Zimmer Biomet Holdings (ZBH) 2025 Earnings Quality Report

Grade: F — Major Red Flags

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-20) + Yahoo Finance

Auditor: PricewaterhouseCoopers LLP — Clean opinion, auditor since 2000 (2 Critical Audit Matters)

One-line verdict: Zimmer Biomet had a messy 2025. Net sales grew 7.2% to $8.23B (driven 2.5 points by the Paragon 28 acquisition), but net earnings fell 22% from $903.8M to $705.1M — a $199M decline that management attributes to "inventory and instrument charges of approximately $170 million related to certain product lines we intend to discontinue; costs related to the acquisition of Paragon 28 and the acquisition of Monogram Technologies Inc.; U.S. tariffs; higher performance-related compensation; and investments made to direct-to-patient marketing." Operating cash flow actually rose $198M to $1.70B — a cleaner underlying story than GAAP earnings suggest. But two red flags fire on the screen: cash of $0.6B covers only 8% of $7.5B total debt, and goodwill/intangibles of $14.7B represents 115% of equity — the company's tangible net worth is negative. The AR watch flag adds context: receivables grew 15.1% against 7.2% revenue growth, driven partly by Paragon 28 integration and "opportunistic end-of-year customer purchases and capital sales above historic levels." ZBH issued $2.49B of senior notes in 2025 to fund the Paragon 28 acquisition plus refinance $1.46B of maturing debt — net debt increased meaningfully. Operating margin collapsed from 16.7% to 13.3%, a 340 basis point compression.

Four Product Categories, 57%/43% US/International Split

Per the MD&A's Net Sales by Geography table:

By product category:

Per the MD&A: "S.E.T. net sales increased by 15.2 percent in 2025 when compared to 2024. S.E.T. net sales growth was primarily driven by the Paragon 28 acquisition, which had a positive effect of 10.5 percent on net sales growth, as well as net sales growth in CMFT, upper extremities and sports medicine products of 12.5 percent, 8.2 percent and 5.5 percent, respectively. These increases were partially offset by declines of 14.2 percent and 0.7 percent in net sales of biologics and trauma products, respectively."

Core Knees and Hips — Zimmer's flagship franchises — grew 4.7%. That is market-matching growth, not market-beating. The outperformance comes from M&A (Paragon 28 — foot and ankle) rather than core orthopedics.

Pricing remained neutral: "Global selling prices had a minimal effect on year-over-year sales growth in 2025... the majority of countries in which we operate continue to experience pricing pressure from local hospitals, health systems, and governmental healthcare cost containment efforts."

Margin Compression: A Multi-Factor Squeeze

Per the Expenses as % of Net Sales table in MD&A:

Operating profit margin fell 340 basis points to 13.3%. The drivers:

Much of the margin compression is thus non-recurring — product line discontinuation inventory write-downs, one-time M&A costs, and investments in commercial infrastructure. But a non-trivial portion is structural: tariffs on U.S.-manufactured goods for export markets, and investments in direct-to-patient marketing are ongoing costs.

Results of Operations Summary

Per the MD&A: "These unfavorable items were partially offset by the net sales increase, a favorable mix shift to higher margin products and markets, favorable adjustments related to contingent consideration for acquisitions, gains recognized on our equity investments in 2025 compared to losses in 2024, lower restructuring costs due to the timing of our restructuring programs, and lower litigation-related charges."

So the P&L has both tailwinds and headwinds: favorable contingent consideration adjustments, equity investment gains, and lower restructuring vs. inventory write-downs, Paragon 28 acquisition costs, and tariffs. Net: -$199M YoY.

2026 Guidance: Modest Growth, Margin Recovery

Per the MD&A's 2026 Outlook: "We expect year-over-year net sales growth of 2.5 percent to 4.5 percent in 2026 to be driven by a combination of market growth, new product introductions, the Paragon 28 acquisition and positive effects of changes in foreign currency exchange rates, partially offset by the expected impact from changes to our go-to-market strategy and execution in the U.S. and certain other international markets, as well as price declines."

Note: "price declines" are explicitly guided. Revenue growth will decelerate from 7.2% in 2025 to 2.5-4.5% in 2026.

