The following information should be read in conjunction with the interim condensed consolidated financial statements and related notes, included elsewhere in this Form 10-
Q. Certainpercentages 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 may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed in this Form 10-Q and in our Annual Report, particularly in "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors."
March 1, 2022, ZimVie Inc.("ZimVie", "we," "us" and "our") and Zimmer Biomet Holdings Inc. ("Zimmer Biomet") entered into a Separation and Distribution Agreement, pursuant to which Zimmer Biomet agreed to spin off its spine and dental businesses into ZimVie, a new, publicly traded company. ZimVieis now a standalone publicly traded company and, on March 1, 2022, regular-way trading of our common stock commenced on the Nasdaq Stock Marketunder the symbol "ZIMV." The distribution was completed pursuant to the Separation and Distribution Agreement and other agreements with Zimmer Biomet related to the distribution, including, but not limited to a tax matters agreement, an employee matters agreement, a transition services agreement and transition manufacturing agreements. ZimVieis a leading medical technology company dedicated to enhancing the quality of life for spine and dental patients worldwide. We develop, manufacture and market a comprehensive portfolio of products and solutions designed to treat a wide range of spine pathologies and support dental tooth replacement and restoration procedures. Our broad portfolio addresses all areas of spine with market leadership in cervical disc replacement ("CDR") and vertebral body tethering to treat pediatric scoliosis, and we are well-positioned in the growing global dental implant and biomaterials market with market leadership in oral reconstruction. Our operations are principally managed on a products basis and include two operating segments, 1) the spine products segment, and 2) the dental products segment. In the spine products market, our core services include designing, manufacturing and distributing a full suite of spinal surgery solutions to treat patients with back or neck pain caused by degenerative conditions, deformities, tumors or traumatic injury of the spine. We also provide devices that promote bone healing. In the dental products market, our core services include designing, manufacturing and distributing a comprehensive portfolio of dental implant solutions, biomaterials and digital dentistry solutions. Dental reconstructive implants are for individuals who are totally without teeth or are missing one or more teeth, dental prosthetic products are aimed at providing aesthetic and functional restoration to resemble the original teeth, and dental regenerative products are for soft tissue and bone rehabilitation.
We have a broad geographic revenue base, with meaningful exposure to both established and emerging markets. We have six manufacturing site locations, and a global presence in approximately 25 countries.
Impact of the COVID-19 Global Pandemic
Our results have been 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 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. Although we began to see some recovery of elective surgical procedures as various lockdowns and stay-at-home measures were lifted during 2021, resurgences and highly-transmissible variants resulted in further deferrals of elective surgical procedures in the second half of 2021 and in the first quarter of 2022. Our business is seasonal in nature to some extent, as many of our products are used in elective 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 the
U.S.However, typical seasonal patterns have been, and could continue to be, different as a result of COVID-19. With the deferral of elective surgical procedures, we have taken prudent measures in an effort to maintain an adequate financial profile to have access to capital to fund the business during these unprecedented times. In continued response to the COVID-19 pandemic, we have taken a cautious approach to discretionary spending such as travel, meetings and other project spend that can be delayed with limited long-term detriment to the business. However, to date we have not experienced significant disruptions in our supply chain, or in our ability to meet our customer demands. 18 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Three Months Ended
The following table presents net sales by product category and the components of the percentage changes (dollars in thousands):
Three Months Ended March 31, Foreign 2022 2021 % Inc (Dec) Volume/Mix Price Exchange Spine
$ 114,113 $ 132,588(13.9 )% (13.3 )% 0.6 % (1.2 )% Dental 120,569 113,352 6.4 7.2 2.0 (2.8 ) Third Party Sales 234,682 245,940 (4.6 ) (3.8 ) 1.2 (2.0 ) Related Party 919 1,791 (48.7 ) N/A N/A N/A Total $ 235,601 $ 247,731(4.9 ) N/A N/A N/A Demand (Volume/Mix) Trends The spine product category revenue was impacted by markets exited in connection with the distribution, products that were discontinued in late 2021 due to a brand rationalization initiative, increased competition on certain products, distributor bulk orders in the first quarter of 2021 that did not recur and the surge in COVID cases in early 2022 related to the Omicron variant. In the dental product category, there was increased demand in the three months ended March 31, 2022for all product types, with the strongest growth in implants and digital products. Within the dental product category, positive volume/mix trends reflect higher demand for tooth replacement procedures combined with the growing market segment of digital dentistry and biomaterials.
