 65 companys principal area operation outside united states europe company also operations multiple foreign countries including japan pacific region canada latin america region geographic information follows millions note leases company leases various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases future minimum lease commitments leases follows millions 420 343 222 103 67 thereafter 117 1272 rent expense totaled 659 million 2007 560 million 2006 493 million 2005 66 note 14 contingencies 2007 company announced reached resolution us attorneys office district new jersey connection previously announced investigation relating consulting contracts professional service agreements remuneration agreements stryker corporation orthopedic surgeon orthopedic surgeon training medical school graduate using considering surgical use hip knee joint replacementreconstruction products manufactured sold stryker corporation resolution form nonprosecution agreement 18month period term agreement companys orthopaedics subsidiary subject oversight federal monitor appointed us attorney regarding compliance certain standards procedures connection retention payment orthopaedic surgeon consultants related reconstructive products provision certain benefits surgeons 2007 company disclosed us securities exchange commission made informal inquiry company regarding possible violations foreign corrupt practices act connection sale medical devices certain foreign countries subsequently 2008 company received subpoena us department justice criminal division requesting certain documents period january 1 2000 present connection us securities exchange commission inquiry 2006 company announced received subpoena us department justice antitrust division requesting documents period january 2001 present regarding possible violations federal criminal law including possible violation antitrust laws relating manufacture sale orthopaedic implant devices stryker fully cooperating us department justice us securities exchange commission regarding matters 2007 company received two warning letters fda regarding compliance certain quality system specifications reconstructive implant manufacturing facilities one letter facility cork ireland another facility mahwah new jersey company takes matters seriously fully cooperating fda address observations pursuant certain companys credit lease agreements company provided financial guarantees third parties form indemnification provisions indemnify third parties costs including limited adverse judgments lawsuits imposition additional income taxes due either change tax law adverse interpretation tax law terms guarantees equal terms related credit lease agreements company able calculate maximum potential amount future payments could required make guarantees potential payment dependent occurrence future unknown events eg changes us foreign tax laws 67 summary quarterly data unaudited stryker corporation subsidiaries millions except per share amounts price quotations reported supplied new york stock exchange 68 item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements board directors shareholders stryker corporation audited accompanying consolidated balance sheets stryker corporation subsidiaries december 31 2011 2010 related consolidated statements earnings shareholders equity cash flows three years period ended december 31 2011 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stryker corporation subsidiaries december 31 2011 2010 consolidated results operations cash flows three years period ended december 31 2011 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states stryker corporations internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 13 2012 expressed unqualified opinion thereon ernst young llp grand rapids michigan february 13 2012 stryker corporation subsidiaries consolidated statements earnings see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries consolidated statements shareholders’ equity see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements dollar amounts millions except per share amounts otherwise specified stryker corporation subsidiaries notes consolidated financial statements december 31 2011 note 1 significant accounting policies nature operations stryker corporation “company” “we” ”us” “our” one worlds leading medical technology companies products include implants used joint replacement trauma spinal surgeries surgical equipment surgical navigation systems endoscopic communications systems patient handling emergency medical equipment well medical device products used variety medical specialties basis presentation consolidated financial statements include company subsidiaries intercompany transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted united states gaap requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying disclosures estimates based managements best knowledge current events actions company may undertake future estimates used accounting among items pensions stock options valuation acquired intangible assets useful lives depreciation amortization longlived assets future cash flows associated impairment testing goodwill indefinitelived intangible assets longlived assets deferred tax assets liabilities uncertain income tax positions contingencies actual results may ultimately differ estimates revenue recognition sales recognized revenue realized realizable earned policy recognize revenue title product ownership risk loss transfer customer date shipment date receipt customer reconstructive products receive appropriate notification product used implanted provision estimated sales returns discounts rebates sales incentives recorded reduction net sales period revenue recognized shipping handling costs charged customers included net sales cost sales cost sales primarily comprised direct materials supplies consumed manufacture product well manufacturing labor depreciation expense direct overhead expense necessary acquire convert purchased materials supplies finished product cost sales also includes cost distribute products customers inbound freight costs warehousing costs shipping handling activity research development engineering expenses research development costs charged expense incurred 462 394 336 2011 2010 2009 respectively costs include expenditures new product manufacturing process innovation improvements existing products processes costs primarily consist salaries wages consulting depreciation maintenance research facilities equipment selling general administrative expenses selling general administrative expense primarily comprised selling expenses marketing expenses administrative indirect overhead costs amortization loaner instrumentation depreciation amortization expense nonmanufacturing assets miscellaneous operating items currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate statements united states dollars recorded comprehensive income oci currency translation adjustments accumulated oci gain 176 december 2011 gain 196 december 2010 transactional exchange gains losses reflected net earnings cash equivalents highly liquid investments remaining stated maturities three months less purchased considered cash equivalents recorded cost marketable securities marketable securities consist marketable debt securities certificates deposit mutual funds mutual funds acquired offset changes certain liabilities related deferred compensation arrangements expected used settle liabilities pursuant investment policy individual marketable security investments must minimum credit quality single per standard poor’s fitch a2 per moody’s corporation time acquisition overall portfolio marketable securities must maintain minimum average credit quality double per standard poor’s fitch aa per moody’s corporation event rating downgrade minimum credit quality subsequent purchase marketable security investment evaluated determine appropriate action take minimize overall risk marketable security investment portfolio december 31 2011 1 investments marketable securities credit quality rating less single per standard poor’s fitch a2 per moody’s corporation marketable securities classified availableforsale trading securities accounts receivable accounts receivable consists trade miscellaneous receivables allowance maintained dollar amounts millions except per share amounts otherwise specified doubtful accounts estimated losses collection accounts receivable estimates made regarding ability customers make required payments based historical credit experience expected future trends accounts receivable written reasonable collection efforts exhausted inventories stated lower cost market cost generally determined using firstin firstout fifo cost method excess obsolete inventory resulting potential inability sell specific products prices excess current carrying costs reserves maintained reduce current carrying cost market prices financial instruments financial instruments consist cash equivalents marketable securities accounts receivable investments accounts payable debt foreign currency exchange