ZIMMER BIOMET HOLDINGS, INC. The following discussion and analysis should be read in conjunction with the consolidated financial statements and the corresponding notes included elsewhere in this Annual Report on Form 10-K. 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. The following discussion, analysis and comparisons generally focus on the operating results for the years endedDecember 31, 2021 and 2020. Discussion, analysis and comparisons of the years endedDecember 31, 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . OnFebruary 5, 2021 , we announced our intention to pursue a plan to spin off our Spine and Dental businesses into a new public company. The expected completion date of the spinoff of ZimVie isMarch 1, 2022 . 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 recovery 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 take in response to the virus in those areas. In the second half of 2021, the highly transmissible Delta and Omicron variants resulted in further deferrals of elective surgical procedures. Additionally, we believe that staffing shortages at hospitals are also contributing to the deferral of elective surgical procedures.
2021 Financial Highlights
In 2021, our net sales increased by 11.6 percent compared to 2020 primarily due to the significant deferral of elective surgical procedures at the onset of the COVID-19 pandemic in 2020. Our net earnings were$401.6 million in 2021 compared to a net loss of$138.9 million in 2020. In 2021, we returned to profitability compared to a net loss in 2020, primarily due to higher net sales combined with fixed operating costs that did not increase proportionally to the increase in net sales, and a reduction in operating expenses including goodwill and intangible asset impairment charges and certain fixed overhead and hourly production worker labor expenses. In 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. The additional expense for suspended and limited production continued throughout 2020 and while we did recognize similar charges in 2021, they were lower than the 2020 charges. These reduced expenses in 2021 were partially offset by a charge for the early extinguishment of debt, higher research and development expenses, including certain agreements we entered into to gain access to or acquire third-party in-process R&D projects, higher consulting and professional service expenses related to the planned spinoff of our Spine and Dental businesses, and higher litigation-related charges.
2022 Outlook
We believe the COVID-19 variant surges and continuing staffing shortages that occurred late in 2021 will continue to negatively impact our net sales in 2022. As previously mentioned, we expect to spin off our Spine and Dental businesses onMarch 1, 2022 . We expect to apply discontinued operations accounting after the separation, which will require us to recast our prior period results to reflect both continuing and discontinued operations. Accordingly, it is difficult to provide forward-looking information that is comparable to our historical results until the recasting of prior periods is complete.
RESULTS OF OPERATIONS
We analyze sales by three geographies, theAmericas , EMEA andAsia Pacific , and by the following product categories: Knees; Hips; S.E.T.; Spine & Dental; and Other. This sales analysis differs from our reportable operating segments, which are based upon our senior management organizational structure and how we allocate 32 -------------------------------------------------------------------------------- resources towards 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.Net Sales by Geography
The following tables present net sales by geography and the components of the percentage changes (dollars in millions):
Year Ended December 31, Volume/ Foreign
2021 2020 % Inc Mix Price Exchange
Americas $ 4,800.2 $ 4,335.4 10.7 % 11.7 % (1.2 ) % 0.2 %
EMEA 1,671.1 1,391.3 20.1 16.7 (0.3 ) 3.7
Asia Pacific 1,364.9 1,297.8 5.2 8.9 (5.5 ) 1.8
Total $ 7,836.2 $ 7,024.5 11.6 12.1 (1.8 ) 1.3
Year Ended December 31, Volume/ Foreign
2020 2019 % (Dec) Mix Price Exchange
Americas $ 4,335.4 $ 4,875.8 (11.1 ) % (7.9 ) % (3.1 ) % (0.1 ) %
EMEA 1,391.3 1,746.9 (20.4 ) (20.5 ) (0.8 ) 0.9
Asia Pacific 1,297.8 1,359.5 (4.5 ) (4.5 ) (1.5 ) 1.5
Total $ 7,024.5 $ 7,982.2 (12.0 ) (10.0 ) (2.4 ) 0.4
"Foreign Exchange" used in the tables in this report represents the effect of changes in foreign currency exchange rates on sales.
The following tables present net sales by product category and the components of the percentage changes (dollars in millions):
Year Ended December 31, Volume/ Foreign
2021 2020 % Inc Mix Price Exchange
Knees $ 2,647.9 $ 2,378.3 11.3 % 12.4 % (2.4 ) % 1.3 %
Hips 1,856.1 1,750.5 6.0 8.2 (3.3 ) 1.1
S.E.T. 1,727.8 1,525.6 13.3 12.2 (0.3 ) 1.4
Spine & Dental 1,008.8 897.0 12.5 11.8 (0.3 ) 1.0
Other 595.6 473.1 25.9 26.7 (1.7 ) 0.9
Total $ 7,836.2 $ 7,024.5 11.6 12.1 (1.8 ) 1.3
Year Ended December 31, Volume/ Foreign
2020 2019 % (Dec) Mix Price Exchange
Knees $ 2,378.3 $ 2,780.6 (14.5 ) % (12.1 ) % (2.7 ) % 0.3 %
Hips 1,750.5 1,931.5 (9.4 ) (7.1 ) (2.8 ) 0.5
S.E.T. 1,525.6 1,652.5 (7.7 ) (5.9 ) (2.1 ) 0.3
Spine & Dental 897.0 1,021.8 (12.2 ) (11.4 ) (1.3 ) 0.5
Other 473.1 595.8 (20.6 ) (19.1 ) (1.9 ) 0.4
Total $ 7,024.5 $ 7,982.2 (12.0 ) (10.0 ) (2.4 ) 0.4
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The following table presents net sales by product category by geography for our
Knees and Hips product categories, which represent our most significant product
categories (dollars in millions):
Year Ended December 31,
2021 vs. 2020 2020 vs. 2019
2021 2020 2019 % Inc/(Dec) % Inc/(Dec)
Knees
Americas $ 1,574.2 $ 1,444.7 $ 1,645.4 9.0 % (12.2 ) %
EMEA 588.9 485.6 650.6 21.3 (25.4 )
Asia Pacific 484.8 448.0 484.6 8.2 (7.6 )
Total $ 2,647.9 $ 2,378.3 $ 2,780.6 11.3 (14.5 )
Hips
Americas $ 997.8 $ 941.5 $ 1,016.3 6.0 % (7.4 ) %
EMEA 474.0 407.8 499.8 16.2 (18.4 )
Asia Pacific 384.3 401.2 415.4 (4.2 ) (3.4 )
Total $ 1,856.1 $ 1,750.5 $ 1,931.5 6.0 (9.4 )
Demand (Volume/Mix) Trends
Changes in volume and mix of product sales had a positive effect of 12.1 percent
on year-over-year sales during the year ended December 31, 2021 . Volume trends
were positive in 2021 as elective surgical procedures were not as significantly
impacted by the COVID-19 pandemic as compared to 2020 when there were
significant deferrals at the beginning of the pandemic. However, 2021 did
experience periods with higher deferrals of elective surgical procedures, most
notably at the beginning of 2021 before vaccines were widely available and
during surges of the Delta and Omicron virus variants. Accordingly, net sales in
2021 did not return to the pre-pandemic levels of 2019.
