STRYKER CORP (SYK) FY 2024 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

About Stryker

Stryker is a global leader in medical technologies and, together with our customers, we are driven to make healthcare better. We offer innovative products and services in MedSurg, Neurotechnology, and Orthopaedics that help improve patient and healthcare outcomes. Alongside our customers around the world, we impact more than 150 million patients annually. Our goal is to achieve sales growth at the high-end of the medical technology (MedTech) industry and maintain our long-term capital allocation strategy that prioritizes: (1) Acquisitions, (2) Dividends and (3) Share repurchases.

Overview of 2024

In 2024 we achieved reported net sales growth of 10.2%. Excluding the impact of acquisitions and divestitures, sales grew 10.2% in constant currency. We reported net earnings of $2,993 and net earnings per diluted share of $7.76. Excluding the impact of certain items, we achieved adjusted net earnings(1) of $4,700 and adjusted net earnings per diluted share(1) of $12.19 representing growth of 15.0%.

We continued our capital allocation strategy by investing $1,628 in acquisitions and paying $1,219 in dividends to our shareholders.

In 2024 we completed various acquisitions for total consideration of $1,628 in upfront payments, net of cash acquired, as well as $400 of contingent consideration if certain commercial or clinical milestones are achieved. Refer to Note 6 to our Consolidated Financial Statements for further information.

In May 2024 we repaid the outstanding $600 principal amount of the 3.375% senior unsecured notes due May 15, 2024. In September 2024 we issued $750 of 4.250% senior unsecured notes due September 11, 2029, €800 of 3.375% senior unsecured notes due September 11, 2032, $750 of 4.625% senior unsecured notes due September 11, 2034 and €600 of 3.625% senior unsecured notes due September 11, 2036. In November 2024 we repaid the outstanding €500 of floating rate senior notes and in December 2024 we repaid €850 of 0.250% senior unsecured notes.

(1)    Refer to "Non-GAAP Financial Measures" for a discussion of non-GAAP financial measures used in this report and a reconciliation to the most directly comparable GAAP financial measure.

CONSOLIDATED RESULTS OF OPERATIONS

nm - not meaningful

Note: In the fourth quarter 2024 we reorganized our Spine business to align with certain updates to our internal reporting structure. The spine enabling technologies portfolio (Enabling Technologies) was reclassified to Other Orthopaedics, the interventional spine portfolio was reclassified to Neuro Cranial and the remaining Spine business was renamed to Spinal Implants. Neuro Cranial includes sales related to interventional spine of $413, $327 and $282 for 2024, 2023 and 2022. Other Orthopaedics includes sales related to Enabling Technologies of $152, $149 and $131 for 2024, 2023 and 2022. In the first quarter 2024 a product line previously included in Instruments has been reclassified to Endoscopy to align with a change in our internal reporting structure. We have reflected these changes in all historical periods presented.

Consolidated Net Sales

Consolidated net sales in 2024 increased 10.2% as reported and 10.7% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.5%. Excluding the 0.5% impact of acquisitions and divestitures, net sales in constant currency increased by 9.1% from increased unit volume and 1.1% due to higher prices. The unit volume increase was primarily due to higher shipments across all businesses.

Consolidated net sales in 2023 increased 11.1% as reported and 11.6% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.5%. Excluding the 0.1% impact of acquisitions and divestitures, net sales in constant currency increased by 10.9% from increased unit volume and 0.6% due to higher prices. The unit volume increase was due to higher shipments across all MedSurg and Neurotechnology businesses and most Orthopaedics businesses.

MedSurg and Neurotechnology Net Sales

MedSurg and Neurotechnology net sales in 2024 increased 11.1% as reported and 11.6% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.5%. Excluding the 0.4% impact of acquisitions and divestitures, net sales in constant currency increased by 9.5% from increased unit volume and 1.7% due to higher prices. The unit volume increase was due to higher shipments across all MedSurg and Neurotechnology businesses.

