Advantage:Zimmer
2004
Annual Report
Zimmer Holdings, Inc.
Training at the Zimmer Institute
Advantage Zimmer: Performance
Zimmer is the #1 pure-play orthopaedics company in the world. To maintain our
advantage, we continue to execute the strategies that have served us well since
we were spun off as a public company:
4
6
8
VALUE-ADDED EDUCATION
Zimmer provides education and transfers skill sets to surgeons
and nurses, collaborates with healthcare providers, and
connects with patients through our Keeping Pace with Life®
outreach program.
INNOVATIVE INVESTMENT
Zimmer has industry-leading research and development programs,
devoting significant R&D resources to new technology and platforms
such as Zimmer ® Minimally Invasive SolutionsTM (MISTM) Procedures
and Technologies and Trabecular Metal TM Technology.
FLAWLESS INTEGRATION
Zimmer has moved quickly to realize the synergies of the
Centerpulse acquisition with aggressive cross-training, worldwide
adoption of best practices and expense reductions that we
expect will amount to $100 million annually by the end of 2006.
10
ENHANCING QUALITY OF LIFE FOR PATIENTS WORLDWIDE
Understanding the needs of patients worldwide and responding
with products and services that enhance their quality of life is
Zimmer’s overarching goal.
TO OUR STOCKHOLDERS:
The phrase Advantage Zimmer is likely to mean something different to
each of our stakeholders. To our patients, it may mean faster recovery,
shorter hospital stay, less rehab and a quicker return to work. To our
surgeons, the Zimmer advantage consists of leading-edge educational pro-
grams and advanced procedures, technologies and products. To investors,
our advantage is found in clear strategies and flawless execution. To our
dedicated employees, the Zimmer advantage is the opportunity to grow
as part of a world leader while making life better for patients worldwide.
Ray Elliott
Chairman, President and
Chief Executive Officer
In 2004, we continued to deliver the Zimmer advantage to each
• Raised estimates of annual synergy savings to $100 million
of our stakeholder groups. After three full years as a public
from our initial projection of $70 million to $90 million
company, Zimmer today has a solid foundation for continued
• Combined and trained sales organizations
growth and leadership in the global reconstructive orthopaedics
• Created common branding worldwide
industry. We hold the #1 position in the reconstructive market
• Created common worldwide financial consolidation and
in the U.S., Europe and Japan, as well as the #1 worldwide
quality systems
position in both knees and hips. Our market capitalization
• Implemented a global product development system to
approximates $20 billion, with annual sales of nearly $3 billion.
improve speed-to-market
Every year we invest almost 6% of sales in research and
• Consolidated orthobiologics research in Austin, Texas
development to add new and better solutions and technologies
• In-sourced a variety of formerly out-sourced manufacturing
to our roster of more than 100,000 orthopaedic product SKUs.
functions
Further demonstrating our global footprint, our products are
• Initiated a worldwide supply chain strategic plan for
available in more than 100 countries. Our size and scope is
manufacturing and distribution networks
reflected in more than 1 million square feet of manufacturing
• Unified professional medical education initiatives.
capability. Best of all, more than 6,500 Zimmer employees
are working hard to strengthen our advantage.
The integration of Centerpulse has exceeded our expectations.
2004 HIGHLIGHTS
An equally smooth process has been the creation of our
new Trabecular Metal Technology division. Because of our
As we began 2004, a key focus was the integration of Centerpulse,
prior distribution relationship with Implex, we have a running
including the realization of both targeted synergies and identi-
start on both integration and new technology applications
fied opportunities. Of the 3,364 scheduled milestones required
that will allow us to expand our reconstructive, trauma and
to execute the entire integration, we have accomplished 2,041.
spinal product offerings significantly. We are tripling the
Achievements to date include:
production capacity of our new Trabecular Metal Technology
1
FINANCIAL HIGHLIGHTS
Dollars in millions
27%
15%
6%
5%
7%
58%
82%
Sales by Geographic Segment Reported
(cid:1) Americas
(cid:1) Europe
(cid:1) Asia Pacific
Consolidated
Sales by Product Category Reported
(cid:1) Reconstructive
(cid:1) Trauma
(cid:1) Spine
(cid:1) Orthopaedic Surgical Products
Consolidated
2002
$ 933
$ 170
$ 269
$1,372
2002
$1,061
$ 134
—
$ 177
$1,372
2003
$1,208
$ 366
$ 327
$1,901
2003
$1,521
$ 150
$
35
$ 195
$1,901
2004
$1,741
$ 809
$ 431
$2,981
2004
$2,456
$ 173
$ 134
$ 218
$2,981
division in New Jersey in order to meet the growing demand
We take our commitment to deliver on expectations seriously,
for this material that resembles and behaves like bone in
and we have kept our pledge. In 2004, net sales increased
certain aspects.
57% reported, and 15% pro forma,(2) to $2.98 billion, including
We expect to be equally successful with other acquisitions
a 4% increase due to changes in foreign exchange rates. Diluted
and agreements announced recently. For example, we reached
earnings per share were $2.19 reported, and $2.41 adjusted,(1)
an agreement with CeramTec AG of Germany that, subject to
an increase of 34% adjusted(1) over the prior year.
FDA approval, will allow Zimmer to enter the U.S. market for
A few of the many noteworthy facts include: 2004 was our
ceramic-on-ceramic hip replacement, an attractive option for
third full year as a public company, and our third consecutive
younger patients. We also entered into a distribution agreement
year with growth in adjusted(1) earnings per share in excess of
with Baxter Healthcare Corporation that will allow Zimmer to mar-
30%. In addition, 2004’s $2.41 adjusted(1) earnings per share is
ket Baxter’s ambulatory pump as part of a pain management kit
50 cents above the $1.91 First Call consensus estimate for
for orthopaedic and other non-oncology surgical procedures in
Zimmer at the time our intention to acquire Centerpulse was
the United States. Most recently, Zimmer acquired U.S. distribu-
announced. It’s clear that the acquisition of Centerpulse not only
tion rights for the Palacos®* line of bone cement products man-
was accretive to earnings on an adjusted(1) basis the very first day
ufactured by Heraeus Kulzer of Germany, a world leader in the
after closing but also continues to be, even with the issuance of
development and production of orthopaedic bone cement prod-
about 45 million new shares.
ucts and other health care technologies.
Our 2004 results reflect our detailed focus on operations.
By the end of the year, our gross profit margin increased to
FINANCIAL PERFORMANCE: DELIVERING ON EXPECTATIONS
76.4% reported and 76.8% adjusted,(1) which we believe is the
Our ability to identify opportunities for growth and integrate
best in our industry. In the first 15 months since closing the
them into our business is creating an advantage for our
acquisition of Centerpulse, we have generated more than $1 bil-
investors. When we announced our acquisition of Centerpulse,
lion in operating cash flow. As a result, we have accelerated the
we indicated that we would deliver a minimum of 10 percent
time frame to fully repay the debt related to the acquisitions of
sales growth for the first two full years, 2004 and 2005. We
both Centerpulse and Implex to mid-2006 at the latest. Also,
also projected adjusted(1) growth of 20 percent or more in
we have increased shareholder equity from $745 million at
earnings per share for 2004; 20 to 25 percent for 2005; and
the time of the Centerpulse acquisition to just under $4 billion
the potential to exceed 25 percent for 2006.
at the end of 2004.
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* Trademark of Heraeus Kulzer GmbH
Percentage growth reflects 2004 over 2003. Dollars in millions except for per share amounts.
Dollar Values assume $100 was invested on August 7, 2001.
Net
Sales
Operating
Profit
Operating
Cash Flow
Diluted Earnings
Per Share
Stock
Performance
+15% Pro forma(2)
+57% Reported
2,981
2,590
1,901
2,168
1,372
+55% Adjusted (1)
+74% Reported
+69% Reported
904
763
862
+34% Adjusted (1)
+34% Reported
2.41
2.19
1.80
1.64
495
1.31
584
451
401
220
$350
$300
$250
$200
$150
$100
$ 50
02 03 04
04
(1)“Adjusted” refers to performance measures that exclude in process R&D write-offs, acquisition and integration expenses, inventory
step-up, a tax benefit from decreased Swiss deferred taxes and the change in accounting principle for instruments, as applicable.
(2) “Pro forma” sales include Centerpulse sales for prior periods, as reflected by the green portion of the Net Sales bars above.
See enclosed reconciliations of non-GAAP financial measures, page 72.