contracts exception longterm debt discussed detail note 8 estimates fair value financial instruments approximate carrying amounts december 31 2011 2010 recognize marketable securities consolidated balance sheets fair value adjustments fair value marketable securities classified availableforsale recorded increases decreases net income taxes within accumulated comprehensive gain loss shareholders’ equity adjustments fair value marketable securities classified trading recorded earnings amortized cost marketable debt securities adjusted amortization premiums discounts maturity computed effective interest method amortization included income expense along interest realized gains losses cost securities sold determined specific identification method review declines fair value investments classified availableforsale impairment determine whether decline fair value otherthantemporary impairment resulting losses otherthantemporary impairments availableforsale marketable securities recorded consolidated statements earnings recognize derivatives consolidated balance sheets fair value enter forward currency exchange contracts mitigate impact currency fluctuations transactions denominated nonfunctional currencies thereby limiting risk would otherwise result changes exchange rates nonfunctional currency exposures principally relate intercompany receivables payables arising intercompany purchases manufactured products periods forward currency exchange contracts correspond periods exposed transactions realized gains losses included measurement recording transactions denominated nonfunctional currencies forward currency exchange contracts recorded fair value period resulting gains losses included income expense consolidated statements earnings property plant equipment property plant equipment stated cost depreciation computed either straightline decliningbalance method estimated useful lives 3 30 years buildings improvements 3 10 years machinery equipment fourth quarter 2010 announced definitive agreement sell op1 product family use orthopaedic bone applications related manufacturing facility west lebanon nh result announcement recorded 76 net taxes impairment charge reduce carrying value associated assets fair value december 31 2010 assets held sale included current assets consolidated balance sheet totaled 62 29 net property plant equipment 25 inventories 8 february 1 2011 completed sale total consideration 60 material gain loss recorded upon completion transaction third quarter 2010 sold manufacturing facility france total consideration 53 cash transaction recorded gain 13 net taxes transaction included 5year supply agreement volumes commensurate presale production levels contingent purchasers ability provide products meet specific quality standards supply agreement may terminated material breach occurs goodwill intangible assets goodwill represents excess purchase price fair value tangible net assets acquired businesses acquisition date amounts allocated identifiable intangible assets factors contribute recognition goodwill include securing synergies specific business available market participants expected increase revenues profits acquisition talented workforce cost savings opportunities strategic benefit expanding presence orthobiologics neurotechnology markets diversifying product portfolio fair values identifiable intangible assets primarily determined using income approach intangible assets include limited developed technology customer relationships reflect expected continued customer patronage trademarks patents amortized straightline basis estimated useful lives 4 40 years goodwill longlived assets impairment tests perform annual impairment test fourth quarter year earlyadopted provisions accounting standards update asu 201108 intangibles goodwill testing goodwill impairment permits us consider qualitative indicators fair value reporting unit unlikely reporting unit impaired goodwill certain circumstances may also utilize discounted cash flow analysis requires dollar amounts millions except per share amounts otherwise specified certain assumptions estimates made regarding market conditions future profitability review longlived assets indicators impairment whenever events changes circumstances indicate carrying amount may recoverable evaluation performed lowest level identifiable cash flows individual asset level asset group level defined undiscounted cash flows expected generated related assets estimated assets useful life based updated projections evaluation indicates carrying amount asset may recoverable potential impairment measured based upon fair value related asset group determined appropriate market appraisal valuation technique assets classified held sale recorded lower carrying amount fair value less costs sell loaner instrumentation loaner instrumentation represents net book value loaner instruments surgical implants provided us customers loaner instrumentation amortized straightline basis 3year period amortization expense loaner instrumentation included selling general administrative expenses stock options december 31 2011 key employee director stock option plans described fully note 9 consolidated financial statements measure cost employee stock options based grantdate fair value recognize cost using straightline method period recipient required provide services exchange options typically vesting period weightedaverage fair value per share options granted 2011 2010 2009 estimated date grant using blackscholes option pricing model 1714 1587 1309 respectively fair value options granted estimated using following weightedaverage assumptions riskfree interest rate periods within expected life options granted based us treasury yield curve effect time grant expected stock price volatility based historical volatility stock expected option life representing period time options granted expected outstanding based historical option exercise employee termination data income taxes deferred income tax assets liabilities determined based differences financial reporting income tax bases assets liabilities measured using enacted income tax rates effect years differences expected reverse deferred income tax benefits generally represent change net deferred income tax assets liabilities year amounts result adjustments related acquisitions appropriate interest expense penalties incurred associated uncertain income tax positions included income expense operate multiple income tax jurisdictions inside outside united states accordingly management must determine appropriate allocation income jurisdictions based current interpretations complex income tax regulations income tax authorities jurisdictions regularly perform audits income tax filings income tax audits associated allocation income complex issues including inventory transfer pricing cost sharing product royalty foreign branch arrangements may require extended period time resolve may result significant income tax adjustments changes income allocation required jurisdictions different income tax rates legal contingencies involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters fully described note 7 consolidated financial statements outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing management’s best estimate probable cost minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies accumulated comprehensive gain loss components accumulated comprehensive gain loss follows dollar amounts millions except per share amounts otherwise specified recently issued accounting standards 2011 fasb amended provisions fair value measurement topic fasb codification amendment provides consistent definition fair value ensures fair value measurement disclosure requirements similar gaap international financial reporting standards ifrs topic changes certain fair value measurement principles enhances disclosure requirements particularly level 3 fair value measurements provisions effective reporting periods beginning december 15 2011 applied prospectively adoption amendment material effect consolidated financial statements 2011 fasb amended provisions comprehensive income topic fasb codification amended provisions issued enhance comparability entities report gaap ifrs provide consistent method presenting nonowner transactions affect entitys equity topic eliminates option report comprehensive income components statement changes shareholders equity requires entity present total comprehensive income components net income components comprehensive income either single continuous statement two separate consecutive statements amended provisions effective fiscal years interim periods within years beginning december 15 2011 early adoption new guidance permitted full retrospective application required adoption amendment material effect consolidated financial statements amendment impacts presentation 2011 fasb amended provisions intangiblesgoodwill topic fasb codification amended provisions issued simplify entities test goodwill impairment topic allow companies assess qualitative factors determine morelikelythannot