MedSurg and Neurotechnology net sales in 2023 increased 11.7% as reported and 12.2% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.5%. Excluding the 0.3% impact of acquisitions and divestitures, net sales in constant currency increased by 10.2% from increased unit volume and 1.7% due to higher prices. The unit volume increase was due to higher shipments across all MedSurg and Neurotechnology businesses.

Orthopaedics Net Sales

Orthopaedics net sales in 2024 increased 8.9% as reported and 9.4% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.5%. Excluding the 0.7% impact of acquisitions and divestitures, net sales in constant currency increased by 8.7% from increased unit volume. The unit volume increase was due to higher shipments across all Orthopaedics businesses.

Orthopaedics net sales in 2023 increased 10.3% as reported and 10.9% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.6%. Excluding the 0.1% impact of acquisitions and divestitures, net sales in constant currency increased by 11.9% from increased unit volume partially offset by 1.1% due to lower prices. The unit volume increase was due to higher shipments across most Orthopaedics businesses.

Gross Profit

Gross profit was $14,440, $13,058 and $11,578 in 2024, 2023, and 2022. The key components of the change were:

Gross profit as a percentage of net sales increased to 63.9% in 2024 from 63.7% in 2023 due to higher sales pricing and favorable volume partially offset by higher manufacturing and supply chain costs primarily due to inflationary pressures impacting fixed and variable manufacturing costs as well as higher amortization of inventory stepped up to fair value.

Gross profit as a percentage of net sales increased to 63.7% in 2023 from 62.8% in 2022 due to higher sales pricing and favorable volume offset by higher manufacturing and supply chain costs primarily due to higher raw material costs in the first six months of 2023 and supply chain inefficiencies.

While segment mix was not a significant driver of the change in gross profit as a percent of net sales between 2024, 2023 and 2022, we generally expect segment mix to have an unfavorable impact for the foreseeable future as we anticipate more rapid sales growth in our lower gross margin MedSurg and Neurotechnology segment than our Orthopaedics segment.

Research, Development and Engineering Expenses

Research, development and engineering expenses as a percentage of net sales in 2024 decreased to 6.5% from 6.8% in 2023 primarily due to lower spend on medical device regulations in the European Union.

Research, development and engineering expenses as a percentage of net sales in 2023 decreased to 6.8% from 7.9% in 2022 primarily due to increased spending for product launches, the write-off of certain intangible assets and higher spend related to the new medical device regulations in the European Union in 2022.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of net sales in 2024 decreased to 34.0% from 34.7% in 2023 primarily due to continued spend discipline and lower charges for structural optimization and certain legal matters partially offset by higher acquisition-related costs.

Selling, general and administrative expenses as a percentage of net sales in 2023 of 34.7% remained relatively flat with 34.6% in 2022 as charges of $132 related to share-based awards for Vocera employees that vested upon our acquisition in 2022 were partially offset by disciplined increases in spend and investments in 2023 to support our growth, including sales growth incentives and increased spend on travel and meetings. In addition, in 2022 we determined that certain commercial and regulatory milestones related to technology acquired in the purchase of Mobius Imaging and Cardan Robotics were no longer probable of being achieved and recorded $110 to reduce the fair value of contingent consideration.

Amortization of Intangible Assets

Amortization of intangible assets was $623, $635 and $627 in 2024, 2023 and 2022. These amounts include amortization related to intangible assets acquired in 2024 from various acquisitions, 2023 from Cerus Endovascular Limited (Cerus) and 2022 from Vocera. Refer to Notes 6 and 8 to our Consolidated Financial Statements for further information.

Goodwill and Other Impairments

In 2024 and 2022 we recorded goodwill impairment charges of $456 and $216 related to our Spine business.

In 2024 we recognized an estimated loss of $362 as a result of classifying certain assets in our Spinal Implants business as held for sale. Refer to Notes 8, 16 and 17 to our Consolidated Financial Statements for further information.

In 2024, 2023 and 2022 we recorded other impairments of $159, $36 and $54. Refer to Notes 15 and 16 to our Consolidated Financial Statements for further information.

