ZIMMER BIOMET HOLDINGS, INC. - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2022

Commission File Number 001-16407

ZIMMER BIOMET HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

345 East Main Street, Warsaw, IN  46580

(Address of principal executive offices)

Telephone:  (574) 267-6131

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒

As of April 22, 2022, 209,577,347 shares of the registrant’s $.01 par value common stock were outstanding.

ZIMMER BIOMET HOLDINGS, INC.

INDEX TO FORM 10-Q

March 31, 2022

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Part I – Financial Information

Item 1.  Financial Statements

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in millions, except per share amounts, unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions, unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts, unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions, except per share amounts, unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions, unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  Basis of Presentation

The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.

In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented.  The December 31, 2021 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).  The December 31, 2021 recasted financial information for discontinued operations reporting, as further discussed in Note 2, has not been audited.  Results for interim periods should not be considered indicative of results for the full year.

Risks and Uncertainties - Our results have been and are expected to continue to be impacted by the COVID-19 global pandemic. The vast majority of our net sales are derived from products used in elective surgical procedures which continue to be deferred due to precautions in certain markets and staffing shortages.  The consequences of COVID-19 continue to be extremely fluid and there are many market dynamics that are difficult to predict.  The COVID-19 pandemic may have an unfavorable effect on our financial position, results of operations and cash flows in the near term.  

Spinoff - On March 1, 2022, we completed the previously announced separation of our spine and dental businesses into a new public company through the distribution by Zimmer Biomet of 80.3% of the outstanding shares of common stock of ZimVie Inc. (“ZimVie”) to Zimmer Biomet’s stockholders. The historical results of our spine and dental businesses that were contributed to ZimVie in the spinoff have been reflected as discontinued operations in our condensed consolidated financial statements through the date of the spinoff and in the prior year periods as the spinoff represents a strategic shift in our business that has a major effect on operations and financial results. As of December 31, 2021, the assets and liabilities associated with these businesses are classified as assets and liabilities of discontinued operations in the condensed consolidated balance sheet.  The disclosures presented in our notes to the interim condensed consolidated financial statements are presented on a continuing operations basis.

The words “we,” “us,” “our” and similar words, “Zimmer Biomet” and “the Company” refer to Zimmer Biomet Holdings, Inc. and its subsidiaries.  “Zimmer Biomet Holdings” refers to the parent company only.

2. Discontinued Operations

On March 1, 2022, we completed the previously announced separation of our spine and dental businesses through the distribution of 80.3% of the outstanding shares of common stock of ZimVie to our stockholders at the close of business on February 15, 2022 (the “Record Date”). The distribution was made in the amount of one share of ZimVie common stock for every ten shares of our common stock owned by our stockholders at the close of business on the Record Date. Fractional shares of ZimVie common stock were not issued but instead were aggregated and sold in the open market with the proceeds being distributed pro rata in lieu of such fractional shares.

In the fourth quarter of 2021, ZimVie entered into a credit agreement with a financial institution providing for revolving loans of up to $175.0 million and term loan borrowings of up to $595.0 million. On February 28, 2022, prior to separation, ZimVie borrowed the entire $595.0 million available under the term loan. Approximately $540.6 million of this amount was paid by ZimVie to Zimmer Biomet in the form of a dividend at separation which is included in our cash flows from financing activities in the condensed consolidated statements of cash flows. We used proceeds from the dividend, along with cash on hand and proceeds from a draw on our revolving credit facility, to repay our 3.150% Senior Notes due 2022 which had an outstanding principal balance of $750.0 million.