On margins: "We estimate operating profit will increase in 2026 when compared to 2025 due to higher net sales, leverage from fixed operating expenses, ongoing savings from our restructuring plans, non-recurrence of inventory and instrument charges related to certain product lines we expect to discontinue and lower employee termination and other charges from our restructuring plans. However, we expect that these favorable items may be partially offset by the impact from inflation, investments in our U.S. commercial sales channel, higher net interest expense and a higher estimated effective tax rate due to favorable 2025 adjustments that are not expected to recur."

Translation: 2026 should see margin recovery (inventory write-downs don't repeat) but face offsets from inflation, continued commercial investment, higher interest expense (from Paragon 28 debt), and a higher tax rate.

Cash Flow: The Underlying Story

Per the MD&A Liquidity section:

CFFO grew $198M despite net earnings falling $199M — the $170M inventory write-down is non-cash, so it shows up in GAAP earnings but not in cash flow. Per the MD&A: "The increase in 2025 was primarily due to higher net sales, favorable timing of accounts payable relative to 2024 and lower bonus and restructuring-related payments. These favorable items were partially offset by costs related to closing the Paragon 28 and Monogram acquisitions, U.S. tariffs and higher interest."

CFFO/Net Earnings of 2.41 is the highest it has ever been — but this is a mechanical effect of the non-cash inventory write-downs.

Per the MD&A on investing: "Cash flows used in investing activities were $1,975.7 million in 2025 compared to $888.1 million in 2024. Instrument and property, plant and equipment additions reflected ongoing investments in our product portfolio... In 2025 we paid $1,393.2 million, net of cash acquired, for the acquisitions of Paragon 28 and Monogram."

Per the MD&A on financing: "In 2025, we issued senior notes for proceeds of $2,492.1 million. We used these proceeds, along with cash on hand, for the acquisition of Paragon 28, to redeem $1,463.0 million of senior notes, and to repurchase $487.0 million of our common stock."

Net debt math: +$2,492M (new notes) - $1,463M (retired notes) = +$1,029M in net new debt. Plus they spent $487M on buybacks.

Balance Sheet: $0.6B Cash, $7.5B Debt, $14.7B Intangibles

Per the MD&A: "As of December 31, 2025, we had $591.9 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 on June 26, 2026, and $1.5 billion available under a five-year revolving facility that matures on June 27, 2030."

Cash of $591.9M covers only 8% of total debt of $7.5B — the C4 red flag. Goodwill and intangibles of $14.7B = 115% of equity — the D1 red flag. Like every other orthopedic roll-up, Zimmer Biomet has built its balance sheet through acquisition (Biomet merger 2015, multiple smaller deals since).

The 364-day revolver that "matures on June 26, 2026" is notable — ZBH needs to refinance that facility within 6 months of filing. The five-year facility extends through 2030.

Accounts Receivable Watch Flag

The screening engine flagged A2: "AR growth 15.1% exceeds revenue growth 7.2%." Let me check the MD&A for context.

Per the MD&A on U.S. growth: "The 7.3 percent net sales growth in the U.S. in 2025 when compared to 2024 was driven by the Paragon 28 acquisition, market growth in our Knees, Hips and S.E.T. product categories, new product introductions, lower net sales in the prior year periods due to operational challenges fulfilling customer orders as a consequence of a new ERP software system implementation and opportunistic end-of-year customer purchases and capital sales above historic levels, partially offset by price reductions."

The phrase "opportunistic end-of-year customer purchases and capital sales above historic levels" is important. End-of-year stocking orders typically create receivables that collect in Q1 of the following year, mechanically pushing DSO higher at period end. The 2026 10-K's Q1 cash flow will confirm whether the AR balance unwinds into cash — or whether it represents a more structural slowdown in collections.

Additionally, Paragon 28 was acquired April 21, 2025, which adds 8+ months of foot and ankle receivables to the Q4 balance. The ERP recovery from 2024 is another factor — 2024 receivables were artificially low due to order fulfillment disruption.