Operating Income

Operating income was $3,689, $3,888 and $2,841 in 2024, 2023 and 2022. Operating income decreased as a percentage of sales to 16.3% in 2024 from 19.0% in 2023 and increased from 15.4% in 2022. Refer to the comments above for discussion of the primary drivers of the change.

MedSurg and Neurotechnology operating income as a percentage of net sales increased to 29.6% in 2024 from 28.5% in 2023. MedSurg and Neurotechnology operating income as a percentage of net sales increased to 28.5% in 2023 from 26.0% in 2022. Orthopaedics operating income as a percentage of net sales increased to 28.5% in 2024 from 27.2% in 2023. Orthopaedics operating income as a percentage of net sales increased to 27.2% in 2023 from 29.1% in 2022. The key components of the change were:

The increase in MedSurg and Neurotechnology operating income as a percentage of net sales in 2024 from 2023 was primarily driven by higher unit volumes, higher prices and a decrease in selling, general and administrative expenses as a percentage of sales partially offset by higher manufacturing and supply chain costs.

The increase in MedSurg and Neurotechnology operating income as a percentage of net sales in 2023 from 2022 was primarily driven by higher unit volumes, higher prices and lower manufacturing and supply chain costs due to supply chain challenges impacting capital products in our MedSurg businesses in 2022 which improved in 2023 partially offset by higher selling, general and administrative expenses as a percentage of sales due to continued investments including sales growth incentives and a more normalized cadence of travel and meetings.

The increase in Orthopaedics operating income as a percentage of net sales for 2024 from 2023 was primarily driven by higher sales volumes and a decrease in selling, general and administrative expenses as a percentage of sales partially offset by higher manufacturing and supply chain costs.

The decrease in Orthopaedics operating income as a percentage of net sales for 2023 from 2022 was primarily driven by higher higher manufacturing and supply chain costs primarily due to increased inventory reserves partially offset by higher unit volumes.

Other Income (Expense), Net

Other income (expense), net was ($197), ($215) and ($158) in 2024, 2023 and 2022. The decrease in net expense in 2024 from 2023 was primarily due to higher interest income partially offset by lower interest expense in 2024. The increase in net expense in 2023 from 2022 was primarily due to the release of accrued interest of $50 in 2022 related to the effective settlement of the United States federal income tax audit for years 2014 through 2018. Refer to Note 11 to our Consolidated Financial Statements for further information and higher interest income in 2023.

Income Taxes

Our effective tax rate was 14.3%, 13.8% and 12.1% for 2024, 2023 and 2022. The effective income tax rate for 2024 decreased from 2023 due to the 2024 deferred tax benefit on the outside basis difference related to the anticipated sale of the Spinal Implants business partially offset by the 2023 tax effect related to transfers of intellectual property between tax jurisdictions. The effective income tax rate for 2023 increased from 2022 due to the 2022 effective settlement of the United States federal income tax audit for years 2014 through 2018 and the 2022 reversal of deferred income tax on undistributed earnings of foreign subsidiaries partially offset by the 2023 tax effect related to transfers of intellectual property between tax jurisdictions. Additionally, the effective income tax rates for 2024, 2023 and 2022 reflect the continued lower effective income tax rates as a result of our European operations and certain discrete tax items.

The Organisation for Economic Cooperation and Development (OECD), which represents a coalition of member countries, has put forth two proposed base erosion and profit shifting frameworks that revise the existing profit allocation and nexus rules (Pillar One) and ensure a minimal level of taxation (Pillar Two). On December 12, 2022 the European Union member states agreed to implement the Inclusive Framework’s global corporate minimum tax rate of 15%, and various countries within and outside the European Union have either enacted or proposed new tax laws implementing Pillar Two in 2024. The OECD continues to release additional guidance and we anticipate more countries will enact similar tax laws. Some of the new tax laws became effective in 2024 while others will be effective in future years. These tax law changes and any additional contemplated tax law changes could increase tax expense in future periods.

Net Earnings

Net earnings for 2024 increased to $2,993 or $7.76 per diluted share from $3,165 or $8.25 per diluted share in 2023 and $2,358 or $6.17 per diluted share in 2022. Refer to the comments above for discussion of the primary drivers of the change.

