Zimmer Biomet(ZBH) - 2024 Q1 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for Zimmer Biomet Holdings, Inc. and its subsidiaries for the three months ended March 31, 2024 and 2023, along with detailed notes explaining the basis of presentation, significant accounting policies, revenue breakdown, restructuring activities, inventory, property, plant and equipment, acquisitions, debt, accumulated other comprehensive income, fair value measurements, derivative instruments, income taxes, earnings per share, segment information, and commitments and contingencies Condensed Consolidated Statements of Earnings Details net sales, operating profit, and net earnings for the specified periods | Metric (in millions, except per share) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------------------------- | :---------------------------------- | :---------------------------------- | | Net Sales | $1,889.2 | $1,831.0 |\ | Operating Profit | $265.9 | $327.3 |\ | Net Earnings | $172.8 | $232.8 |\ | Net Earnings of Zimmer Biomet Holdings, Inc. | $172.4 | $232.5 |\ | Basic EPS | $0.84 | $1.11 |\ | Diluted EPS | $0.84 | $1.11 | - Net Sales increased by $58.2 million (3.2%) YoY, from $1,831.0 million in Q1 2023 to $1,889.2 million in Q1 2024. Operating Profit decreased by $61.4 million (18.8%) YoY, from $327.3 million in Q1 2023 to $265.9 million in Q1 2024. Net Earnings decreased by $60.0 million (25.8%) YoY, from $232.8 million in Q1 2023 to $172.8 million in Q1 2024. Diluted EPS decreased by $0.27 (24.3%) YoY, from $1.11 in Q1 2023 to $0.84 in Q1 2024[9] Condensed Consolidated Statements of Comprehensive Income Presents net earnings and other comprehensive income components, reflecting changes in equity from non-owner sources | Metric (in millions) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------- | :---------------------------------- | :---------------------------------- | | Net Earnings of Zimmer Biomet Holdings, Inc. | $172.4 | $232.5 |\ | Total Other Comprehensive (Loss) Income | $(20.2) | $1.3 |\ | Comprehensive Income Attributable to Zimmer Biomet Holdings, Inc. | $152.2 | $233.8 | - Total Other Comprehensive Income shifted from a gain of $1.3 million in Q1 2023 to a loss of $20.2 million in Q1 2024, primarily due to foreign currency cumulative translation adjustments moving from a gain of $12.4 million to a loss of $35.8 million[11] Condensed Consolidated Balance Sheets Provides a snapshot of the company's assets, liabilities, and equity at specific points in time | Metric (in millions) | March 31, 2024 | December 31, 2023 | | :------------------- | :------------- | :---------------- | | Total Current Assets | $4,631.5 | $4,609.5 |\ | Total Assets | $21,452.4 | $21,496.9 |\ | Total Current Liabilities | $2,797.0 | $2,857.4 |\ | Total Liabilities | $8,846.4 | $9,008.7 |\ | Total Stockholders' Equity | $12,606.0 | $12,488.1 | - Total Assets slightly decreased from $21,496.9 million at December 31, 2023, to $21,452.4 million at March 31, 2024. Total Liabilities decreased by $162.3 million, while Total Stockholders' Equity increased by $117.9 million over the same period[14] Condensed Consolidated Statements of Stockholders' Equity Outlines changes in stockholders' equity, including net earnings, other comprehensive income, dividends, and share repurchases | Metric (in millions) | Balance January 1, 2024 | Balance March 31, 2024 | | :------------------- | :---------------------- | :--------------------- | | Total Stockholders' Equity | $12,488.1 | $12,606.0 |\ | Net earnings | $172.4 | $172.4 |\ | Other comprehensive loss | $(20.2) | $(20.2) |\ | Cash dividends declared | $(49.3) | $(49.3) |\ | Share repurchases | - | $(88.0) | - Total Stockholders' Equity increased by $117.9 million from January 1, 2024, to March 31, 2024. Key activities included net earnings of $172.4 million, an other comprehensive loss of $20.2 million, cash dividends of $49.3 million, and share repurchases of $88.0 million[15] Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities for the specified periods | Metric (in millions) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------- | :---------------------------------- | :---------------------------------- | | Net cash provided by operating activities | $228.0 | $307.7 |\ | Net cash used in investing activities | $(195.0) | $(149.4) |\ | Net cash used in financing activities | $(50.1) | $(206.7) |\ | Change in cash and cash equivalents | $(22.7) | $(45.5) |\ | Cash and cash equivalents, end of period | $393.0 | $330.2 | - Net cash provided by operating activities decreased by $79.7 million YoY, from $307.7 million in Q1 2023 to $228.0 million in Q1 2024. Net cash used in investing activities increased by $45.6 million