goodwill might impaired whether necessary perform twostep goodwill impairment test required current accounting standards amended provisions effective fiscal years beginning december 15 2011 early adoption permitted elected enact early adoption amendment material effect consolidated financial statements 2011 fasb amended provisions balance sheet disclosure offsetting assets liabilities topic fasb codification amended provisions provide new disclosures recognized financial instruments derivative instruments either offset balance sheet subject enforceable master netting arrangement similar agreement amended provisions effective fiscal years beginning january 1 2013 amended provisions required applied retrospectively prior periods presented adoption amendment material effect consolidated financial statements reclassifications certain prior year amounts reclassified conform presentation used 2011 note 2 subsequent events january 2012 stryker biotech reached settlement united states attorney’s office district massachusetts part settlement pled one misdemeanor charge paid nontaxdeductible fine 15 result resolution department justice dismissed thirteen felony charges stryker biotech contained 2009 federal grand jury indictment previously disclosed biotech division target federal grand jury investigation conducted united states attorneys office district massachusetts settlement represented recognized subsequent event accordingly recorded fourth quarter 2011 results evaluated subsequent events december 31 2011 concluded material transactions occurred subsequent date provided additional evidence conditions existed december 31 2011 require adjustment consolidated financial statements note 3 financial instruments accounting guidance fair value measurements certain financial assets liabilities requires financial assets liabilities carried fair value classified disclosed one following three categories level 1 quoted market prices active markets identical assets liabilities level 2 observable marketbased inputs unobservable inputs corroborated market data level 3 unobservable inputs reflecting reporting entitys assumptions external inputs active markets applying fair value principles valuation assets liabilities required maximize use quoted market prices minimize use unobservable inputs calculate fair value level 1 level 2 instruments based exchange traded price similar identical instruments available based observable inputs fair value level 3 instruments calculated net present value expected cash flows based externally provided obtained inputs certain level 3 assets may also based sale prices similar assets fair value calculations take consideration credit risk counterparties changed valuation techniques used measuring fair value financial assets liabilities year dollar amounts millions except per share amounts otherwise specified valuation financial instruments aforementioned pricing categories following rollforward assets measured fair value recurring basis using unobservable inputs level 3 june 2010 exercised auction rate securities ars rights agreement ars rights entered 2008 ubs financial services inc ubs one investment providers whereby received right sell ars par value ubs time period june 30 2010 july 2 2012 pursuant agreement redeemed entire remaining outstanding ars investment 140 par value result election 2010 recorded losses 17 income expense recognize change fair value estimate ars rights losses offset corresponding gains fair value estimate related ars investment following summary marketable securities dollar amounts millions except per share amounts otherwise specified unrealized losses availableforsale marketable securities primarily caused increases interest yields result continued challenging conditions global credit markets many investments downgraded rating agencies since initial purchase less 1 investments corporate assetbacked debt securities credit quality rating less single per standard poor’s fitch intend sell investments likely required sell investments recovery amortized cost basis may maturity consider investments otherthantemporarily impaired december 31 2011 cost estimated fair value availableforsale marketable securities december 31 2011 contractual maturity gross unrealized losses fair value investments unrealized losses deemed otherthantemporarily impaired aggregated investment category length time individual securities continuous unrealized loss position december 31 follows interest marketable securities income totaled 34 49 54 2011 2010 2009 respectively included income expense note 4 derivative instruments hedging strategies estimated fair value forward currency exchange contracts represents measurement contracts monthend spot rates adjusted current forward points exposed credit loss event nonperformance counterparties outstanding forward currency exchange contracts anticipate nonperformance counterparties years ended december 31 2011 2010 2009 recognized foreign currency transaction gains losses included income expense consolidated statements earnings 3 7 1 respectively outstanding derivative contracts effects consolidated balance sheets december 31 2011 2010 note 5 acquisitions october 2011 acquired concentric medical inc concentric manufactures markets minimally invasive products treatment acute ischemic stroke cash transaction 135 acquisition concentric enhances product offerings within neurotechnology spine segment july 2011 acquired memometal technologies memometal cash transaction 150 including assumed debt 9 additional 12 paid upon completion certain milestones memometal develops manufactures markets products extremity hand foot indications acquisition memometal enhances product offerings within reconstructive segment dollar amounts millions except per share amounts otherwise specified june 2011 acquired orthovita inc orthovita developer manufacturer orthobiologic biosurgery products cash transaction 316 acquisition orthovita complements existing product offerings primarily within neurotechnology spine business segment january 2011 acquired assets neurovascular division boston scientific corporation neurovascular cash transaction 1450 additional 50 payment made upon completion certain milestones acquisition neurovascular substantially enhances presence neurotechnology market allowing us offer comprehensive portfolio products neurosurgical neurovascular devices effects acquisitions completed 2011 included consolidated results operations prospectively date acquisition pro forma consolidated results operations year ended december 31 2011 would differ significantly result acquisitions purchase price allocations based upon preliminary valuations estimates assumptions subject change within measurement period valuations finalized allocation preliminary purchase price acquired net assets acquisitions completed 2011 note 6 goodwill intangible assets completed annual impairment tests goodwill concluded impairment exists changes net carrying amount goodwill segment follows following summary intangible assets estimated amortization expense five succeeding years follows dollar amounts millions except per share amounts otherwise specified note 7 contingencies commitments contingencies involved various proceedings legal actions claims arising normal course business including proceedings related product labor intellectual property matters outcomes matters generally known prolonged periods time certain legal proceedings claimants seek damages well compensatory equitable relief could result payment significant claims settlements andor imposition injunctions equitable relief legal matters management sufficient information reasonably estimate future obligations liability representing managements best estimate probable cost minimum range probable losses best estimate within range known resolution legal matters recorded estimates based consultation legal counsel previous settlement experience settlement strategies april 2011 lawsuits brought hillrom company inc affiliated entities us filed united states district court western district wisconsin united states district court southern district indiana suits allege infringement united states patent laws respect certain patient handling equipment manufactured sold us seek damages permanent injunctions wisconsin lawsuit subsequently transferred us district court indiana intend vigorously defend matters third quarter 2010 received subpoena united states department justice related sales marketing regulatory matters related stryker painpump also third quarter 2010 received subpoena united states department justice related sales marketing otisknee device investigations ongoing march 2010 shareholders derivative action complaint certain current former directors officers filed united states district court western district michigan southern division lawsuit brought westchester putnam counties heavy highway laborers local 60 benefit funds laborers local 235 benefit funds complaint alleges claims breach fiduciary duties gross mismanagement connection certain product recalls united states