The spine product category continued to experience governmental healthcare cost containment efforts and similar efforts at local hospitals and health systems. The dental product category experienced price improvement in certain geographic regions, especially
Foreign Currency Exchange Rates
In countries where we have a subsidiary, we sell to customers in their local currencies. Accordingly, our net sales as reported in
United States("U.S.") Dollars are affected by changes in foreign currency exchange rates. We are primarily exposed to foreign currency exchange rate risk with respect to net sales denominated in Euros, Japanese Yen, Chinese Renminbi, Canadian Dollars and New Taiwan Dollars.
Expenses as a Percent of
Three Months Ended March 31, 2022 vs. 2021 2022 2021 Inc (Dec) Cost of products sold, excluding intangible asset amortization 36.1 % 32.3 % 3.8 % Related party cost of products sold, excluding intangible asset amortization 0.3 0.5 (0.2 ) Intangible asset amortization 8.9 8.8 0.1 Research and development 7.5 5.4 2.1 Selling, general and administrative 56.9 52.1 4.8 Restructuring 0.3 0.2 0.1 Acquisition, integration, divestiture and related 3.8 0.5 3.3 Operating (Loss) Income (13.8 ) 0.1 (13.9 )
Cost of Products Sold and Intangible Asset Amortization
The increase in cost of products sold as a percentage of sales in the three months ended
March 31, 2022compared to the three months ended March 31, 2021was due to an incremental $1.7 millionin share-based compensation expense due to converted Zimmer Biomet 19 -------------------------------------------------------------------------------- awards (for more information, see Note 3 to our condensed consolidated financial statements) and an increase of $1.6 millionin excess and obsolete inventory charges, resulting from the sales declines in the spine product category.
Intangible asset amortization as a percentage of net sales increased slightly in the three months ended
Research and development ("R&D") expenses as a percentage of net sales and in terms of dollars increased in the three months ended
March 31, 2022as compared to the three months ended March 31, 2021, primarily as a result of an incremental $1.9 millionin share-based compensation expense due to converted Zimmer Biomet awards (for more information, see Note 3 to our condensed consolidated financial statements). SG&A expenses increased in dollars and as a percentage of sales in the three months ended March 31, 2022as compared to the three months ended March 31, 2021primarily as a result of an incremental $8.1 millionin share-based compensation expense due to converted Zimmer Biomet awards (for more information, see Note 3 to our condensed consolidated financial statements). Additionally, increases in travel and conferences expenses were partially offset by decreases in variable selling and distribution expenses resulting from decreased sales. Restructuring expense is related to Zimmer Biomet's Restructuring Plans instituted in the fourth quarters of 2019 and 2021 with an overall objective of reducing costs to allow investment in higher priority growth opportunities. We recognized expenses of $0.7 millionand $0.5 millionin the three months ended March 31, 2022and 2021, respectively, primarily related to employee termination benefits, contract terminations and retention period compensation and benefits. For more information regarding these expenses, see Note 2 to our condensed consolidated financial statements. Acquisition, integration, divestiture and related expenses increased in the three months ended March 31, 2022as compared to the three months ended March 31, 2021due to the increased costs related to the March 1, 2022distribution and costs incurred in connection with building out capabilities necessary to becoming a standalone, public company.
Other Income (Expense), net, Interest Expense, net, and Income Taxes
Our non-operating other income (expense), net, primarily relates to the remeasurement of monetary assets and liabilities that are denominated in a currency other than the subsidiary’s functional currency. Therefore, the income or expense varies based upon the volatility of foreign currency exchange rates.
