Zimmer Holdings, Inc. 2011 Form 10-K Summary
Business context and reporting period
The filing is Zimmer Holdings, Inc.’s Form 10-K for the fiscal year ended December 31, 2011, filed February 24, 2012. The supplied metadata identifies Zimmer Biomet Holdings, Inc., but the filing itself names Zimmer Holdings, Inc. The company designs, manufactures and markets orthopedic reconstructive, spine, trauma, dental, biologic and surgical products in more than 100 countries.
Operations are reported through the Americas, Europe and Asia Pacific geographic segments. The Americas represented 55% of 2011 sales, Europe 27% and Asia Pacific 18%.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $4,451.8 million | $4,220.2 million | +5% |
| Gross profit | $3,329.8 million | $3,208.0 million | +4% |
| Gross margin | 74.8% | 76.0% | Down 1.2 points |
| Operating profit | $1,024.1 million | $916.7 million | +12% |
| Operating margin | 23.0% | 21.7% | Up 1.3 points |
| Net earnings attributable to Zimmer | $760.8 million | $596.9 million | +27% |
| Diluted EPS | $4.03 | $2.97 | +36% |
| Operating cash flow | $1,176.9 million | $1,193.5 million | Down $16.6 million |
Net margin was approximately 17.1% in 2011. The effective tax rate declined to 22.4% from 30.6%, primarily reflecting the impact of certain claims, tax matter resolutions and the absence of a goodwill impairment charge.
Fourth-quarter 2011 net sales were $1,167.3 million, gross profit was $864.1 million and net earnings attributable to Zimmer were $156.6 million, compared with fourth-quarter 2010 sales of $1,134.7 million and net earnings of $34.9 million. Fourth-quarter 2010 included $204.0 million of goodwill impairment and other adjustments.
At December 31, 2011, cash and cash equivalents were $768.3 million and short-term and long-term investments were $672.7 million. Total assets were $8.515 billion. Long-term debt was $1.576 billion, with an additional $143.3 million of short-term debt. The company had $1.207 billion available under its $1.350 billion revolving credit facility, which matured November 30, 2012, and stated that it intended to obtain a replacement facility.
Investing cash outflows were $624.4 million and financing cash outflows were $455.8 million. Capital spending for instruments and property, plant and equipment totaled $269.2 million. The company repurchased $1.050 billion of common stock, or 18.9 million shares, during 2011.
Material changes versus the prior comparable period
- Sales increased 5%, driven by 4 percentage points of volume and mix, 2 percentage points of foreign exchange benefit and offset by a 1 percentage point pricing decline.
- Europe sales rose 10% and Asia Pacific sales rose 16%, while Americas sales were essentially flat.
- Product growth was strongest in trauma, up 16%; dental, up 13%; hips, up 7%; and extremities, up 9%. Spine sales declined 4% and knee sales increased 2%.
- Gross margin declined because of foreign-currency hedge losses, lower selling prices, higher unit costs and inventory step-up charges.
- Operating margin improved despite $157.8 million of certain claims expense and $75.2 million of special items. No goodwill impairment was recorded in 2011, compared with $204.0 million in 2010.
- Durom Cup-related provisions increased materially. Total cumulative provisions were $388.2 million, including $162.0 million recorded in 2011, and the estimated remaining liability was $311.1 million before considering insurance recoveries.
- The company declared its first quarterly dividend, $0.18 per share, payable in April 2012.
- Debt increased following the November 2011 issuance of $550 million of senior notes, consisting of $250 million due 2014 and $300 million due 2021.
Guidance, outlook, commentary and risks
Management projected 2012 sales growth of 1% to 3%, assuming low-single-digit knee and hip procedure growth. Pricing was expected to reduce sales growth by approximately 2 percentage points and foreign exchange by approximately 1 percentage point at year-end 2011 rates.
- Expected 2012 gross margin: 74% to 75%.
- Expected R&D expense: 5% to 6% of sales.
- Expected SG&A: 39.5% to 40.5% of sales, excluding special items.
- Approximately $100 million of restructuring and transformation costs and $10 million of acquisition and integration costs were expected in 2012.
- Expected 2012 net interest expense and income: approximately $65 million.
- Expected 2012 capital spending for instruments and property, plant and equipment: approximately $120 million to $140 million.
Key risks include weak elective procedure volumes, European austerity and hospital receivable collections, pricing and reimbursement pressure, foreign-exchange volatility, regulatory and quality-system compliance, product liability litigation, the ongoing FCPA investigation, tax disputes with the IRS, healthcare reform including the 2.3% U.S. medical-device excise tax scheduled for 2013, and potential future goodwill impairment.
The FDA issued Form 483 inspection observations concerning quality systems at the Warsaw, Indiana facility. Zimmer responded and expected a reinspection, but stated that the potential financial impact could not be estimated. The company also disclosed a $20.3 million judgment in the Polett litigation that it was appealing and had not accrued.
Management reported effective internal control over financial reporting, and PricewaterhouseCoopers expressed an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Reconcile the supplied company name with the filing’s registrant name, Zimmer Holdings, Inc.
- Assess whether the 2011 earnings increase remains strong after excluding the lower 2010 comparison caused by goodwill impairment and after considering the $157.8 million of 2011 certain claims expense.
- Monitor the ultimate cost, timing and insurance recovery of the Durom Cup claims; the filing states that additional losses beyond accrued amounts cannot be reasonably estimated.
- Evaluate European receivable quality and potential bad-debt exposure, particularly in Italy, Spain, Portugal and Greece.
- Confirm refinancing or replacement of the $1.350 billion revolving credit facility before its November 2012 maturity.
- Track the FDA Warsaw quality-system remediation, the FCPA investigation and the IRS tax assessment, each of which could produce material future costs or restrictions.
- Test the 2012 outlook against pricing pressure, currency effects, procedure volumes, restructuring costs and the scheduled medical-device excise tax.