Based upon country dynamics, volume changes varied by region in 2021. The volume
increases in 2021 were largely a product of how much the COVID-19 pandemic
negatively affected the various regions in 2020. In EMEA, stay-at-home measures
were far more prevalent than other geographies in 2020 and therefore volume
increases were greater in this region in 2021 as elective surgical procedures
resumed. In the Americas , elective surgical procedures in the U.S. varied from
state-to-state depending on local infection rates and preventative measures in
2020. In Asia Pacific , containment of the COVID-19 virus varied from
country-to-country in 2020, but overall some of our larger markets in this
region were not as affected in 2020 as other locations. Additionally, in Asia
Pacific in 2021, China sales were negatively impacted from a combination of
variables related to the implementation of a nationwide volume-based procurement
("VBP") process. The China VBP had a negative effect on volume due to inventory
reductions by distributors and short-term deferral of procedures as patients
waited to have a surgical procedure performed until after VBP pricing is
effective.
Pricing Trends
Global selling prices had a negative effect of 1.8 percent on year-over-year sales during 2021. In the majority of countries in which we operate, we continue to experience pricing pressure from governmental healthcare cost containment efforts and from local hospitals and health systems. Pricing in 2021 was also negatively affected by the anticipated China VBP implementation due to ongoing pricing negotiations with distributor partners.
Foreign Currency Exchange Rates
In 2021, changes in foreign currency exchange rates had a positive effect of 1.3
percent on year-over-year sales. If foreign currency exchange rates remain at
levels consistent with recent rates, we estimate they will have a negative
impact of approximately 2.0 percent on sales in 2022 for the full year.
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--------------------------------------------------------------------------------Estimated Market Trends
The following table presents estimated* 2021 global market information (dollars
in billions):
Global Global Zimmer Biomet
Market Historic Market Market
Size** % Growth*** Position**
Knees $ 10 Low-Single Digit 1
Hips 8 Low-Single Digit 1
S.E.T. 25 Mid-Single Digit N/A
Spine 12 Low-Single Digit 6
Dental 8 Mid-Single Digit 5
* Estimates are not precise and are based on competitor annual filings, Wall
Street equity research and Company estimates
** Only includes the subsegments in these markets in which we compete
*** Represents historic growth in recent years, absent the effects of the
COVID-19 pandemic, and excludes the effect of changes in foreign currency
exchange rates on sales growth
N/A In these product categories, due to the breadth of subcategories and since
some major competitors are privately owned, it is difficult to determine our
exact position.
Expenses as a Percent of
Year Ended December 31,
2021 vs. 2020 2020 vs. 2019
2021 2020 2019 Inc/(Dec) Inc/(Dec)
Cost of products sold, excluding
intangible asset amortization 29.9 % 30.3 % 28.2 % (0.4 ) % 2.1 %
Intangible asset amortization 7.9 8.5 7.3 (0.6 ) 1.2
Research and development 6.3 5.3 5.6 1.0 (0.3 )
Selling, general and
administrative 42.4 45.2 41.9 (2.8 ) 3.3
Goodwill and intangible asset
impairment 0.2 9.2 0.9 (9.0 ) 8.3
Restructuring and other cost
reduction initiatives 1.6 1.7 0.6 (0.1 ) 1.1
Quality remediation 0.7 0.7 1.0 - (0.3 )
Acquisition, integration,
divestiture and related 1.0 0.3 0.2 0.7 0.1
Operating Profit (Loss) 10.0 (1.2 ) 14.2 11.2 (15.4 )
Cost of Products Sold and Intangible Asset Amortization
We calculate gross profit as net sales minus cost of products sold and intangible asset amortization. Our gross margin percentage is gross profit divided by net sales. The following table sets forth the factors that contributed to the gross margin changes in each of 2021 and 2020 compared to the prior year:
Year Ended December 31,
2021 2020
Prior year gross margin 61.2 % 64.5 %
Lower average selling prices (0.5 ) (0.7 )
Average cost per unit (0.4 ) 0.4
Excess and obsolete inventory charges 1.0 (0.5 )
Discontinued products inventory charges 0.3 (0.4 )
Royalties 0.1 0.1
Impact of foreign currency hedges (0.7 ) 0.2
Temporarily suspended or limited production 0.8 (1.2 )
Intangible asset amortization 0.6 (1.2 )
Other (0.1 ) -
Current year gross margin 62.3 % 61.2 %
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The increase in gross margin percentage in 2021 compared to 2020 was primarily
due to lower excess and obsolete inventory charges and lower impact from
intangible asset amortization as well as the fact that 2020 had higher charges
from certain fixed overhead costs and hourly production worker labor expenses
when we temporarily suspended or limited production at certain manufacturing
facilities. Intangible asset amortization and excess and obsolete inventory
charges did not increase ratably with the increase our net sales in 2021 and
therefore were a positive impact to our gross margin percentage. These favorable
items were partially offset by hedge losses recognized in the current year as
part of our hedging program compared to hedge gains in the prior year, and lower
average selling prices.