02 03 04
02 03
02 03
04
02
01
ZIMMER
S&P 500 HEALTHCARE EQUIPMENT INDEX
S&P 500
03
04
During the year, we also were able to improve our effective
tax rate to 25.9% reported and 31.5% adjusted,(1) compared with
INNOVATIVE INVESTMENT
Zimmer continues to invest in products and technologies that will
33.6% reported and 33.4% adjusted(1) in 2003, an improvement
yield still greater improvements in patient quality of life. Our R&D
of almost two points year-to-year and in excess of four points
pipeline contains 146 projects with over $1 million of development
from our first quarter as a public company compared with 2004.
each and some 163 projects in total. Of the 146 projects, about
VALUE-ADDED EDUCATION
two-thirds involve new platforms, new technologies and MIS
Technologies. For example, the Orthobiologics Group in Austin is
By collaborating with innovative surgeons worldwide, Zimmer
developing innovative solutions for hip fracture and cartilage
strives to improve patient quality of life with our MIS Procedures
regeneration. Similarly, new technology platforms in the dental
and Technologies. Through medical education events, live
and spine areas will spark growth in those markets. We expect
Webcast surgery, interactive learning tools and The Zimmer
new products to consistently deliver 15% to 20% of our sales,
Institute, we have exposed more than 7,500 surgeons
or in the near term $500 million to $600 million each year. In
worldwide to our innovative techniques and designs. Some
2004, new products contributed $541 million or 18% of sales,
100,000 patients and medical staff have visited our Zimmer
up from 17% in 2003.
Mobile Learning Center, in more than 150 stops across the
Clearly, 2004 was another year of noteworthy achievements
United States in 2004 alone. More than 2.6 million visitors
for Zimmer, as shown by our being named one of the Medical
logged onto Zimmer Web properties, including more than
Manufacturers of the Year by Medical Device and Diagnostics
400,000 who visited the patient education portion of our
Industry Magazine. This distinction is a tribute to the relentless
site, www.pacewithlife.com.
efforts of more than 6,500 Zimmer employees. It’s their dedica-
The evidence continues to grow that our MIS Procedures are
tion that will continue to deliver the Zimmer advantage to our
improving productivity and profitability for surgeons and hospitals.
patients, surgeons and stockholders for years to come.
In a study of clinical data and a white paper on more than 700 hip
patients who received Zimmer MIS 2-IncisionTM, MIS Mini-Incision,
and traditional surgery at 20 hospitals, the Zimmer MIS 2-Incision
Procedure delivered improvements in per patient profitability.
Ray Elliott
The study also demonstrated lower hospital and rehabilitative
Chairman, President and Chief Executive Officer
care utilization as well as significantly improved patient outcomes.**
January 31, 2005
** As demonstrated by Zimmer study. Patient outcome improvement measured as change in SF-36 function score. See page 10 for more information.
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Advantage Zimmer:
Value-Added Education
Connecting with patients
The NexGen® LPS-Flex Knee (left) accommodates
flexion up to 155 degrees (far right), and is avail-
able with ProlongTM Highly Crosslinked Polyethylene,
complementing the NexGen Complete Knee Solution.
Zimmer launched the MIS Quad-Sparing Total Knee
Arthroplasty (TKA) (near right) in November of 2004
which allows surgeons to perform TKA through a
7-10 cm incision without cutting muscles or tendons.
Direct-to-Consumer education and marketing
programs (center) help the public understand mini-
mally invasive joint replacement surgery and find
surgeons trained in the latest techniques (bottom).
The world’s leading orthopaedic specialists use Zimmer techniques
procedures, along with a consumer education program to help
and procedures to improve their patients’ lives. The Zimmer
patients understand important differences between various types
network of educational locations contributes to a common pool
of minimally invasive joint replacement surgery.
of data and best practices, enabling each participant to benefit
Our public education campaign encompasses a number of
from the experience and development of the others.
resources for consumers who want to learn more about minimally
ZIMMER INSTITUTE EXPANDS THE BENEFITS OF MIS The Zimmer
Institute and its Satellites, the flagship of our MIS Procedures
and Technologies education efforts, offer surgeons the opportunity
to learn surgical procedures in a laboratory environment that closely
simulates an operating room.
Since we established the Zimmer Institute at our Warsaw,
Indiana headquarters in 2003, we have expanded its reach by
adding many leading institutions to the list of participating organi-
Expanding education
zations. To date, we have
secured partnerships with
invasive joint replacement and locate orthopaedic surgeons
trained in the latest techniques. During the year, the Company
added two new Zimmer Institute Satellites; launched a 13-city,
low-cost public relations and Direct-to-Consumer (DTC) campaign
capitalizing on more than 100,000 visits to the Company’s
“Find-a-Doctor” Web-based surgeon locator; and supported 17
different MIS-related papers. In addition, Zimmer placed more than
2,000 MIS Quad-Sparing and MIS Mini-Incision Knee Replacement
instrument sets in the field — by management estimates, more
than the Company’s top three competitors combined.
such prestigious institu-
ECONOMIC VALUE-ADDED FOR HOSPITALS Because today’s
tions as Johns Hopkins
patients need joint implants earlier than in the past, Zimmer will
University School of
also be focusing on hospitals and payors besides Medicare, such
Medicine, University of
as insurance companies, HMOs and Workmen’s Compensation
Nebraska Medical Center,
carriers. As part of our “Economic Value-Added” strategy, we
Tucson Orthopaedic Institute, Ohio Orthopaedic Surgery Institute,
are emphasizing to these payors the potential of MIS Procedures
University of British Columbia Centre for Excellence in Education
not only to enhance the quality of patients’ lives but also to
and Innovation, Alabama Orthopaedic Institute in North America,
shorten hospital stays and rehabilitation time.
and with several international partners. We also have established
Healthcare providers also are beginning to realize the benefits
learning centers at leading hospitals throughout North America.
of using MIS Procedures. For example, recent data indicate that,
GROWING ACCEPTANCE OF MIS Zimmer has spearheaded the
growth and acceptance of MIS Procedures and Technologies and
moved proactively to train surgeons in different MIS approaches
for both knee and hip replacement procedures.
Last November, for example, Zimmer launched its MIS
Quad-SparingTM Total Knee Arthroplasty, one of the least-invasive
and first widely available minimally invasive knee replacement
compared with traditional open surgery, Zimmer’s patented MIS
2-Incision Hip Replacement Procedure can yield significant
benefits in cost reduction and productivity while enhancing
patient quality of life. Compared with conventional techniques,
the MIS 2-Incision Technique showed the highest incremental
value after three months, with 30% less cost and 30% greater
improvement in physical function.*
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* As demonstrated by Zimmer study. Patient outcome improvement measured as change in SF-36 function score. See page 10 for more information.
MIS Quad-Sparing TKA
Direct-to-Consumer education and marketing
Up to 155 degrees
of flexion
30%
improvement in both
cost and patient
outcomes is possible
with Zimmer 2-Incision
hip replacement*
Training at The Zimmer Institute in Warsaw, IN
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Advantage Zimmer:
Innovative Investment
Advancements in orthopaedic materials,
procedures and technologies
Zimmer is using Trabecular Metal Technology
(left) across an array of primary and revision
hip, knee and spinal implants. Woven materials
(near right) are used in a prototype for a next
generation hip fixation product. Electromagnetic
(EM) tracking from Zimmer Computer Assisted
Solutions (center) is being developed for hip
and knee MIS applications. Bone regeneration
materials from Zimmer Dental (far right) can be
used for various bone grafting needs.
Zimmer continues to build on its leadership in research and devel-
Products introduced in 2004 included the expansion of our
opment, particularly in Minimally Invasive Solutions Procedures,
Tapered Screw-Vent ® Implant System, which enhances stability while
Trabecular Metal Technology, Zimmer Computer Assisted Solutions,
allowing placement in even the most challenging locations. Further,
orthobiologics and our expansion into spine and dental.
we successfully expanded our Puros® Allograft family of bone regen-
INDUSTRY-LEADING R&D
In 2004, while completing the
integration of Centerpulse,
146 projects for the future
About two-thirds of our R&D is
invested in new technologies, MIS
Technologies and new platforms.
eration products.
POSITIONING OUR SPINAL BUSINESS FOR GROWTH Our flagship
spinal offering, Dynesys® Dynamic Stabilization System, can
alleviate lower back and leg pain using flexible materials to
stabilize the spine, as an adjunct to fusion. For other patients,
30%
we are planning to add a second-generation disc replacement
15%
9%
6%
MIS
New
Technologies
New
Platforms
Revision
Support
offering to address that clinical indication.