YoY, from $149.4 million in Q1 2023 to $195.0 million in Q1 2024. Net cash used in financing activities decreased by $156.6 million YoY, from $206.7 million in Q1 2023 to $50.1 million in Q1 2024[18] Notes to Interim Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the interim condensed consolidated financial statements Note 1. Basis of Presentation Clarifies unaudited financial data, normal adjustments, and interim results not indicative of full-year performance - Financial data is unaudited and includes only normal recurring adjustments, not indicative of full-year results[19][20] - Rounding may cause sums of components in tables to not equal total amounts reported in millions[21] Note 2. Significant Accounting Policies Outlines accounting principles and evaluation of new FASB ASUs on segment and income tax disclosures - The company is evaluating the impact of ASU 2023-07 (Improvements to Reportable Segment Disclosures), effective for fiscal years beginning after December 15, 2023, and interim periods for fiscal years beginning after December 15, 2024[24] - The company is evaluating the impact of ASU 2023-09 (Improvements to Income Tax Disclosures), effective for fiscal years beginning after December 15, 2024[25] Note 3. Revenue Details net sales by geography and product category, highlighting key growth drivers | Net Sales by Geography (in millions) | March 31, 2024 | March 31, 2023 | | :----------------------------------- | :------------- | :------------- | | United States | $1,099.2 | $1,060.4 |\ | International | $790.0 | $770.6 |\ | Total | $1,889.2 | $1,831.0 | | Net Sales by Product Category (in millions) | March 31, 2024 | March 31, 2023 | | :------------------------------------------ | :------------- | :------------- | | Knees | $788.1 | $762.5 |\ | Hips | $491.2 | $492.8 |\ | S.E.T. | $452.6 | $433.4 |\ | Other | $157.3 | $142.3 |\ | Total | $1,889.2 | $1,831.0 | - Net sales increased by 3.2% YoY. U.S. sales grew 3.7%, while International sales grew 2.5%. Knees sales increased by 3.4%, S.E.T. sales increased by 4.4%, and Other sales increased by 10.6%. Hips sales slightly decreased by 0.3%[26][27] Note 4. Restructuring Describes ongoing global restructuring programs aimed at optimizing cost structure and driving efficiencies | Restructuring Plan | Total Estimated Pre-Tax Charges (in millions) | Incurred as of March 31, 2024 (in millions) | | :----------------- | :-------------------------------------------- | :------------------------------------------ | | 2023 Restructuring Plan | ~$120.0 | $92.4 |\ | 2021 Restructuring Plan | ~$180.0 | $170.0 |\ | 2019 Restructuring Plan | ~$370.0 | $336.4 | - The 2023 Restructuring Plan incurred $79.6 million in expenses during Q1 2024, primarily for employee termination benefits[29] - The 2021 Restructuring Plan is expected to be completed by the end of 2024, and the 2019 Restructuring Plan by the end of 2025[30][31] Note 5. Inventories Provides a breakdown of inventory categories, including finished goods, work in progress, and raw materials | Inventory Category (in millions) | March 31, 2024 | December 31, 2023 | | :------------------------------- | :------------- | :---------------- | | Finished goods | $1,846.7 | $1,831.2 |\ | Work in progress | $226.7 | $246.5 |\ | Raw materials | $314.8 | $307.5 |\ | Total Inventories | $2,388.2 | $2,385.2 | Note 6. Property, Plant and Equipment Details the composition of net property, plant and equipment, with instruments as the largest asset category | Category (in millions) | March 31, 2024 | December 31, 2023 | | :------------------------------- | :------------- | :---------------- | | Land | $18.8 | $18.9 |\ | Buildings and equipment | $2,254.1 | $2,245.9 |\ | Capitalized software costs | $555.2 | $552.2 |\ | Instruments | $3,814.6 | $3,748.6 |\ | Construction in progress | $206.4 | $200.6 |\ | Accumulated depreciation | $(4,758.2) | $(4,705.8) |\ | Property, plant and equipment, net | $2,090.9 | $2,060.4 | Note 7. Acquisitions Summarizes recent acquisitions, their strategic purpose, and the allocation of associated goodwill - Acquired Embody, Inc. for $154.5 million (1.1 million shares + $19.5 million cash) to expand the sports medicine portfolio[36] - Completed three other acquisitions in 2023 for orthopedics and surgical technology, with initial cash considerations of $15.0 million, $42.2 million, and $60.7 million, respectively, plus contingent considerations[37][38][41] - Goodwill from these acquisitions, totaling $215.0 million, is primarily allocated to the Americas operating segment and Americas Orthopedics reporting unit, with the April 2023 acquisition goodwill in the Asia Pacific segment[43][45] Note 8. Debt Outlines the company's debt structure, including