Operating Expenses
Research & development ("R&D") expenses increased in both amount and as a
percentage of net sales in 2021 compared to 2020 primarily due to reengaging in
R&D projects in 2021, including the implementation of the European Union Medical
Device Regulation ("EU MDR"), compared to 2020 when COVID-19 caused delays in
project spending. In addition to reengaging in projects, in 2021 we also entered
into certain agreements to gain access to or acquire third-party in-process R&D
projects that resulted in charges of $65.0 million .
Selling, general & administrative ("SG&A") expenses increased in 2021 compared
to 2020, but decreased as a percentage of net sales. SG&A expenses increased
primarily due to higher variable selling and distribution costs related to
increased net sales, higher performance-based compensation in the current year
as similar costs were reduced in the prior year due to the effect COVID-19 had
on our operating results, higher litigation-related charges, and increased
travel and medical training and education costs as we have partially resumed
these activities. Despite the increase in SG&A expenses, SG&A as a percentage of
net sales declined in 2021 when compared to 2020 as our SG&A expenses included
many fixed costs that did not increase ratably with the increase in net sales in
the 2021 period.
In 2021, we recognized an intangible asset impairment charge of $16.3
million . In 2020, we recognized goodwill and intangible asset impairment charges
of $645.0 million , including charges of $470.0 million and $142.0 million
related to our EMEA and Dental reporting units, respectively, in the first
quarter of 2020. For more information regarding these charges, see Note 11 to
our consolidated financial statements.
In December 2021 , our management approved a restructuring program to reorganize
our operations in preparation for the planned spinoff of ZimVie with an
objective of reducing costs. In December 2019 , our Board of Directors approved,
and we initiated, a restructuring program with an objective of reducing costs to
allow us to invest in higher priority growth opportunities. We recognized
expenses of $129.1 million and $116.9 million in the years ended December 31,
2021 and 2020, respectively, attributable to restructuring and other cost
reduction initiatives, primarily related to employee termination benefits, sales
agent contract terminations, and consulting and project management expenses
associated with these programs. For more information regarding these expenses,
see Note 4 to our consolidated financial statements.
Our quality remediation expenses increased slightly to $53.1 million in 2021
compared to $50.9 million in 2020. We continue to incur quality remediation
expenses to complete our remediation milestones that address inspectional
observations on Form 483 and a Warning Letter issued by the FDA at our Warsaw
North Campus facility, among other matters.
Acquisition, integration, divestiture and related expenses increased to $79.8
million in 2021 compared to $23.8 million in 2020 due primarily to consulting
and other professional service expenses related to the planned spinoff of our
Spine and Dental businesses and integration expenses related to the acquisitions
made in 2020.
Other Income (Expense), net, Interest Expense, net, Loss on Early Extinguishment of Debt and Income Taxes
In 2021, our other income, net was lower than in 2020 primarily due to losses recognized from changes to the fair value of our equity investments in 2021 compared to gains recognized in the prior year and lower pension-related gains recognized in 2021 compared to 2020.
Interest expense, net, decreased in 2021 when compared to 2020 primarily due to debt paydown and fixed-to-variable interest rate swaps we entered into in 2021.
In 2021, we recognized a
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Our effective tax rate ("ETR") on earnings before income taxes was 3.9 percent
and 49.9 percent for the years ended
In 2020, the income tax benefit was driven by changes in estimates to uncertain tax positions, favorable tax audit settlements, jurisdictional mix of earnings and losses, and a$43.0 million tax benefit fromSwitzerland's Federal Act on Tax Reform and AHV Financing ("TRAF"). Other significant impacts to the ETR in 2020 included the$612.0 million goodwill impairment charge, which resulted in a loss before taxes, but had no corresponding tax benefit. Absent discrete tax events, we expect our future ETR will be lower than theU.S. corporate income tax rate of 21.0 percent due to our mix of earnings betweenU.S. and foreign locations, which have lower corporate income tax rates. Our ETR in future periods could also potentially be impacted by: changes in our mix of pre-tax earnings; changes in tax rates, tax laws or their interpretation, including theEuropean Union rules on state aid; the outcome of various federal, state and foreign audits; and the expiration of certain statutes of limitations. Currently, we cannot reasonably estimate the impact of these items on our financial results. Segment Operating Profit Operating Profit as a Net Sales Operating Profit Percentage of Net Sales Year Ended December 31, Year Ended December 31, Year Ended December 31,
(dollars in millions) 2021 2020 2019 2021
2020 2019 2021 2020 2019
Americas Orthopedics $ 4,102.1 $ 3,699.5 $ 4,148.8 $ 1,709.3 $ 1,528.2 $ 1,831.8 41.7 % 41.3 % 44.2 %
EMEA 1,533.8 1,288.6 1,623.1 392.7 308.9 484.0 25.6 24.0 29.8
Asia Pacific 1,318.3 1,256.9 1,323.8 429.4 420.5 472.7 32.6 33.5 35.7
Americas Spine and
Global Dental 882.0 779.5 886.5 136.0 105.6 150.9 15.4 13.5 17.0
In 2021, the Americas Orthopedics, EMEA and Americas Spine and Global Dental
operating segments' operating profit and operating profit as a percentage of net
sales increased when compared to 2020 due the recovery of elective surgical
procedures when compared to the deferrals that occurred during the onset of the
COVID-19 pandemic in 2020. These operating segments have various fixed costs
that do not fluctuate proportionally to net sales changes, which results in
improved operating profit as a percentage of net sales as net sales increase. In
the Asia Pacific operating segment, while operating profit increased due to
higher net sales in 2021 when compared to 2020, operating profit as a percentage
of net sales decreased. The decrease in operating profit as a percentage of net
sales was primarily due the effect of the China VBP which had a significant
negative effect on pricing in 2021 without a corresponding reduction in cost of
products sold. In addition, the amount of our foreign currency exchange rate
hedge gains recognized in this operating segment in 2021 was lower than the
amount recognized in 2020.
