Stryker Corporation (SYK) Earnings Call Transcript & Summary

Welcome to the Second Quarter 2026 Stryker Earnings Call. My name is Megan, and I'll be your operator for today's call. [Operator Instructions]. This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-K filed with the SEC. I will now turn the call over to Mr. Kevin Lobo, Chair and Chief Executive Officer. You may proceed, sir.

Welcome to Stryker's second quarter earnings call. Joining me today are Preston Wells, Stryker's CFO; and Nick Mead, Vice President of Investor Relations. For today's call, I will provide opening comments, followed by Nick with market trends and some product updates. Preston will then provide additional details regarding our results and guidance before opening the call to Q&A. Our second quarter results demonstrated the strength of our broad product portfolio and resiliency of our teams. Our recovery from the cybersecurity incident continued as we ramped overall production to meet ongoing demand and support patient care. We delivered strong organic sales growth of 9% including high single-digit growth from both our MedSurg and Neurotechnology and Orthopedics businesses. Geographically, our U.S. organic sales growth of 9% included double-digit organic growth from our medical, trauma extremities and Endoscopy businesses and high single-digit organic growth in ortho tech and instruments. This growth was offset by supply disruptions in our Peripheral Vascular business. While our sales force hiring and integration has made great progress, the supply disruption resulted in a meaningful back order situation with lost sales in the quarter. We have addressed the issue and back orders should reach a manageable level by the end of Q3. We remain confident in the long-term outlook for peripheral vascular, including the ADS acquisition, which closed in the quarter. Internationally, our 8.9% organic sales growth was driven by strong performances in Australia, New Zealand, Germany, Canada, South Korea, Japan, India and Brazil. We continue to see long-term growth opportunities in our international markets through strong commercial execution and the introduction of products that have demonstrated success in the United States in recent years. From an earnings perspective, we delivered adjusted EPS growth of 17.9%, reflecting improved gross margins as well as our ongoing commitment to rigorous operational execution. We exited Q2 with regained momentum and expect a strong second half of the year, driven by high demand for our capital products, continued production ramp and strong commercial execution. We are narrowing our full year guidance and our businesses are well positioned to deliver another strong year of financial performance. Finally, our financial position and cash flow generation remains strong, providing firepower to deploy capital. Preston will elaborate on that in his section. I would like to acknowledge our teams for their efforts in putting us on track to deliver another strong year of organic sales and adjusted earnings growth. With that, I will now turn the call over to Nick.

Thank you, Kevin. My comments today will focus on the capital and procedural environment as well as several key product highlights. Capital delivery was a key driver of the growth in the quarter as we recovered from the cybersecurity incident and demand remains strong. We exited the quarter with an elevated backlog and expect continued strength in the hospital capital environment through the remainder of the year. The U.S. procedural environment remains stable. While there has been some commentary on softness in surgical volumes, particularly in discretionary procedures, we have not observed meaningful changes in volume trends. Our portfolio is highly diversified. With the vast majority of our businesses supporting high acuity, medically necessary in emergent care where clinical demand remains strong. Importantly, the fundamental drivers of health care demand remained firmly in place, including an aging population, the ongoing need for hospital workforce productivity and the increase in the occurrence of chronic disease. Together, these trends continue to support durable demand for our differentiated product portfolio. Now I'd like to turn to some product highlights. We delivered our best ever Q2 for Mako installations, both in the U.S. and internationally, and utilization rates across our installed base continue to trend upward. This year, we celebrate 20 years of Mako and its evolution into a multispecialty robotics platform with applications spanning hip, knee, spine and shoulder procedures. Furthermore, we recently announced the full commercial launch of Mako RPS in the U.S., expanding our robotics portfolio and offering surgeons additional options across a range of care settings. With more than 2.5 million procedures performed globally and systems installed across 47 countries, Mako remains well positioned to drive continued growth through innovation, clinical evidence and expanding adoption worldwide. We are rapidly moving to full commercial launches of Triathlon Gold and our Triathlon medial stabilized insert, both of which are generating strong interest and positive customer feedback. During Q2, we also have approval on the PROPHECY patient-specific planning and guides for our new Encompass total ankle replacement system, and we've just moved to full commercial launch. Additionally, we recently received approval and have initiated a limited launch for our Pangea trauma plating system in Europe to be followed by a full commercial launch during the fourth quarter within instruments, we look forward to the upcoming launch of the Sonopet 3 ultrasonic aspirator. These products are part of the steady cadence of next-generation and innovative products across our broad base of businesses that fuel our growth. Let me now turn the call over to Preston.