Also, in connection with the spinoff, we entered into definitive agreements with ZimVie that, among other things, set forth the terms and conditions of the separation and distribution. The agreements set forth the principles and actions taken or to be taken in connection with the separation and the distribution and provide a framework for our relationship with ZimVie from and after the separation and the distribution.  The agreements include a Separation and Distribution Agreement, a Tax Matters Agreement, an Employee Matters Agreement, a Transition Services Agreement (the “TSA”), an Intellectual Property Matters Agreement, a Stockholder and Registration Rights Agreement, a Transition Manufacturing and Supply Agreement (the “TMA”), a Reverse Transition Manufacturing and Supply Agreement (the “Reverse TMA”) and a Transitional Trademark License Agreement, each dated as of March 1, 2022.

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Pursuant to the TSA, both we and ZimVie agree to provide certain services to each other, on an interim, transitional basis from and after the separation and the distribution. The services include certain regulatory services, commercial services, operational services, tax services, clinical affairs services, information technology services, finance and accounting services and human resource and employee benefits services. The remuneration to be paid for such services is generally intended to allow the company providing the services to recover all of its costs and expenses of providing such services. The TSA will terminate on the expiration of the term of the last service provided thereunder, which will generally be no later than March 31, 2025.  However, we expect most TSA services will be completed by the end of 2023.

Pursuant to the TMA and the Reverse TMA, Zimmer Biomet or ZimVie, as the case may be, will manufacture or cause to be manufactured certain products for the other party, on an interim, transitional basis. Pursuant to such agreements, Zimmer Biomet or ZimVie, as the case may be, will be required to purchase certain minimum amounts of products from the other party. Each of the TMA and the Reverse TMA has a two-year term, with a one-year extension possible upon mutual agreement of the parties.

We recognize any gains or losses from the TSA and TMA agreements in Acquisition, integration, divestiture and related expense in our condensed consolidated statements of earnings.  Amounts included in the condensed consolidated statements of earnings related to these agreements for the three-month periods ended March 31, 2022 and 2021 were immaterial. Amounts due to and due from ZimVie were also immaterial as of March 31, 2022.

We retained 19.7 percent of the outstanding common shares of ZimVie.  Given our inability to exert significant influence over ZimVie, we recognize this investment at fair value in prepaid expenses and other current assets on our condensed consolidated balance sheet.  Changes to the fair value of the investment is recognized in non-operating other (expense) income, net.

As discussed in Note 1, Basis of Presentation, the results of our spine and dental businesses have been reflected as discontinued operations in the current year period through the date of the spinoff and in the prior year period.  Details of earnings (loss) from discontinued operations included in our condensed consolidated statements of earnings are as follows (in millions):

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Details of assets and liabilities of discontinued operations are as follows (in millions):

In a pro rata spinoff of consolidated subsidiaries, the distribution of the assets and liabilities are recognized through equity instead of net earnings.  Accordingly, we have recognized the distribution of net assets to ZimVie in retained earnings.  Additionally, the dividend we received from ZimVie at the separation was also recognized in retained earnings.  

3.  Significant Accounting Policies  

Use of Estimates - The accompanying unaudited condensed consolidated financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  We have made our best estimates, as appropriate under GAAP, in the recognition of our assets and liabilities.  These estimates have considered the impact the COVID-19 pandemic may have on our financial position, results of operations and cash flows.  Such estimates included, but were not limited to, variable consideration to our customers, our allowance for doubtful accounts for expected credit losses, the net realizable value of our inventory, the fair value of our goodwill and the recoverability of other long-lived assets.  Actual results could differ materially from these estimates.

Other Expense (Income), Net - Other expense (income), net includes gains/(losses) on changes in fair value of our investments, gains/(losses) on remeasurement of monetary assets and liabilities denominated in a currency other than an entity’s functional currency and the related gains/(losses) on derivative instruments that are not designated as hedging instruments that we use to manage the currency exposures of these assets and liabilities, certain components of pension expense, and other non-operating gains/(losses).  In the three-month period ended March 31, 2022, we recognized a loss of $51.0 million related to our investment in ZimVie.  The initial value of our investment was based upon our 19.7 percent share of the carrying value of net assets transferred to ZimVie on the separation date.  At March 31, 2022 we valued our investment at fair value based upon ZimVie’s share price on that date, less a discount to sell unregistered shares.  In future reporting periods, we will continue to recognize our investment in ZimVie at fair value with any gains/losses recognized in other expense (income), net.  