Non-GAAP Operating Performance Measures
We use financial measures that differ from financial measures determined in accordance with GAAP to evaluate our operating performance. These non-GAAP financial measures exclude, as applicable, certain inventory and manufacturing-related charges including charges to discontinue certain product lines; intangible asset amortization; goodwill and intangible asset impairment; restructuring and other cost reduction initiative expenses; quality remediation expenses; acquisition, integration, divestiture and related expenses; certain litigation gains and charges; expenses to establish initial compliance with the EU MDR; expenses related to certain R&D agreements; loss on early extinguishment of debt; other charges; any related effects on our income tax provision associated with these items; the effect ofSwitzerland tax reform; other certain tax adjustments; and, with respect to earnings per share information, provide for the effect of dilutive shares assuming net earnings in a period of a reported net loss. We use these non-GAAP financial measures internally to evaluate the performance of the business. Additionally, we believe these non-GAAP measures provide meaningful incremental information to investors to consider when evaluating our performance. We believe these measures offer the ability to make period-to-period comparisons that are not impacted by certain items that can cause dramatic changes in reported income but that do not impact the fundamentals of our operations. The non-GAAP measures enable the evaluation of operating results and trend analysis by allowing a reader to better identify operating trends that may otherwise be masked or distorted by these 37 --------------------------------------------------------------------------------
types of items that are excluded from the non-GAAP measures. In addition, adjusted diluted earnings per share is used as a performance metric in our incentive compensation programs.
The following are reconciliations from our GAAP net earnings and diluted
earnings per share to our non-GAAP adjusted net earnings and non-GAAP adjusted
diluted earnings per share used for internal management purposes (in millions,
except per share amounts):
Year ended December 31,
2021 2020 2019
Net Earnings (Loss) of Zimmer Biomet
Holdings, Inc. $ 401.6 $ (138.9 ) $ 1,131.6
Inventory and manufacturing-related
charges(1) 41.8 54.2 53.9
Intangible asset amortization(2) 615.7 597.6 584.3Goodwill and intangible asset impairment(3) 16.3 645.0 70.1 Restructuring and other cost reduction initiatives(4) 130.5 116.9 50.0 Quality remediation(5) 53.2 49.8 87.6 Acquisition, integration, divestiture and related(6) 81.8 23.8 12.2 Litigation(7) 192.9 159.8 65.0 Litigation settlement gain(8) - - (23.5 ) European Union Medical Device Regulation(9) 46.5 25.3 30.9 Certain R&D agreements(10) 65.0 - - Loss on early extinguishment of debt(11) 165.1 - - Other charges(12) 11.9 10.7 119.2 Taxes on above items (13) (292.6 ) (253.4 ) (226.2 ) Swiss tax reform (14) 30.1 (5.0 ) (315.0 ) Other certain tax adjustments (15) (9.8 ) (104.2 ) (13.7 ) Adjusted Net Earnings$ 1,550.0 $ 1,181.6 $ 1,626.4 Year ended December 31, 2021 2020 2019 Diluted Earnings (Loss) per share$ 1.91 $ (0.67 ) $ 5.47 Inventory and manufacturing-related charges(1) 0.20 0.26 0.26 Intangible asset amortization(2) 2.93 2.89 2.83 Goodwill and intangible asset impairment(3) 0.08 3.12 0.34 Restructuring and other cost reduction initiatives(4) 0.62 0.56 0.24 Quality remediation(5) 0.25 0.24 0.42 Acquisition, integration, divestiture and related(6) 0.39 0.12 0.06 Litigation(7) 0.92 0.77 0.31 Litigation settlement gain(8) - - (0.11 ) European Union Medical Device Regulation(9) 0.22 0.12 0.15 Certain R&D agreements(10) 0.31 - - Loss on early extinguishment of debt(11) 0.78 - - Other charges(12) 0.06 0.05 0.58 Taxes on above items (13) (1.39 ) (1.22 ) (1.09 ) Swiss tax reform (14) 0.14 (0.03 ) (1.52 ) Other certain tax adjustments (15) (0.05 ) (0.50 ) (0.07 ) Effect of dilutive shares assuming net earnings(16) - (0.04 ) - Adjusted Diluted EPS$ 7.37 $ 5.67 $ 7.87
(1) Inventory and manufacturing-related charges include excess and obsolete
inventory charges on certain product lines we intend to discontinue,
incremental cost of products sold from stepping up inventory to its fair
value from its manufactured cost in business combination accounting and
other inventory and manufacturing-related charges or gains.