Non-GAAP Financial Measures

We supplement the reporting of our financial information determined under accounting principles generally accepted in the United States (GAAP) with certain non-GAAP financial measures, including percentage sales growth in constant currency; percentage organic sales growth; adjusted gross profit; adjusted selling, general and administrative expenses; adjusted research, development and engineering expenses; adjusted operating income; adjusted other income (expense), net; adjusted income taxes; adjusted effective income tax rate; adjusted net earnings; and adjusted net earnings per diluted share (Diluted EPS). We believe these non-GAAP financial measures provide meaningful information to assist investors and shareholders in understanding our financial results and assessing our prospects for future performance. Management believes percentage sales growth in constant currency and the other adjusted measures described above are important indicators of our operations because they

exclude items that may not be indicative of or are unrelated to our core operating results and provide a baseline for analyzing trends in our underlying businesses. Management uses these non-GAAP financial measures for reviewing the operating results of reportable business segments and analyzing potential future business trends in connection with our budget process and bases certain management incentive compensation on these non-GAAP financial measures. To measure percentage sales growth in constant currency, we remove the impact of changes in foreign currency exchange rates that affect the comparability and trend of sales. Percentage sales growth in constant currency is calculated by translating current and prior year results at the same foreign currency exchange rate. To measure percentage organic sales growth, we remove the impact of changes in foreign currency exchange rates, acquisitions and divestitures, which affect the comparability and trend of sales. Percentage organic sales growth is calculated by translating current year and prior year results at the same foreign currency exchange rates excluding the impact of acquisitions and divestitures. To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect the comparability of operating results and the trend of earnings. The income tax effect of each adjustment was determined based on the tax effect of the jurisdiction in which the related pre-tax adjustment was recorded. These adjustments are irregular in timing and may not be indicative of our past and future performance. The following are examples of the types of adjustments that may be included in a period:

1.Acquisition and integration-related costs. Costs related to integrating recently acquired businesses (e.g., costs associated with the termination of sales relationships, employee retention and workforce reductions, manufacturing integration costs and other integration-related activities), changes in the fair value of contingent consideration, amortization of inventory stepped-up to fair value, specific costs (e.g., deal costs and costs associated with legal entity rationalization) related to the consummation of the acquisition process and legal entity rationalization and acquisition-related tax items.

2.Amortization of purchased intangible assets. Periodic amortization expense related to purchased intangible assets.

3.Structural optimization and other special charges. Costs associated with employee retention and workforce reductions, the closure or transfer of manufacturing and other facilities (e.g., site closure costs, contract termination costs and redundant employee costs during the work transfers), product line exits (primarily inventory, long-lived asset and specifically-identified intangible asset write-offs), certain long-lived and intangible asset write-offs and impairments and other charges.

4.Medical device regulations. Costs specific to updating our quality system, product labeling, asset write-offs and product remanufacturing to comply with the new medical device reporting regulations and other requirements of the European Union.

5.Recall-related matters. Changes in our best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within a range is not known, to resolve the Rejuvenate, LFIT V40, Wright legacy hip products and other product recalls.

6.Regulatory and legal matters. Changes in our best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within a range is not known, to resolve certain regulatory or other legal matters

and the amount of favorable awards from settlements.

7.Tax matters. Impact of accounting for certain significant and discrete tax items.

Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported sales growth, gross profit, selling, general and administrative expenses, research, development and engineering expenses, operating income, other income (expense), net, income taxes, effective income tax rate, net earnings and net earnings per diluted share, the most directly comparable GAAP financial measures. These

non-GAAP financial measures are an additional way of viewing aspects of our operations when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures at the end of the discussion of Consolidated Results of Operations below. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

The weighted-average diluted shares outstanding used in the calculation of adjusted net earnings per diluted share are the same as those used in the calculation of reported net earnings per diluted share for the respective period.

