Zimmer Biomet Holdings 10-Q 2021-09-30

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 September 30, 2021

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 October 28, 2021, 208,908,008 shares of the registrant’s $.01 par value common stock were outstanding.

ZIMMER BIOMET HOLDINGS, INC.

INDEX TO FORM 10-Q

September 30, 2021

Part I – Financial Information

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.

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions, unaudited)

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

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.

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions, except per share amounts, unaudited)

| | | Zimmer Biomet Holdings, Inc. Stockholders | | | | | | | | | | | | | | |

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The following discussion and analysis should be read in conjunction with the interim condensed consolidated financial statements and corresponding notes included elsewhere in this Form 10-Q. Certain percentages presented in this discussion and analysis are calculated from the underlying whole-dollar amounts and, therefore, may not recalculate from the rounded numbers used for disclosure purposes.

On February 5, 2021, we announced our intention to pursue a plan to spin off our Spine and Dental businesses to form ZimVie. We are targeting completion of the spin-off by mid-2022, subject to the satisfaction of certain conditions, including, among others, final approval of our Board of Directors, receipt of a favorable opinion and IRS ruling with respect to the tax-free nature of the transaction, obtaining debt financing for the new company, and the effectiveness of a Form 10 registration statement with the SEC. The following discussion and analysis includes these businesses in our discussion of financial condition and results of operations.

Executive Level Overview

Impact of the COVID-19 Global Pandemic

Our results 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. As COVID-19 rapidly started to spread throughout the world in early 2020, our net sales decreased dramatically as countries took precautions to prevent the spread of the virus with lockdowns and stay-at-home measures and as hospitals deferred elective surgical procedures. The timing, level and sustainability of the return of elective surgical procedures has been difficult to predict, as a number of factors are involved, including which geographies are affected and the different measures governments and healthcare systems may take in response to the virus in those areas. In the third quarter of 2021, the highly transmissible Delta variant has resulted in deferrals of elective surgical procedures, most notably in the U.S. Additionally, we believe that staffing shortages at hospitals are also contributing to the deferral of elective surgical procedures.

Results for the Three and Nine-Month Periods ended September 30, 2021

Our net sales decreased by 0.3 percent in the three-month period ended September 30, 2021 and increased by 17.4 percent in the nine-month period ended September 30, 2021, compared to the same prior year periods. The decline in the three-month period was primarily attributable to deferred elective surgical procedures due to the Delta variant, staffing shortages at hospitals and other COVID-19 related issues. The increase in net sales in the nine-month period was primarily due to the significant deferral of elective surgical procedures at the onset of the pandemic in 2020. Our net earnings were $145.6 million and $485.6 million in the three and nine-month periods ended September 30, 2021, respectively, compared to net earnings of $242.5 million and a net loss of $472.6 million in the same prior year periods, respectively. The decline in net earnings in the three-month period ended September 31, 2021 compared to the same prior year period was primarily due to higher litigation-related charges, costs related to the ZimVie spinoff and higher research and development (“R&D”) spending. For the nine-month period ended September 30, 2021, we returned to profitability compared to the net loss in the same prior year period, primarily due to a reduction in operating expenses including goodwill and intangible asset impairment charges, certain fixed overhead and hourly production worker labor expenses, and litigation-related charges. In the nine-month period ended September 30, 2020, we recognized $645.0 million of goodwill and intangible asset impairment charges primarily due to the forecasted impact of COVID-19 on our operating results. In the second quarter of 2020, we also temporarily suspended or limited production at certain manufacturing facilities, resulting in additional expense recognized in cost of products sold that related to certain fixed overhead costs and hourly production worker labor expenses that are included in the cost of inventory when these facilities are operating at normal capacity. Lastly, in the nine-month period ended September 30, 2021, we recognized net litigation-related charges of $53.3 million compared to $100.4 million in the same 2020 period.