Our interest expense, net, in the three months ended
March 31, 2022was related to our new Credit Agreement (for more information, see Note 9 to our condensed consolidated financial statements). Interest expense, net, in the three months ended March 31, 2021was related to debt due to parent and was insignificant. Our effective tax rate ("ETR") on loss before income taxes was 22.4% and 324.7% for the three months ended March 31, 2022and 2021, respectively. In the three months ended March 31, 2022, the additional income tax benefit compared to the 21% statutory rate was driven by the impact of losses recorded prior to the distribution that were calculated on a "carve-out" basis, which applied the accounting guidance as if we filed income tax returns on a standalone, separate return basis and are not reflective of the tax results we expect to generate in the future. The benefit was further driven by state tax benefits, partially offset by foreign rate differentials and other permanent items. In the three months ended March 31, 2021, the income tax benefit was largely driven by the close to break-even income. In periods where our operating income approximates or is equal to break-even, the effective tax rates for quarter-to-date and full-year periods may not be meaningful due to discrete period items. During the three months ended March 31, 2022, income tax balances were adjusted to reflect the income tax positions after distribution, including those related to tax loss and credit carryforwards, other deferred tax assets and liabilities and valuation allowances. These separation-related adjustments resulted in a $3.9 millionincrease to the net deferred tax liability, primarily due to inventory and intangible assets transferred in the separation, tax rate changes and changes to the permanent reinvestment assertion in the post-separation environment. The increase in the net deferred tax liability was offset by a corresponding decrease in NPI. 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; 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. 20 --------------------------------------------------------------------------------
Segment Operating Profit Operating Profit as a Net Sales Operating Profit Percentage of Net Sales Three Months Ended March 31, Three Months Ended March 31, Three Months Ended March 31, (dollars in thousands) 2022 2021 2022 2021 2022 2021 Spine
$ 114,113 $ 132,588 $ 5,099 $ 16,3374.5 % 12.3 % Dental 120,569 113,352 25,659 23,274 21.3 20.5 In the three months ended March 31, 2022, our spine segment's net sales declined compared to the three months ended March 31, 2021due to markets exited in connection with the distribution, products that were discontinued in late 2021 due to a brand rationalization initiative, increased competition on certain products, distributor bulk orders in the first quarter of 2021 that did not recur and the surge in COVID cases in early 2022 related to the Omicron variant. In the three months ended March 31, 2022, our dental segment's net sales increased compared to the three months ended March 31, 2021due to increased sales in all product types, with the highest growth experienced in implants and digital products. In our spine segment, operating profit decreased, driven by a decline in sales and increased pricing pressure on our cost of products sold, as well as an increase in E&O charges. In our dental segment, operating profit increased in the three months ended March 31, 2022primarily due to increased sales and product mix.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Cash flows used in operating activities were
$9.9 millionin the three months ended March 31, 2022compared to cash flows provided by operating activities of $20.0in the three months ended March 31, 2021due to the decline in profitability and other assets and liabilities, which includes the impact of increased prepaid insurance for policies that became effective after the distribution. Cash flows from operating assets and liabilities decreased in the three months ended March 31, 2022compared to the three months ended March 31, 2021primarily due to increased accounts receivable and other assets and liabilities, partially offset by increased accounts payable and accrued liabilities, increased income taxes and decreased inventory. Cash flows used in investing activities were $8.1 millionin the three months ended March 31, 2022compared to $14.2 millionin the three months ended March 31, 2021. Additions to instruments and property, plant and equipment reflected ongoing investments in our product portfolio and optimization of our manufacturing and logistics network. Cash flows provided by financing activities were $22.2 millionin the three months ended March 31, 2022compared to cash flows used in financing activities of $7.3 millionin the three months ended March 31, 2021. In the 2022 period, borrowings under our term loan (as discussed in Note 9) were used primarily for a dividend to Zimmer Biomet at the time of the distribution.
Post-Distribution Liquidity and Capital Resources
Subsequent to the distribution, we no longer participate in the centralized treasury management of Zimmer Biomet. Our ability to fund our operations and capital needs depends upon our ability to generate ongoing cash from operations and to access the capital markets. Our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures, repayment of borrowings and strategic business development transactions. On
February 28, 2022we borrowed $595.0 millionof available term loan borrowings and on March 1, 2022, we repaid $34.0 millionof the term loan borrowing. We transferred $540.6 millionof the proceeds from such borrowing to Zimmer Biomet. We will make interest payments on the term loan borrowings quarterly, and we will commence quarterly principal payments in mid-2022. For additional information regarding our current debt arrangements, including the term loan amortization schedule, see Note 13 to our combined financial statements included in our Annual Report. In addition, for information regarding our other material estimated future cash requirements under our contractual obligations and certain other commitments, see "Material Cash Requirements" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report. There have been no material changes to such information except as set forth herein. We believe that future cash from operations will provide us the opportunity to enter into financing arrangements and access capital markets to provide adequate resources to fund our future cash flow needs, but we cannot assure you that we will be able to enter into such arrangements or transactions on satisfactory terms or at all.
CRITICAL ACCOUNTING ESTIMATES
Our financial results are affected by the selection and application of accounting policies and methods and require 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 21 -------------------------------------------------------------------------------- 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. There were no changes in the three-month period ended
March 31, 2022to the application of our critical accounting estimates as described in our Annual Report.
See Note 1 to our condensed consolidated financial statements for information on how recent accounting pronouncements have affected or may affect our financial position, results of operations or cash flows.
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