New product developments are in the areas of Trabecular
Metal Technology and posterior MIS Procedures and
Technologies.
Zimmer delivered more than 40
major development projects to
40%
the market. We generated more
than $540 million in new prod-
uct sales, which represents 18
percent of sales – consistent with
our goal of 15 to 20 percent.
PURSUING BREAKTHROUGHS IN ORTHOBIOLOGICS Zimmer is
INNOVATIONS IN COMPUTER ASSISTED SOLUTIONS We success-
developing biological solutions to repair and regenerate damaged or
fully completed the first computer image-guided MIS 2-Incision Hip
degenerated orthopaedic tissues. In 2004, we completed work to
Replacement live surgery early in 2004 with new software and instru-
launch the Zimmer ® Collagen Repair Patch to treat rotator cuff tears,
mentation co-developed with our partner, Medtronic Navigation.
which is planned for release in early 2005. We also continued our
With this technology, surgeons can accurately position and track
collaboration with ISTO Technologies to develop a chondral graft for
implants and instruments used in total hip and knee arthroplasty.
cartilage repair and pursued the European release of our Denovo®-T
In early 2005, Zimmer Computer Assisted Solutions (CAS)
Autologous Chrondrocyte Transplantation Graft for articular cartilage
set new standards with state of the art navigation tools such as
repair. In addition, we have ongoing programs and technology survey
electromagnetic (EM) tracking. For the first time in orthopaedic
activities in the areas of soft tissue repair and regeneration including
history, the successful use of EM MIS Technology provides
tendon, ligament and meniscus and in bone regeneration, spine
surgeons with improved ease of use due to the elimination of
and dental areas.
OUR EXPANDING DENTAL BUSINESS We are developing less inva-
sive, less time-consuming dental procedures that produce more
visually pleasing results. Our strategy is to combine our expertise
in prosthetics with our strong array of implant options. To help
dentists deliver better care to their patients, we offer a variety of
industry-leading educational and practice-building programs
such as Peer Practicum® and DuSER.®
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line of sight issues experienced with existing optical approaches.
The technology is presently being developed for both hip and knee
MIS applications and could be used in virtually any reconstructive
procedure. In February of 2005 the world’s first successful TKA
procedure using EM navigation was performed using the MIS
Quad-Sparing Technique.
Next generation hip fixation product
Zimmer Computer Assisted Solutions
Puros Block Allograft
18%
of 2004 sales
came from
new products*
The cellular structure of Trabecular Metal Material (middle of photo) resembles bone (top of photo)
and approximates its properties more closely than other prosthetic metals.
* Sales from “new products” defined as sales of products introduced in the preceding rolling 36-month period.
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Advantage Zimmer:
Flawless Integration
Creating a global leader
After acquiring Centerpulse, Zimmer created a
brand identity that communicated its global
leadership (left). Some examples of completed
integration milestones include the insourcing
of investment castings to Warsaw (bottom)
and forgings to Winterthur (center). We are
moving the Cancellous-Structured TitaniumTM
(CSTi)TM Porous Coating process (far right) from
Austin to Warsaw. We are tripling the capacity
of our Trabecular Metal reactor production in
the New Jersey area (near right) to meet growing
demand for this material.
The acquisitions of Centerpulse and Implex illustrate the way
In addition, we began transferring production from Austin,
Zimmer has moved to add capabilities that will assist us in
Texas to Warsaw, Indiana; Ponce, Puerto Rico; and Winterthur,
continuing to be a leader in the orthopaedics industry.
Switzerland; and are expanding the manufacturing capacity of
CENTERPULSE In acquiring Centerpulse, Zimmer combined a U.S.
company with a European company, and moved quickly to brand
the resulting entity as a global provider. Just over one year after the
successful completion of our offer for Centerpulse, our integration
efforts are ahead of schedule and expected annual cost savings
Integration on track
With nearly two-thirds of our
now exceed $100 million,
which is higher than our origi-
integration milestones completed,
nal estimates of $70 million
we expect annual cost savings
to $90 million. The success of
100%
3,364
this integration is a tribute to
more than 6,500 worldwide
employees, including approxi-
mately 100 full-time people
to exceed $100 million.
61%
52% 2,041
41% 1,745
1,379
21%
701
those facilities and our distribution facility in Warsaw. We also
are moving to best practices from across the company, and are
insourcing forgings to Winterthur and investment castings and
high volume instruments to Warsaw.
Equally impressive has been the ongoing cultural integration
of the two companies, a process made easier by the similarities
in the two companies’ core values. Zimmer conducts regular
employee perception surveys to ensure the integration process
is on track.
While there has been tremendous progress, certain integration
activities will continue for the next two years. Complete integration, of
all information technology systems and the manufacturing optimiza-
tion are expected to be ongoing activities over the next two years.
who contributed thousands
IMPLEX Completed in April 2004, our acquisition of Implex
of dedicated hours integrating
will enable us to increase Trabecular Metal sales to more than
the two companies. We have
$100 million in 2005. The cellular structure of Trabecular Metal–
completed more than 2,000
The Best Thing Next To BoneTM– approximates the physical and
Q1 04
Q2 04 Q3 04
Q4 04
2006
Completed
Planned
of the 3,364 milestones that
mechanical properties of bone more closely than other prosthetic
were identified by our integra-
materials. The unique, highly porous, trabecular configuration is
tion teams. Those milestones represent more than 350 individ-
conducive to bone formation, enabling rapid and extensive tissue
ual projects, which are tracked by company management on a
infiltration and strong attachment. Because Zimmer has been
daily and weekly basis.
marketing Trabecular Metal Products for more than three years,
Among those milestones were the restructuring of our sales
we have a running start on both integration and new technology
forces in the U.S., Europe and Asia Pacific and the conversion of
applications. Zimmer has 13 active Trabecular Metal Technology
select distributor markets to a direct sales model. By the end of
development projects in the reconstructive area, and we will be
2004, the global cross-training of the two sales forces was more
expanding our spinal products significantly.
than 70 percent complete.
8
Trabecular Metal Reactor in New Jersey
Forging process in Winterthur
Vacuum furnace in Warsaw
6,500+
employees worldwide
contributed thousands
of dedicated hours to
make the integration
a success
Investment casting in Warsaw
9
Advantage Zimmer:
Enhancing Quality of Life for Patients Worldwide
Zimmer’s commitment to under-
standing the needs of patients
is yielding improved clinical
outcomes. Zimmer’s business is
driven by the needs of a “new
patient” who is more active, more
knowledgeable, and living longer.
The new patient is likely to be a woman, as women now
represent 63 percent of knee patients, compared with
52 percent 10 years ago. The
increase is due at least in part
to a higher incidence of arthritis
and osteoporosis among older
females compared with males.
Women also make 85 percent of
healthcare purchasing decisions.*
Our MIS Hip and Knee Procedures are meeting patient
expectations for enhanced post-surgery quality of life.
Zimmer studies, for example, indicated that compared
with traditional open hip replacement surgery, Zimmer’s
advanced MIS 2-Incision Procedure targets minimal
blood donation or loss, 50 to 75
percent less rehabilitation time,
minimal
tissue disruption and
scarring, and reduced or elimi-
nated narcotic pain relief. Many
patients are often able to walk and
return home on the same day.
* Source: U.S. Government Statistics
Zimmer MIS Hip Procedures
Yield Clinical and Cost Benefits
Three months after surgery, patients
receiving Zimmer MIS 2-Incision and
Mini-Incision Hip Procedures showed
greater improvement in SF-36* Physical
Function than with conventional surgery,
and at lower cost.
Total Inpatient
Acute Hospital and
Post-Discharge
Rehabilitation Cost
in Dollars
39
11,072
13,006
34
15,000
12,000
9,000
6,000
3,000
0
SF-36 Physical
Function Change
PreOp to 3
Months Post Op
14,449
27
50
40
30
20
10
0
■ MIS 2- ■ MIS Mini- ■ Conventional
Incision Incision Surgery
* SF-36 is a registered trademark of the Medical Outcomes
Trust, Inc. The 36-item short-form SF-36 Health Survey was
designed for use in clinical practice and research, health
policy evaluations, and general population surveys.