(2) We exclude intangible asset amortization as well as deferred tax rate
changes on our intangible assets from our non-GAAP financial measures
because we internally assess our performance against our peers without this
amortization. Due to various levels of acquisitions among our peers,
intangible asset amortization can vary significantly from company to
company.
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(3) In the first quarter of 2020, we recognized goodwill impairment charges of
units, respectively. In the second quarters of 2021 and 2020, we recognized
$16.3 million and$33.0 million , respectively, of in-process research and development ("IPR&D") intangible asset impairments on certain IPR&D projects.
(4) In 2019 and 2021, we initiated global restructuring programs that include a
reorganization of key businesses and an overall effort to reduce costs in
order to accelerate decision-making, focus the organization on priorities to
drive growth and to prepare for the planned spinoff of ZimVie. Restructuring
and other cost reduction initiatives also include other cost reduction
initiatives that have the goal of reducing costs across the
organization. The costs include employee termination benefits; contract
terminations for facilities and sales agents; and other charges, such as
retention period salaries and benefits and relocation costs.
(5) We are addressing inspectional observations on Form 483 and a Warning Letter
issued by the
previous inspections of our Warsaw North Campus facility, among other
matters. This quality remediation has required us to devote significant
financial resources and is for a discrete period of time. The majority of
the expenses are related to consultants who are helping us to update
previous documents and redesign certain processes.
(6) The acquisition, integration, divestiture and related net expenses we have
excluded from our non-GAAP financial measures included costs from the
planned spinoff of ZimVie (our Spine and Dental businesses) of
and costs from various acquisitions.
(7) We are involved in routine patent litigation, product liability litigation,
commercial litigation and other various litigation matters. We review
litigation matters from both a qualitative and quantitative perspective to
determine if excluding the losses or gains will provide our investors with
useful incremental information. Litigation matters can vary in their
characteristics, frequency and significance to our operating results. The
litigation charges and gains excluded from our non-GAAP financial measures
in the periods presented relate to product liability matters where we have
received numerous claims on specific products, patent litigation and
commercial litigation related to a common matter in multiple
jurisdictions. In regards to the product liability matters, due to the
complexities involved and claims filed in multiple districts, the expenses
associated with these matters are significant to our operating results. Once
the litigation matter has been excluded from our non-GAAP financial measures
in a particular period, any additional expenses or gains from changes in
estimates are also excluded, even if they are not significant, to ensure
consistency in our non-GAAP financial measures from period-to-period.
(8) In the first quarter of 2019, we settled a patent infringement lawsuit outof court, and the other party agreed to pay us an upfront, lump-sum amount
for a non-exclusive license to the patent.
(9) The European Union Medical Device Regulation imposes significant additional
premarket and postmarket requirements. The new regulations provided a
transition period until
meet the additional requirements. For certain devices, this transition
period can be extended until
financial measures the incremental costs incurred to establish initial
compliance with the regulations related to our previously-approved medical
devices. The incremental costs primarily include temporary personnel and
third-party professionals necessary to supplement our internal resources.
(10) During the year ended
to gain access to or acquire third-party IPR&D projects.
(11) We recognized a loss on early extinguishment of debt during the year ended
series of senior notes.
(12) We have incurred other various expenses from specific events or projects
that we consider highly variable or that have a significant impact to our
operating results that we have excluded from our non-GAAP measures. These
include costs related to legal entity, distribution and manufacturing
optimization, including contract terminations, gains and losses from changes
in fair value on our equity investments, as well as, in the 2020 and 2019
periods, our costs of complying with a Deferred Prosecution Agreement
("DPA") with the
Practices Act matters involving
which DPA concluded in
(13) Represents the tax effects on the previously specified items, including the
deferred tax rate changes on intangible assets. The tax effect for the
jurisdiction is calculated based on an effective rate considering federal
and state taxes, as well as permanent items. For jurisdictions outside the
items were incurred.
(14) We recognized a tax benefit related to TRAF in addition to an impact from
certain restructuring transactions in
adjustments relating to the ongoing impacts of tax only amortization
resulting from TRAF as well as certain restructuring transactions in
Switzerland .
(15) Other certain tax adjustments relate to various discrete tax period
adjustments. In 2021, the adjustments were primarily related to tax reform
planning. In 2020, the adjustments were primarily related to the resolution
of or changes in estimates of significant uncertain tax positions as a
result of settlements or favorable rulings. In 2019, the adjustments were
primarily related to changes in tax rates on deferred tax liabilities
recorded on
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intangible assets recognized in acquisition-related accounting and
adjustments from internal restructuring transactions that provide us access
to offshore funds in a tax efficient manner.
(16) Due to the reported net loss for 2020, the effect of dilutive shares
assuming net earnings is shown as an adjustment. Diluted share count used in
Adjusted Diluted EPS is (in millions):
Year ended
December 31, 2020
Diluted shares 207.0
Dilutive shares assuming net earnings 1.4
Adjusted diluted shares 208.4
LIQUIDITY AND CAPITAL RESOURCES
As ofDecember 31, 2021 , we had$478.5 million in cash and cash equivalents. In addition, we had$1.0 billion available to borrow under a 364-day revolving credit agreement that matures onAugust 19, 2022 , and$1.5 billion available under a five-year revolving facility that matures onAugust 20, 2026 . The terms of the 364-day revolving credit agreement and the 2021 five-year revolving facility are described further in Note 13 to our consolidated financial statements. At the ZimVie spinoff date, we expect to receive approximately$500 million from ZimVie as partial consideration for the contribution of assets in connection with the separation. Additionally, we will retain 19.7 percent of the outstanding shares of ZimVie common stock after the separation. We intend to dispose of all of the ZimVie common stock after the distribution by exchanging such ZimVie common stock forZimmer Biomet debt obligations over time. We believe that cash flows from operations, our cash and cash equivalents on hand, cash received from the spinoff of ZimVie and available borrowings under our revolving credit facilities will be sufficient to meet our ongoing liquidity requirements for at least the next twelve months. However, due to the continued uncertainties related to the COVID-19 pandemic, it is possible our needs may change. Further, there can be no assurance that, if needed, we will be able to secure additional financing on terms favorable to us, if at all.