food drug administration fda warning letters government investigations relating physician compensation criminal proceeding brought biotech division case stayed special committee board directors evaluates claims january 2010 purported class action lawsuit us filed united states district court southern district new york behalf purchased common stock january 25 2007 november 13 2008 inclusive lawsuit seeks remedies securities exchange act 1934 may 2010 lawsuit transferred united states district court western district michigan southern division defending vigorously 2009 federal grand jury district massachusetts returned indictment charging stryker biotech llc certain thencurrent employees former employee stryker biotech wire fraud conspiracy defraud fda distribution misbranded device false statements fda january 2012 stryker biotech reached settlement united states attorneys office district massachusetts stryker pled one misdemeanor charge paid nontax deductible fine 15 result resolution department justice dismissed thirteen felony charges stryker biotech contained 2009 federal grand jury indictment charges thencurrent former employees stryker biotech also dismissed 2007 united states department health human services office inspector general hhs issued civil subpoena us seeking determine whether violated various laws paying consulting fees providing things value orthopedic surgeons healthcare educational institutions inducements use strykers orthopedic medical devices procedures paid whole part medicare investigation ongoing produced numerous documents materials hhs response subpoena 2007 disclosed united states securities exchange commission sec made inquiry us regarding possible violations foreign corrupt practices act connection sale medical devices certain foreign countries subsequently 2008 received subpoena united states department justice criminal division requesting certain documents period since january 1 2000 connection sec inquiry fully cooperating us department justice sec regarding matters purchase commitments operating leases purchase commitments materials supplies services property plant equipment part normal course business addition lease various manufacturing warehousing distribution facilities administrative sales offices well equipment operating leases future commitments obligations minimum lease commitments leases dollar amounts millions except per share amounts otherwise specified rent expense totaled 96 81 75 2011 2010 2009 respectively note 8 longterm debt credit facilities debt summarized follows september 2011 sold 750 senior unsecured notes due september 2016 notes 2016 notes bear interest 200 per year unless previously redeemed mature september 30 2016 received net proceeds 749 net offering discount 1 2016 notes carry effective interest rate 204 intend use net proceeds offering working capital general corporate purposes including acquisitions stock repurchases business opportunities 1000 senior unsecured revolving credit facility due august 2013 2010 facility requires us comply certain financial covenants compliance covenants december 31 2011 january 2010 sold 500 senior unsecured notes due january 15 2015 notes 500 senior unsecured notes due january 15 2020 notes 2015 notes bear interest 300 per year unless previously redeemed mature january 15 2015 2020 notes bear interest 4375 per year unless previously redeemed mature january 15 2020 company received net proceeds 996 net offering discount 4 2015 notes 2020 notes carry effective interest rates 302 446 respectively net proceeds offering continue available working capital general corporate purposes including acquisitions stock repurchases business opportunities july 15 2011 entered commercial paper program may issue private placement basis unsecured commercial paper notes maximum aggregate amount outstanding time 500 may issue notes program time net proceeds sale notes used general corporate purposes program contains customary representations warranties covenants indemnification provisions maturities notes vary may exceed 397 days notes must minimum denomination 025 notes sold discount par alternatively sold par bear interest either fixed floating rate vary based upon market conditions time issuance notes interest floating rate note may cd rate b commercial paper rate c federal funds rate libor rate e prime rate f treasury rate g base rate may specified time issuance notes redeemable prior maturity subject voluntary prepayment december 31 2011 notes issued outstanding program addition lines credit issued various financial institutions available fund daytoday operating needs december 31 2011 1098 additional borrowing capacity available existing credit facilities weightedaverage interest rate excluding required fees borrowings 33 december 31 2011 december 31 2011 total unamortized debt issuance costs incurred connection senior unsecured notes 13 fair value long term debt including current maturities december 31 2011 2010 1837 1026 respectively based quoted interest rates similar types amounts borrowing agreements interest expense including required fees incurred outstanding debt credit facilities included income expense totaled 94 53 14 2011 2010 2009 respectively interest paid debt including required fees 54 39 5 2011 2010 2009 respectively note 9 capital stock december 2011 2010 2009 announced board directors authorized us purchase 500 750 respectively common stock manner timing amount purchases determined management based evaluation market conditions stock price factors subject regulatory considerations purchases made time open market privately negotiated transactions otherwise dollar amounts millions except per share amounts otherwise specified make repurchases pursuant 500 repurchase program announced 2011 500 program announced 2010 repurchased 63 million shares cost 297 2011 750 program announced 2009 repurchased 55 million shares total cost 325 2011 exhausted authorization repurchase program 05 million authorized shares 1 par value preferred stock none outstanding stock options employee stock award plans grant stock options certain key employees exercise price less fair market value underlying common stock date grant options granted periods 10 years become exercisable varying installments summary stock option activity follows aggregate intrinsic value represents cumulative difference fair market value underlying common stock option exercise prices options exercised years ended december 31 2011 2010 2009 69 73 38 respectively shares reserved future compensation grants stryker common stock 32 million december 31 2011 11 million december 31 2010 exercise prices options outstanding december 31 2011 ranged 2640 6780 december 31 2011 88 unrecognized compensation cost related nonvested stock options granted long term incentive plans cost expected recognized following 48 years weightedaverage period 15 years restricted stock units rsus performance stock units psus grant rsus key employees employee stock award plans fair value rsus determined based number shares granted closing quoted price common stock day prior date grant less anticipated dividends rsus generally vest onethird increments threeyear period settled stock 2011 implemented performance stock program granted psus 2006 longterm incentive plan senior level executives program psus earned threeyear performance cycle vest march year following end performance cycle number psus ultimately earned based performance relative preestablished goals three year performance cycle fair value psus determined based closing quoted price common stock day prior date grant summary rsu psu activity follows december 31 2011 43 unrecognized compensation cost related nonvested rsus cost expected recognized expense following 37 years weightedaverage period 10 years weighted average grant date fair value per share rsus granted 2011 2010 5649 5106 respectively fair value rsus vested 2011 13 december 31 2011 5 unrecognized compensation cost related nonvested psus cost expected recognized expense following 20 years weightedaverage period 10 years employee stock purchase plans espp full time part time employees may participate espp provided meet certain eligibility requirements purchase price common stock terms espp defined 95 closing stock price last trading day purchase period 2011 2010 issued 185529 179634 shares respectively espp dollar amounts millions except per share amounts otherwise specified note 10 restructuring charges fourth quarter 2011 recorded 38 severance related costs connection focused reduction global workforce restructuring activities expected reduce global workforce approximately 5 end 2012 targeted reductions restructuring activities initiated provide efficiencies realign resources advance new medical device excise tax scheduled begin 2013 well allow continued investment strategic areas drive growth addition recorded 25 intangible asset impairment 6 agent conversion 7 contractual obligations certain restructuring actions resulted discontinued use specific assets exit certain lease commitments 2009 recorded 30 