Zimmer Biomet Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly results for the three months ended March 31, 2022, compared with the same period in 2021. Zimmer Biomet designs, manufactures and markets orthopedic reconstructive, sports medicine, biologics, extremities and trauma, craniomaxillofacial, thoracic and related surgical products. Reportable segments are Americas, EMEA and Asia Pacific.
On March 1, 2022, the company completed the spin-off of its spine and dental businesses into ZimVie Inc. Historical results of those businesses are presented as discontinued operations. Zimmer Biomet retained a 19.7% ZimVie interest, carried at fair value.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $1,663.2 million | $1,601.4 million | Up 3.9% |
| Operating profit | $198.4 million | $258.7 million | Down 23.3% |
| Operating margin | 11.9% | 16.2% | Down 4.3 percentage points |
| Net earnings from continuing operations attributable to Zimmer Biomet | $73.0 million | $193.4 million | Down 62.3% |
| Total net earnings attributable to Zimmer Biomet | $14.2 million | $198.1 million | Down 92.8% |
| Diluted EPS from continuing operations | $0.35 | $0.92 | Down $0.57 |
| Diluted EPS | $0.07 | $0.94 | Down $0.87 |
| Cash flow from continuing operations | $315.7 million | $223.5 million | Up $92.2 million |
- U.S. sales were $941.2 million, up 5.8%; international sales were $722.0 million, up 1.4%.
- By product category, Knees increased 7.9%, Hips increased 0.9%, S.E.T. declined 0.2% and Other increased 8.2%.
- Volume and mix benefited sales by 8.4%, while pricing reduced sales by 1.6% and foreign exchange reduced sales by 2.9%.
- Cost of products sold rose to 30.1% of sales from 27.2%, reflecting excess and obsolete inventory charges, inflationary cost pressures and lower average selling prices.
- Research and development increased to 5.8% of sales from 5.1%; SG&A increased to 41.2% from 41.0%.
- Cash and cash equivalents were $435.8 million at March 31, 2022, compared with $378.1 million at December 31, 2021.
- Total debt was $6.3 billion, including $1.0145 billion classified as current and $5.2863 billion classified as long-term. The company had $100.0 million outstanding under its five-year revolving facility and no borrowings under its $1.0 billion 364-day facility.
- Available revolving capacity was approximately $1.0 billion under the 364-day facility and $1.4 billion under the five-year facility. The company was in compliance with debt covenants.
- Capital expenditures and instrument additions totaled $92.8 million in continuing-operations investing cash flows.
Material Changes Versus the Prior Comparable Period
- Sales improved as elective procedures recovered from COVID-19 impacts in the 2021 period, particularly in the United States and Europe. Asia Pacific sales declined 13.1%, primarily because of China lockdowns and volume-based procurement pressures.
- Operating profit declined despite higher sales because of inflation, inventory charges, increased R&D and SG&A spending, litigation charges, restructuring costs and the resumption of travel, medical training and other activities.
- Other expense was $56.1 million versus other income of $7.7 million, primarily due to a $51.0 million unrealized loss on the company’s ZimVie investment.
- Discontinued operations produced a $58.8 million after-tax loss versus $4.7 million of earnings in Q1 2021, primarily reflecting costs associated with the ZimVie separation.
- Restructuring and other cost-reduction charges increased to $43.9 million from $21.3 million. The 2021 Restructuring Plan is expected to generate approximately $240 million of total charges and approximately $210 million of gross annual pre-tax savings by the end of 2024.
- Net litigation-related charges increased to $33.2 million from $10.7 million, and accrued litigation liabilities were $423.0 million at March 31, 2022.
- The company redeemed $750.0 million of senior notes due in 2022 using cash, a $100.0 million revolving-facility draw and funds received from ZimVie.
Guidance, Outlook, Risks and Unusual Items
- Management expects COVID-19 effects and hospital staffing shortages to continue negatively affecting sales, although less severely than in 2021. Supply-chain and inflation pressures are expected to increase expenses, partially offset by restructuring savings.
- If recent foreign-exchange rates persist, management estimates an approximately 3.5% negative effect on full-year 2022 sales.
- The company expects its future effective tax rate, absent discrete events, to be below the 21.0% U.S. corporate rate because of its foreign earnings mix. Q1 2022 effective tax rate was 27.8%, affected by the nondeductible ZimVie investment loss.
- Elective-procedure volumes remain exposed to COVID-19 variants, staffing shortages and hospital capacity constraints. Other operating risks include inflation, supply-chain disruption, pricing pressure, foreign exchange, China’s volume-based procurement program and the Russia-Ukraine conflict.
- The company continues remediation related to an FDA warning letter and inspection observations at its Warsaw North Campus. Adverse regulatory action could restrict manufacturing, marketing or sales.
- Significant litigation remains unresolved, including product-liability matters involving hip implants and metal reactions. The filing states that losses beyond accrued amounts for certain matters cannot be reasonably estimated.
- The IRS has proposed tax adjustments for prior years, including a proposed increase in 2013 U.S. federal taxable income that could result in approximately $370 million of additional tax expense, subject to interest and penalties. Zimmer Biomet disputes the proposed adjustments.
- Contractual development, distribution and other potential payments, dependent on future events, could range from zero to approximately $360 million.
- In April 2022, the company acquired another company for approximately $100 million and temporarily borrowed an additional $100.0 million under its five-year revolving facility; it subsequently repaid that tranche, leaving $100.0 million outstanding.
Most Important Facts for Investors to Verify
- Whether elective surgical volumes recover as expected and whether hospital staffing shortages continue to constrain procedures.
- The sustainability of sales growth after considering foreign exchange, pricing pressure and China’s procurement program.
- Progress and realized savings from the 2019 and 2021 restructuring programs versus their projected charges and benefits.
- Liquidity and refinancing plans for the $1.0145 billion of current debt, including Euro Notes and Japanese term loans maturing in 2022, and the 364-day facility maturing August 19, 2022.
- Changes in the fair value of the retained ZimVie investment and the resulting volatility in other income or expense.
- Developments in FDA remediation, product-liability litigation and the pending IRS tax matters.
- Post-spin-off execution, including transition-services and manufacturing agreements with ZimVie and any related tax or indemnification obligations.