Sources of Liquidity
Cash flows provided by operating activities were$1,499.2 million in 2021 compared to$1,204.5 million and$1,585.8 million in 2020 and 2019, respectively. The increase in cash flows from operating activities in 2021 when compared to 2020 was primarily the result of higher net earnings in the 2021 period. Additionally, in 2020 we terminated our accounts receivable purchase arrangements in theU.S. andJapan which we estimate negatively impacted operating cash flows by approximately$300 million . Cash flows used in investing activities were$503.6 million in 2021 compared to$613.8 million and$729.3 million in 2020 and 2019, respectively. Instrument and property, plant and equipment additions reflected ongoing investments in our product portfolio and optimization of our manufacturing and logistics network. In order to preserve cash, we prioritized investments in 2020 which resulted in lower investments in property, plant and equipment. As further discussed in Note 10 to our consolidated financial statements, we made various acquisitions in 2020 requiring initial cash outlays of$235.5 million , net of acquired cash. Cash flows used in financing activities were$1,306.0 million in 2021. In 2021, we issued senior notes and received$1,599.8 million in proceeds, which, along with cash on hand, were used to extinguish$1,993.2 million aggregate outstanding principal amount of our senior notes pursuant to cash tender offers for certain outstanding series of our senior notes, at a total reacquisition price of$2,154.8 million . Additionally, we used cash on hand to redeem$500.0 million of other senior notes that matured in 2021. We also had deferred business combination payments of$145.0 million that were paid in 2021 under the terms of the purchase agreements. Cash flows used in financing activities were$421.8 million in 2020. In 2020, we issued senior notes and received$1,497.1 million in proceeds, which were used to pay our$1,500.0 million senior notes at maturity onApril 1, 2020 . Additionally, with cash flows generated from operations, in 2020 we redeemed$250.0 million of our floating rate senior notes that matured onMarch 19, 2021 . Further, the termination of certain accounts receivable purchase arrangements in 2020 resulted in$54.6 million of financing cash outflows to the purchasing financial institutions. These outflows represent the amount of unremitted cash that we had collected on sold accounts receivable as ofDecember 31, 2019 that was repaid in 2020. 40 --------------------------------------------------------------------------------
We place our cash and cash equivalents in highly-rated financial institutions and limit the amount of credit exposure to any one entity. We invest only in high-quality financial instruments in accordance with our internal investment policy. As ofDecember 31, 2021 ,$450.2 million of our cash and cash equivalents were held in jurisdictions outside of theU.S. Of this amount,$58.0 million is denominated inU.S. Dollars and, therefore, bears no foreign currency translation risk. The balance of these assets is denominated in currencies of the various countries where we operate. We intend to repatriate$5.0 to$6.0 billion of unremitted earnings in future years.
Material Cash Requirements from Known Contractual and Other Obligations
AtDecember 31, 2021 , we had outstanding debt of$7,068.8 million , of which$1,605.1 million was classified as current debt. Of our current debt,$750.0 million of senior notes mature onApril 1, 2022 ,$286.5 million of Japanese Yen denominated term loans mature onSeptember 27, 2022 , and$568.6 million of Euro denominated senior notes mature onDecember 13, 2022 . We believe we can satisfy these debt obligations with cash generated from our operations, cash received from the spinoff of ZimVie, by issuing new debt, and/or by borrowing on our revolving credit facilities. We also estimate our interest payments will be$163.0 million in 2022 and continue to decline annually thereafter assuming we continue to pay down our debt as it matures and incur no additional borrowings. For additional information on our debt, including types of debt, maturity dates, interest rates, debt covenants and available revolving credit facilities, see Note 13 to our consolidated financial statements. In February, May, August andDecember 2021 , our Board of Directors declared cash dividends of$0.24 per share. We expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the Board of Directors and may be adjusted as business needs or market conditions change.
In
As discussed in Note 4 to our consolidated financial statements, we have a 2021 Restructuring Plan and a 2019 Restructuring Plan. The 2021 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately$240 million , of which approximately$30 million was incurred throughDecember 31, 2021 . We expect to reduce gross annual pre-tax operating expenses by approximately$210 million relative to the 2021 baseline expenses by the end of 2024 as program benefits under the 2021 Restructuring Plan are realized. The 2019 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately$350 million to$400 million , of which approximately$225 million was incurred throughDecember 31, 2021 . We expect to reduce gross annual pre-tax operating expenses by approximately$200 million to$300 million relative to the 2019 baseline expenses by the end of 2023 as program benefits under the 2019 Restructuring Plan are realized. As discussed in Note 17 to our consolidated financial statements, theIRS has issued proposed adjustments for years 2010 through 2012, as well as proposed adjustments for years 2013 through 2015, reallocating profits between certain of ourU.S. and foreign subsidiaries. We have disputed these proposed adjustments and intend to continue to vigorously defend our positions. Although the ultimate timing for resolution of the disputed tax issues is uncertain, future payments may be significant to our operating cash flows. Under the Tax Cuts and Jobs Act of 2017, we have a$215.3 million liability remaining from a one-time tax on the mandatory deemed repatriation of post-1986 untaxed foreign earnings and profits ("toll charge") for the deemed repatriation of unremitted foreign earnings. This amount was recorded in non-current income tax liabilities on our consolidated balance sheet as ofDecember 31, 2021 . As discussed in Note 21 to our consolidated financial statements, we are involved in various litigation matters. We estimate the total liabilities for all litigation matters was$420.5 million as ofDecember 31, 2021 . We expect to pay these liabilities over the next few years. In the normal course of business, we enter into purchase commitments, primarily related to raw materials. However, we do not believe these purchase commitments are material to the overall standing of our business or our liquidity. 41 -------------------------------------------------------------------------------- We have entered into various agreements that may result in future payments dependent upon various events such as the achievement of certain product R&D milestones, sales milestones, or, at our discretion, maintenance of exclusive rights to distribute a product. These estimated payments related to these agreements could range from$0 to$365 million .
