Zimmer Biomet Holdings, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Zimmer Biomet designs, manufactures and markets orthopedic reconstructive, sports medicine, biologics, extremities, trauma, craniomaxillofacial, thoracic and related surgical products. The filing covers the three and nine months ended September 30, 2022. Results are presented on a continuing-operations basis after the March 1, 2022 spinoff of the spine and dental businesses into ZimVie Inc.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $1,669.8 million | $1,685.4 million | $5,114.8 million | $5,050.1 million |
| Operating profit | $245.3 million | $243.0 million | $724.6 million | $726.5 million |
| Operating margin | 14.7% | 14.4% | 14.2% | 14.4% |
| Net earnings attributable to Zimmer Biomet | $194.0 million | $145.6 million | $361.9 million | $485.6 million |
| Diluted EPS | $0.92 | $0.69 | $1.72 | $2.31 |
| Net cash from operating activities, continuing operations | Not separately provided for the quarter | Not separately provided for the quarter | $1,112.0 million | $1,066.7 million |
- Q3 sales declined 0.9%, while nine-month sales increased 1.3%. Foreign exchange reduced year-over-year sales by 5.9% in Q3 and 4.7% for the first nine months.
- Q3 volume and mix increased sales by 6.4%; pricing reduced sales by 1.4%. Nine-month volume and mix increased sales by 7.4%, while pricing reduced sales by 1.4%.
- Q3 U.S. sales increased 3.2% to $973.0 million; international sales declined 6.2% to $696.8 million. Nine-month U.S. sales increased 3.4%, while international sales declined 1.4%.
- Q3 product-category sales increased 1.4% for Knees and 3.1% for Hips, but declined 6.4% for S.E.T. and 7.2% for Other. Nine-month Knees and Hips sales increased 5.0% and 2.2%, respectively.
- Q3 net earnings benefited from lower litigation expense and approximately $81 million of tax benefits related primarily to a Swiss tax settlement and finalization of a Swiss tax step-up. Nine-month earnings were reduced by the ZimVie spinoff, a $114.3 million unrealized loss on the retained ZimVie investment, higher restructuring costs and discontinued-operation losses.
- Q3 effective tax rate was negative 9.3%; the nine-month rate was 11.9%, compared with 14.8% and 14.2%, respectively, in the comparable 2021 periods.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $545.4 million at September 30, 2022, compared with $378.1 million at December 31, 2021.
- Operating cash flow from continuing operations was $1,112.0 million for the first nine months, up from $1,066.7 million. Investing cash outflow was $409.5 million, including $99.8 million for an acquisition and $124.5 million for property, plant and equipment. Financing cash outflow was $462.3 million.
- Total debt was $5.7 billion, comprising $659.1 million of current debt and $5,055.2 million of long-term debt. The filing reports $5.8 billion of senior-note principal, partially offset by discounts, issuance costs and hedge-related adjustments.
- Current maturities include $489.8 million of Euro Notes due December 2022, $86.3 million of senior notes due March 2023 and an $83.0 million short-term term loan expected to settle in the first quarter of 2023.
- The company had no borrowings outstanding under its $1.5 billion five-year revolving facility, maturing August 2027, or its $1.0 billion 364-day facility, maturing August 2023. Management stated that operating cash flow, cash on hand and available facilities should cover liquidity needs for at least the next twelve months.
- Debt agreements require a consolidated indebtedness-to-EBITDA ratio generally no greater than 4.5 to 1.0, subject to specified exceptions. The company reported compliance at September 30, 2022.
Material changes, outlook and unusual items
- The ZimVie separation resulted in spine and dental results being reported as discontinued operations and included a $540.6 million dividend received from ZimVie. Zimmer Biomet retained approximately 5.1 million ZimVie shares, or approximately 19.7% at separation, and intends to dispose of them by the end of the first quarter of 2023. The retained investment generated a $114.3 million loss during the first nine months.
- The company acquired a privately held sternal-closure business in April 2022 for $100.0 million in cash, with $11.0 million of deferred payments. Purchase accounting remained preliminary.
- Restructuring charges were $28.3 million in Q3 and $129.2 million for the first nine months, compared with $22.5 million and $62.6 million, respectively, in 2021. The 2021 Restructuring Plan is expected to generate approximately $220 million of total charges and approximately $190 million of annual gross pre-tax savings by the end of 2024. The 2019 plan is expected to generate approximately $350 million to $400 million of charges and $180 million to $280 million of annual gross savings by the end of 2023.
- Management expected COVID-19 and hospital staffing shortages to continue affecting fourth-quarter sales, although less severely than in 2021 and early 2022. At recent foreign-exchange rates, fourth-quarter sales were expected to be negatively affected in the mid-single digits and full-year 2022 sales by approximately 5.5% from currency. Inflation and supply-chain pressures were expected to increase expenses, partially offset by restructuring savings.
- Key ongoing risks include elective-procedure volatility, inflation and supply-chain disruption, foreign-exchange movements, China volume-based procurement, the Russia-Ukraine conflict, possible China-Taiwan tensions, FDA remediation matters, product liability litigation, tax audits and substantial debt refinancing requirements.
- The FDA warning letter concerning the Warsaw North Campus remained pending. The company had accrued $373.0 million for litigation liabilities at September 30, 2022 and stated that ultimate litigation costs could exceed current estimates.
- The IRS has proposed material transfer-pricing adjustments for prior years, including an estimated approximately $370 million increase in U.S. federal tax for 2013 before interest and penalties. The company disputes the proposed adjustments. Management estimated that unrecognized tax benefits could change within the next twelve months by a decrease of up to $130 million or an increase of up to $20 million.
Most important facts for investors to verify
- Whether elective-surgery volumes continue recovering and offset currency, pricing, staffing and reimbursement pressures.
- The timing and cash cost of the December 2022 and 2023 debt maturities and settlement of the $83.0 million short-term term loan.
- The ultimate value and disposal proceeds of the retained ZimVie shares and the effect of the related forward exchange agreement.
- Progress, potential sanctions and commercial effects associated with the pending FDA warning letter and Warsaw remediation.
- Future litigation payments and whether accrued liabilities of $373.0 million adequately cover product-liability and other claims.
- Resolution and potential cash impact of the IRS transfer-pricing disputes and other global tax audits.
- Whether restructuring savings materialize as projected while inflation, supply-chain costs and quality-remediation spending remain elevated.