Accounting Pronouncements Recently Adopted

In July 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-05 Lessors – Certain Leases with Variable Lease Payments which is an amendment to Accounting Standards Codification Topic 842 – Leases (“ASC 842”).  Under the prior ASC 842 guidance, variable payments were excluded from the measurement of the initial net investment in the lease if the payments do not depend on an index or a rate.  For sales-type or direct financing leases, this could result in the recognition of a day-one loss for leases with entire or partial variable payments.  ASU 2021-05 requires lessors to classify leases with entire or partial variable payments as operating leases if otherwise a day-one loss would be recognized.  The ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those years.  Early adoption of this ASU is permitted.  The ASU can either be applied retrospectively to leases that were commenced or modified on or after the adoption of ASC 842 or applied prospectively to leases that commence or are modified after the adoption of ASU 2021-05.  We adopted this standard as of January 1, 2022. The adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.

Accounting Pronouncements Not Yet Adopted

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In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848).  ASU 2020-04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. Early adoption of this ASU is permitted, and we may elect to apply the amendments prospectively through December 31, 2022. We are currently evaluating the impact this ASU will have on our financial statements.

There are no recently issued accounting pronouncements that we have not yet adopted that are expected to have a material effect on our financial position, results of operations or cash flows.

4.  Revenue

Net sales by geography are as follows (in millions):

Net sales by product category are as follows (in millions):

S.E.T. includes sales from our Sports Medicine, Extremities, Trauma, Craniomaxillofacial and Thoracic product categories.  Other includes sales from our Technology, Surgical and Bone Cement product categories.

This net sales presentation differs from our reportable operating segments, which are based upon our senior management organizational structure and how we allocate resources toward achieving operating profit goals.  Each of our reportable operating segments sells all the product categories noted above.  Accordingly, the only difference from the presentation above and our reportable operating segments are the geographic groupings.  

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5.  Restructuring

In December 2021, we initiated a new global restructuring program (the “2021 Restructuring Plan”) to reorganize our operations in preparation for the planned spinoff of ZimVie with an objective of reducing costs.  The 2021 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $240 million and reduce gross annual pre-tax operating expenses by approximately $210 million by the end of 2024 as program benefits are realized.  The pre-tax restructuring charges consist of employee termination benefits; contract terminations for sales agents; and other charges, such as consulting fees and project management expenses.  The restructuring charges incurred in the three-month period ended March 31, 2022 primarily related to employee termination benefits, sales agent contract terminations, consulting fees and project management expenses.  The following table summarizes the liabilities recognized related to the 2021 Restructuring Plan (in millions):

In December 2019, we initiated a global restructuring program (the “2019 Restructuring Plan”) with an objective of reducing costs to allow us to further invest in higher priority growth opportunities.  The 2019 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $350 million to $400 million and reduce gross annual pre-tax operating expenses by approximately $200 million to $300 million by the end of 2023 as program benefits are realized.  The pre-tax restructuring charges consist of employee termination benefits; contract terminations for facilities and sales agents; and other charges, such as consulting fees, project management and relocation costs.  The restructuring charges incurred in the three-month period ended March 31, 2022 primarily related to distributor contract terminations, consulting and project management.  The following table summarizes the liabilities recognized related to the 2019 Restructuring Plan (in millions):

For the expense estimated to be recognized for the 2019 Restructuring Plan, we have disclosed the midpoint in our estimated range of expenses.  

We do not include restructuring charges in the operating profit of our reportable segments.

