Zimmer Biomet Holdings, Inc. — 2021 Q2 Form 10-Q Summary
Business context and reporting period
Zimmer Biomet designs, manufactures and markets orthopedic reconstructive products, sports medicine, extremities and trauma products, spine, craniomaxillofacial and thoracic products, office-based technologies, dental implants and related surgical products. This unaudited report covers the three and six months ended June 30, 2021, compared primarily with the corresponding 2020 periods.
Results continued to reflect the COVID-19 pandemic, which reduced elective surgical procedures in 2020. Management reported improving procedure volumes in 2021, but recovery remained uneven and uncertain. The company also reorganized its reporting structure in preparation for a planned mid-2022 spin-off of its Spine and Dental businesses into SpinCo.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Net sales | $2,026.9 million | $1,226.1 million | $3,874.3 million | $3,009.9 million |
| Sales growth | 65.3% | — | 28.7% | — |
| Operating profit (loss) | $220.5 million | $(171.7) million | $486.1 million | $(627.7) million |
| Operating margin | 10.9% | (14.0)% | 12.5% | (20.9)% |
| Net earnings (loss) attributable to Zimmer Biomet | $141.9 million | $(206.6) million | $340.0 million | $(715.1) million |
| Diluted EPS | $0.67 | $(1.00) | $1.62 | $(3.46) |
| Adjusted diluted EPS | $1.90 | $0.05 | $3.61 | $1.75 |
| Operating cash flow | Not separately reported | Not separately reported | $700.4 million | $398.1 million |
Quarterly revenue growth was driven principally by volume and mix, which contributed 62.2 percentage points, and foreign exchange, which contributed 4.6 percentage points. Pricing reduced growth by 1.5 percentage points. For the six-month period, volume and mix contributed 26.8 percentage points, foreign exchange 3.5 percentage points and pricing reduced growth by 1.6 percentage points.
- Second-quarter revenue by geography was $1,239.6 million in the Americas, $429.8 million in EMEA and $357.5 million in Asia Pacific.
- Second-quarter product revenue was $665.6 million for Knees, $474.6 million for Hips, $462.1 million for S.E.T., $263.5 million for Dental and Spine, and $161.1 million for Other.
- Cash and cash equivalents were $1,042.4 million at June 30, 2021, compared with $802.1 million at December 31, 2020.
- Total assets were $24.2 billion and total stockholders’ equity was $12.6 billion at June 30, 2021.
- Inventory increased to $2,533.0 million from $2,450.7 million at year-end 2020, while accounts receivable declined to $1,420.4 million from $1,452.7 million.
- Cash used in investing activities was $232.2 million, primarily reflecting instrument and property, plant and equipment additions and hedge settlements. Cash used in financing activities was $224.1 million, including $200.0 million of debt repayment and $99.8 million of dividends.
Debt and liquidity
- Total debt was $7,852.5 million at June 30, 2021, including $1,050.0 million classified as current and $6,802.5 million classified as long-term.
- Current debt included $300.0 million of senior notes due November 30, 2021 and $750.0 million of senior notes due April 1, 2022.
- Management intended to redeem the $300.0 million notes on August 30, 2021 using cash on hand. The $750.0 million obligation was expected to be funded through operating cash flow, refinancing and/or revolver borrowings.
- The company had no borrowings under its $1.5 billion 2019 Multicurrency Revolving Facility, maturing November 1, 2024, or its $1.0 billion September 2020 Revolving Facility, maturing September 17, 2021.
- Management stated that operating cash flow, cash on hand and available revolver capacity were expected to cover ongoing liquidity requirements for at least the next twelve months, although COVID-19-related uncertainty could change that assessment.
Material changes versus the prior comparable period
- The company returned to profitability as elective procedures recovered from the severe 2020 disruption. Second-quarter net earnings attributable to Zimmer Biomet improved from a $206.6 million loss to $141.9 million of earnings; six-month earnings improved from a $715.1 million loss to $340.0 million.
