Zimmer Biomet Holdings, Inc. — 2020 Form 10-K Summary
Business context and reporting period
Zimmer Biomet designs, manufactures and markets orthopedic reconstructive, sports medicine, biologics, extremities and trauma, spine, craniomaxillofacial and thoracic, dental, robotic and related surgical products. The filing covers the year ended December 31, 2020; the company’s fourth quarter ended December 31, 2020 is also presented in the unaudited quarterly information.
- Approximately 80% of 2020 net sales came from consignment arrangements.
- Approximately 40% of 2020 net sales were generated outside the United States.
- Sales are concentrated in elective procedures, making the business highly sensitive to procedure volumes and healthcare-system capacity.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $7,024.5 million | $7,982.2 million | Down 12.0% |
| Gross margin | 61.2% | 64.5% | Down 3.3 percentage points |
| Operating profit (loss) | $(87.8) million | $1,137.5 million | Material deterioration |
| Operating margin | (1.2%) | 14.2% | Down 15.4 percentage points |
| Net earnings (loss) attributable to Zimmer Biomet | $(138.9) million | $1,131.6 million | Turned to a loss |
| Diluted EPS | $(0.67) | $5.47 | Material deterioration |
| Adjusted diluted EPS | $5.67 | $7.87 | Down 28.0% |
| Operating cash flow | $1,204.5 million | $1,585.8 million | Down 24.1% |
Fourth-quarter 2020 sales were $2,085.3 million, down 1.9% from the fourth quarter of 2019. Fourth-quarter net earnings attributable to Zimmer Biomet were $333.7 million, compared with $320.7 million in the prior-year quarter; the filing notes that fourth-quarter sales benefited from strategic sales, bulk orders and shipment timing.
- 2020 sales declines were driven primarily by COVID-19-related deferrals of elective surgeries. Sales declined 9.7% in the first quarter and 38.3% in the second quarter, recovered 2.0% in the third quarter, and declined 1.9% in the fourth quarter.
- Sales by geography: Americas $4,335.4 million, EMEA $1,391.3 million and Asia Pacific $1,297.8 million.
- Sales by product category: Knees $2,389.8 million, Hips $1,750.5 million, S.E.T. $1,322.0 million, Dental, Spine and CMFT $1,043.7 million, and Other $518.5 million.
- Goodwill and intangible-asset impairment charges totaled $645.0 million, including $612.0 million of goodwill impairment and $33.0 million of intangible-asset impairment.
- Restructuring and other cost-reduction charges were $116.9 million; quality-remediation expense was $50.9 million; and net litigation-related charges were $159.8 million.
Balance sheet, debt and liquidity
| Metric at December 31, 2020 | Amount |
|---|---|
| Cash and cash equivalents | $802.1 million |
| Total assets | $24,417.7 million |
| Total debt | $8,126.5 million |
| Current portion of debt | $500.0 million |
| Stockholders’ equity | $12,199.4 million |
| Available revolving facilities | $2.5 billion |
- The company states that operating cash flow, cash on hand and available revolving capacity should meet liquidity requirements for at least the next twelve months.
- The $500.0 million current debt at year-end consisted of $200.0 million of floating-rate notes and $300.0 million of 3.375% senior notes due in 2021. The remaining $200.0 million of floating-rate notes was repaid in January and February 2021.
- Debt service obligations for the next twelve months were expected to be approximately $700 million, excluding leases and equipment notes.
- Cash flows used in investing activities were $613.8 million, including $235.5 million for business combinations and $117.5 million for property, plant and equipment additions.
- Cash flows used in financing activities were $421.8 million, including debt refinancing and $198.5 million of dividends paid.
Material changes versus the prior comparable period
- COVID-19 caused a 12.0% full-year sales decline, significantly lower procedure volumes and greater fixed-cost absorption pressure.
- Gross margin declined from 64.5% to 61.2%, primarily because of limited production, excess and obsolete inventory charges, discontinued-product charges, lower prices and higher intangible amortization as a percentage of sales.
- The company moved from $1.1 billion of net earnings attributable to Zimmer Biomet in 2019 to a $138.9 million net loss in 2020.
- Operating cash flow decreased by $381.3 million. Termination of U.S. and Japan accounts-receivable purchase arrangements reduced 2020 operating cash flow by approximately $300 million.
- Total debt increased from approximately $8.2 billion at December 31, 2019, based on current and long-term debt balances, to approximately $8.1 billion at December 31, 2020, while the maturity profile changed materially through refinancing.
- The company completed acquisitions of A&E Medical Corporation and Relign Corp. in 2020 for aggregate cash consideration of $244.9 million, with $145.0 million of guaranteed deferred payments due in 2021.
Guidance, outlook, risks and unusual items
- Management expected COVID-19 surges late in 2020 to continue pressuring 2021 sales, but anticipated that vaccine distribution could allow elective procedures to return toward pre-pandemic levels during 2021. The filing does not provide a specific 2021 sales or earnings forecast.
- Management believes a deferred-procedure backlog could support market growth once patients and hospitals regain confidence, and that operating margins could improve because fixed costs would not rise proportionally with sales.
- The 2019 Restructuring Plan is 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. Approximately $145 million of restructuring charges had been incurred through December 31, 2020.
- On February 5, 2021, the company announced its intention to spin off its Spine and Dental businesses into a separate public company, targeted for completion in mid-2022. Completion, timing and tax-free treatment remain subject to multiple conditions, including Board approval, an IRS ruling and a Form 10 registration statement.
- The FDA warning letter relating to quality-system observations at the Warsaw North Campus remained pending at year-end. Related Form 483 observations and quality-remediation activities could lead to further regulatory action, product restrictions or manufacturing limitations.
- Material contingencies include product-liability claims, Heraeus trade-secret litigation, shareholder derivative actions, tax audits and proposed IRS transfer-pricing adjustments. The IRS revised proposal for 2013–2015 could result in approximately $370 million of additional tax expense, excluding interest and penalties, although the company disputes the position.
- Goodwill was $9.3 billion and intangible assets were $7.1 billion at year-end. Further impairment charges remain possible if procedure volumes, cash-flow forecasts or market valuations deteriorate.
- The company had $619.4 million of unrecognized tax benefits and $279.2 million of remaining toll-charge tax liability at December 31, 2020.
- PricewaterhouseCoopers LLP issued an unqualified audit opinion and concluded that internal control over financial reporting was effective as of December 31, 2020.
Most important facts for investors to verify
- Recovery in elective procedure volumes, particularly in EMEA and the Americas, and the effect of additional COVID-19 waves or healthcare-capacity constraints.
- 2021 sales and margin progression versus the company’s qualitative recovery expectations, including the effect of pricing pressure and foreign exchange.
- Debt maturities, refinancing needs, covenant headroom and the availability of the $2.5 billion in revolving facilities.
- Execution, remaining cost and realized savings from the 2019 Restructuring Plan.
- Status and financial consequences of the Warsaw North Campus FDA warning letter and related quality remediation.
- Potential additional goodwill or intangible-asset impairments, especially in EMEA, Dental and Americas CMFT.
- Progress, costs, tax treatment and completion conditions for the proposed Spine and Dental spin-off.
- Resolution and cash requirements associated with product-liability litigation, Heraeus matters and the disputed IRS transfer-pricing assessments.