In our condensed consolidated statement of earnings, we report restructuring charges in our “Restructuring and other cost reduction initiatives” financial statement line item.  We report the expenses for other cost reduction initiatives with restructuring expenses because these activities also have the goal of reducing costs across the organization.  However, since the cost reduction initiative expenses are not considered restructuring, they have been excluded from the amounts presented in this note.

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6.  Inventories

7.  Property, Plant and Equipment

We had $12.9 million and $10.3 million of property, plant and equipment included in accounts payable as of March 31, 2022 and December 31, 2021, respectively.

8.  Debt

Our debt consisted of the following (in millions):

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At March 31, 2022, our total current and non-current debt of $6.3 billion consisted of $6.0 billion aggregate principal amount of our senior notes, which included €1.5 billion Euro-denominated senior notes (“Euro Notes”), an ¥11.7 billion Japanese Yen term loan agreement (“Japan Term Loan A”) and a ¥21.3 billion Japanese Yen term loan agreement (“Japan Term Loan B”) that will each mature on September 27, 2022, and $100.0 million of outstanding borrowings under the 2021 Five-Year Revolving Facility (defined below), partially offset by debt discount and issuance costs of $34.5 million and fair value adjustments totaling $78.9 million.

On March 18, 2022, we redeemed the full $750.0 million outstanding principal amount of our 3.150% Senior Notes due 2022.  A $100.0 million draw under the 2021 Five-Year Revolving Facility, together with cash on hand, were used to redeem these notes.  $540.6 million of this cash on hand came from the dividend paid by ZimVie to Zimmer Biomet at separation.

In the three-month period ended March 31, 2021, we redeemed the $200.0 million outstanding principal amount of our floating rate notes due 2021.

On August 20, 2021, we entered into a new five-year revolving credit agreement (the “2021 Five-Year Credit Agreement”) and a new 364-day revolving credit agreement (the “2021 364-Day Revolving Credit Agreement”), as described below. Borrowings under these credit agreements will be used for general corporate purposes.

The 2021 Five-Year Credit Agreement contains a five-year unsecured revolving facility of $1.5 billion (the “2021 Five-Year Revolving Facility”). The 2021 Five-Year Credit Agreement replaces the previous revolving credit agreement (the “2019 Credit Agreement”), which contained a five-year unsecured multicurrency revolving facility of $1.5 billion (the “2019 Multicurrency Revolving Facility”). There were no borrowings outstanding under the 2019 Credit Agreement at the time it was terminated.

The 2021 Five-Year Credit Agreement will mature on August 20, 2026, with two one-year extensions exercisable at our discretion and subject to required lender consent.  The 2021 Five-Year Credit Agreement also includes an uncommitted incremental feature allowing us to request an increase of the facility by an aggregate amount of up to $500.0 million.  As of March 31, 2022, there was $100.0 million of outstanding borrowings under the 2021 Five-Year Revolving Facility.

Borrowings under the 2021 Five-Year Credit Agreement bear interest at floating rates, based upon either LIBOR for the applicable interest period or at an alternate base rate, in each case, plus an applicable margin determined by reference to our senior unsecured long-term debt credit rating.  We pay a facility fee on the aggregate amount of the 2021 Five-Year Revolving Facility at a rate determined by reference to our senior unsecured long-term debt credit rating.  The 2021 Five-Year Credit Agreement contains customary affirmative and negative covenants and events of default for unsecured financing arrangements, including, among other things, limitations on consolidations, mergers, and sales of assets.  The Five-Year Credit Agreement also requires us to maintain a consolidated indebtedness to consolidated EBITDA ratio of no greater than 4.5 to 1.0 as of the last day of any period of four consecutive fiscal quarters (with such ratio subject to increase to 5.0 to 1.0 for a period of time in connection with a qualified material acquisition and certain other restrictions).  We were in compliance with all covenants under the 2021 Five-Year Credit Agreement as of March 31, 2022.   