10
Exercising and gardening again after MIS
Quad-Sparing Knee Replacement Procedure
“Immediately after surgery, the pain was gone for
the first time in 15 years. Within a month, I was
back to doing everything I had enjoyed, only
without the pain. I even danced at a wedding and
sent a photograph to my surgeon. It felt great.”
Martha Morris, Alabama
Hospital to home in less than two days
“I was amazed to be out of hospital so
Martha Morris
quickly, and my knee is infinitely better
than it has been.”
Tim Barnard, Winchmore Hill, United Kingdom
Treating patients 17 days after surgery
“When the surgeon told me that I could have
MIS Quad-Sparing TKA and be back to work
in a matter of weeks, not months, I scheduled
the procedure right away.”
Dr. Martin Ungerleider, New Jersey
Two months after total hip surgery
“My recommendation is not to wait for too long.
The quality of life returns quickly after surgery.
I am doing very well and do not have any pain.”
Hugo Braendle, Hergiswil NW, Switzerland
Yoga instructor without pain after Zimmer’s MIS 2-Incision
Hip Replacement Procedure
“I didn’t want a major operation with a big cut.
It was a gift to get out of the hospital so quickly.”
Kathleen Flanagan, California
Dr. Martin Ungerleider
Kathleen Flanagan
11
Advantage Zimmer: More Innovation
Reconstructive Implant
Our spirit of innovation in products, processes and
technologies changes orthopaedic care every day.
Our broad range of applications enables us to improve
the quality of life for both younger and older patients
along the continuum of care.
Minimally Invasive Solutions
Procedures and Technologies
Zimmer has developed procedures and
instrumentation that make it possible
for surgeons to use minimally invasive
techniques with a number of its knee and
hip implants, and has plans to release
implants specifically for
minimally invasive
procedures.
Zimmer Computer-Assisted
Solutions
Zimmer CAS image guidance tools were
developed exclusively by Zimmer for both
MIS and traditional procedures. Zimmer
CAS uses high-speed comput-
ers and multiple imaging
technology to track, in real
time, the location of surgical
instrumentation.
Trabecular Metal
Technology
12
Zimmer’s advanced instrument concepts allow surgeons to perform our minimally
invasive procedures with smaller instruments that accommodate smaller incisions
and cause less disruption of surrounding tissues, muscles and tendons. As a result,
patients have the potential to experience faster recovery time and require less
rehabilitation and pain medication.
Trabecular Metal Technology
This highly porous material is made of
elemental tantalum and resembles bone
very closely in its structure and mechanical
properties. Clinical experience in thou-
sands of cases has proven the versatility
of Trabecular Metal Technology in diverse
orthopaedic applications and is currently
used in primary and revision hip, knee,
spine, trauma and shoulder products.
Alternate Bearing Surfaces
Highly Crosslinked
Polyethylene Technology
This bearing surface material for total
knee replacement is designed to offer
improved wear performance over that of
conventional polyethylene. Highly
crosslinked polyethylene materials,
under our Durasul,® Longevity®and
Prolong brands, have become Zimmer’s
most popular articulating surface.
Metasul® Metal-on-Metal
Technology
This technology for hip implants has
become Zimmer’s most popular tri-
bological solution in Europe. Metasul
provides highly wear resistant metal-
on-metal articulation.
Zimmer Orthobiologics
Zimmer is developing biological solutions
to repair and regenerate damaged or
degenerated tissues. We are collaborating
with ISTO Technologies in the develop-
ment of a cartilage graft for cartilage
tissue repair and regeneration, and we
worked with Tissue Science Laboratories
on the development of the Zimmer
Collagen Repair Patch.
Transformational Technology
Products for proximal femoral fractures—
this advanced proprietary technology
is designed for less invasive treatment of
the most common fracture in the body.
Knees
Knee replacement surgeries include f
for the replacement of arthritic areas
for the replacement, repair or enhan
from a previous procedure. Knee rep
total or partial reconstruction of the
limited knee degeneration and invo
compartment of the knee. Total reco
all three compartments of the knee.
MIS Minimally Invasive
Solutions for Total Knee
Arthroplasty
In collaboration with renowned surgeons,
Zimmer has developed a comprehensive
portfolio of MIS Knee Procedures and
training, enabling surgeons to choose the
approach they feel most confident in
performing. Approaches currently include
the MIS Quad-Sparing, Subvastus and
Midvastus Procedures, and MIS Medial
Parapatellar techniques.
NexGen® Complete
Knee Solution
The top-selling knee system in the world,
this comprehensive knee replacement
system allows surgeons to create solutions
specific to the unique needs of each patient
for primary or revision surgery. It offers
several surgical philosophies including
market-leading posterior stabilized (PS)
designs. Recent releases in the NexGen
System are the LPS-Flex and the patented
cruciate retaining CR-Flex for patients
who require deep flexion during their
daily activities.
NexGen LPS-Flex
Total Knee
s
first-time joint replacement procedures
s of the knee and revision procedures
ncement of an implant or component
placement procedures may involve
knee. Partial reconstructions treat
olve the replacement of only one
onstruction refers to replacement of
Innex TM(1) Total Knee System
This knee prosthesis system, which was
launched in 2001, enables unique
intra-operative flexibility for all tricompart-
mental implantations and is available with
both mobile and fixed bearing options.
(1) Not available for commercial distribution in the U.S.
Natural-Knee® II System
The Natural-Knee System consists of inter-
changeable implants with features including
a proprietary CSTi Porous Coating option for
stable fixation in active patients, a deepened
trochlear groove to maximize range of motion,
and simple to use instrumentation. The
Natural-Knee II System is based on the design
principles of the Natural-Knee System, which
has 20 years of excellent clinical experience.
Natural-Knee II
System
Hips
Total hip replacement surgeries replace both the head of the femur and
the socket portion of the pelvis. These surgeries include first time joint
replacement procedures and revision procedures for the replacement,
repair or enhancement of an implant or component from a previous
procedure. Today, many replacement components are porous and
do not require bone cement because bone can grow into, and onto,
the implant surface.
MIS Minimally Invasive
Solutions for Total Hip
Arthroplasty
In collaboration with renowned surgeons,
Zimmer has developed a comprehensive
portfolio of MIS Hip Procedures and training,
enabling surgeons to choose the approach
they feel most confident in performing.
Approaches currently available or in develop-
ment include the MIS 2-Incision, Anterior,
Anterolateral, and Posterior procedures,
as well as the MIS Mini-Incision Anterolateral
and Posterolateral Procedures.
Alloclassic® (Zweymüller TM)
Hip Prosthesis
This is one of the largest selling stems
available today that is practically unchanged
since its introduction in 1979, with minor
modifications made to address demands of
today’s patients and surgeons.
Zimmer M/L Taper Hip Prosthesis
This product was launched in 2003 as part
of Zimmer’s portfolio of cementless tapered
stems, a rapidly growing segment in the
primary stem market.
Zimmer
Unicompartmental
Knee
Zimmer Unicompartmental
Knee System
This system adds to Zimmer’s portfolio of
high flexion knee replacement options. It
was designed for less invasive surgeries
and offers three new surgical approaches.
Its design builds on the Zimmer M/G®
Unicompartmental Knee System introduced
in 1987.
Prolong Highly Crosslinked
Polyethylene
This bearing surface material for total knee
replacement is designed to offer improved
wear performance and is the only articulating
surface product with the ability to claim
“resistance to delamination.”
Trabecular Metal
Augments and Tibial Cones
These components combine the benefits
of Trabecular Metal Technology with the
clinically proven geometries of the NexGen
Total Knee. They provide structural support
in areas of bone loss and offer an innovative
alternative to grafting procedures.
Clockwise from left: Trilogy,
Allofit and Trabecular Metal
Modular Acetabular Cups
VerSys® Hip System
This is one of the most comprehensive single
system brands of hip implants in the world.
It incorporates a wide variety of design
philosophies while utilizing a single set
of instruments, thus reducing the need
for extensive training of hospital staff.
The VerSys FullCoat and Fiber Metal Taper
stems are used extensively with Zimmer’s
MIS Mini- and MIS 2-Incision techniques
for primary hip replacement.
CLS® Hip System
The CLS Hip is a grit-blasted, titanium,
cementless stem. With a 100% implant
survivorship at 11 years,(2) the CLS stem
has become a standard for proximal
press-fit design.
