Zimmer Biomet Holdings, Inc. — 2022 Form 10-K Summary
Business context and reporting period
Zimmer Biomet is a global medical technology company providing orthopedic reconstructive, sports medicine, biologics, extremities and trauma, craniomaxillofacial and thoracic, surgical, robotic and digital products. The filing covers the year ended December 31, 2022, with comparisons to 2021 and 2020. Results are generally presented on a continuing-operations basis following the March 1, 2022 spinoff of the spine and dental businesses into ZimVie Inc.
- Approximately 85% of 2022 net sales were consignment sales.
- The company generated approximately 42% of 2022 net sales outside the United States.
- Reportable segments were Americas, EMEA, and Asia Pacific.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $6,939.9 million | $6,827.3 million | Up 1.6% |
| Operating profit | $696.3 million | $860.3 million | Down 19.1% |
| Operating margin | 10.0% | 12.6% | Down 2.6 percentage points |
| Gross margin | 63.3% | 63.5% | Down 0.2 percentage points |
| Net earnings attributable to Zimmer Biomet | $231.4 million | $401.6 million | Down 42.4% |
| Diluted EPS | $1.10 | $1.91 | Down $0.81 |
| Operating cash flow from continuing operations | $1,356.2 million | $1,404.3 million | Down $48.1 million |
| Cash and cash equivalents | $375.7 million | $378.1 million | Down $2.4 million |
| Total debt | $5,696.5 million | $7,068.8 million | Down $1,372.3 million |
Sales growth reflected a 7.6% positive volume and mix effect, partly offset by a 1.0% pricing decline and a 5.0% adverse foreign-exchange effect. U.S. sales increased 4.1% to $4,012.4 million, while international sales declined 1.5% to $2,927.5 million.
- Knees sales increased 4.9% to $2,778.3 million.
- Hips sales increased 2.1% to $1,894.9 million.
- S.E.T. sales decreased 1.8% to $1,696.7 million.
- Other sales decreased 4.3% to $570.0 million.
- Cash flow from investing activities was an outflow of $522.0 million, including $258.3 million of instrument additions, $187.9 million of property and equipment additions, and $99.8 million for an acquisition.
- Cash flow from financing activities was an outflow of $775.7 million. The company paid $201.2 million in dividends and $126.4 million for share repurchases.
Material changes versus the prior comparable period
- Elective procedure volumes recovered across most markets as COVID-19 disruptions eased, although staffing shortages, virus surges and supply-chain constraints continued to limit demand and production.
- Operating profit declined primarily because of a $289.8 million goodwill impairment charge, higher restructuring costs, inflationary manufacturing costs, inventory charges and higher non-operating expense.
- The company recorded a $116.6 million loss on its retained ZimVie investment. The retained shares were disposed of in February 2023.
- Interest expense decreased to $164.8 million from $208.4 million, reflecting debt repayments and refinancing activity. The 2021 period included a $165.1 million loss on early extinguishment of debt; no comparable charge was recorded in 2022.
- Restructuring expense increased to $191.6 million from $125.7 million. Quality remediation expense declined to $33.8 million from $52.8 million.
- EMEA goodwill was fully impaired following pressure from foreign-exchange movements, inflation, higher discount rates and regional macroeconomic risks. Goodwill at December 31, 2022 was $8.6 billion and intangible assets were $5.1 billion.
- The company completed the acquisition of a privately held sternal closure company for $100.0 million in cash at closing, plus $11.0 million of deferred payments.
Guidance, outlook, risks and unusual items
Management expects 2023 revenue growth to be supported by market growth, recovery in procedure volumes and new product introductions. Management expects COVID-19-related procedure deferrals and staffing pressures to continue but at lower levels than in 2022. Foreign exchange is expected to remain a headwind, while supply-chain and inflation pressures are expected to persist, with some easing in the second half of 2023.
- Management expects lower 2023 expenses from the absence of the 2022 goodwill impairment, reduced quality-remediation spending and lower restructuring costs.
- Interest expense is expected to increase primarily because of higher interest rates.
- The 2021 Restructuring Plan is expected to generate approximately $190 million of gross annual pretax operating-expense reductions by the end of 2024, with approximately $220 million of total charges. The 2019 plan is expected to generate savings near the low end of a previously estimated $180 million to $280 million range by the end of 2023.
- At December 31, 2022, the company had $1.0 billion available under a 364-day revolving facility and $1.1 billion available under a five-year revolving facility. Management stated that available cash, operating cash flow and borrowing capacity should satisfy liquidity needs for at least the next 12 months.
- Debt maturities and repayments included $86.3 million of senior notes due March 19, 2023 and $375.0 million outstanding under the five-year revolving facility, which management expected to repay during 2023. The $83.0 million short-term term loan was settled in February 2023 using ZimVie shares and $33.9 million of cash.
- The company had $349.2 million of accrued litigation liabilities at December 31, 2022 and recognized $65.9 million of net litigation-related charges during 2022. Matters include product-liability claims involving the Durom Cup, M/L Taper and related hip products, and M2a-Magnum hips.
- An FDA warning letter concerning quality-system nonconformities at the Warsaw North Campus remained pending as of February 24, 2023. Further regulatory action could restrict manufacturing, marketing or product approvals.
- The IRS has proposed transfer-pricing and profit-allocation adjustments for multiple tax years, including a proposed increase in 2013 U.S. federal taxable income that could result in approximately $370 million of additional tax expense before interest and penalties. The company disputes the adjustments.
- Potential future payments under development, distribution and other agreements range from $0 to approximately $415 million, depending on milestones and other events.
- On February 14, 2023, the company acquired Embody, Inc. for initial consideration valued at $154.6 million, including 1.1 million shares and $19.6 million of cash, plus potential milestone consideration of up to $120.0 million.
Important facts for investors to verify
- Whether procedure-volume recovery offsets foreign-exchange, pricing, inflation and supply-chain pressures in 2023.
- The company’s progress in resolving the pending FDA warning letter and related Form 483 observations.
- Actual cash generation and debt repayment, including the 2023 maturity and revolving-facility obligations.
- Whether restructuring plans achieve the stated cost savings without impairing operations or product availability.
- Potential additional goodwill or intangible-asset impairments, particularly if EMEA or other reporting-unit forecasts deteriorate.
- The ultimate resolution and cash impact of IRS tax disputes, uncertain tax positions and the tax treatment of the ZimVie spinoff and retained-interest disposal.
- Developments in product-liability litigation and whether the $349.2 million accrued litigation liability adequately reflects ultimate exposure.
- China volume-based procurement effects, international reimbursement changes and regulatory-certification requirements under the EU Medical Device Regulation.