Zimmer Biomet Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Zimmer Biomet designs, manufactures and markets orthopedic reconstructive, sports medicine, extremities, trauma, craniomaxillofacial, thoracic and related surgical products. This unaudited report covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
On March 1, 2022, the company completed the spinoff of its spine and dental businesses into ZimVie Inc. Those businesses are presented as discontinued operations. Continuing operations therefore primarily reflect the company’s remaining orthopedic and related surgical businesses.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Net sales | $1,781.8 million | $1,763.3 million | $3,445.0 million | $3,364.7 million |
| Operating profit | $280.9 million | $224.8 million | $479.3 million | $483.5 million |
| Operating margin | 15.8% | 12.7% | 13.9% | 14.4% |
| Net earnings attributable to Zimmer Biomet | $153.7 million | $141.9 million | $167.9 million | $340.0 million |
| Diluted EPS | $0.73 | $0.67 | $0.80 | $1.62 |
| Operating cash flow from continuing operations | Not separately provided for the quarter | Not separately provided for the quarter | $661.2 million | $642.5 million |
Quarterly net sales increased 1.0%, while six-month sales increased 2.4%. Sales growth reflected recovery in elective procedures and favorable volume and mix, partly offset by foreign-exchange headwinds and pricing pressure. Volume and mix contributed 7.2% and 7.8% to year-over-year sales growth in the quarter and six-month period, respectively.
- Product categories: Second-quarter Knees sales increased 5.9% and Hips sales increased 2.7%; S.E.T. declined 3.4% and Other declined 11.0%. For six months, Knees increased 6.9%, Hips increased 1.8%, S.E.T. declined 1.9% and Other declined 2.7%.
- Geography: Second-quarter U.S. sales increased 1.3% and international sales increased 0.7%. Six-month U.S. sales increased 3.5% and international sales increased 1.0%.
- Foreign exchange: Currency movements reduced sales by 5.0% in the quarter and 4.0% for six months.
- Margins and expenses: Second-quarter operating margin improved to 15.8% from 12.7%, helped by higher sales, restructuring savings and the absence of $65.0 million of prior-year in-process research and development charges. Six-month operating margin declined to 13.9% from 14.4%, primarily because of higher restructuring, litigation, inflation, travel and other operating costs.
- Taxes: Effective tax rates were 22.8% for the quarter and 24.5% for six months, compared with 18.7% and 13.9%, respectively, in the prior-year periods. The 2022 rates were affected by the nondeductible loss on the ZimVie investment.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $386.4 million at June 30, 2022, compared with $378.1 million at December 31, 2021.
- Operating cash flow from continuing operations was $661.2 million for the first six months, compared with $642.5 million in 2021.
- Investing cash outflows from continuing operations were $324.3 million, including $99.8 million for a business acquisition, $120.6 million for instruments and $77.3 million for property, plant and equipment.
- Financing cash outflows from continuing operations were $268.4 million, including $750.0 million of senior-note redemptions and $100.5 million of dividends. The company received $540.6 million from ZimVie at the spinoff and temporarily borrowed and repaid $220.0 million under its revolving facility.
- Total debt was approximately $6.0 billion, consisting of $851.9 million current debt and $5,172.0 million long-term debt. The company had no borrowings outstanding under its $1.5 billion five-year facility or $1.0 billion 364-day facility at June 30, 2022.
- The company stated that cash flows, cash on hand and available credit are expected to satisfy liquidity requirements for at least the next twelve months. It intended to enter into a similar 364-day revolving facility when the existing facility matured on August 19, 2022.
- Debt maturities included $242.9 million of Japanese Yen term loans due September 2022, $522.7 million of Euro notes due December 2022 and $86.3 million of senior notes due March 2023.
Material changes, outlook and unusual items
- ZimVie spinoff: The company retained a 19.7% ZimVie interest, carried at fair value. It recognized investment losses of $33.3 million in the quarter and $84.3 million for six months, substantially affecting other expense and year-to-date earnings.
- Restructuring: The 2021 restructuring plan is expected to generate approximately $230 million of pretax charges and approximately $210 million of annual gross pretax savings by the end of 2024. Approximately $100 million had been incurred through June 30, 2022. The 2019 plan is expected to generate approximately $335 million to $385 million of charges and $180 million to $280 million of annual savings by the end of 2023; approximately $230 million had been incurred through June 30, 2022.
- Acquisition: On April 18, 2022, the company acquired a privately held sternal closure company for $100.0 million in cash, with $11.0 million of deferred payments. The purchase price allocation remained preliminary.
- 2022 outlook: Management expected COVID-19 and hospital staffing shortages to continue affecting sales, but less severely than in 2021 and early 2022. At then-current exchange rates, full-year sales were expected to be negatively affected by approximately 5.0%. Supply-chain and inflationary pressures were expected to increase expenses, partly offset by restructuring savings.
- COVID-19 and procedures: Elective surgical procedure volumes recovered as the Omicron surge subsided, but future procedure levels remained uncertain.
- Regulatory and quality matters: The FDA warning letter concerning quality-system issues at the Warsaw North Campus remained pending. Continued remediation is required, and adverse FDA action could restrict manufacturing, marketing or sales.
- Litigation and contingencies: Accrued litigation liabilities were $395.8 million at June 30, 2022. The company recognized $35.7 million of net litigation charges in the first six months. Potential contractual payments tied to development, distribution and other milestones ranged from $0 to approximately $370 million.
- Tax disputes: IRS proposed adjustments for prior years remain contested, including a proposed increase in U.S. federal taxable income that could result in approximately $370 million of additional tax expense for 2013, before interest and penalties. The company stated that no payment is required until applicable proceedings are completed.
Most important facts for investors to verify
- Whether elective procedure volumes recover as expected and whether hospital staffing shortages or renewed COVID-19 waves limit demand.
- The magnitude and timing of foreign-exchange effects, pricing pressure, China’s volume-based procurement program and inflationary costs.
- Progress, remaining charges and realized savings under the 2019 and 2021 restructuring plans.
- The valuation and potential future monetization of the retained ZimVie investment, including its effect on earnings volatility.
- Refinancing or repayment plans for the September and December 2022 debt maturities and the March 2023 maturity.
- Developments in the FDA warning-letter remediation and related quality or product-liability exposure.
- Outcomes of IRS tax disputes, product-liability litigation and other contingencies.
- Final purchase accounting for the sternal closure acquisition and any resulting changes to goodwill, intangible assets or liabilities.