(2) 2004 Swedish National Registry
Trabecular Metal Tibial Cones
Alloclassic Hip
Stem and Metasul
Articulation
Technology
Zimmer
M/L Taper
VerSys Fiber
Metal Taper
13
Spine
Extremities
Dental
Zimmer’s shoulder and elbow
products are designed to treat
arthritic conditions and fractures
as well as to enhance the outcome
of primary or revision surgery.
Zimmer’s dental products
consist of implants used to take
the place of missing teeth, as
well as regenerative materials,
periodontal membranes and
bone grafting products used to
restore hard tissue in the upper
and lower jaw.
Zimmer has numerous active
research and development
projects in the areas of fusion,
non-fusion, and biologic fusion
alternatives. The company
currently offers spine products in
four key categories or franchises.
Zimmer
Collagen
Repair
Patch
Zimmer® Collagen Repair Patch
Zimmer worked with Tissue Science
Laboratories to develop an innovative,
nonresorbable biological collagen patch
for repair of rotator cuff injuries.
The Coonrad/Morrey®
Total Elbow
The Coonrad/Morrey Total Elbow is designed
to restore elbow joint function in cases of
primary, revision, or trauma surgery. A wide
variety of joint sizes and combinations allow
the physician to create solutions that are
specific to each patient.
Bigliani/Flatow ® The Complete
Shoulder Solution
The Bigliani/Flatow Shoulder allows for
the restoration of shoulder joint function
in cases of shoulder replacement surgery.
It is designed to replicate the natural
shoulder’s mobility, balance, and stability
with a multitude of component sizes.
Bigliani/Flatow
Shoulder
Tapered Screw-Vent Internal
Hex Implant System
A new Fixture Mount Transfer was designed
for easier preparation and more accurate
impression taking. This multi-purpose fixture
mount is both a transfer for first-stage impres-
sions and a prepable temporary abutment.
Tapered Screw-Vent
Implant System
Puros Family of
Allograft Materials
Zimmer Dental offers three unique Puros
Allograft Products to use together or sepa-
rately for various bone grafting needs:
Puros Cancellous Particulate, Puros Cortical
Particulate, and Puros Block Allografts.
The natural collagen and minerals found in
Puros Allografts foster strong and rigid bone
growth, and facilitate full bone remodeling.
AtlantisTM(4) Abutment
Atlantis patient specific abutments use a
patented process that employs 3D optical
scanning, automated design software and
integrated machining to manufacture indi-
vidualized components for the dental
implant market. The use of Atlantis
Abutments simplifies the restorative proce-
dure and improves outcomes for patients
and practitioners.
(4) Trademark of Atlantis Components Inc.
Atlantis Abutment
Trilogy ® Acetabular System
The Trilogy System combines proven features
with new technology designed to inhibit the
formation and migration of polyethylene debris.
With this product, Zimmer provides multiple
defense mechanisms against the poly debris
that can be associated with osteolysis.
Allofit TM Hip Acetabular System
The Allofit Acetabular System is designed to
achieve maximum stability in virtually every
press-fit situation. It is available to use with
advanced tribological technologies such
as metal-on-metal and highly crosslinked
polyethylene.
Trabecular Metal
Acetabular Cup Systems
The elliptical shape of the cup creates an
interference fit with the spherically reamed
acetabulum. From the pole of the dome,
the interference fit increases until a 2mm
differential is achieved at the face of the cup.
This maximizes bone contact and enhances
initial stability.
Longevity Highly Crosslinked
Polyethylene
Made from a proprietary process that
interlinks molecular chains, Longevity
Polyethylene leaves virtually no free
radicals that promote oxidation. The
product was developed to address the
issue of wear in total hip arthroplasty.
DuromTM(3) Hip Resurfacing System
The Durom Hip Resurfacing System is
particularly suited to younger patients,
allowing them to return to an active lifestyle.
It uses Zimmer’s highly wear resistant
Metasul Metal-on-Metal Technology as
the bearing surface for the implant design
and preserves femoral bone, making it
ideal for young and active patients.
(3) Not available for commercial distribution in the U.S.
Durom Hip Resurfacing System
Dynesys
System
Dynesys® Dynamic
Stabilization System
The Dynesys System uses flexible materials
to stabilize the affected lower spine while
preserving the natural anatomy of the spine.
The system is indicated as an adjunct to fusion.
NeuGraft ®(5) Strip
A mixture of purified fibrillar collagen (PFC) and
hydroxyapatite/tricalcium phosphate ceramic
(HA/TCP), the NeuGraft Strip, when coated with
autogenous bone marrow, is indicated for use
in bony voids or gaps that are not intrinsic to
the stability of the bony structure.
(5) Trademark of NeuColl, Inc.
Trinica® Select Anterior
Cervical Plate System(6)
The Trinica Select Plate System and All-
Through-One (ATO) instrumentation simplifies
the surgical procedure while requiring less
retraction and reduces the risk of soft-tissue
damage. The Trinica Select Self Drilling Screws
seek to provide the surgeon with the option to
reduce the amount of instruments, thereby
potentially reducing the amount of retraction
and OR time to implant the Trinica Select Plate.
(6)The Trinica® and Trinica® Select Anterior
Cervical Plate Systems technology was
invented by GARY KARLIN MICHELSON, M.D.
and is covered by one or more of the following:
U.S. Patents 6,193,721, 6,398,783,
6,454,771 and D449,692; and pending
U.S. and international patent applications.
Trabecular Metal Spacers
The Trabecular Metal Technology has a wide
range of spinal applications. In the United
States, Trabecular Metal shapes are cleared
for both Thoracolumbar and Vertebral Body
Replacement procedures as well as bone
void fillers.
Trabecular
Metal Spacers
14
Trauma
Orthopaedic Surgical Products
Trauma products include devices
used primarily to reattach or
stabilize damaged bone and
tissue to support the body’s
natural healing process.
Zimmer offers a comprehensive
line of products for use in the
fixation of fractures.
Zimmer Periarticular
Plating System
The comprehensive stainless steel
Periarticular Plating System includes the
recently released locking plates, which are
pre-contoured to closely follow the shape
of the bone and create a fit that requires
little or no additional bending.
Zimmer
Periarticular
Locking Plate
NCB® Locking Plates
The titanium NCB Locking Plates feature
variable-angle locking screws to allow sur-
geons the choice of where to apply screws
in the treatment of complex fractures.
Sirus® Nail System
This system covers all indications for both
non-reamed and reamed medullary nailing,
including all closed and open femoral
shaft fractures; subtrochanteric fractures;
shaft fractures in combination with femoral
neck or pertrochanteric fractures; and
pseudoarthrosis or delayed union.
Sirus
Nail System
M/DN ® Intramedullary
Fixation System
A nailing system for internal fixation of
long bone fractures, this product offers
multiple screw options for increased
surgical flexibility.
ITST TM Intertrochanteric/
Subtrochanteric Fixation
System
This system permits less invasive fixation
of femoral fractures that were traditionally
repaired with more invasive compression
hip screws.
TransFx TM External
Fixation System
This product is designed for upper and
lower extremity fracture management.
It provides the physician with choices in
frame construction, simplicity in frame
management, and ease of transition in
frame sizes, based upon anatomy and
fracture type.
WristoreTM(7) Distal Radius
Fracture Fixator
An adjustable and stable approach for
fractures of the distal radius, the Wristore
Distal Radius Fracture Fixator stabilizes
fracture fragments near the joint. It can be
used to quickly help restore joint function.
(7) Trademark of Millennium Medical Technologies, Inc.
Wristore Fixator
Zimmer has developed and con-
tinues to develop technologically
advanced surgical products to
support its reconstructive implant
and trauma product systems in
the operating room environment
with a focus on blood and pain
management products.
Zimmer Blood
Reinfusion System
This product salvages, filters and then
reinfuses a patient’s own blood following
surgery. It, therefore, reduces the need
for donor blood and its related cost or
potential problems.
OrthoPAT ®(8) Orthopedic
Perioperative Autotransfusion
System
This blood management system is designed
specifically for orthopaedic surgery to
salvage, wash and reinfuse a patient’s own
blood both during and after the procedure.
This reduces or eliminates the need for
stored blood and related complications.
(8) Trademark of Haemonetics Corporation
A.T.S.® Automatic
Tourniquet Systems
Zimmer is the market leader in surgical
tourniquet systems and accessories. These
products are used to create a bloodless
surgical field.