senior notes and revolving credit facilities, and covenant compliance | Debt Category (in millions) | March 31, 2024 | December 31, 2023 | | :-------------------------- | :------------- | :---------------- | | Current portion of long-term debt | $970.0 | $900.0 |\ | Long-term debt | $4,826.2 | $4,867.9 |\ | Total Debt | $5,796.2 | $5,767.9 | - The company has a $1.5 billion 2023 Five-Year Revolving Facility and a $1.0 billion 2023 364-Day Revolving Credit Agreement, both with no outstanding borrowings as of March 31, 2024[52][56][55][57] - Outstanding borrowings under the Uncommitted Credit Facility were $120.0 million as of March 31, 2024[50] Note 9. Accumulated Other Comprehensive Income Explains changes in AOCI, primarily driven by foreign currency translation and cash flow hedge adjustments | AOCI Component (in millions) | Balance at Dec 31, 2023 | Balance at Mar 31, 2024 | | :--------------------------- | :---------------------- | :---------------------- | | Foreign Currency Translation | $(159.4) | $(195.2) |\ | Cash Flow Hedges | $63.3 | $80.0 |\ | Defined Benefit Plan Items | $(94.9) | $(96.0) |\ | Total AOCI | $(191.0) | $(211.2) | - Foreign currency cumulative translation adjustments resulted in a loss of $35.8 million in Q1 2024, compared to a gain of $12.4 million in Q1 2023[62] - Unrealized cash flow hedge gains were $34.7 million in Q1 2024, up from $8.8 million in Q1 2023[62] Note 10. Fair Value Measurement of Assets and Liabilities Details fair value measurement of financial assets and liabilities, including derivatives and contingent consideration | Fair Value Item (in millions) | March 31, 2024 (Recorded Balance) | December 31, 2023 (Recorded Balance) | | :---------------------------- | :-------------------------------- | :----------------------------------- | | Total Assets | $104.1 | $60.2 |\ | Total Liabilities | $326.0 | $359.8 | - Contingent consideration related to acquisitions, valued using discounted cash flow techniques and probability-weighted estimates, decreased from $141.7 million at December 31, 2023, to $115.2 million at March 31, 2024[66][68] - During Q1 2024, the company issued 0.2 million shares ($23.4 million) and paid $1.5 million cash for a commercial milestone related to the Embody acquisition[67] Note 11. Derivative Instruments and Hedging Activities Describes the use of derivatives to manage interest rate and foreign currency risks, designated as various hedge types - The company uses fixed-to-variable interest rate swaps as fair value hedges to manage interest rate risk, with changes in fair value recorded in current earnings[72] - Foreign currency exchange forward contracts are used as cash flow hedges for intercompany sales of inventory, with gains/losses temporarily recorded in AOCI and reclassified to cost of products sold when the hedged item affects net earnings[80][81] - Euro Notes and cross-currency interest rate swaps are designated as net investment hedges to mitigate foreign exchange rate fluctuations on investments in foreign subsidiaries, with changes in fair value recorded in AOCI[76][77] | Effect of Hedging on Income Statement (in millions) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------------------- | :---------------------------------- | :---------------------------------- | | Gain (loss) on fair value hedging (Interest rate swaps) | $(10.6) | $(8.2) |\ | Gain (loss) on cash flow hedging (Foreign exchange forward contracts) | $22.0 | $23.1 |\ | Gain on net investment hedging (Cross-currency interest rate swaps) | $8.2 | $9.0 | Note 12. Income Taxes Discusses the effective tax rate, ongoing tax audits, and estimates for changes in unrecognized tax benefits - Effective tax rate (ETR) increased to 19.7% in Q1 2024 from 18.9% in Q1 2023, driven by the mix of U.S. and foreign earnings[96] - The IRS has proposed adjustments for tax years 2010-2012, 2013-2015 (including a proposed $370 million additional tax expense for 2013 related to transfer pricing), and 2016-2019, which the company intends to vigorously contest[93][94][95] - Management's best estimate for changes in unrecognized tax benefits within the next twelve months ranges from a $270 million decrease to a $20 million increase[91] Note 13. Earnings Per Share Provides details on basic and diluted weighted average common shares outstanding used in EPS calculations | Metric (in millions) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------- | :---------------------------------- | :---------------------------------- | | Weighted average shares outstanding for basic net earnings per share | 205.2 | 209.4 |\ | Weighted average shares outstanding for diluted net earnings per share | 206.2 | 210.4 | - Basic and diluted weighted