Reconciliation of the Most Directly Comparable GAAP Financial Measure to Non-GAAP Financial Measure

(a) Charges represent certain acquisition and integration-related costs associated with acquisitions, including:

(b) Structural optimization and other special charges represent the costs associated with:

(c) Goodwill and other impairments represent the costs associated with:

(d) Charges represent the costs specific to updating our quality system, product labeling, asset write-offs and product remanufacturing to comply with the medical device reporting regulations and other requirements of the new medical device regulations in the European Union.

(e) Charges represent changes in our best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within a range is not known, to resolve certain recall-related matters.

(f) Charges represent changes in our best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within a range is not known, to resolve certain regulatory or other legal matters and the amount of favorable awards from settlements.

(g) Benefits / (charges) represent the accounting impact of certain significant and discrete tax items, including:

FINANCIAL CONDITION AND LIQUIDITY

We believe our financial condition continues to be of high quality, as evidenced by our ability to generate substantial cash from operations and to readily access capital markets at competitive rates despite the current macroeconomic environment. Operating cash flow provides the primary source of cash to fund operating needs and capital expenditures. Excess operating cash is used first to fund acquisitions to complement our portfolio of

businesses. Other discretionary uses include dividends and share repurchases. We supplement operating cash flow with debt to fund our activities as necessary. Our overall cash position reflects our business results and a global cash management strategy that takes into account liquidity management, economic factors and tax considerations.

Operating Activities

Cash provided by operating activities was $4,242, $3,711 and $2,624 in 2024, 2023 and 2022. The increase in 2024 was primarily due to higher cash earnings partially offset by changes in working capital. The increase in 2023 from 2022 was primarily due to higher net earnings and increased collections on accounts receivable.

Investing Activities

Cash used in investing activities was $3,000, $962 and $2,924 in 2024, 2023 and 2022. Cash used in 2024 included cash paid for various acquisitions and purchases of short-term investments partially offset by proceeds from the settlement of certain foreign currency forward contracts designated as net investment hedges. The decrease in cash used in 2023 was primarily due to lower amounts paid for acquisitions. Our 2023 acquisitions included Cerus and in 2022 we acquired Vocera.

Financing Activities

Cash used in financing activities was $525, $1,594 and $749 in 2024, 2023 and 2022. Cash used in 2024 was primarily driven by dividend payments of $1,219 and repayments of $2,039 to pay off maturing senior unsecured notes. These repayments were offset by net proceeds of $3,011 from the issuance of senior unsecured notes as described in Note 10 to our Consolidated Financial statements. In 2023 we received proceeds of 1,241 from issuance of long-term debt and made payments of $2,058 on long-term debt and dividend payments of $1,139. In 2022 we made payments of $653 on long-term debt and dividend payments of $1,051. There were no share repurchases in 2024, 2023 or 2022.

We maintain debt levels that we consider appropriate after evaluating a number of factors including cash requirements for ongoing operations, investment and financing plans (including acquisitions and share repurchase activities) and overall cost of capital. Refer to Note 10 to our Consolidated Financial Statements for further information.

Liquidity

Cash, cash equivalents and marketable securities were $3,743 and $3,053, and our current assets exceeded current liabilities by $7,231 and $4,597 on December 31, 2024 and 2023. In addition, we have $750 of short-term investments which mature in the first quarter of 2025. We anticipate being able to support our short-term liquidity and operating needs from a variety of sources including cash from operations, commercial paper and existing credit lines. We also have a revolving credit agreement maturing in October 2026 with an aggregate principal amount of $2,250.

We raised funds in the capital markets in the past and may continue to do so from time-to-time. We continue to have strong investment-grade short-term and long-term debt ratings that we believe should enable us to refinance our debt as needed.

Our cash, cash equivalents and marketable securities held in locations outside the United States was approximately 20% and 25% on December 31, 2024 and 2023.

Guarantees and Other Off-Balance Sheet Arrangements

We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, of a magnitude that we believe could have a material impact on our financial condition or liquidity.

CONTRACTUAL OBLIGATIONS AND FORWARD-LOOKING CASH REQUIREMENTS

In 2024 we recorded charges for various legal matters as further described in Note 7 to our Consolidated Financial Statements. Recorded reserves represent the best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within the range is not known. The final outcome of these matters is dependent on many variables that are difficult to

predict. The ultimate cost to entirely resolve these matters may be materially different from the amount of the current estimates and could have a material adverse effect on our financial position, results of operations and cash flows. We are not able to reasonably estimate the future periods in which payments will be made.