related agent conversion charges representing costs associated termination certain thirdparty agent agreements europe middle east africa emea division initiative intended provide greater control distribution channels well improve customer focus selling efficiency addition recorded 18 asset impairment charges relate primarily identifiable intangible assets result decision discontinue selling certain products within reconstructive medsurg finally recorded 13 severance related costs connection workforce reduction employmentrelated severance costs approximately 120 employees resulting decision simplify organization structure biotech emea japan canada divisions 6 contractual obligations charges connection termination various supplier contracts well incidental costs related discontinued product lines summary restructuring liability balance full year restructuring activity 2011 2010 2009 follows restructuring projects initiated 2009 substantially complete expect 2011 restructuring actions complete end 2012 related payments made end first quarter 2013 note 11 income taxes earnings income taxes consisted income taxes consisted 2011 recorded income tax benefit related favorable settlement united states internal revenue service irs regarding proposed adjustment previously filed 2003 2007 income tax returns related income tax positions taken cost sharing arrangements two wholly owned entities operating ireland recorded charges uncertain tax positions related outcome irs settlements net income tax benefit adjustments 82 dollar amounts millions except per share amounts otherwise specified reconciliation united states federal statutory income tax rate effective income tax rate deferred income tax assets liabilities comprised net operating loss carryforwards totaling 251 december 31 2011 available reduce future taxable earnings certain domestic foreign subsidiaries united states loss carryforwards 116 expire 2011 2019 international loss carryforwards 135 expire 2011 2031 102 subject full valuation allowance 2009 repatriated 787 foreign earnings united states recorded tax expense 67 2009 tax benefit 7 2010 tax benefit 7 2011 recognize tax liability benefit associated repatriation provision made united states federal state income taxes international income taxes may result future remittances undistributed earnings foreign subsidiaries determined indefinitely reinvested 5646 december 31 2011 determination amount unrecognized deferred income tax liability practicable changes amounts recorded uncertain income tax positions follows dollar amounts millions except per share amounts otherwise specified income tax expense could reduced 235 347 december 31 2011 december 31 2010 respectively upon favorable resolution uncertain income tax positions reasonably possible amount unrecognized tax benefits significantly change due one following events next twelve months expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject controversy various taxing jurisdictions operate including inventory transfer pricing cost sharing product royalty foreign branch arrangements able reasonably estimate amount future periods changes unrecognized tax benefits may required normal course business income tax authorities various income tax jurisdictions inside outside united states conduct routine audits income tax returns filed prior years audits generally designed determine individual income tax authorities agreement interpretations complex income tax regulations regarding allocation income various income tax jurisdictions exceptions longer subject audits income tax authorities tax years prior 2006 income tax years subsequent 2005 open examination many income tax jurisdictions operate 2011 2010 received income tax assessments related income tax position taken allocation profits within europe previously filed 2005 2006 2007 2008 income tax returns believe followed applicable tax laws regulations vigorously defend income tax position ultimately lose respect income tax position could material unfavorable impact income tax expense results operations cash flows future periods note 12 retirement plans provide certain employees defined contribution plans portion retirement plan expense defined contribution plans funded stryker common stock use stryker common stock represents non cash operating activity reflected consolidated statements cash flows certain subsidiaries funded unfunded defined benefit pension plans covering employees substantially defined benefit pension plans projected benefit obligations excess plan assets obligations funded status estimated net actuarial loss defined benefit pension plans recognized accumulated comprehensive gain loss net periodic benefit cost year ended december 31 2012 3 estimate immaterial amount amortization prior service cost transition amount defined benefit pension plans recognized accumulated comprehensive gain loss net periodic benefit cost year ended december 31 2012 pension plans accumulated benefit obligation excess plan assets projected benefit obligations accumulated benefit obligations fair value plan assets 298 292 195 respectively december 31 2011 288 281 186 respectively december 31 2010 dollar amounts millions except per share amounts otherwise specified change benefit obligation plan assets components net periodic pension cost discount rate discount rates selected using hypothetical portfolio high quality bonds december 31 would provide necessary cash flows match projected benefit payments expected return plan assets expected return plan assets determined applying target allocation asset category plan investments anticipated return asset category based historical projected returns dollar amounts millions except per share amounts otherwise specified investment strategy investment strategy defined benefit pension plans meet liabilities plans fall due maximize return invested assets within appropriate risk tolerances weightedaverage target actual allocation plan assets asset category follows valuation pension plan assets pricing categories level 3 pension plan assets see note 3 explanation fair value hierarchy consist primarily guaranteed investment contracts insurance companies insurance contracts guarantee us principal repayment fixed rate return valuation level 3 assets based third party actuarial valuations estimation surrender value guaranteed investment contract us insurance company surrender value equals actuarial value notional investments underlying guaranteed investment contract using actuarial assumptions stated guaranteed investment contract rollforward pension plan assets measured fair value recurring basis using unobservable inputs level 3 expect contribute 22 defined benefit pension plans 2012 estimated future benefit payments year based expected future service appropriate note 13 segment geographic data 2011 began segregating reporting three reportable business segments reconstructive medsurg neurotechnology spine prior 2011 segregated operations two reportable business segments orthopaedic implants medsurg equipment conjunction ongoing evolution business model notably neurovascular acquisition believe change reportable business segments accurately reflects way management monitors performance aligns strategies allocates resources current environment reconstructive segment includes orthopaedic reconstructive hip knee trauma implant systems well related products medsurg segment includes surgical equipment surgical navigation systems instruments endoscopic communications systems endoscopy patient handling emergency medical equipment medical related products neurotechnology spine segment includes neurovascular products spinal implant systems related products category shown table includes corporate global operations administration central research development initiatives interest expense interest marketable securities income sharebased compensation includes compensation related employee director stock option restricted stock unit grants performance stock unit grants reportable segments business units offer different products services managed separately business requires different manufacturing technology marketing strategies accounting policies segments described summary significant accounting policies note 1 consolidated financial statements measure dollar amounts millions except per share amounts otherwise specified financial results reportable segments using internal performance measure excludes acquisition integration related charges restructuring related charges certain impairments gains property plant equipment certain income tax adjustments associated repatriation foreign earnings certain patent litigation gains identifiable assets used exclusively operations business segment allocated used jointly corporate assets principally cash equivalents marketable securities property plant equipment countries local revenuegenerating operations combined following geographic areas united states including puerto rico ireland european countries primarily include germany france switzerland united kingdom foreign countries include japan