Thanks, Nick. Detailed financial information has been provided in today's press release. Today, I will focus my comments on our second quarter financial results and the related drivers. Organic sales growth was 9% for the quarter against a double-digit comparable in the second quarter of 2025. Pricing was flat and foreign currency had a 0.4% favorable impact on sales. This quarter had the same number of selling days compared to the prior year. Adjusted earnings per share of $3.69 was up $0.56 or 17.9% from the same quarter last year. driven by our strong sales growth, a continued focus on operational excellence and a net benefit in the quarter from tariff-related costs. Foreign currency translation had a favorable impact of $0.01. Now I will provide some highlights around our quarterly segment performance. For the quarter, MedSurg and Neurotechnology delivered organic sales growth of 9.2%, which included 8.9% of U.S. organic growth and 10.5% of international organic growth. Instruments U.S. organic sales rose 84% against the prior year comparable of 16.3%. Growth this quarter included a robust double-digit performance in our intervental spine paying portfolio as well as a strong performance from our Surgical Technologies business, which includes Neptune Waste Management, smoke evacuation and surg account products. Endoscopy, U.S. organic sales grew 10.2%, reflecting strong demand across multiple areas of the business. Operating group infrastructure and renovations were a key growth driver, including a robust performance from the recently launched oculi Life. We also delivered strong growth in our urology and connected OR products within the core Endoscopy portfolio as well as in sports medicine, where double-digit growth was driven by its expanded range of shoulder and plant products. Medical U.S. organic sales increased 13.1% and included very strong double-digit performances from our Sage and emergency care businesses. From a product perspective, growth was led by preoperative [indiscernible] products, powered cots and LIFEPAK 35, which continues to generate strong customer interest and capture additional market share. Capital demand also remains elevated as evidenced by an increased backlog and strong orders as we exited the quarter, including city events and our Smart Care business, which includes Vocera and Care AI. Vascular U.S. organic sales declined 6.7% from a year earlier due to the operational disruption in peripheral vascular that Kevin discussed in his remarks. Partially offset by solid growth in our hemorrhagic portfolio, driven by the Surpass Elite flow diverting stents. Internationally, MedSurg and Neurotechnology organic sales growth of 10.5% and included broad strength across endoscopy, medical and instruments. Geographically, growth was led by a robust performance in Australia, New Zealand, Germany, Canada, Brazil and India. Orthopaedics delivered organic sales growth of 8.6% in the quarter, which included 9.1% of U.S. organic growth and 7.5% of international organic growth. U.S. knees organic sales grew 6.2%, reflecting the continued adoption of Mako for robotic-assisted knee procedures and momentum from our cementless new products. U.S. Hips organic sales rose 4.9% and reflecting the ongoing success of our Insignia Hip Stem and the Mako Robotic Hip platform with our latest application having the expanded ability to address more difficult primary hip cases and hip revisions. U.S. Trauma and Extremities organic sales increased 12.5%, with strong double-digit sales growth in our trauma and upper extremities businesses. Pangea continues to be a key driver of our growth in our trauma business and our multiyear growth momentum in shoulders was driven by the continued strong performance of our differentiated portfolio and the recent full commercial launch of Mako shoulder on Mako 4. U.S. OrthoTec organic sales grew 9.2%, driven by robust Mako installations. Internationally, Orthopaedics organic sales growth of 7.5% included strength in knees, OrthoTech and trauma and extremities and was led regionally by Canada, South Korea, Australia, New Zealand, Brazil and India. Similar to the first quarter, the conflict in Iran had a modest impact on overall company growth. Now I will focus on certain operating and nonoperating items in the quarter. Our adjusted gross margin of 66% was 60 basis points favorable to the second quarter of 2025, reflecting the impact of the net tariff benefit I previously mentioned as well as improvements in business mix and cost discipline. Our adjusted operating margin was 27.4% of sales, which was 170 basis points favorable to the second quarter of 2025. The driven by the gross margin improvement as well as lower adjusted SG&A as a percentage of sales due to our ongoing focus on spend discipline and margin expansion. Adjusted other income and expense of $101 million was $5 million lower than 2025. We continue to expect our full year 2026 adjusted other income and expense to be approximately $420 million. The second quarter had an adjusted effective tax rate of 16.5%, reflecting the impact of geographic mix and certain discrete tax items. For 2026, we continue to expect our full year effective tax rate to be in the range of 15% to 16%. Turning to cash. We ended the second quarter with approximately $3.5 billion of cash and marketable securities and year-to-date cash from operations of $1.8 billion. Supported by a strong balance sheet and robust cash flows, we remain focused on M&A opportunities to drive top line growth as our primary capital allocation priority. Additionally, considering our elevated level of cash flow generation and recent valuation compression across the med tech sector, we plan to resume share repurchases this quarter. And now I will discuss our full year 2026 guidance. Considering our year-to-date results, our presence in attractive end markets, largely supporting acute and emerging procedures and durable and for our capital products, we are narrowing our full year guidance and now expect organic net sales growth to be in the range of 8.3% to 9.3% and adjusted net earnings per share to be in the range of $14.95 to $15.10. Our full year sales guidance reflects a modestly positive pricing impact. Additionally, should rates hold near current levels, we anticipate a slightly favorable impact to both sales and earnings per share. With that, I will now open up the call for Q&A.