average common shares outstanding decreased YoY, contributing to EPS calculations[97] Note 14. Segment Information Presents financial data for Americas, EMEA, and Asia Pacific segments, detailing sales and operating profit performance | Segment (in millions) | Net Sales (Q1 2024) | Net Sales (Q1 2023) | Operating Profit (Q1 2024) | Operating Profit (Q1 2023) | | :-------------------- | :------------------ | :------------------ | :------------------------- | :------------------------- | | Americas | $1,186.5 | $1,141.3 | $639.3 | $608.9 |\ | EMEA | $444.8 | $425.6 | $153.0 | $149.5 |\ | Asia Pacific | $258.0 | $264.1 | $93.3 | $90.2 | - Americas segment operating profit increased by 5.0% YoY, driven by higher net sales and lower royalty expense. EMEA operating profit increased by 2.3% YoY, but operating profit as a percentage of net sales decreased due to higher manufacturing costs and a lower-margin profit mix. Asia Pacific operating profit increased by 3.4% YoY, despite a net sales decline, due to higher hedge gains, lower royalty expense, and restructuring savings[138][139][140] - Certain product category headquarter costs (R&D, marketing) and support function costs were reclassified from operating segments to Corporate items in Q1 2024[101] Note 15. Commitments and Contingencies Outlines legal proceedings, product liability lawsuits, and contractual obligations for future payments - Accrued litigation liabilities were $226.5 million as of March 31, 2024, down from $244.1 million at December 31, 2023[105] - The company faces ongoing product liability lawsuits related to Durom Cup, M/L Taper and Versys Femoral Head implants, and Biomet metal-on-metal hip implants[106][108][110] - Potential future payments from contractual obligations (R&D, sales milestones) could range from $0 to approximately $405 million[112] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Reviews Zimmer Biomet's financial performance, key drivers, and outlook for the reporting period - Net sales increased 3.2% in Q1 2024 compared to the prior year, driven by market growth, new product introductions, and commercial execution, but tempered by a 1.2% negative foreign currency effect[115] - Net earnings declined from $232.5 million in Q1 2023 to $172.4 million in Q1 2024, primarily due to $71.0 million in employee termination benefits-related charges from the 2023 Restructuring Plan[116] - For 2024, the company expects mid-single-digit revenue growth, a negative 0.5% impact from foreign currency, and an increase in operating profit, partially offset by higher intangible asset amortization and restructuring costs[117] Executive Level Overview Summarizes the company's financial performance and strategic outlook for the reporting period - Net sales increased 3.2% in Q1 2024 compared to the prior year, driven by market growth, new product introductions, and commercial execution, but tempered by a 1.2% negative foreign currency effect[115] - Net earnings declined from $232.5 million in Q1 2023 to $172.4 million in Q1 2024, primarily due to $71.0 million in employee termination benefits from the 2023 Restructuring Plan[116] - The 2024 outlook projects mid-single-digit revenue growth, a negative 0.5% foreign currency impact, and increased operating profit, partially offset by higher intangible asset amortization and restructuring costs[117] Results of Operations Analyzes the company's net sales, expenses, and operating profit, detailing key performance drivers | Net Sales by Geography (in millions) | Q1 2024 | Q1 2023 | % Inc | | :----------------------------------- | :------ | :------ | :---- | | United States | $1,099.2 | $1,060.4 | 3.7% |\ | International | $790.0 | $770.6 | 2.5% |\ | Total | $1,889.2 | $1,831.0 | 3.2% | | Net Sales by Product Category (in millions) | Q1 2024 | Q1 2023 | % Inc / (Dec) | | :------------------------------------------ | :------ | :------ | :------------ | | Knees | $788.1 | $762.5 | 3.4% |\ | Hips | $491.2 | $492.8 | (0.3)% |\ | S.E.T. | $452.6 | $433.4 | 4.4% |\ | Other | $157.3 | $142.3 | 10.6% |\ | Total | $1,889.2 | $1,831.0 | 3.2% | | Expenses as a Percentage of Net Sales | Q1 2024 | Q1 2023 | % Inc / (Dec) | | :------------------------------------ | :------ | :------ | :------------ | | Cost of products sold, excluding intangible asset amortization | 27.1% | 27.4% | (0.3)% |\ | Intangible asset amortization | 7.5% | 7.3% | 0.2% |\ | Research and development | 5.7% | 6.0% | (0.3)% |\ | Selling, general and administrative | 39.0% | 39.1% | (0.1)% |\ | Restructuring and other cost reduction initiatives | 6.6% | 2.3% | 4.3% |\ | Operating profit | 14.1% | 17.9% | (3.8)% | Liquidity and Capital Resources Discusses the company's cash position, cash flow