canada countries pacific region latin american region sales attributable geographic area based upon customer’s country domicile longlived assets include net property plant equipment goodwill intangibles net property plant equipment based upon physical location assets geographic information follows note 14 summary quarterly data unaudited price quotations reported supplied new york stock exchange dollar amounts millions except per share amounts otherwise specified item 9 nannannannannannannanitem 15 exhibits financial statement schedules reports form 8k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date march 14 2003 dean h bergy dean h bergy vice president chief financial officer secretary principal financial accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated certifications certification principal executive officer john w brown certify 1 reviewed annual report form 10k stryker corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 14 2003 john w brown john w brown chairman president chief executive officer certification principal financial officer dean h bergy certify 1 reviewed annual report form 10k stryker corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 14 2003 dean h bergy dean h bergy vice president chief financial officer secretary form 10k item 15a 3 item 15c stryker corporation subsidiaries exhibit indexitem 15 exhibits financial statement schedules reports form 8k 58 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date march 12 2004 dean h bergy dean h bergy vice president chief financial officer secretary principal financial accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated 59 form 10k item 15a 3 item 15c stryker corporation subsidiaries exhibit index 60 item 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date march 2 2005 dean h bergy dean h bergy vice president chief financial officer principal financial accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated form 10k item 15a 3 item 15c stryker corporation subsidiaries exhibit index compensation arrangement end filingitem 15 exhibits financial statement schedules 1 financial statements following consolidated financial statements company subsidiaries set forth part ii item 8 report independent registered public accounting firm financial statements consolidated balance sheets december 31 2006 consolidated statements earnings years ended december 31 2006 2005 2004 consolidated statements shareholders equity years ended december 31 2006 2005 2004 consolidated statements cash flows years ended december 31 2006 2005 2004 notes consolidated financial statements 2 financial statement schedules consolidated financial statement schedule ii company subsidiaries submitted separate section report following signature page schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted 3 exhibits list exhibits required filed part report set forth exhibit index immediately precedes exhibits incorporated herein reference c financial statement schedules consolidated financial statement schedule ii company subsidiaries submitted separate section report following signature page schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted 71 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date february 28 2007 dean h bergy dean h bergy vice president chief financial officer principal financial accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated 72 schedule ii valuation qualifying accounts stryker corporation subsidiaries uncollectible amounts written net recoveries b effect changes foreign exchange rates 73 form 10k item 15a 3 item 15c stryker corporation subsidiaries exhibit index 74 item 15 exhibits financial statement schedules 1 financial statements following consolidated financial statements company subsidiaries set forth part ii item 8 report independent registered public accounting firm financial statements consolidated balance sheets december 31 2008 2007 consolidated statements earnings years ended december 31 2008 2007 2006 consolidated statements shareholders equity years ended december 31 2008 2007 2006 consolidated statements cash flows years ended december 31 2008 2007 2006 notes consolidated financial statements 2 financial statement schedules consolidated financial statement schedule ii company subsidiaries submitted separate section report following signature page schedules provision made applicable accounting regulation us securities exchange commission required related instructions inapplicable therefore omitted 3 exhibits list exhibits required filed part report set forth exhibit index immediately precedes exhibits incorporated herein reference c financial statement schedules consolidated financial statement schedule ii company subsidiaries submitted separate section report following signature page schedules provision made applicable accounting regulation us securities exchange commission required related instructions inapplicable therefore omitted 77 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date february 20 2009 dean h bergy dean h bergy vice president chief financial officer coprincipal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated 78 schedule ii valuation qualifying accounts stryker corporation subsidiaries uncollectible amounts written net recoveries b effect changes foreign exchange rates 79 form 10k item 15a 3 item 15c stryker corporation subsidiaries exhibit index 80 exhibit 11 statement computation per share earnings note 10 net earnings per share page 61 report exhibit 21 subsidiaries registrant list subsidiaries exhibit 23 consent experts counsel consent independent registered public accounting firm exhibit 31 rule 13a14a certifications certification principal executive officer stryker corporation ii certification coprincipal financial officer stryker corporation iii certification coprincipal financial officer stryker corporation exhibit 32 18 usc section 1350 certifications certification president chief executive officer stryker corporation ii certification vice president chief financial officer stryker corporation iii certification vice president finance stryker corporation exhibit 99 additional exhibits 2008 employee stock purchase plan amended february 10 2009 compensation arrangement 81 item 15 exhibits financial statement schedules 1 financialstatements following consolidated financial statements company subsidiaries set forth part ii item 8 report independent registered public accounting firm financial statements consolidated balance sheets december 31 2009 2008 consolidated statements earnings years ended december 31 2009 2008 consolidated statements shareholders’ equity years ended december 31 2009 2008 2007 consolidated statements cash flows years ended december 31 2009 2008 2007 notes consolidated financial statements 2 financialstatement schedules consolidated financial statement schedule ii company subsidiaries submitted separate section report following signature page schedules provision made applicable accounting regulation us securities exchange commission required related instructions inapplicable therefore omitted 3 exhibits list exhibits required filed part report set forth exhibit index immediately precedes exhibits incorporated herein reference c financialstatement schedules consolidated financial statement schedule ii company subsidiaries submitted separate section report following signature page schedules provision made applicable accounting regulation us securities exchange commission required related instructions inapplicable therefore omitted signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated stephen p macmillan curt r hartman stephen p macmillan chairman president chief executive officer principal executive officer curt r hartman vice president chief financial officer principal financial officer tony mckinney tony mckinney vice president chief accounting officer principal accounting officer howard e cox jr srikant datar howard e cox jrdirector srikant datar phddirector donald engelman louise l francesconi donald engelman phddirector louise l francesconidirector howard l lance william u parfet howard l lancedirector william u parfetdirector ronda e stryker ronda e strykerdirector schedule iivaluation qualifying accounts stryker corporation subsidiaries uncollectible amounts written net recoveries b effect changes foreign exchange rates form 10kitem 15a 3 item 15c stryker corporation subsidiaries exhibit index compensation arrangement furnished form 10kitem 15 exhibits financial statement schedules 1 financial statements following consolidated financial statements company subsidiaries set forth part ii item 8 report independent registered public accounting firm financial statements consolidated balance sheets december 31 2010 2009 consolidated statements earnings years ended december 31 2010 2009 consolidated statements shareholders’ equity years ended december 31 2010 2009 2008 consolidated statements cash flows years ended december 31 2010 2009 notes consolidated financial statements 2 financial statement schedules consolidated financial