The 18-Point Screening

Key Risks from the 10-K

1. Competition from J&J MedTech, Stryker, and Smith & Nephew

Per Item 1A Risk Factors: "The orthopedics and broader musculoskeletal care industry is highly competitive. In the global markets for our knees, hips, and S.E.T. products, our major competitors include Johnson & Johnson MedTech (formerly the DePuy Synthes Companies of Johnson & Johnson), Stryker Corporation and Smith & Nephew plc... Competition within the industry is primarily based on technology, innovation, quality, reputation, customer service and pricing."

Knees growth of 4.7% is roughly market-matching. Stryker has grown faster in comparable quarters. ZBH's core franchise is not gaining share.

2. Pharmaceutical Alternatives to Joint Replacement

Per Item 1A: "We also face competition from pharmaceutical and other therapies that may be more attractive than, or have other benefits over, our products, or that could affect the frequency, progressions or symptoms of diseases and conditions that our products treat."

GLP-1 drugs (weight loss) reduce knee pain in many patients and may delay or eliminate joint replacement in a subset. This is a slow but real headwind to ZBH's flagship franchise.

3. Data Privacy and Security

Per Item 1A: "If we fail to comply with data privacy and security laws and regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected."

4. Manufacturing and Raw Materials Concentration

Per Item 1A: "We purchase some supplies from single sources for reasons of quality assurance, sole source availability, cost effectiveness or constraints resulting from regulatory requirements." Single-source supplier concentration is the classic medtech vulnerability.

5. Tariffs

Per the MD&A's 2025 results, U.S. tariffs explicitly contributed to the 180 bps increase in cost of products sold. 2026 tariff policy remains uncertain.

6. Talent Retention

Per Item 1A: "Recent legal and regulatory changes may affect our ability to enforce post-termination obligations from certain employees and third parties with respect to non-competition, non-solicitation and protection of confidential information, which may negatively impact our ability to retain key employees and third-party distributors." The FTC non-compete ban saga affects ZBH's distributor protection.

7. Acquisition Execution (Paragon 28, Monogram)

Per Item 1A (implied): Paragon 28's $324M of technology intangibles required the second PwC Critical Audit Matter. Integration of a $1.3B acquisition plus Monogram's AI-guided surgery platform (October 2025) in a single year is non-trivial.

Auditor's Two Critical Audit Matters

PwC — Zimmer Biomet's auditor since 2000 — identified two CAMs:

1. Tax Liabilities for Certain Unrecognized Tax Benefits ($247.4M): "The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in numerous jurisdictions across the Company's global operations. The Company's income tax filings are regularly under audit in multiple federal, state, and foreign jurisdictions."

2. Acquisition of Paragon 28 — Valuation of a Certain Technology Intangible Asset ($324M of technology intangibles): "The fair value of acquired technology intangible assets was estimated by management using the multi-period excess earnings method. Management's significant assumptions used in the valuation of technology intangible assets included revenue growth rates, obsolescence rate, gross margin, operating expenses, and contributory asset charge rate."

The second CAM confirms that Paragon 28's valuation is judgment-heavy and dependent on forward revenue growth assumptions. If foot and ankle market growth disappoints, these intangibles could face impairment.

Key Financial Trends (3-Year)

Summary

Grade: F. Two red flags and a 340 basis point operating margin compression explained by transient factors — but with structural debt loading.

Zimmer Biomet's 2025 story is mostly transient: a non-cash $170M inventory write-down for discontinued product lines + $487M in buyback + $1.39B in net acquisitions + $2.49B in senior note issuance + 7.3% U.S. revenue growth partly from Paragon 28 and partly from "opportunistic end-of-year customer purchases."

The screening red flags:

Watch flag:

Yellow flags:

Important context:

What to watch in 2026:

Zimmer Biomet is a quality operator in a slow-growth industry with structural balance sheet leverage from a decade of acquisitions. The 2025 numbers are noisy from one-time items. The 2026 10-K will show whether the margin story is truly transient.

**Disclaimer**: This report is based on Zimmer Biomet Holdings' fiscal year 2025 10-K filed with the SEC on February 20, 2026. This is NOT investment advice.

**About EarningsGrade**: We screen earnings reports for financial red flags using an 18-point forensic framework. Grade F means major red flags were detected that warrant thorough investigation.