activities, and available capital resources - Cash and cash equivalents totaled $393.0 million as of March 31, 2024, with $1.0 billion available under the 2023 364-Day Credit Agreement and $1.5 billion under the 2023 Five-Year Revolving Facility[141] - Net cash provided by operating activities decreased to $228.0 million in Q1 2024 from $307.7 million in Q1 2023, driven by higher bonus, income tax, and restructuring payments[143] - Net cash used in financing activities was $50.1 million in Q1 2024, including $113.6 million for common stock repurchases and $70.0 million net proceeds from revolving facilities[145] - The company repurchased approximately 0.7 million shares for $88.0 million in Q1 2024, with $67.8 million remaining authorized under the $1.0 billion share repurchase program[152] Recent Accounting Pronouncements Refers to disclosures on new accounting standards and their potential impact on financial reporting - Refer to Note 2 for details on recent accounting pronouncements[156] Critical Accounting Estimates Confirms no changes to critical accounting estimates previously disclosed in the annual report - No changes to critical accounting estimates in Q1 2024 compared to the 2023 Annual Report on Form 10-K[157] Cautionary Note Regarding Forward-Looking Statements and Factors That May Affect Future Results Warns that forward-looking statements are subject to risks and uncertainties that could impact future results - Forward-looking statements are based on current beliefs and subject to significant risks and uncertainties[158] - Key risk factors include competition, pricing pressures, dependence on new product development, business disruptions, restructuring execution, and challenges with governmental laws and regulations[159] - The company disclaims any intention or obligation to update or revise forward-looking statements[161] Item 3. Quantitative and Qualitative Disclosures About Market Risk Confirms no material changes to market risk disclosures since the prior annual report - No material changes in market risk disclosures since the 2023 Annual Report on Form 10-K[163] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures and the absence of material changes in internal control - Disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2024[165] - No material changes in internal control over financial reporting occurred during Q1 2024[166] Part II - Other Information Item 1. Legal Proceedings Refers to detailed information on ongoing legal proceedings and related liabilities - Legal proceedings information is detailed in Note 15 of the financial statements[167] Item 1A. Risk Factors Advises readers to consider the comprehensive risk factors outlined in the annual report - Risk factors from the 2023 Form 10-K should be carefully considered, as they could materially affect the business[168] - Additional unknown or currently immaterial risks may also adversely affect the company[168] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details the issuance of equity securities and share repurchases during the reporting period - Issued 0.2 million common shares ($23.4 million) for an Embody acquisition commercial milestone in Q1 2024[169] - Repurchased 0.2 million common shares in February 2024 to minimize dilution from the milestone issuance[169] | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :------------ | :------------------------------- | :--------------------------- | | January 2024 | 530,017 | $120.94 |\ | February 2024 | 192,737 | $123.87 |\ | March 2024 | - | - |\ | Total | 722,754 | $121.72 | Item 3. Defaults Upon Senior Securities Confirms that there were no defaults on senior securities during the reporting period - No defaults upon senior securities[171] Item 4. Mine Safety Disclosures States that mine safety disclosures are not applicable to the company's operations - Not applicable[171] Item 5. Other Information Covers other material events, including auditor engagement and trading arrangements by insiders - Audit Committee approved PricewaterhouseCoopers LLP for audit-related and tax services[171] - No Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements were adopted, amended, or terminated by directors or officers in Q1 2024[172][173] Item 6. Exhibits Provides a comprehensive list of all exhibits filed or furnished as part of the report - Exhibits include Restated Certificate of Incorporation, Restated Bylaws, Change in Control Severance Agreements, List of Subsidiaries, and various certifications (e.g., Section 302, Section 906)[174] Signatures Confirms the official signing of the report by authorized financial officers - Report signed by Suketu Upadhyay (CFO) and Paul Stellato (VP, Controller, CAO) on May 2, 2024[176]