As further described in Note 11 to our Consolidated Financial Statements, on December 31, 2024 we had a reserve for uncertain income tax positions of $349. Due to uncertainties regarding the ultimate resolution of income tax audits, we are not able to reasonably estimate the future periods in which any income tax payments to settle these uncertain income tax positions will be made.

As further described in Note 12 to our Consolidated Financial Statements, on December 31, 2024 our defined benefit pension plans were underfunded by $290, of which approximately $291 related to plans outside the United States. Due to the rules affecting tax-deductible contributions in the jurisdictions in which the plans are offered and the impact of future plan asset performance, changes in interest rates and potential changes in legislation in the United States and other foreign jurisdictions, we are not able to reasonably estimate the amounts that may be required to fund defined benefit pension plans.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our financial statements in accordance with generally accepted accounting principles, there are certain accounting policies, which may require substantial judgment or estimation in their application. We believe these accounting policies and the others set forth in Note 1 to our Consolidated Financial Statements are critical to understanding our results of operations and financial condition. Actual results could differ from our estimates and assumptions, and any such differences could be material to our results of operations and financial condition.

Income Taxes

Our annual tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary and reverse over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities.

Deferred tax assets generally represent the tax effect of items that can be used as a tax deduction or credit in future years for which we have already recorded the tax benefit in our income statement. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment was deferred, the tax effect of expenditures for which a deduction was taken in our tax return but has not yet been recognized in our financial statements or assets recorded at fair value in business combinations for which there was no corresponding tax basis adjustment.

Inherent in determining our annual tax rate are judgments regarding business plans, tax planning opportunities and expectations about future outcomes. Realization of certain deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. Although realization is not assured, management believes it is more likely than not that our deferred tax assets, net of valuation allowances, will be realized.

We operate in multiple jurisdictions with complex tax policy and regulatory environments. In certain of these jurisdictions, we may take tax positions that management believes are supportable but are potentially subject to successful challenge by the applicable taxing authority. These differences of interpretation with the respective governmental taxing authorities can be impacted by the local economic and fiscal environment. We evaluate our tax positions and establish liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. We review these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and adjust them accordingly. We have a number of audits in process in various jurisdictions. Although the resolution of these tax positions is uncertain, based on currently available information, we believe that it is more likely than not that the ultimate outcomes will not have a material adverse effect on our financial position, results of operations or cash flows.

Due to the number of estimates and assumptions inherent in calculating the various components of our tax provision, certain changes or future events, such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans, could have an impact on those estimates and our effective tax rate.

Acquisitions, Goodwill and Intangibles, and Long-Lived Assets

Our financial statements include the operations of an acquired business starting from the completion of the acquisition. In addition, the assets acquired and liabilities assumed are recorded on the date of acquisition at their respective estimated fair values, with any excess of the purchase price over the estimated fair values of the net assets acquired recorded as goodwill.

Significant judgment is required in estimating the fair value of intangible assets and in assigning their respective useful lives. Accordingly, we typically obtain the assistance of third-party valuation specialists for significant items. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. We typically use an income method to estimate the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product or technology life cycles, the economic barriers to entry and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur that could affect the accuracy or validity of the estimates and assumptions.

Determining the useful life of an intangible asset also requires judgment. With the exception of certain trade names, the majority of our acquired intangible assets (e.g., certain trademarks or brands, customer and distributor relationships, patents and technologies) are expected to have determinable useful lives. Our assessment as to the useful lives of these intangible assets

is based on a number of factors including competitive environment, market share, trademark, brand history, underlying product life cycles, operating plans and the macroeconomic environment of the countries in which the trademarked or branded products are sold. Our estimates of the useful lives of determinable-lived intangibles are primarily based on these same factors. Determinable-lived intangible assets are amortized to expense over their estimated useful life.

