Zimmer Biomet Holdings, Inc. — 2021 Form 10-K Summary
Business context and reporting period
Zimmer Biomet is a global musculoskeletal healthcare company offering orthopedic reconstructive, sports medicine, biologics, extremities and trauma, spine, craniomaxillofacial and thoracic, dental, robotic and related surgical products. This Form 10-K covers the year ended December 31, 2021; the filing is an annual report rather than a standalone fourth-quarter filing.
- Approximately 80% of 2021 net sales came from consignment arrangements, with revenue generally recognized upon implantation.
- Approximately 40% of net sales were generated outside the United States.
- The Company announced a planned March 1, 2022 spinoff of its Spine and Dental businesses into ZimVie Inc. The businesses remained included in 2021 results.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change or comment |
|---|---|---|---|
| Net sales | $7,836.2 million | $7,024.5 million | Increased 11.6% |
| Operating profit (loss) | $780.1 million | $(87.8) million | Operating margin improved to 10.0% from (1.2)% |
| Net earnings attributable to Zimmer Biomet | $401.6 million | $(138.9) million | Returned to profitability |
| Diluted EPS | $1.91 | $(0.67) | GAAP diluted EPS |
| Adjusted diluted EPS | $7.37 | $5.67 | Non-GAAP measure |
| Gross margin | 62.3% | 61.2% | Improved 110 basis points |
| Cash flow from operations | $1,499.2 million | $1,204.5 million | Improved primarily from higher earnings |
| Cash and equivalents | $478.5 million | $802.1 million | Decreased after debt activity and other financing uses |
| Total debt | $7,068.8 million | $8,126.5 million | Balance-sheet debt decreased; current debt increased to $1,605.1 million |
Sales growth reflected a 12.1% favorable volume and mix impact and a 1.3% favorable foreign-exchange impact, partly offset by a 1.8% pricing headwind. Sales remained below 2019 levels because COVID-19 continued to defer elective procedures.
- Americas sales increased 10.7% to $4,800.2 million.
- EMEA sales increased 20.1% to $1,671.1 million.
- Asia Pacific sales increased 5.2% to $1,364.9 million.
- Product-category sales increased 11.3% for Knees, 6.0% for Hips, 13.3% for S.E.T., 12.5% for Spine and Dental, and 25.9% for Other.
Reported earnings benefited from the absence of the substantial 2020 impairment charges. Goodwill and intangible-asset impairment was $16.3 million in 2021 versus $645.0 million in 2020. Offsetting items included $165.1 million of debt-extinguishment loss, $129.1 million of restructuring costs, $79.8 million of acquisition, integration and divestiture costs, $53.1 million of quality-remediation expenses, $192.9 million of litigation charges in the non-GAAP reconciliation, and $65.0 million for certain third-party research and development agreements.
Material changes versus the prior comparable period
- Elective procedure volumes recovered from the sharp COVID-19 disruption experienced in 2020, although Delta and Omicron surges and hospital staffing shortages caused renewed deferrals in late 2021.
- China’s nationwide volume-based procurement program negatively affected Asia Pacific results through distributor inventory reductions, pricing negotiations, channel-inventory revaluation and procedure deferrals. Asia Pacific operating margin declined to 32.6% from 33.5% despite higher operating profit.
- Research and development expense increased to $497.2 million from $372.0 million, including $65.0 million related to access to or acquisition of third-party in-process R&D projects and higher EU Medical Device Regulation spending.
- Restructuring and other cost-reduction expense increased to $129.1 million from $116.9 million. The 2021 restructuring plan is expected to generate approximately $210 million of gross annual pre-tax savings by the end of 2024 after approximately $240 million of total charges.
- The Company issued $1.6 billion of senior notes and used cash and proceeds to repurchase or redeem debt, including $1.993 billion of principal through cash tender offers and $500 million of notes maturing in 2021.
- Litigation liabilities increased to $420.5 million at December 31, 2021 from $319.4 million, and the Company recorded higher litigation-related charges.
Liquidity, debt and capital resources
- Operating cash flow was $1,499.2 million; investing cash outflow was $503.6 million; financing cash outflow was $1,306.0 million.
- Available borrowing capacity was $1.0 billion under a 364-day facility maturing August 19, 2022, and $1.5 billion under a five-year facility maturing August 20, 2026. No borrowings were outstanding under either facility at year-end.
- Debt principal due during 2022 included $750.0 million of senior notes, $286.5 million of Japanese yen term loans and $568.6 million of euro-denominated senior notes. Estimated 2022 interest payments were $163.0 million.
- Management stated that operating cash flow, cash on hand, expected proceeds from the ZimVie separation and available revolver capacity should satisfy liquidity needs for at least the next twelve months, subject to COVID-19-related uncertainty.
- The Company paid quarterly dividends of $0.24 per share in 2021. Its $1.0 billion share-repurchase authorization remained unused at year-end.
Guidance, outlook, risks and unusual items
- Management expected COVID-19 variant surges and hospital staffing shortages to continue negatively affecting 2022 sales. The filing did not provide a clear full-year 2022 sales or earnings range.
- Following the ZimVie separation, the Company expected discontinued-operations accounting and recast prior-period results, making near-term comparisons difficult.
- The planned spinoff involved a pro rata distribution of 80.3% of ZimVie shares, with Zimmer Biomet retaining 19.7% and intending to dispose of that retained interest over time. Completion, tax treatment, timing and expected benefits were not assured.
- An FDA warning letter issued in 2018 concerning quality-system nonconformities at the Warsaw North Campus remained pending as of February 25, 2022. Quality-remediation expenses were $53.1 million in 2021.
- Material risks include COVID-19 and elective-procedure recovery, regulatory remediation, product liability and intellectual-property litigation, supply-chain concentration, cybersecurity, pricing and reimbursement pressure, foreign-exchange exposure, tax audits and the Company’s substantial debt burden.
- The IRS had proposed transfer-pricing adjustments for prior years, including an approximately $370 million potential additional tax expense related to 2013, before interest and penalties. The Company disputed the adjustments.
- The filing reported total goodwill of $9.2 billion and intangible assets of $6.3 billion. Although all reporting units exceeded carrying values by more than 20% in the 2021 annual impairment test, further impairment remains possible if forecasts, procedure volumes or discount rates deteriorate.
- In January 2022, Zimmer Biomet and Heraeus entered into a confidential memorandum of understanding to resolve global bone-cement litigation; the definitive agreement and payment terms were still being formalized, with payments expected over approximately three years.
Most important facts for investors to verify
- Actual completion, accounting treatment and financial impact of the March 1, 2022 ZimVie spinoff, including the disposition of Zimmer Biomet’s retained interest.
- 2022 elective-procedure volumes, sales recovery, foreign-exchange effects and pricing impact from China’s volume-based procurement program.
- Refinancing or repayment of the $1.605 billion of current debt and compliance with the 4.5-to-1 consolidated indebtedness-to-EBITDA covenant.
- Status and financial consequences of the Warsaw North Campus FDA warning letter and related quality remediation.
- Resolution and cash-payment requirements associated with product liability, Heraeus, shareholder derivative and other litigation matters.
- Ultimate outcome of the IRS transfer-pricing disputes and other uncertain tax positions, including the $558.6 million unrecognized-tax-benefit liability.
- Whether restructuring plans achieve the targeted approximately $210 million and $200 million to $300 million of annual gross pre-tax savings.