[Operator Instructions]. SP1 Our first question will come from Joanne Wuensch with Citibank.

I actually have a lot. I'm curious guidance -- the updated guidance, what your thought process was in narrowing it particularly lowering the top end of the range, which leads me to my second question of how you're thinking about revenue growth in the back half of the year? And then I'm just going to go really into this. EPS, you had a really nice beat in the quarter versus what we were looking for. but it doesn't look like it's flowing through for the full year guidance, and I'm curious why.

Joanne, I'll take the first part of your question and then the EPS question, and then I'll let Kevin jump in on how we're thinking about sales from a remainder of the year perspective. So from a top line guidance standpoint, really, we [indiscernible] you're done. Obviously, we're coming out of the cyber event that impacted Q1. We've seen the momentum in the recovery starting to come back in Q2. And we have a good ways to go in the second half in terms of continuing that momentum to deliver on the guidance range. And quite frankly, when we look at what's left to do with the rest of the year and where we are with our products and with the markets right now, we felt like it was a prudent range to be in the 83% to 9.3%, just looking at it in totality. And so Kevin can talk a little bit about the revenue piece a little bit in just a second. Let me just address your EPS question. So from an EPS standpoint, when we look at the beat in the quarter, it is driven partially by the tariff refunds that are happening that happened in the quarter. But as a reminder, when we talked about the first quarter earnings, and those were obviously well below expectations driven by the cyber event. There are costs that are coming through from a cyber perspective, both lost absorption from manufacturing as well as our IT costs that we have that we're planning for as we come through the remediation that will offset that benefit. So when you look at it on a half year basis, it actually you can see those offsets already happening.