statement schedule ii company subsidiaries submitted separate section report following signature page schedules provision made applicable accounting regulation us securities exchange commission required related instructions inapplicable therefore omitted 3 exhibits list exhibits required filed part report set forth exhibit index immediately precedes exhibits incorporated herein reference c financial statement schedules consolidated financial statement schedule ii company subsidiaries submitted separate section report following signature page schedules provision made applicable accounting regulation us securities exchange commission required related instructions inapplicable therefore omitted signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated stephen p macmillan curt r hartman stephen p macmillan chairman president chief executive officer principal executive officer curt r hartman vice president chief financial officer principal financial officer tony mckinney tony mckinney vice president chief accounting officer principal accounting officer howard e cox jr srikant datar howard e cox jrdirector srikant datar phddirector roch doliveux donald engelman roch doliveuxdirector donald engelman phddirector louise l francesconi allan c golston louise l francesconidirector allan c golstondirector howard l lance william u parfet howard l lancedirector william u parfetdirector ronda e stryker ronda e strykerdirector schedule iivaluation qualifying accounts stryker corporation subsidiaries uncollectible amounts written net recoveries b effect changes foreign exchange rates form 10kitem 15a 3 item 15c stryker corporation subsidiaries exhibit index compensation arrangement furnished form 10kitem 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date february 27 2013 dean h bergy dean h bergy interim chief financial officer vice president corporate secretary pursuant requirements securities exchange act 1934 report signed following persons date indicated behalf registrant capacities indicated kevin lobo dean h bergy kevin lobo president chief executive officer principal executive officer dean h bergy interim chief financial officer vice president corporate secretary principal financial officer tony mckinney tony mckinney vice president chief accounting officer principal accounting officer william u parfet ronda e stryker william u parfetdirector nonexecutive chairman ronda e strykerdirector roch doliveux srikant datar roch doliveuxdirector srikant datar phddirector louise l francesconi allan c golston louise l francesconidirector allan c golstondirector howard l lance howard e cox jr howard l lancedirector howard e cox jrdirector schedule iivaluation qualifying accounts stryker corporation subsidiaries uncollectible amounts written net recoveries b effect changes foreign exchange rates dollar amounts millions except per share amounts otherwise specified form 10kitem 15a 3 item 15c stryker corporation subsidiaries exhibit index compensation arrangementitem 15 exhibits financial statement schedules dollar amounts millions except per share amounts otherwise specified signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons date indicated behalf registrant capacities indicated kevin lobo william r jellison kevin lobo president chief executive officer principal executive officer william r jellison vice president chief financial officer principal financial officer tony mckinney tony mckinney vice president chief accounting officer principal accounting officer william u parfet ronda e stryker william u parfetdirector nonexecutive chairman ronda e strykerdirector roch doliveux srikant datar roch doliveuxdirector srikant datar phddirector louise l francesconi allan c golston louise l francesconidirector allan c golstondirector andrew k silvernail howard e cox jr andrew k silvernail director howard e cox jrdirector howard l lance howard l lance director schedule iivaluation qualifying accounts stryker corporation subsidiaries uncollectible amounts written net recoveries b effect changes foreign exchange rates dollar amounts millions except per share amounts otherwise specified form 10kitem 15a 3 item 15c stryker corporation subsidiaries exhibit index compensation arrangementitem 15 exhibits financial statement schedules dollar amounts millions except per share amounts otherwise specified stryker corporation 2014 form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons date indicated behalf registrant capacities indicated kevin lobo william r jellison kevin lobo chairman president chief executive officer william r jellison vice president chief financial officer principal executive officer principal financial officer william e berry jr william e berry jr vice president corporate controller principal accounting officer howard e cox jr allan c golston howard e cox jrdirector allan c golstondirector srikant datar william u parfet srikant datar phddirector william u parfetdirector roch doliveux andrew k silvernail roch doliveuxdirector andrew k silvernail director louise l francesconi ronda e stryker louise l francesconidirector ronda e strykerdirector stryker corporation 2014 form 10k form 10kitem 15a 3 item 15c stryker corporation subsidiaries exhibit index stryker corporation 2014 form 10k compensation arrangementitem 15 exhibits financial statement schedules dollar amounts millions except per share amounts otherwise specified stryker corporation 2015 form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons date indicated behalf registrant capacities indicated kevin lobo william r jellison kevin lobo chairman chief executive officer william r jellison vice president chief financial officer principal executive officer principal financial officer william e berry jr william e berry jr vice president corporate controller principal accounting officer howard e cox jr allan c golston howard e cox jrdirector allan c golstondirector srikant datar william u parfet srikant datar phddirector william u parfetdirector roch doliveux andrew k silvernail roch doliveuxdirector andrew k silvernail director louise l francesconi ronda e stryker louise l francesconidirector ronda e strykerdirector stryker corporation 2015 form 10k form 10kitem 15a 3 item 15c stryker corporation subsidiaries exhibit index stryker corporation 2015 form 10k compensation arrangement © schedules omitted pursuant item 601b2 regulation sk stryker hereby undertakes furnish supplementally copies omitted schedules upon request us securities exchange commissionitem 15 exhibits financial statement schedules registrants may voluntarily include summary information required form 10k item 16 elected include summary information dollar amounts millions except per share amounts otherwise specified stryker corporation 2016 form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date february 9 2017 stryker corporation glenn boehnlein glenn boehnlein vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons date indicated behalf registrant capacities indicated kevin lobo glenn boehnlein kevin lobo chairman chief executive officer glenn boehnlein vice president chief financial officer principal executive officer principal financial officer william e berry jr william e berry jr vice president corporate controller principal accounting officer howard e cox jr allan c golston howard e cox jrdirector allan c golstondirector srikant datar andrew k silvernail srikant datar phddirector andrew k silvernail director roch doliveux ronda e stryker roch doliveuxdirector ronda e strykerdirector louise l francesconi louise l francesconidirector stryker corporation 2016 form 10k form 10kitem 15a 3 item 15c stryker corporation subsidiaries exhibit index stryker corporation 2016 form 10k stryker corporation 2016 form 10k compensation arrangement © schedules omitted pursuant item 601b2 regulation sk stryker hereby agrees furnish supplementally copy omitted schedule upon request us securities exchange commissionitem 15 exhibits financial statement schedules dollar amounts millions except per share amounts otherwise specified stryker corporation 2017 form 10k form 10kitem 15a 3 item 15c stryker corporation subsidiaries exhibit index stryker corporation 2017 form 10k stryker corporation 2017 form 10k compensation arrangement © schedules omitted pursuant item 601b2 regulation sk stryker hereby agrees furnish supplementally copy omitted schedule upon request us securities exchange commission none stryker corporation 2017 form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date february 8 2018 glenn boehnlein glenn boehnlein vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons date indicated behalf registrant capacities indicated kevin lobo glenn boehnlein kevin lobo glenn boehnlein chairman chief executive officer vice president chief financial officer principal executive officer principal financial officer william e berry jr william e berry jr vice president corporate controller principal accounting officer mary k brainerd louise l francesconi mary k brainerd louise l francesconi director howard e cox jr