Stryker Corporation (SYK) Earnings

Management highlights

### Overall Q2 Performance and Recovery - Stryker delivered 9% overall organic sales growth and 17.9% adjusted EPS growth in Q2 2026, continuing recovery from the Q1 2026 cybersecurity incident, with production ramping to meet ongoing demand. - U.S. organic growth hit 9%, with double-digit growth in medical, trauma extremities, and endoscopy; international organic growth reached 8.9%, driven by strong results in Australia, New Zealand, Germany, Canada, South Korea, Japan, India, and Brazil. - Adjusted gross margin expanded 60 bps year-over-year to 66%; adjusted operating margin expanded 170 bps year-over-year to 27.4%, driven by cost discipline, business mix improvements, and a net tariff benefit. ### Product and Pipeline Updates - Celebrated 20 years of the Mako robotics platform, which has performed over 2.5 million global procedures across 47 countries; Mako RPS launched commercially in the U.S. expanding the robotics portfolio to new care settings. - Recent key approvals and launches: Prophecy patient-specific planning/guides for the new Encompass total ankle replacement system (full commercial launch initiated); Pangea trauma plating system received European approval (limited launch underway, full Q4 2026 launch planned); Soniped 3 ultrasonic aspirator upcoming launch; Triathlon Gold and Triathlon Medial Stabilized Insert are ramping commercial launch with strong customer feedback. - The AVS (peripheral vascular) acquisition closed in Q2 2026. ### Capital Deployment - M&A remains the top capital allocation priority to drive long-term top-line growth; Stryker will resume share repurchases in Q3 2026, with $1 billion in board-approved authorization available, dependent on M&A deal flow and stock valuation. - Stryker maintains a strong balance sheet with $3.5 billion in cash and marketable securities, and $1.8 billion in year-to-date operating cash flow as of Q2 end.

Guidance

- Stryker narrowed its full year 2026 organic net sales growth guidance to a range of 8.3% to 9.3%, raising the lower bound from 8% and lowering the upper bound from previous guidance. - Full year 2026 adjusted EPS guidance is narrowed to $14.95 to $15.10, with Q2 2026 tariff-related EPS benefits offset by ongoing cybersecurity incident remediation and manufacturing absorption costs from Q1. - Full year 2026 adjusted other income and expense is expected to be approximately $420 million, and the full year adjusted effective tax rate is expected to remain in the 15% to 16% range, consistent with prior guidance. - Management expects most catch-up growth from the Q1 cybersecurity disruption to occur in the second half of 2026, with ~11% organic growth required in H2 2026 to hit the guidance midpoint, which management states it is confident in achieving based on existing strong order backlog.

Segment performance

1. **MedSurg and Neurotechnology**: Delivered 9.2% organic sales growth overall, with 8.9% U.S. organic growth and 10.5% international organic growth. This segment contributed 50-55% of total company revenue by standard Stryker segment breakdown. Key U.S. sub-segment performance: Instruments +8.4%, Endoscopy +10.2%, Medical +13.1%, Vascular -6.7% (due to peripheral vascular operational disruption, partially offset by growth in the hemorrhagic portfolio). Broad international growth across endoscopy, medical, and instruments led by Australia, New Zealand, Germany, Canada, Brazil, and India. 2. **Orthopedics**: Delivered 8.6% organic sales growth overall, with 9.1% U.S. organic growth and 7.5% international organic growth. This segment contributed approximately 45-50% of total company revenue. Key U.S. sub-segment performance: Knees +6.2% (driven by Mako robotic adoption and cementless knee momentum), Hips +4.9% (driven by Insignia HIP stem and Mako Revive HIP platform success), Trauma and Extremities +12.5%, Orthotech +9.2% (driven by robust Mako installations). International growth was led by Canada, South Korea, Australia, New Zealand, Brazil, and India, with strength across knees, orthotech, and trauma/extremities.

Risks & headwinds

- The Q1 2026 cybersecurity incident created residual manufacturing absorption costs and ongoing IT remediation expenses that offset Q2 tariff benefits and will continue to impact full year 2026 profitability. - An unanticipated supply disruption at a single peripheral vascular (Inari) manufacturing plant created a meaningful backlog and resulted in lost Q2 sales, as emergent peripheral vascular procedures cannot be delayed; the backlog is expected to reach manageable levels by end-Q3 2026, with some lost share that management expects to recapture. - Production ramp to fulfill the elevated capital equipment backlog could face unanticipated constraints that limit near-term revenue delivery, though management notes it has accounted for this risk in the current guidance range. - Proposed Medicare reimbursement cuts for large joint replacements could create long-term pressure, though management expects the final outcome to be reasonable and the shift to ASC site-of-care benefits Stryker's diversified portfolio. - Macroeconomic raw material cost pressures (including oil) remain a headwind that is managed within the current guidance range. - The ongoing conflict in Iran continues to create a modest drag on overall company growth.

Analyst Q&A

• Q: Why did Stryker narrow full year guidance by lowering the top end, and why didn't the strong Q2 EPS beat flow through to higher full year guidance? /

  A: Management narrowed the guidance after half the year is complete, with clear visibility into ongoing production ramp needs after the Q1 cyber incident, and 8.3-9.3% growth is the most prudent range given current visibility. The Q2 EPS beat was driven by one-time tariff refunds, which are offset by remaining cyber incident costs (manufacturing idle capacity and IT remediation) from Q1. Beating the top end of guidance would require faster-than-projected production ramp and procedure growth, which management will reassess after Q3. (412 characters)

• Q: What is the impact of recent proposed Medicare reimbursement cuts for large joint replacements on procedure demand, and how is the industry responding? /

  A: Proposed Medicare cuts regularly create initial sticker shock, but the industry and physician community provide input that typically results in a more reasonable final outcome. Continued shifting of procedures to ASC sites of care is an ongoing trend, which benefits Stryker due to its strong portfolio position in ASCs. Long-term demand for joint replacements remains unabated, driven by demographic trends of aging populations and higher activity levels among seniors. (398 characters)

• Q: What caused the peripheral vascular supply disruption, and could there be durable share loss from this issue? /

  A: The disruption was isolated to a single Inari manufacturing facility that produces most of the segment's products, occurring after the Salesforce integration was completed. The backlog is already being worked down and will reach manageable levels by end-Q3. Some lost sales occurred because emergent procedures cannot be delayed, but management prioritized core high-volume loyal customers, and expects to recapture lost share with the now-stabilized Salesforce once the backlog is resolved. Long-term, the segment has strong products and a solid growth outlook. (421 characters)

• Q: Could you comment on early feedback for Mako RPS, and what adoption trends are you seeing so far? /

  A: Early feedback from the limited pre-commercial launch has been outstanding; surgeons praise the ease of use and haptic feedback for the handheld robotic system. Mako RPS is specifically a fit for surgeons who do not want a full Mako system, especially for total knee procedures in ASCs. Management has intentionally prioritized converting non-Stryker surgeons in the early launch phase, rather than just adding capability to existing Mako users, and will now ramp the full commercial launch. (384 characters)

• Q: What is the outlook for the peripheral vascular mechanical thrombectomy market, and how will the upcoming IVL launch interact with this portfolio? /

  A: The mechanical thrombectomy market has significant untapped growth potential, with the seminal Peerless2 clinical trial completed enrollment and set to read out mid-2025, which is expected to meaningfully lift overall market demand. Inari holds a full product portfolio in the space, and the current supply issues are internal, not market-related. IVL will drop into the existing peripheral vascular sales force, with approval possible before end-2026 for above-the-knee indications, and cross-selling opportunities will strengthen the overall segment call point. (410 characters)