Yes. Related to your question about [indiscernible] and Joanne, to Preston's point, [indiscernible] is already done. As we look at the production that we have to -- just the building of all of the capital equipment that's required, we have the orders to really drive very high growth. It's just how fast can we actually make everything to deliver. I would say our ability to beat the top end would be hinging on two factors. One is the market would have to be strong in procedures. We expect it to be consistent. If it improves a little bit, that obviously gives us a tailwind. And then if we can ramp our products and including some of the new products that we're launching, ahead of what we're projecting right now, then that could cause us to actually raise on the top end. But right now, this is the best visibility that we have with what we know now. Obviously, at the end of Q3, we will update our guidance and it can improve on a faster trajectory than we could look to maybe move it up. But at this point, this is the best visibility of that gap. And honestly, on a $25 billion business, growing at around the 9% range. It's still a pretty good year given that we were knocked out for almost an entire month.

Your next question will come from Robbie Marcus with JPMorgan.

Great. Two for me. One, Kevin, [indiscernible] whoever wants to take it. One of the things we're all trying to figure out is sort of what's underlying and what's catch-up from first quarter I know you had talked to some of the capital being more second half weighted. The quarter was in line with expectations with some puts and takes, vascular being one of them. Hips being another medical being on the plus side. How should we think about what's underlying and normal trend versus where you saw the recapture from first quarter? And if you're able to quantify anything, that would be helpful. And then I have a follow-up after.

Yes. So thanks, Robbie. As we talked about really in the first quarter call, ewe talked about the variability of the different businesses that we have. So it's hard to really pin down, okay, this is specifically the underlying versus catch-up. I mean there are some areas that, that was a little bit easier where there's just some catch-up revenue to book. I would say, for the most part, what we are seeing is we are seeing continued momentum across all of our businesses we see really strong demand for our capital products. Like that's the one where we'll see a more significant uptick. In the second half of the year, based on what Kevin talked about earlier with production ramping and really getting ourselves back online to be able to produce at a faster rate to support the volumes that we have. So really, I'd say what you see really in the second quarter is primarily just the momentum of the underlying business primarily with a few other elements that are maybe coming into play here and there throughout that business.

Yes. The only thing I'd add, Robbie, is we always have variability in our quarters, just a range of businesses that we have. I would tell you, Peripheral Vascular was certainly not something we're expecting. Supply disruption was acute, and we took the pain. But overall, we hit the number that we were aiming for in the quarter because we had some outperformances in endoscopy and medical. And even within Medical, our bed business, we have tremendous number of orders that we have a big job to catch up to deliver. So it actually wasn't a very strong performance in spite of Medical's overall terrific growth, and it's not because we don't have the demand. It's just because making that takes time, and we were out of production for a long period of time. So that's one particular product that we have a lot of catch-up to do. But so there's a lot of noise underneath these numbers, but overall, the business performed very well. The demand is still strong. And you're going to see a little bit of volatility across our businesses probably in Q3, Q4, but we feel good about the overall health of our businesses and they're going to recover at kind of different points of time. And even the procedures, right? Rescheduling procedures was very, very hard. No one's ever gone through at least this kind of an event that we went through. And so it has created a little bit of inconsistency across our businesses. But overall, for the full year, we're feeling really good about our business.

Great. And one quick follow-up. Kevin, one of the things everybody has been concerned about, you kind of touched on this, but I'd love a little more color. Just the backdrop of slowing or stable procedure volumes. We've had a lot of mixed data points and the current and future state of the CapEx environment. I'd love to get your thoughts on both of those.

Yes. Well, I think we've sort of talked about them in Nick's remarks. Look, we see the procedure environment is healthy. And in the businesses where we operate, we see us -- the demand for procedures is strong. It's healthy, it's stable. It's whatever word active you want to use. We don't see issues with the procedures that we are replay. And capital, I would say, is very. If I look at our back, we have an elevated backlog. We had a record month of Mako sales work. We're just not seeing any issues related to company equipment. We did see and we have commented on this even in the last quarter, a slight slowdown in Europe. Related to procedures, but certainly not in the United States and not in the other markets.