- Operating margin improved to 10.9% from negative 14.0% in the second quarter and to 12.5% from negative 20.9% for the six-month period.
- The 2020 periods included substantially higher impairment charges: $33.0 million in the second quarter and $645.0 million for the first six months, compared with $16.3 million in 2021 for each period. The 2020 six-month charge included $470.0 million related to EMEA and $142.0 million related to Global Dental.
- Research and development expense increased to $180.5 million in the second quarter and $274.9 million for the six-month period. The 2021 periods included $65.0 million of charges related to agreements providing access to or acquiring third-party in-process R&D projects.
- Restructuring and other cost-reduction charges declined to $19.6 million in the second quarter and $41.4 million for the six-month period, compared with $28.0 million and $73.0 million, respectively.
- Six-month litigation-related charges declined to $9.7 million from $81.1 million in the 2020 comparable period.
- Operating cash flow increased to $700.4 million from $398.1 million, while financing cash outflows increased primarily because 2021 included repayment of $200.0 million of floating-rate notes and 2020 included $1.5 billion of senior-note proceeds.
Guidance, outlook, risks and unusual items
- Management did not provide a specific full-year revenue or earnings guidance figure in the filing. It stated that the recovery in elective procedures was continuing but slower than previously anticipated.
- COVID-19 cases were rising in several geographies due to slowing vaccination rates and the Delta variant. Management expected recovery to vary by region and planned continued investment in R&D and commercial initiatives.
- China’s volume-based procurement process was expected to pressure Asia Pacific Knee and Hip sales modestly in the second half of 2021, with implementation expected in early 2022.
- The planned Spine and Dental spin-off was targeted for completion by mid-2022 but remained subject to board approval, tax opinions and an IRS ruling, debt financing for SpinCo, SEC registration effectiveness and other conditions. Completion was not assured.
- The 2019 Restructuring Plan was expected to generate total pre-tax charges of approximately $350 million to $400 million and gross annual pre-tax operating expense reductions of approximately $200 million to $300 million by the end of 2023. The company expected approximately $230 million of charges by the end of 2021.
- Potential future payments included $145.0 million of guaranteed deferred consideration for the 2020 acquisitions, estimated contractual payments ranging from zero to approximately $380 million, and possible tax payments associated with disputed IRS adjustments.
- The IRS proposed an adjustment related to 2013 of approximately $370 million, before interest and penalties, involving transfer pricing and profit allocation. The company disputed the adjustment and stated that no payment was required while applicable proceedings continued.
- Material contingencies included product-liability claims, Heraeus trade-secret litigation, ongoing FDA remediation and a pending FDA warning letter related to the Warsaw North Campus. The company reported estimated remaining liabilities of $47.9 million for Durom Cup claims, $49.2 million for Metal Reaction claims and $69.5 million for Biomet metal-on-metal hip claims.
- The company remained exposed to pricing pressure, reimbursement reductions, regulatory requirements, supply-chain constraints, foreign exchange and interest-rate movements, cybersecurity risks, acquisition integration risk and its substantial debt burden.
Most important facts for investors to verify
- Whether elective procedure volumes continue to recover or are disrupted by COVID-19 resurgences, including the Delta variant.
- Whether the company refinances or repays the $750.0 million senior notes due April 1, 2022 and how debt levels affect leverage and interest expense.
- Progress, costs, financing and tax treatment of the planned Spine and Dental spin-off.
- Actual restructuring savings versus the stated $200 million to $300 million annual target and remaining restructuring charges.
- Resolution and potential cash impact of the IRS examinations, product-liability matters, Heraeus litigation and FDA warning-letter remediation.
- Impact of China’s volume-based procurement process and continuing global pricing pressure on revenue and margins.
- The sustainability of reported earnings after excluding amortization, impairment, restructuring, litigation, R&D agreements and other non-GAAP adjustments.