In some of our acquisitions, we acquire in-process research and development (IPRD) intangible assets. For acquisitions accounted for as business combinations, IPRD is considered to be an indefinite-lived intangible asset until the research is completed (then it becomes a determinable-lived intangible asset) or determined to have no future use (then it is impaired). For asset acquisitions, IPRD is expensed immediately unless there is an alternative future use.

Indefinite-lived intangible assets and goodwill are not amortized but are tested annually for impairment or whenever events or circumstances indicate such assets may be impaired. Our annual impairment testing date is October 31. When it is unlikely that an indefinite-lived intangible asset or goodwill of a reporting unit is impaired, we perform a qualitative assessment. For goodwill, that qualitative assessment may be periodically supplemented with a corroborative quantitative analysis.

When necessary, we perform a quantitative impairment test and determine the fair value of the indefinite-lived intangible asset or reporting unit using an income approach. For the quantitative impairment test of goodwill, we corroborate our concluded value under the income approach using a market approach that utilizes trading multiples derived from a peer set of similar companies. The income approach calculates the present value of estimated future cash flows and requires certain assumptions and estimates be made regarding market conditions and our future profitability. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows used to measure fair value. Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal business plans. We believe such assumptions and estimates are also comparable to those that would be used by other marketplace participants.

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

During 2022 we recognized a goodwill impairment charge of $216 for the Spine reporting unit. Due to the impairment charge in 2022, we performed a quantitative impairment test for our Spine reporting unit at October 31, 2023 and determined that its fair value exceeded its carrying amount and no additional impairment charges were recorded.

The Spine business’s operating results continue to be affected by inflationary pressures and the competitive environment. These

inputs were included in the updated projections used in our annual long-range financial plan, which was approved during the third quarter 2024. Additionally, it was considered likely that we would reorganize our Spine reporting unit during the fourth quarter 2024 to separate the spine enabling technologies portfolio (Enabling Technologies) from the spinal implant portfolio (Spinal Implants). While changes in reporting units are accounted for on a prospective basis, they may be an indicator that goodwill of a reporting unit is potentially impaired. As a result of these factors, we performed a quantitative impairment test of the Spine reporting unit at September 30, 2024. The outcome of the impairment test was that the fair value of the Spine reporting unit exceeded its carrying amount by 9% and we did not record any impairment charges in the third quarter 2024.

Due to the minimal passing margin of the quantitative impairment test performed at September 30, 2024 and an increase in the discount rate impacting the Spine reporting unit’s weighted average cost of capital used to discount the estimated future cash flows, we performed a quantitative impairment test for our Spine reporting unit at October 31, 2024.

As the impairment test indicated that goodwill was impaired, we evaluated the recoverability of the underlying asset groups prior to performing a quantitative goodwill impairment test for our Spine reporting unit at October 31, 2024. There were no indicators of impairment of the long-lived assets of the Enabling Technologies asset group; however, we determined that further evaluation of the Spinal Implants asset group was necessary. A recoverability test was performed by comparing the undiscounted cash flows of the Spinal Implants asset group to its carrying amount. Significant inputs to the analysis included assumptions for future revenue growth, operating margin, remaining useful life of the primary asset and the salvage value of the net assets. As a result, we determined that the undiscounted cash flows of the Spinal Implants asset group exceeded its net carrying amount by over 80% and further testing of long-lived assets was not necessary.

As we determined that there was no impairment of long-lived assets in the Spine reporting unit, we completed the quantitative goodwill impairment test and concluded that our Spine reporting unit's carrying amount was in excess of its estimated fair value and recognized a goodwill impairment charge of $273. The impairment charge for the Spine reporting unit was driven by a decrease in future product demand due to the competitive environment and an increase in the Spine reporting unit’s weighted average cost of capital.

In our quantitative goodwill impairment tests performed at September 30 and October 31, the fair value of our Spine reporting unit was determined using a discounted cash flow analysis, which is a form of the income approach. Significant inputs to the analysis included assumptions for future revenue growth, operating margin and the rate used to discount the estimated future cash flows to their present value based on the reporting unit’s estimated weighted average cost of capital. Our assumptions for revenue growth and operating margin considered several operating factors, including surgery volumes, increased costs and our competitive environment. We believe our estimates are appropriate based upon current and future market conditions and the best information available at the impairment assessment date.