Pulsavac® Plus and Pulsavac
Plus LP Wound Debridement
Systems
These products are used for cleaning and
debridement of contaminants and foreign
matter from wounds using simultaneous
irrigation and suction. Both systems are
completely disposable to reduce the risk
of cross contamination.
Zimmer Ambulatory Pump
This product is part of a kit(9) that is
designed to deliver a slow, continuous
administration of anesthetic agent for
post-surgical pain management. The
system can stay with the patient during
recovery and rehabilitation.
(9) Not yet available for commercial distribution
Zimmer
Ambulatory
Pump
Blood
Reinfusion
System
15
Advantage Zimmer:
Global Leadership
The worldwide #1 pure-play orthopaedic company, Zimmer has operations in more than
24 countries around the world and sells products in more than 100 countries. Zimmer’s
mission is to develop, produce and globally market the highest quality orthopaedic
products and services that repair, replace and regenerate. Through the hands of
skilled surgeons, we enhance patient quality of life. We are supported in that
mission by the efforts of more than 6,500 employees.
STOCKHOLM, SWEDEN
KIEL, GERMANY
BRUSSELS, BELGIUM
SWINDON, UK
PARIS, FRANCE
RENNES, FRANCE
FREIBURG, GERMANY
ETUPES, FRANCE
TOULOUSE, FRANCE
BARCELONA, SPAIN
AIX EN PROVENCE, FRANCE
CATANIA, ITALY
MISSISSAUGA, CANADA
CEDAR KNOLLS, NJ
DOVER, OH
BALTIMORE, MD
COLUMBUS, OH
STATESVILLE, NC
ORLANDO, FL
PLANTATION, FL
SAN JUAN, PUERTO RICO
PONCE, PUERTO RICO
INNSBRUCK, AUSTRIA
BUDAPEST, HUNGARY
MÖDLING, AUSTRIA
TREVISO, ITALY
MILAN, ITALY
TALLINN, ESTONIA
UTRECHT, NETHERLANDS
MOSCOW, RUSSIA
MÜNSINGEN, SWITZERLAND
WINTERTHUR, SWITZERLAND
BAAR, SWITZERLAND
RAMAT GAN, ISRAEL
BEIJING, CHINA
SHANGHAI, CHINA
CHENGDU, CHINA
GUANGZHOU, CHINA
CHENNAI, INDIA
GREENSIDE,
SOUTH AFRICA
SEOUL, SOUTH KOREA
TOKYO, JAPAN
GOTEMBA, JAPAN
FUKUOKA, JAPAN
TAIPEI, TAIWAN
HONG KONG
BANGKOK, THAILAND
SINGAPORE
PERTH, AUSTRALIA
SYDNEY, AUSTRALIA
AUCKLAND,
NEW ZEALAND
WARSAW, IN
MINNEAPOLIS, MN
VANCOUVER, CANADA
OMAHA, NE
ST. LOUIS, MO
MEMPHIS, TN
DALLAS, TX
CARLSBAD, CA
TUCSON, AZ
AUSTIN, TX
BIRMINGHAM, AL
ZIMMER CORPORATE
HEADQUARTERS ( )
MANUFACTURING AND/OR
MAJOR DISTRIBUTION
FACILITIES
OTHER OPERATING
SUBSIDIARIES
MEDICAL EDUCATION
LOCATIONS
16
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For year ended December 31, 2004
Commission file number 001-16407
ZIMMER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
345 East Main Street
Warsaw, Indiana
(Address of principal executive offices)
13-4151777
(IRS Employer Identification No.)
46580
(Zip Code)
Registrant’s telephone number, including area code:
(574) 267-6131
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.01 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ¥
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¥
No n
The aggregate market value of shares held by non-affiliates was $21,590,347,993 (based on closing price of these shares on the
New York Stock Exchange on June 30, 2004, and assuming solely for the purpose of this calculation that all directors and executive
officers of the registrant are ‘‘affiliates’’). As of February 18, 2005, 246,690,710 shares of the registrant’s $.01 par value common
stock were outstanding.
Document
Proxy Statement with respect to the 2005 Annual Meeting of Stockholders
Documents Incorporated by Reference
Form 10-K
Part III
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
This annual report contains certain statements that are forward-looking statements within the meaning of federal securities
laws. When used in this report, the words ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘plan,’’ ‘‘believe,’’ ‘‘predict,’’
‘‘potential,’’ ‘‘project,’’ ‘‘target,’’ ‘‘forecast,’’ ‘‘intend’’ and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, price and product competition, rapid technological
development, demographic changes, dependence on new product development, the mix of our products and services, supply
and prices of raw materials and products, customer demand for our products and services, the ability to successfully integrate
acquired companies including Centerpulse AG and Implex Corp., the outcome of the pending informal Securities and Exchange
Commission investigation of Centerpulse AG accounting, control of costs and expenses, the ability to form and implement
alliances, changes in reimbursement programs by third-party payors, governmental laws and regulations affecting our U.S. and
international businesses, including tax obligations and risks, product liability and intellectual property litigation losses,
international growth, general industry and market conditions and growth rates and general domestic and international economic
conditions including interest rate and currency exchange rate fluctuations. Readers of this report are cautioned not to place
undue reliance on these forward-looking statements, since, while the Company believes the assumptions on which the forward-
looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be
accurate. This cautionary statement is applicable to all forward-looking statements contained in this report and the material
accompanying this report which comprise the Company’s annual report to stockholders.
Table of Contents
PART I
Item 1.
Business
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security Holders
PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B. Other Information
PART III
Item 10.
Directors and Executive Officers of the Registrant
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
2
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3
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20
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Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
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Part I
ITEM 1. Business
GENERAL
Zimmer Holdings, Inc., a Delaware corporation, is a
global leader in the design, development, manufacture and
marketing of reconstructive orthopaedic implants, including
joint and dental, spinal implants, and trauma products and
related orthopaedic surgical products. The Company is
headquartered in Warsaw, Indiana. Unless the context
requires otherwise, the terms ‘‘Zimmer’’ and ‘‘Company’’ refer
to Zimmer Holdings, Inc. and all of its subsidiaries.
In October 2003, the Company finalized its acquisition of
Centerpulse AG (‘‘Centerpulse’’), a Switzerland-based
orthopaedics company and the leader in the European
reconstructive market. In addition to providing the Company
with a leading position in the European orthopaedic
reconstructive implant market, the Centerpulse acquisition
provided the Company with a platform in the faster growing
spine and dental implant markets. As discussed in detail in
this report, the Centerpulse acquisition had a significant
impact on the Company’s financial results in 2004.
On April 23, 2004, the Company acquired Implex Corp.
(‘‘Implex’’), a New Jersey based company, pursuant to an
Amended and Restated Agreement and Plan of Merger (the
‘‘Merger Agreement’’). The Implex acquisition was a
culmination of a distribution and strategic alliance agreement,
under which the Company and Implex had been operating
since 2000, relating to the commercialization of
reconstructive implant and trauma products incorporating
Trabecular MetalTM Technology. Subsequent to the
acquisition, the Company changed the name of Implex to
Zimmer Trabecular Metal Technology, Inc.
Throughout 2004 and entering 2005, a key focus of the
Company has been, and will continue to be, the successful
integration of the Centerpulse and Implex businesses. In
2004, the Company performed ahead of schedule under its
comprehensive integration plan. As of the conclusion of 2004,
the Company accomplished more than 2,000 of the total
planned 3,364 integration milestones for the Centerpulse
acquisition and the Company raised the estimated,
sustainable integration cost synergies for this transaction to
slightly over $100 million annually, an increase from the
original estimates of $70 to $90 million. The Company also
expects cash on hand to be in excess of total outstanding
debt incurred from the Centerpulse and Implex acquisitions
by June 30, 2006, absent any cash requirements for
acquisitions.
Zimmer was incorporated on January 12, 2001 as a
wholly-owned subsidiary of Bristol-Myers Squibb Company
(‘‘Bristol-Myers’’). Zimmer, Inc., a predecessor founded in
1927, was acquired by Bristol-Myers in 1972 and along with
its wholly-owned subsidiaries and certain other of Bristol-
Myers’ operations comprised the orthopaedics business of
Bristol-Myers. On August 6, 2001, the Company was spun off
from Bristol-Myers and became an independent public
company.
CUSTOMERS, SALES AND MARKETING
The Company’s primary customers include
musculoskeletal surgeons, neuro-surgeons, oral surgeons,
dentists, hospitals, distributors, healthcare dealers and, in
their capacity as agents, healthcare purchasing organizations
or buying groups. These customers range from large
multinational enterprises to independent surgeons.