2021 Outlook

In the fourth quarter of 2021, we expect deferrals of elective surgical procedures will continue due to the Delta variant and staffing shortages at hospitals. Since the clinical need for many of our products does not go away, we believe some patients will return for these surgical procedures, but how quickly that occurs continues to be uncertain. Additionally, we expect that China sales will be negatively impacted from a combination of variables related to the implementation of volume-based procurement (“VBP”) including potential distributor inventory reductions, ongoing pricing negotiations with distributor partners, revaluation of channel inventory and/ or volume reductions as patients may defer procedures until after VBP is effective. Although the government pricing levels have been finalized, the final impact of these variables may be materially different than what we have estimated. We also plan to continue our investments in key R&D and commercial initiatives as we prepare for the recovery of elective surgical procedures.

Results of Operations

We analyze sales by three geographies, the Americas, EMEA and Asia Pacific, and by the following product categories: Knees; Hips; S.E.T.; Dental & Spine; and Other. This sales analysis 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. We analyze sales by geography because the underlying market trends in any particular geography tend to be similar across product categories and because we primarily sell the same products in all geographies. Our business is seasonal in nature to some extent, as many of our products are used in elective surgical procedures, which typically decline during the summer months and can increase at the end of the year once annual deductibles have been met on health insurance plans. In 2021, it is uncertain if this seasonal pattern will be similar to years prior to 2020, due to COVID-19 and its continued impacts.

Net Sales by Geography

The following tables present our net sales by geography and the components of the percentage changes (dollars in millions):

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There have been no material changes from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2020.

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Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During the quarter ended September 30, 2021, we transitioned certain functions into our new Global Business Services (“GBS”) organization. This is part of a multiyear plan to support our growth while simplifying and centralizing key global processes to harmonize and gain efficiencies in our processes and internal controls. Although the underlying internal controls did not significantly change with this move, the responsibility to perform these internal controls has transferred to the new GBS centers as well as certain outsourced providers.

Part II – Other Information

Item 1. Legal Proceedings | --- | --- |

Information pertaining to legal proceedings can be found in Note 17 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report and is incorporated herein by reference.

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You should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”) and the factors discussed below, which could materially affect our business, financial condition and results of operations. Except as set forth below, there have been no material changes in those risk factors. The risks described in our 2020 Form 10-K and below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations. In addition, the COVID-19 pandemic could exacerbate or trigger other risks discussed in our 2020 Form 10-K and below, any of which could materially affect our business, financial condition and results of operations.

The risk factor in our 2020 Form 10-K entitled “If third-party payors decline to reimburse our customers for our products or reduce reimbursement levels, the demand for our products may decline and our ability to sell our products profitably may be harmed” is replaced in its entirety by the following:

If third-party payors or key participants in government healthcare systems decline to reimburse our customers for our products or reduce reimbursement levels, the demand for our products may decline and our ability to sell our products profitably may be harmed.

We sell our products and services to hospitals, doctors, dentists and other healthcare providers, which receive reimbursement for the healthcare services provided to their patients from third-party payors, such as domestic and international government programs, private insurance plans and managed care programs. These third-party payors may deny reimbursement if they determine that a product or service used in a procedure was not in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication. Third-party payors may also decline to reimburse for experimental procedures and products.

In addition, third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for medical products and services. If third-party payors reduce reimbursement levels or change reimbursement models for hospitals and other healthcare providers for our products, demand for our products may decline, or we may experience increased pressure to reduce the prices of our products, which could have a material adverse effect on our sales and results of operations.

We have also experienced downward pressure on product pricing and other effects of healthcare reform in our international markets. For example, China has implemented a volume-based procurement process designed to decrease prices for medical devices and other products. If key participants in government healthcare systems reduce the reimbursement levels for our products, including through political changes or transitions, our sales and results of operations may be adversely affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | --- | --- |

None

Item 3. Defaults Upon Senior Securities | --- | --- |

None

Item 4. Mine Safety Disclosures | --- | --- |

Not applicable

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During the three-month period ended September 30, 2021, the Audit Committee of our Board of Directors approved the engagement of PricewaterhouseCoopers LLP, our independent registered public accounting firm, to perform certain non-audit services. This disclosure is made pursuant to Section 10A(i)(2) of the Exchange Act, as added by Section 202 of the Sarbanes-Oxley Act of 2002.

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The following exhibits are filed or furnished as part of this report:

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.