The 2021 364-Day Revolving Credit Agreement is an unsecured revolving credit facility in the principal amount of $1.0 billion (the “2021 364-Day Revolving Facility”).  The 2021 364-Day Revolving Credit Agreement replaced a credit agreement entered into on September 18, 2020 which was also a 364-day unsecured revolving credit facility of $1.0 billion (the “September 2020 Revolving Facility”).  There were no borrowings outstanding under the September 2020 Revolving Facility when it was terminated.  

The 2021 364-Day Revolving Facility will mature on August 19, 2022.  Borrowings under the 2021 364-Day Revolving Credit Agreement bear interest at floating rates based upon either LIBOR for the applicable interest period or at an alternate base rate, in each case, plus an applicable margin determined by reference to our senior unsecured long-term debt credit rating. We pay a facility fee on the aggregate amount of the 2021 364-Day Revolving Facility at a rate determined by reference to our senior unsecured long-term debt credit rating.  The 2021 364-Day Revolving Credit Agreement contains customary affirmative and negative covenants and events of default for an unsecured financing arrangement including, among other things, limitations on consolidations, mergers, and sales of assets.  The 2021 364-Day Revolving Credit Agreement also requires us to maintain a consolidated indebtedness to consolidated EBITDA ratio of no greater than 4.5 to 1.0 as of the last day of any period of four consecutive fiscal quarters (with such ratio subject to increase to 5.0 to 1.0 in connection with a qualified material acquisition and certain other restrictions).  We were in compliance with all covenants under the 2021 364-Day Revolving Credit Agreement, as of March 31, 2022.  As of March 31, 2022, there were no outstanding borrowings under the 2021 364-Day Revolving Credit Agreement.

The estimated fair value of our senior notes, which includes our Euro notes, as of March 31, 2022, based on quoted prices for the specific securities from transactions in over-the-counter markets (Level 2), was $5,995.2 million.  The estimated fair value of Japan Term Loan A and Japan Term Loan B, in the aggregate, as of March 31, 2022, based upon publicly available market yield curves and the terms of the debt (Level 2), was $271.7 million.  The $100.0 million carrying value of the outstanding principal balance of the 2021 Five-Year Revolving Facility approximates its fair value as it bears interest at short-term market rates.  

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9.  Accumulated Other Comprehensive Income

Accumulated other comprehensive income (loss) (“AOCI”) refers to certain gains and losses that under GAAP are included in comprehensive income but are excluded from net earnings as these amounts are initially recorded as an adjustment to stockholders’ equity.  Amounts in AOCI may be reclassified to net earnings upon the occurrence of certain events.  

Our AOCI is comprised of foreign currency translation adjustments, unrealized gains and losses on cash flow hedges and unrecognized prior service costs and gains and losses in actuarial assumptions related to our defined benefit plans.  Foreign currency translation adjustments are reclassified to net earnings upon sale or upon a complete or substantially complete liquidation of an investment in a foreign entity.  In the three-month period ended March 31, 2022, due to the spinoff of ZimVie, certain foreign entities were completely liquidated.  In a pro rata spinoff of consolidated subsidiaries’ assets and liabilities, the distribution of these net assets is recognized through equity instead of net earnings.  Therefore, the foreign currency translation adjustments of those entities that were completely liquidated were reclassified to retained earnings.  Similarly, we had entered into instruments designated as net investment hedges against certain of these same foreign entities.  We reclassified the portion of the net investment hedge gains (losses) deferred in foreign currency translation adjustments related to those entities to retained earnings.  Unrealized gains and losses on cash flow hedges are reclassified to net earnings when the hedged item affects net earnings.  Amounts related to defined benefit plans that are in AOCI are reclassified over the service periods of employees in the plan.

The following table shows the changes in the components of AOCI gains (losses), net of tax (in millions):

The following table shows the reclassification adjustments from AOCI (in millions):

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The following table shows the tax effects on each component of AOCI recognized in our condensed consolidated statements of comprehensive income (in millions):