The Company has operations in more than 24 countries
and markets products in more than 100 countries, with
corporate headquarters in Warsaw, Indiana, and more than
100 manufacturing, distribution and warehousing and/or office
facilities worldwide. The Company manages its operations
through three major geographic segments – the Americas,
which is comprised principally of the United States and
includes other North, Central and South American markets;
Europe, which is comprised principally of Europe and
includes the Middle East and Africa; and Asia Pacific, which
is comprised primarily of Japan and includes other Asian and
Pacific markets. Information about geographic segments can
be found in Note 14 to the Consolidated Financial
Statements, which are included herein under Item 8.
The Company markets and sells product through three
principal channels: 1) direct to health care institutions, such
as hospitals, which is referred to as a direct channel account,
2) through stocking distributors and, in the Asia Pacific
region, healthcare dealers, and 3) directly to dental practices
and dental laboratories. Through the direct channel accounts,
inventory is generally consigned to sales agents or customers
so that products are available when needed for surgical
procedures. With the sales to stocking distributors, healthcare
dealers, dental practices and dental laboratories, title to
product passes generally upon shipment. Products are
marketed and sold to all types of Company customers via
both direct channel accounts and stocking distributors and
healthcare dealers. No individual direct channel account,
stocking distributor, healthcare dealer, dental practice or
dental laboratory accounted for more than 10 percent of the
Company’s net revenues for 2004.
The Company carries inventory in warehouse facilities
and retains title to consigned inventory in sufficient
quantities so that products are available when needed for
surgical procedures. Safety stock levels are determined based
on a number of factors, including demand, manufacturing
lead times and optimal quantities required to maintain the
highest possible service levels. The Company also carries
trade accounts receivable balances based on credit terms that
are generally consistent with local market practices.
The Company utilizes a network of sales associates, sales
managers and support personnel, most of who are employed
by independent distributors and sales agencies. The Company
3
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
invests a significant amount of time and expense in providing
training in such areas as product features and benefits, how
to use specific products and how to best inform surgeons of
such features and uses. Sales force representatives rely
heavily on strong technical selling skills, medical education
and the ability to provide staff technical support for
surgeons.
In response to the different healthcare systems
throughout the world, the Company’s sales and marketing
strategies and organizational structures differ by region. The
Company utilizes a global approach to sales force training,
marketing and medical education into each locality to provide
consistent, high quality service. Additionally, the Company
keeps current with key surgical developments and other
issues related to musculoskeletal surgeons and the medical
procedures they perform, in part through sponsorship of
medical education events. In 2004, the Company sponsored
more than 250 medical education events and meetings with
and among musculoskeletal surgeons around the world.
Americas. The Americas is the largest geographic
segment, accounting for $1,741.3 million, or 58.4 percent, of
2004 net sales, with the United States accounting for
$1,665 million of sales in this region. The United States sales
force consists of independent sales agents, together with
sales associates, sales managers and sales support personnel,
the majority of which sell Company products exclusively for
Zimmer. Sales agents in the United States receive a
commission on product sales and are responsible for many
operating decisions and costs. Sales commissions are accrued
at the time of sale.
In this region, the Company has also concentrated on
negotiating contracts with purchasing organizations or buying
groups and managed care accounts and has increased unit
growth by linking the level of discount received to volume of
purchases by customer health care institutions within a
specified group. At negotiated thresholds within a contract
buying period, price discounts increase. For these buying
groups and managed care accounts, the Company tracks sales
volume by contract and as contractual volume thresholds are
achieved, the higher discounts are applied at an item level on
customer invoices. Under these buying contracts, the
Company is generally designated as one of several identified
preferred purchasing sources for the members of the buying
group for specified products, although the members are not
obligated to purchase the Company’s products.
A majority of hospitals in the United States belong to at
least one group purchasing organization. In 2004, individual
hospital orders purchased through contractual arrangements
with such purchasing organizations or buying groups
accounted for approximately 45 percent of the Company’s net
sales in the United States. Contractual sales were highest
through Novation, LLC (‘‘Novation’’), Premier Purchasing
Partners, L.P. (‘‘Premier’’), and Health Trust Purchasing
Group, representing 21.9 percent, 15.0 percent and
6.3 percent, respectively, of net sales in the United States.
No individual end-user, however, accounted for over
1 percent of the Company’s net sales, and the top ten end-
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users accounted for approximately 3.5 percent of the
Company’s aggregate net sales in the United States.
These buying contracts generally have a term of three
years with extensions as warranted. The Company’s current
arrangements with Premier, Novation and Health Trust
Purchasing Group have all been renegotiated and updated in
the past 12 months.
In the Americas, the Company maintains an extensive
monitoring and incentive system ranking sales agents across
a range of performance metrics. The Company evaluates and
rewards sales agents based on achieving certain sales targets
and on maintaining efficient levels of working capital. The
Company sets expectations for efficient management of
inventory and provides sales agents a motivation to aid in the
collection of receivables.
Europe. The European geographic segment accounted
for $808.3 million, or 27.1 percent, of 2004 net sales, with
France, Germany, Italy, Spain, Switzerland and the
United Kingdom collectively accounting for more than
82 percent of net sales in the region. In addition, the
Company also operates in other key markets such as the
Benelux, Austria, Nordic, and Central and Eastern Europe.
The Company’s sales force in this region is comprised of
independent distributors, commissioned agents, direct sales
associates and sales support personnel. During 2004, the
Company converted its distribution model in France, Italy,
Switzerland and Austria from third-party distributors to direct
sales. As expected following the acquisition of Centerpulse, in
2004 the Company substantially increased its presence in the
European orthopaedic reconstructive implant market. In
marketing its orthopaedic implant portfolio in Europe, the
Company has continued to emphasize the advantages of
clinically proven, established designs.
Asia Pacific. The Asia Pacific geographic segment
accounted for $431.3 million, or 14.5 percent of 2004 net
sales, with Japan being the largest market within this
segment, accounting for 65 percent of the sales in this
region. In addition, the Company operates in key markets
such as Australia, New Zealand, Korea, China, Taiwan, India,
Thailand and Singapore. In Japan and most countries in the
Asia Pacific region, the Company maintains a network of
dealers who act principally as order agents on behalf of
hospitals in the region, together with sales associates who
build and maintain strong relationships with musculoskeletal
surgeons in their markets. These sales associates cover over
7,000 hospitals in the region. The knowledge and skills of the
Company’s sales associates play a critical role in providing
service, product information and support to surgeons who
continue to enhance their knowledge and skills to improve
the quality of surgical outcomes. The Company has
strengthened, and intends to continue to support the clinical
needs of surgeons in the region primarily through
sponsorship of medical education and training programs
relating to orthopaedic surgery. The key marketing and
educational activities in the region center on minimally
invasive surgical procedures and technologies, increased
range of motion and improved patient outcomes.
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The Company’s business is generally not seasonal in
nature; however, many of the Company’s products are used
in elective procedures, which typically decline during the
summer months and holiday seasons.
DISTRIBUTION
The Company generally ships its orders via overnight
courier. The Company’s operations support local language
labeling for all shipments to the European Union member
countries. The Company operates distribution facilities,
among other places, in Warsaw, Indiana; Dover, Ohio;
Statesville, North Carolina; Memphis, Tennessee; Carlsbad,
California; and internationally in Australia, Belgium, Canada,
France, Germany, Italy, Japan, Korea, the Netherlands,
Singapore, Spain, Switzerland and the United Kingdom. The
Company’s backlog of firm orders is not considered material
to an understanding of its business.
PRODUCTS
The Company designs, develops, manufactures and
markets reconstructive orthopaedic implants, including joint
and dental, spinal implants, and trauma products, and related
orthopaedic surgical products. Orthopaedic reconstructive
implants restore joint function lost due to disease or trauma
in joints such as knees, hips, shoulders, and elbows. Dental
reconstructive implants restore function and aesthetics in
patients that have lost teeth due to trauma or disease. Spinal
implants are utilized by orthopaedic surgeons and
neurosurgeons in the treatment of degenerative diseases,
deformities and trauma in all regions of the spine. Trauma
products are devices used primarily to reattach or stabilize
damaged bone or tissue to support the body’s natural healing
process. The Company’s related orthopaedic surgical products
include surgical supplies and instruments designed to aid in
orthopaedic surgical procedures. The Company also has a
limited array of sports medicine products.