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements is affected by the selection and application of accounting policies and methods, and also 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. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. We believe that the accounting estimates and assumptions described below involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results. Excess Inventory and Instruments - We must determine as of each balance sheet date how much, if any, of our inventory may ultimately prove to be unsaleable or unsaleable at our carrying cost. Similarly, we must also determine if instruments on hand will be put to productive use or remain undeployed as a result of excess supply. Accordingly, inventory and instruments are written down to their net realizable value. To determine the appropriate net realizable value, we evaluate current stock levels in relation to historical and expected patterns of demand for all of our products and instrument systems and components. The basis for the determination is generally the same for all inventory and instrument items and categories except for workinprocess inventory, which is recorded at cost. Obsolete or discontinued items are generally destroyed and completely written off. Management evaluates the need for changes to the net realizable values of inventory and instruments based on market conditions, competitive offerings and other factors on a regular basis. Income Taxes - Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management's best assessment of estimated future taxes to be paid. We are subject to income taxes in theU.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense. We estimate income tax expense and income tax liabilities and assets by taxable jurisdiction. Realization of deferred tax assets in each taxable jurisdiction is dependent on our ability to generate future taxable income sufficient to realize the benefits. We evaluate deferred tax assets on an ongoing basis and provide valuation allowances unless we determine it is "more likely than not" that the deferred tax benefit will be realized. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. We are subject to regulatory review or audit in virtually all of those jurisdictions and those reviews and audits may require extended periods of time to resolve. We record our income tax provisions based on our knowledge of all relevant facts and circumstances, including existing tax laws, our experience with previous settlement agreements, the status of current examinations and our understanding of how the tax authorities view certain relevant industry and commercial matters. We recognize tax liabilities in accordance with theFinancial Accounting Standards Board ("FASB") guidance on income taxes and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. Commitments and Contingencies - We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of doing business, including litigation related to product, labor and intellectual property. We establish liabilities for loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Accruals for product liability and other claims are established with the assistance of internal and external legal counsel based on current information and historical settlement information for claims, related legal fees and for claims incurred but not reported.Goodwill and Intangible Assets - We evaluate the carrying value of goodwill and indefinite life intangible assets annually, or whenever events or circumstances indicate that the fair value is below its carrying amount. We evaluate 42 -------------------------------------------------------------------------------- the carrying value of finite life intangible assets whenever events or circumstances indicate the carrying value may not be recoverable. Significant assumptions are required to estimate the fair value of goodwill and intangible assets, most notably estimated future cash flows generated by these assets and risk-adjusted discount rates. As such, these fair value measurements use significant unobservable inputs. Changes to these assumptions could require us to record impairment charges on these assets. In our annual impairment test in the fourth quarter of 2021, all our reporting units exceeded their carrying values by more than 20 percent. Fair value was determined using income and market approaches. Fair value under the income approach was determined by discounting to present value the estimated future cash flows of the reporting units. Significant assumptions are incorporated into the income approach, such as estimated growth rates, forecasted operating expenses and risk-adjusted discount rates. Fair value under the market approach utilized the guideline public company methodology, which uses valuation indicators determined from other businesses that are similar to our reporting units. Future impairment in our reporting units could occur if the estimates used in the income and market approaches change. If our estimates of profitability in the reporting unit decline, the fair value estimate under the income approach will decline. Additionally, changes in the broader economic environment could cause changes to our estimated discount rates and comparable company valuation indicators, which may impact our estimated fair values. Further, changes in foreign currency exchange rates could increase the cost of procuring inventory and services from foreign suppliers, which could reduce reporting unit profitability. As previously discussed, we expect to spin off our Spine and Dental businesses effectiveMarch 1, 2022 . At the separation date, we will be required to compare the carrying value of the assets disposed of in the spinoff to their fair value, and recognize impairment if the assets' carrying value exceeds their fair value. This impairment test is different than the test performed while these assets are being held and used. The impairment test while the assets are being held and used is an undiscounted cash flows recoverability test while the separation date test is done at fair value, which may be estimated using discounted cash flows. Therefore, the difference in impairment testing between assets being held and used and assets being disposed of could result in us recording an impairment charge at the separation date.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 to our consolidated financial statements for information on how recent accounting pronouncements have affected or may affect our financial position, results of operations or cash flows. Item 7A. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in foreign currency exchange rates, interest rates and commodity prices that could affect our financial condition, results of operations and cash flows. We manage our exposure to these and other market risks through regular operating and financing activities and through the use of derivative financial instruments. We use derivative financial instruments solely as risk management tools and not for speculative investment purposes.