Our next question will come from Larry Biegelsen with Wells Fargo.

Kevin, just a follow-up on the revenue guidance. the organic growth needs to be about 11%, I think, in the second half to reach the midpoint of the guidance. So is there any more color you can provide on what's driving your confidence to be able to recapture the lost sales to achieve that and, of course, offset the vascular supply issue you had? And just remind us of why you expect more catch-up in the second half versus in the second quarter. I think that's just been a lingering question investors have had.

Listen, we lowered the bottom end of our range. That should give you some idea. We're not going to lower the bottom end of our -- sorry, base the bottom end of our sales guidance from 8% to 3%, right? So if you're raising that, that means you really don't see a risk of us being able to deliver at the lower end. And that raising is based on just tremendous orders for our capital. And that's just execution. All we have to do is make the products and ship the products. And we can see the production ramp now that our plants have been operating pretty consistently since April 1. And so that visibility is very clear on the capital side. Even on the procedure side, so it's small capital, we do have orders for small capital. We have pretty good visibility into those orders and surgery schedules and our business is feeling really healthy. So that 11%, we feel very, very confident delivery. Otherwise, we wouldn't have raised the lower end of our sales cancer.

Any color just on how to think about the catch-up in Q3 versus Q4?

No. I think, again, like we said before, we're going to see that happening at different paces and different times. And part of it is, as Kevin said, the ramping up of production for those capital products that we can get those out the door. So I think you're going to see kind of a steady cadence across both.

Your next question will come from Ryan Zimmerman with BTIG.

Preston, you talked enough about the top line, I think, with the questions. But can you spend a little bit on margins and the EPS guide, particularly in the back half of the year. If I look at kind of how The Street is thinking about Q3 to Q4. What is it that's going to drive maybe lower EPS in fourth quarter, which is kind of what The Street is assuming to get to the guidance. Is there additional expenses that are needed? Is there a margin impact when you think about kind of the excess production that you're going to do that we need to consider? Just help us think through the cadence there. on the margin and P&L for the EPS guide?

Sure. So first of all, we are still committed to what we talked about last year, which is our 150 basis points over the course of 3 years. So that's still our commitment. I think we've demonstrated the ability over the last couple of years to drive op margin, and we're going to continue to do that. So the teams are fast working on continuing to find ways to get better from an efficiency and productivity standpoint. So that is the underlying kind of focus of the organization. We do have this year several larger moving parts. So obviously, with the cyber event, we have manufacturing shutdown for some period of time and say you lost absorption idle costs that are sitting there that we have to recover from. We also have a lot of work ahead of us in terms of the remediation and stabilization from a cybersecurity perspective. So there's money that's going to be spent throughout the year to support those two activities that are really related to the cyber event itself. In addition, we know that there are some pressures on some different areas around oil and other raw materials that we're managing in this overall guide as well. That's offset by what I talked about before in the tariff refund piece of it. So we have a lot of moving parts. It's a lot of different items that are happening from a macro perspective that we're managing. And so I think it's those elements that are still kind of what's left us with a little bit wider of a guide. On the EPS side. But at the same time, we feel really good about being able to fall in that range. And certainly, as Kevin mentioned before, as sales we're delivering, the more we can do and deliver on the top line, that will -- we expect that to fall through EPS as well as we go. So I think it's really just managing those big macro items throughout into the year is going to be what we're going to aggressively with.

Okay. Very helpful. And then, Kevin, one for you. We've seen physician reimbursement on large joint replacement come down over the last 10, 15 years, pretty steadily. But this year, Medicare like a pretty big swing as much as 20-plus percent on knees, hips, shoulders, et cetera. I'm just wondering if you have any thoughts on what the industry and the orthopedic industry is doing to maybe push back on this? Or whether you think this has any impact in future years on and hip replacement on the physician side?