Historical goodwill impairment assessments for our other reporting units have indicated that their implied fair values exceed their respective carrying amounts by at least 100%. We did not identify any factors in 2024 or 2023 that would lead us to believe

that those reporting units are at risk of a goodwill impairment. Accordingly, we performed qualitative assessments and concluded it was more likely than not that the fair values of those reporting units exceeded their respective carrying amounts. Future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill and indefinite-lived intangible assets, including discount rates and cash flow projections, could result in significantly different estimates of fair value. A significant reduction in estimated fair values could result in impairment charges that could materially affect our results of operations.

During the fourth quarter 2024 management committed to a plan to sell certain assets associated with the Spinal Implants business (disposal group) and such assets were classified as held for sale beginning November 2024. We tested the net carrying amounts of other assets, such as working capital accounts, and determined that there was no impairment as the fair values of these assets approximated their carrying values.

Goodwill was allocated to the disposal group and the retained portion of the Spine reporting unit based on the relative fair values. Goodwill allocated to the disposal group was tested for impairment which resulted in an impairment charge of $183. The fair value of the disposal group was measured based upon unobservable amounts, such as the estimated selling price derived from Company-specific information and market conditions. We believe our estimates are appropriate based upon current and future market conditions and the best information available at the impairment assessment date. As of December 31, 2024, there is no goodwill remaining attributable to the Spinal Implants disposal group.

Finally we compared the carrying amount of the disposal group to the fair value less cost to sell. As a result, we recognized an estimated loss of $362 to record the disposal group at its fair value less cost to sell within goodwill and other impairments in our Consolidated Statements of Earnings. The fair value of the disposal group was measured using a discounted cash flow analysis based upon unobservable inputs, such as estimated selling price derived from Company-specific information, market conditions and the rate used to discount the estimated future cash flows to their present value based on factors including the disposal group’s cost of equity and market yield rates, which are Level 3 inputs. Future changes in the judgments, assumptions and estimates that are used in our fair value estimate, including discount rates and cash flow projections, could result in a significantly different estimate of fair value. In January 2025 we entered into a definitive agreement to sell the Spinal Implants disposal group as further discussed in Note 17. The terms of the definitive agreement were materially the same as those considered as inputs to the valuation of the disposal group at December 31, 2024. A change in the amount or timing of consideration received could increase the fair value by up to $84 or decrease the fair value by up to $218. Refer to Notes 16 and 17 to the Consolidated Financial Statements for additional information on the assets classified as held for sale and the definitive agreement announced to sell certain assets within our Spinal Implants business.

During the fourth quarter 2024 subsequent to the October 31 impairment test, we combined the remainder of the Spine reporting unit representing the Enabling Technologies portfolio into our Joint Replacement reporting unit to align to certain updates to our internal reporting structure. As a result, the goodwill of approximately $580 remaining after allocation to the disposal group was reassigned to the Joint Replacement reporting unit.

Legal and Other Contingencies

We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor, intellectual property and other matters that are more fully described in Note 7 to our Consolidated Financial Statements. The outcomes of these matters will generally not be known for prolonged periods of time. In certain of the legal proceedings, the claimants seek damages, as well as other compensatory and equitable relief, that could result in the payment of significant claims and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which management had sufficient information to reasonably estimate our future obligations, a liability representing management's best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within the range is not known, for the resolution of these legal matters is recorded. The estimates are based on consultation with legal counsel, previous settlement experience and settlement strategies. If actual outcomes are less favorable than those projected by management, additional expense may be incurred, which could unfavorably affect future operating results. We are currently self-insured for certain claims and expenses. The ultimate cost to us with respect to product liability claims could be materially different than the amount of the current estimates and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.

NEW ACCOUNTING PRONOUNCEMENTS

Refer to Note 1 to our Consolidated Financial Statements for further information.