FOREIGN CURRENCY EXCHANGE RISK
We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Swiss Francs, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht,Taiwan Dollars , South African Rand, Russian Rubles, Indian Rupees, Turkish Lira, Polish Zloty,Danish Krone , and Norwegian Krone. We manage the foreign currency exposure centrally, on a combined basis, which allows us to net exposures and to take advantage of any natural offsets. To reduce the uncertainty of foreign currency exchange rate movements on transactions denominated in foreign currencies, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. These forward contracts are designed to hedge anticipated foreign currency transactions, primarily intercompany sale and purchase transactions, for periods consistent with commitments. Realized and unrealized gains and losses on these contracts that qualify as cash flow hedges are temporarily recorded in accumulated other comprehensive income, then recognized in cost of products sold when the hedged item affects net earnings. 43 -------------------------------------------------------------------------------- For contracts outstanding atDecember 31, 2021 , we had obligations to purchaseU.S. Dollars and sell Euros, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht,Taiwan Dollars , South African Rand, Russian Rubles, Indian Rupees, Turkish Lira, Polish Zloty,Danish Krone , and Norwegian Krone and purchase Swiss Francs and sellU.S. Dollars at set maturity dates ranging fromJanuary 2022 throughJune 2024 . The notional amounts of outstanding forward contracts entered into with third parties to purchaseU.S. Dollars atDecember 31, 2021 were$1,295.2 million . The notional amounts of outstanding forward contracts entered into with third parties to purchase Swiss Francs atDecember 31, 2021 were$347.0 million . We maintain written policies and procedures governing our risk management activities. Our policy requires that critical terms of hedging instruments be the same as hedged forecasted transactions. On this basis, with respect to cash flow hedges, changes in cash flows attributable to hedged transactions are generally expected to be offset by changes in the fair value of hedge instruments. As part of our risk management program, we also perform sensitivity analyses to assess potential changes in revenue, operating results, cash flows and financial position relating to hypothetical movements in currency exchange rates. A sensitivity analysis of changes in the fair value of foreign currency exchange forward contracts outstanding atDecember 31, 2021 indicated that, if theU.S. Dollar uniformly strengthened or weakened in value by 10 percent relative to all currencies, with no change in the interest differentials, the fair value of those contracts would affect earnings in a range of a decrease of approximately$98 million to an increase of approximately$91 million before income taxes in periods throughJune 2024 . Any change in the fair value of foreign currency exchange forward contracts as a result of a fluctuation in a currency exchange rate is expected to be largely offset by a change in the value of the hedged transaction. Consequently, foreign currency exchange contracts would not subject us to material risk due to exchange rate movements because gains and losses on these contracts offset gains and losses on the assets, liabilities and transactions being hedged. We had net assets, excluding goodwill and intangible assets, in legal entities with non-U.S. Dollar functional currencies of$1,442.8 million atDecember 31, 2021 . We enter into foreign currency forward exchange contracts with terms of one to three months to manage currency exposures for monetary assets and liabilities denominated in a currency other than an entity's functional currency. As a result, foreign currency remeasurement gains/losses recognized in earnings are generally offset with gains/losses on the foreign currency forward exchange contracts in the same reporting period.
For details about these and other financial instruments, including fair value methodologies, see Note 15 to our consolidated financial statements.
COMMODITY PRICE RISK
We purchase raw material commodities such as cobalt chrome, titanium, tantalum, polymer and sterile packaging. We enter into supply contracts generally with terms of 12 to 24 months, where available, on these commodities to alleviate the effect of market fluctuation in prices. As part of our risk management program, we perform sensitivity analyses related to potential commodity price changes.
INTEREST RATE RISK
In the normal course of business, we are exposed to market risk from changes in interest rates that could affect our results of operations and financial condition. We manage our exposure to interest rate risks through our regular operations and financing activities.
We invest our cash and cash equivalents primarily in highly-rated corporate commercial paper and bank deposits. The primary investment objective is to ensure capital preservation. Currently, we do not use derivative financial instruments in our investment portfolio.
The majority of our debt is fixed-rate debt and therefore is not exposed to changes in interest rates. Based upon our overall interest rate exposure as ofDecember 31, 2021 , a change of 10 percent in interest rates, assuming the principal amount outstanding remains constant, would not have a material effect on interest expense, net. This analysis does not consider the effect of the change in the level of overall economic activity that could exist in such an environment. 44 --------------------------------------------------------------------------------
CREDIT RISK
Financial instruments, which potentially subject us to concentrations of credit risk, are primarily cash and cash equivalents, derivative instruments and accounts receivable.
We place our cash and cash equivalents and enter into derivative transactions with highly-rated financial institutions and limit the amount of credit exposure to any one entity. We believe we do not have any significant credit risk on our cash and cash equivalents or derivative instruments. Our concentrations of credit risks with respect to trade accounts receivable is limited due to the large number of customers and their dispersion across a number of geographic areas and by frequent monitoring of the creditworthiness of the customers to whom credit is granted in the normal course of business. Substantially all of our trade receivables are concentrated in the public and private hospital and healthcare industry in theU.S. and internationally or with distributors or dealers who operate in international markets and, accordingly, are exposed to their respective business, economic and country specific variables. Our ability to collect accounts receivable in some countries depends in part upon the financial stability of these hospital and healthcare sectors and the respective countries' national economic and healthcare systems. Most notably, inEurope healthcare is typically sponsored by the government. Since we sell products to public hospitals in those countries, we are indirectly exposed to government budget constraints and price reduction initiatives. To the extent the respective governments' ability to fund their public hospital programs deteriorates, we may have to record significant bad debt expenses in the future. While we are exposed to risks from the broader healthcare industry inEurope and around the world, there is no significant net exposure due to any individual customer. Exposure to credit risk is controlled through credit approvals, credit limits and monitoring procedures, and we believe that reserves for losses are adequate. 45
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