Yes. Listen, we -- the proposed rules are always so there sticker shock, and this has been going on ever since I've been at Stryker for 15 years. We see the proposed rules come out they look, they create noise. And then the normal of course, of sort of everybody voicing their opinions and ends up getting to a reasonable place. And so I don't assume that it will be any different this time. What you are seeing, of course, is there are shifting a site of care with an orthopedic procedures, that is going to continue with that question. And frankly, Stryker, that's a good thing because we like the ASC as a place where we can win not just in hips and knees, but across our entire portfolio. And so that trend, I think, will continue related to reimbursement pressures. But the demand for drug replacement procedures is unabated. Every day, 12,000 people at turning to 65. There's more and more people being active. So I don't see that changing that dynamic changing, and I think the physicians will do fine. They're needed and their voice will be earned.

Your next question will come from Travis Steed with Bank of America.

I wanted to push a little bit more on the U.S. ortho numbers, especially the U.S. type number. It's hard for us to see the underlying growth there. But it was a little lighter than I think some expected. I don't know if there's anything on share shifts for the market and U.S. [indiscernible] that kind of took some of the upside away this quarter?

Travis, in terms of U.S. hips, nothing that we would point to in terms of major share shifts or changes there. I think the one thing I would point out is, again, the delivery of the number this year was against a pretty large prior year comparable. So we had 8% growth last year in that space. So just -- it's really just a comparable. I think as we look at any of our numbers across Orthopedics, we always say one quarter doesn't make a trend. And so I think that's true here. So nothing major has changed in terms of anything that we've seen in underlying market conditions from a standpoint.

Okay. And maybe a little more color on the are supply disruption. What exactly happened? Is it just the Inari or other parts of vascular certain products? Does that -- is there a catch-up in Q3 assumed in the guide? Or is there some lingering impact you said manageable by the end of Q3. Just curious how it works out on the numbers for Q3.

Yes, the supply disruption. I'm not going to get into the details of what it was, but let's just say it did cause a significant back order specific to one plant in the Inari Business which frankly makes virtually most of the products other than the third-party product factor for us. So we had an issue with that plant. That's created the back order. The backorder is pretty elevated right now, and it will work down to a manageable level by the end of the quarter. We still -- we do expect the business to grow in Q3 and to grow in Q4, but it's going to take a little time for that to build. So because of the backward situation. So we finally got the sales force stabilized. We're feeling really good about things, and then we had this hiccup. And that, unfortunately, when we do acquisitions, we felt this pain before. We've been with some of our other deals in the past and obviously moving in to our Stryker sales force and now [indiscernible] manufacturing systems that we have experienced this. We did this with Sage. It's happened to us with Mako, it's happened to us. We don't obviously enjoy it, but we do love the market, and we do a lot of the products that they have, the pipeline that they have, and we'll be back and it will just take us a little bit of time to dig out from under this backward situation.

Your next question will come from Vik Chopra with BMO Capital Markets.

Kevin, you characterized the second half outlook as strong. I'm just curious what key assumptions are embedded in the back half regarding volume growth, capital conversion and backlog realization. And then I had a quick follow-up, please.

Vik, I'll take that one. In terms of the back half of the year, we're not going to give all the specifics in terms of what we're expecting across each one of those elements that you laid out. But what I can tell you is when we exited this quarter the momentum that we see really across the business. So even just from a procedural standpoint as well as the capital business. And when we look at the capital business, in particular, looking at the order book, looking at how strong that is. I mentioned even some of the products that are driving it for medical, but we see that really across all of our capital businesses. And so it's really our ability to capitalize on that through the production ramp that Kevin is talking about is what gives us a lot of confidence in being able to deliver on the capital side. And the same thing on the procedural side, it's really just continuing to run the offense behind Mako on the joint replacement side, and obviously, the RPS hitting full launch as well. I think those are the things that we really believe in that are going to help drive both sides of those businesses.