allan c golston howard e cox jr allan c golston director srikant datar andrew k silvernail srikant datar phd andrew k silvernail director roch doliveux ronda e stryker roch doliveux dvm ronda e stryker director directoritem 15 exhibits financial statement schedules dollar amounts millions except per share amounts otherwise specified stryker corporation 2018 form 10k form 10kitem 15a 3 item 15c stryker corporation subsidiaries exhibit index stryker corporation 2018 form 10k stryker corporation 2018 form 10k compensation arrangement © schedules omitted pursuant item 601b2 regulation sk stryker hereby agrees furnish supplementally copy omitted schedule upon request us securities exchange commission none stryker corporation 2018 form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date february 7 2019 glenn boehnlein glenn boehnlein vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons date indicated behalf registrant capacities indicated kevin lobo glenn boehnlein kevin lobo glenn boehnlein chairman chief executive officer vice president chief financial officer principal executive officer principal financial officer william e berry jr william e berry jr vice president corporate controller principal accounting officer mary k brainerd sherilyn mccoy mary k brainerd sherilyn mccoy director srikant datar andrew k silvernail srikant datar phd andrew k silvernail director louise l francesconi ronda e stryker louise l francesconi ronda e stryker director allan c golston rajeev suri allan c golston rajeev suri director directoritem 15 exhibits financial statement schedules dollar amounts millions except per share amounts otherwise specified stryker corporation 2019 form 10k form 10kitem 15a 3 item 15c stryker corporation subsidiaries exhibit index stryker corporation 2019 form 10k stryker corporation 2019 form 10k compensation arrangement © schedules omitted pursuant item 601b2 regulation sk stryker hereby agrees furnish supplementally copy omitted schedule upon request us securities exchange commission none stryker corporation 2019 form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date february 6 2020 glenn boehnlein glenn boehnlein vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons date indicated behalf registrant capacities indicated kevin lobo glenn boehnlein kevin lobo glenn boehnlein chairman chief executive officer vice president chief financial officer principal executive officer principal financial officer william e berry jr william e berry jr vice president corporate controller principal accounting officer allan c golston louise l francesconi allan c golston louise l francesconi lead independent director mary k brainerd sherilyn mccoy mary k brainerd sherilyn mccoy director srikant datar andrew k silvernail srikant datar phd andrew k silvernail director roch doliveux ronda e stryker roch doliveux dvm ronda e stryker director directoritem 15exhibits financial statement schedules form 10kitem 15a 3 item 15c stryker corporation subsidiaries exhibit index dollar amounts millions except per share amounts otherwise specified39 stryker corporation 2020 form 10k stryker corporation 2020 form 10k stryker corporation 2020 form 10k compensation arrangement ©schedules omitted pursuant item 601b2 regulation sk stryker hereby agrees furnish supplementally copy omitted schedule upon request us securities exchange commission none stryker corporation 2020 form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons date indicated behalf registrant capacities indicated kevin lobos glenn boehnlein kevin loboglenn boehnlein chairman chief executive officervice president chief financial officer principal executive officerprincipal financial officer william e berry jr william e berry jr vice president corporate controller principal accounting officer allan c golstons sherilyn mccoy allan c golstonsherilyn mccoy lead independent directordirector mary k brainerds andrew k silvernail mary k brainerdandrew k silvernail directordirector giovanni caforios lisa skeete tatum giovanni caforio mdlisa skeete tatum directordirector srikant datars ronda e stryker srikant datar phdronda e stryker directordirector roch doliveuxs rajeev suri roch doliveux dvmrajeev suri directordirectornannanitem 15 exhibits financial statement schedules 1 financial statements following consolidated financial statements company subsidiaries set forth part ii item 8 report independent registered public accounting firm financial statements consolidated balance sheets december 31 2005 consolidated statements earnings years ended december 31 2005 2004 2003 consolidated statements shareholders equity years ended december 31 2005 2004 2003 consolidated statements cash flows years ended december 31 2005 2004 2003 notes consolidated financial statements 2 financial statement schedules consolidated financial statement schedule ii company subsidiaries submitted separate section report following signature page schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted 3 exhibits list exhibits required filed part report set forth exhibit index immediately precedes exhibits incorporated herein reference c financial statement schedules consolidated financial statement schedule ii company subsidiaries submitted separate section report following signature page schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date march 6 2006 dean h bergy dean h bergy vice president chief financial officer principal financial accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule ii valuation qualifying accounts stryker corporation subsidiaries uncollectible amounts written net recoveries b effect changes foreign exchange rates form 10k item 15a 3 item 15c stryker corporation subsidiaries exhibit indexitem 15 exhibits financial statement schedules 1 financial statements following consolidated financial statements company subsidiaries set forth part ii item 8 report independent registered public accounting firm financial statements consolidated balance sheets december 31 2007 2006 consolidated statements earnings years ended december 31 2007 2006 2005 consolidated statements shareholders equity years ended december 31 2007 2006 2005 consolidated statements cash flows years ended december 31 2007 2006 2005 notes consolidated financial statements 2 financial statement schedules consolidated financial statement schedule ii company subsidiaries submitted separate section report following signature page schedules provision made applicable accounting regulation us securities exchange commission required related instructions inapplicable therefore omitted 3 exhibits list exhibits required filed part report set forth exhibit index immediately precedes exhibits incorporated herein reference c financial statement schedules consolidated financial statement schedule ii company subsidiaries submitted separate section report following signature page schedules provision made applicable accounting regulation us securities exchange commission required related instructions inapplicable therefore omitted 73 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation february 28 2008 dean h bergy dean h bergy vice president chief financial officer principal financial accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated 74 schedule ii valuation qualifying accounts stryker corporation subsidiaries uncollectible amounts written net recoveries b effect changes foreign exchange rates 75 form 10k item 15a 3 item 15c stryker corporation subsidiaries exhibit index 76 exhibit 31 rule 13a14a certifications certification principal executive officer stryker corporation ii certification principal financial officer stryker corporation exhibit 32 18 usc section 1350 certifications certification chief executive officer stryker corporation ii certification chief financial officer stryker corporation exhibit 99 additional exhibits 2008 employee stock purchase plan compensation arrangement 77 item 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stryker corporation date february 13 2012 curt r hartman curt r hartman interim chief executive officer vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated curt r hartman tony mckinney curt r hartman interim chief executive officer vice president chief financial officer principal executive officer principal financial officer tony mckinney vice president chief accounting officer principal accounting officer william u parfet ronda e stryker william u parfetdirector nonexecutive chairman ronda e strykerdirector roch doliveux srikant datar roch doliveuxdirector srikant datar phddirector louise l francesconi allan c golston louise l francesconidirector allan c golstondirector howard l lance howard e cox jr howard l lancedirector howard e cox jrdirector schedule iivaluation qualifying accounts stryker corporation subsidiaries uncollectible amounts written net recoveries b effect changes foreign exchange rates dollar amounts millions except per share amounts otherwise specified form 10kitem 15a 3 item 15c stryker corporation subsidiaries exhibit index compensation arrangement