Zimmer Biomet Holdings, Inc. — 2023 Form 10-K Summary
Business context and reporting period
Zimmer Biomet is a global medical technology company focused on orthopedic reconstructive products, sports medicine, biologics, extremities and trauma, craniomaxillofacial and thoracic products, surgical products, and digital and robotic technologies. The filing covers the year ended December 31, 2023. Results are presented primarily on a continuing-operations basis following the March 2022 spinoff of the spine and dental businesses into ZimVie.
- Operating segments: Americas, EMEA, and Asia Pacific.
- Approximately 42% of 2023 net sales were generated outside the United States.
- Approximately 85% of 2023 net sales were consignment sales, generally recognized upon implantation.
- 2023 acquisitions included Embody and several privately held orthopedic and technology businesses.
Financial performance and key metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net sales | $7,394.2 million | $6,939.9 million | 6.5% increase |
| Operating profit | $1,277.7 million | $696.3 million | 83.5% increase |
| Operating margin | 17.3% | 10.0% | 7.3 percentage points higher |
| Net earnings attributable to Zimmer Biomet | $1,024.0 million | $231.4 million | Increase |
| Net earnings from continuing operations | $1,024.0 million | $290.2 million | Increase |
| Diluted EPS from continuing operations | $4.88 | $1.38 | Increase |
| Effective tax rate | 4.0% | 27.9% | Lower |
| Cash flow from operating activities | $1,581.6 million | $1,356.2 million | Increase |
| Capital and other investing cash flows | $(778.9) million | $(522.0) million | Higher use of cash |
| Cash flow from financing activities | $(763.5) million | $(775.7) million | Similar use of cash |
Gross margin was 64.2%, compared with 63.3% in 2022. Favorable product and market mix, higher hedge gains, and lower royalty expense more than offset pricing pressure, inflation, and higher inventory charges. SG&A declined to 38.4% of sales from 39.8%, while R&D increased to 6.2% from 5.9%.
- U.S. sales increased 6.9% to $4,288.8 million; international sales increased 6.1% to $3,105.4 million.
- Knees sales increased 9.4% to $3,038.4 million; Hips increased 3.8% to $1,967.2 million; S.E.T. increased 3.3% to $1,752.6 million; Other increased 11.6% to $636.0 million.
- Volume and mix increased sales by 8.1%; pricing reduced sales by 0.6%; foreign currency reduced sales by 1.0%.
- Cash and cash equivalents were $415.8 million at year-end, including $343.4 million held outside the United States.
- Total debt was $5,767.9 million, including $900.0 million classified as current. Debt service principal obligations expected during the next 12 months were approximately $900 million.
- Available revolving credit capacity was $1.0 billion under a facility maturing July 5, 2024, and $1.5 billion under a facility maturing July 7, 2028.
- Share repurchases totaled approximately $692.2 million in 2023; $155.8 million remained available under the repurchase authorization at year-end.
- Quarterly dividends were $0.24 per share, or $0.96 per share for the year.
Material changes versus the prior comparable period
- Sales growth reflected recovery in elective procedures as pandemic-related disruptions and staffing shortages diminished, along with supply-chain improvements, product introductions, and commercial execution.
- Operating profit improved substantially as 2022 included $292.8 million of goodwill and intangible-asset impairment charges and $33.8 million of quality-remediation expense. No impairment or significant quality-remediation expense was recorded in 2023.
- 2022 included a $116.6 million loss on the ZimVie investment; 2023 included a $2.5 million gain before the remaining ZimVie shares were disposed of in February 2023.
- Interest expense increased to $201.2 million from $164.8 million, and 2023 included $38.9 million of losses on fixed-to-variable interest-rate swaps.
- The effective tax rate declined primarily because unrecognized tax benefits were effectively settled during 2023, producing a material favorable tax effect. This benefit is not expected to recur to the same extent.
- Inventory increased to $2,385.2 million from $2,147.2 million, and excess and obsolete inventory charges increased to $155.2 million from $137.3 million.
- Restructuring charges declined to $151.9 million from $191.6 million, but additional restructuring spending is expected in 2024.
Guidance, outlook, commentary, and risks
Management expects mid-single-digit year-over-year revenue growth in 2024, supported by market growth, new products, commercial execution, and continued supply improvements. Based on year-end 2023 exchange rates, foreign currency is expected to reduce sales growth by approximately 0.5%. Operating profit is expected to increase through sales growth, fixed-cost leverage, and restructuring savings, partly offset by higher intangible-asset amortization and restructuring costs. Net interest expense is expected to increase slightly, while income taxes are expected to rise because of Pillar Two implementation and the nonrecurrence of favorable tax settlements.
- The 2023 Restructuring Plan is expected to generate approximately $120 million to $135 million of pretax charges by the end of 2025 and $175 million to $200 million of annual gross pretax savings relative to the 2023 baseline.
- Known debt maturities include $850 million of senior notes due November 2024 and $50 million under an uncommitted credit facility expected to be repaid during 2024.
- Estimated payments under development, distribution, and other contractual arrangements range from zero to approximately $440 million, depending on milestones and other events.
- Accrued litigation liabilities were $244.1 million at December 31, 2023. The company continues to defend product-liability matters involving Durom Cup, M/L Taper, Versys, and M2a-Magnum products.
- The IRS has proposed material adjustments for tax years 2010–2019, including a proposed increase in 2013–2015 taxable income that could result in approximately $370 million of additional tax expense, before interest and penalties, if the company is unsuccessful.
- Key operating risks include pricing and reimbursement pressure, healthcare cost containment, regulatory compliance, product liability, supply-chain interruptions, dependence on selected suppliers, cybersecurity and data privacy, foreign currency, interest rates, restructuring execution, acquisitions, and potential impairment of goodwill and intangible assets.
- The FDA resolved the Warsaw North Campus warning letter on December 27, 2023, although the company remains engaged in addressing other Form 483 inspectional observations.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2023. The audit opinion was unqualified.
Most important facts for investors to verify
- Whether 2024 mid-single-digit sales growth and expected operating-profit improvement are achieved despite pricing pressure, currency effects, and higher restructuring and tax costs.
- The company’s ability to refinance or repay the $850 million November 2024 maturity while maintaining liquidity and covenant compliance.
- Progress and realized savings from the 2023, 2021, and 2019 restructuring plans, including the planned manufacturing-facility closure.
- Trends in inventory, excess and obsolete inventory charges, supply availability, and consigned inventory carrying costs.
- Resolution and cash impact of IRS tax disputes, unrecognized tax benefits, Pillar Two implementation, and potential ZimVie-related tax matters.
- Developments in product-liability litigation, FDA Form 483 matters, regulatory approvals, recalls, and other legal contingencies.
- Whether growth in Knees, Hips, S.E.T., ROSA robotics, and other digital technologies offsets reimbursement and competitive pressures.
- Future goodwill and intangible-asset impairment sensitivity, particularly under weaker operating performance, higher discount rates, or adverse currency movements.