Orthopaedic Reconstructive Implants
The majority of reconstructive implant procedures
restore joint function lost due to degenerative diseases such
as arthritis and relieve pain in knees and hips.
In 2004, the Company continued its efforts to maximize
the potential patient benefits of applying minimally invasive
surgical techniques to orthopaedic surgery, which the
Company refers to as Minimally Invasive SolutionsTM
(MISTM) Procedures and Technologies. The Zimmer Institute,
with its main facility located at the Company’s global
headquarters, has been used, in addition to 17 satellite
centers and wet lab locations, to facilitate the training of over
2,200 surgeons, sales associates, and other medical
professionals on several innovative MIS Procedures. The
Company expects another 1,800 surgeons to be trained
through The Zimmer Institute and its satellite locations
during 2005.
Company announced that it is working with Johns Hopkins
University School of Medicine to advance education in MIS
Technologies. The Company also announced a similar
relationship with a group of surgeons affiliated with the
University of British Columbia in Vancouver, Canada, as well
as relationships with the University of Nebraska Medical
Center, Ohio Orthopaedic Surgery Institute, Alabama
Orthopaedic Institute, and Tucson Orthopaedic Institute. The
Company has plans to continue to affiliate with additional
North American and international institutions to provide
surgeon education at the Zimmer Institute and its satellite
locations. The principal goals of these MIS Technology efforts
are to reduce the hardships of having a total joint
replacement, such as the time a patient must spend in
rehabilitation, pain reduction and lost time from work. The
Company is continuing its work to develop navigation
systems, through the use of image-guided surgical
technology, to aid surgeons in learning procedures and
gaining confidence in the placement of instrumentation and
implants where navigation is difficult due to the small
incisions necessary in effectuating MIS Procedures. The
Company is focused both on further commercializing existing
MIS Technique approaches and investigating new ways to
apply MIS Technology principles to additional procedures and
products. The Company’s financial investment in the MIS
Technology program in 2004 was more than $30 million,
excluding instruments.
Knee Implants
Total knee surgeries typically include a femoral
component, a patella (knee cap), a tibial tray and an
articulating surface (placed on the tibial tray). Knee
replacement surgeries include first-time joint replacement
procedures and revision procedures for the replacement,
repair or enhancement of an implant or component from a
previous procedure. Knee implants are designed to
accommodate different levels of ligament stabilization of the
joint. While some knee implant designs, called cruciate
retaining (‘‘CR’’) designs, require the retention of the
posterior cruciate ligament, other designs, called posterior
stabilized (‘‘PS’’) designs, provide joint stability without the
posterior cruciate ligament. There are also procedures for
partial reconstruction of the knee, which treat limited knee
degeneration and involve the replacement of only one side or
compartment of the knee with a unicompartmental knee
prosthesis. The Company offers a wide range of products for
specialized knee procedures, including, among others, the
following brands:
ProlongTM Highly Crosslinked Polyethylene Articular
Surfaces. The Prolong Polyethylene is a bearing surface
material for total knee replacement. It is believed to be the
only articulating surface product with the ability to claim
‘‘resistance to delamination’’.
NexGen˛ Complete Knee Solution. The NexGen
The Company is working with several global medical
centers to evaluate and refine advanced minimally invasive
knee and hip replacement procedures. In February 2004, the
Knee product line is a comprehensive system for knee
replacement surgery which has had significant application in
PS, CR and revision procedures. The NexGen Knee System
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offers joint stability and sizing that can be tailored to
individual patient needs while providing surgeons with a
unified system of interchangeable components. The NexGen
Knee System provides surgeons with complete and versatile
knee instrument options, including MIS Quad-SparingTM and
MIS Mini-Incision Instruments, milling and multiple traditional
saw blade cutting instrument systems. The breadth and
versatility of the NexGen Knee System allows surgeons to
change from one type of implant to another during surgery,
according to the needs of the patient, and to support current
surgical philosophies. The ongoing use of Trabecular Metal
Monoblock Tibial Components in both CR and PS
philosophies enhances the Company’s strategy to add new
innovative technologies to this brand. Trabecular Metal
Materials provide a dramatically higher level of porosity and
surface friction than existing alternatives, are similar in
stiffness to natural bone and are believed to be a major
advancement in orthopaedic materials.
The NexGen Complete Knee Solution Legacy˛
Knee-Posterior Stabilized product line provides stability in
the absence of the posterior cruciate ligament. The PS
capabilities have been augmented through the introduction of
the NexGen Legacy Posterior Stabilized Flex Knee (the
‘‘LPS-Flex Knee’’), a high-flexion implant that has the
potential to safely accommodate knee flexion up to a
155-degree range of motion in some patients when implanted
using a specialized surgical technique. The NexGen LPS-Flex
Fixed Prolong Articular Surfaces and Femoral Implants were
released in December 2004.
The NexGen CR product line is designed to be used
in conjunction with a functioning posterior cruciate ligament.
The NexGen CR-Flex Fixed Bearing Knee was added to the
product line in 2003 and is designed with components to
provide a greater range of motion for patients who require
deep bending in their daily activities. The NexGen CR-Flex
Femoral Components allow the surgeon to adjust component
sizing without removing additional bone.
The NexGen Revision Knee product line consists of
several different products that are designed to provide
clinical solutions to surgeons for various revision situations.
In 2004, the Company commercialized a new bone
augmentation implant system made from Trabecular Metal
Technology material. These new augments are designed to
address significant bone loss in revision surgery.
The Natural-Knee˛ System. The Natural-Knee
Prosthesis System consists of a complete range of
interchangeable, anatomically designed implants which
include several innovative features the Company believes
cannot be found in other current systems, including a
proprietary Cancellous-Structured TitaniumTM (CSTiTM)
Porous Coating option for stable fixation in active patients.
The original Natural-Knee System will be celebrating its
20th anniversary of clinical use in 2005. New Natural-Knee II
MIS Instrumentation was launched in December 2004. These
instruments are designed to accommodate a smaller incision
during the knee procedure.
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The InnexTM Total Knee System. The Innex Knee
System offers fixed bearing and mobile bearing knee
components all designed within the same system philosophy.
While the Innex Knee System is best known for its mobile
bearing knee offering, the availability of differing levels of
articular constraint and the Innex Revision Knee components
provide for a comprehensive mobile and fixed bearing knee
system. The Innex Knee System is currently distributed in
Europe and Asia Pacific, but is not available for commercial
distribution in the United States.
Unicompartmental Knee Systems. The M/G˛,
Natural-Knee II and AllegrettoTM Unicompartmental Knee
Systems apply the same flexibility and quality of the
Company’s other knee implant products to unicompartmental,
or single compartment disease. These systems offer the
surgeon the ability to conserve bone by replacing only the
compartment of the knee that has had degenerative changes.
The Zimmer˛ Unicompartmental Knee System was
commercialized in 2004 offering a high flexion design to
unicompartmental knee surgery. The high flexion design is a
patient lifestyle attribute and this product was designed
specifically for less invasive surgeries and strengthens the
Company’s offering in MIS Procedures and Technologies.
The Company has further established itself in the
use of minimally invasive knee surgery with the development
of minimally invasive instruments for the M/G
Unicompartmental Knee System. MIS Mini-Incision Total
Knee Procedures and MIS Quad-Sparing Total Knee
Procedures have allowed the Company to build upon its
industry position by offering surgeons the benefits of MIS
Surgery for their total knee procedures. The MIS Mini-
Incision Total Knee Instruments feature smaller instruments
which accommodate a smaller incision and less disruption of
the surrounding soft tissues. The MIS Quad-Sparing Total
Knee Procedure features advanced instrument concepts
which allow surgeons to perform the total knee arthroplasty
through a 7-10 cm incision without cutting the patient’s
muscles or tendons. Navigation system capability (similar to
an automotive Ground Positioning System (GPS)) was added
by the Company in December 2004 as a tool to aid in the
placement of the implants during surgery.
Hip Implants
Total hip replacement surgeries replace both the head of
the femur and the socket portion of the pelvis (acetabulum)
of the natural hip. Hip procedures include first time, or
primary, joint replacement as well as revision procedures for
the replacement, repair or enhancement of an implant
product or component from a previous procedure.
Historically, most hip implant procedures have involved the
use of bone cement to attach the prosthetic components to
the surrounding bone. Today, most of the components used
in total hip replacement procedures are porous, which means
they do not require bone cement because bone can actually
grow into, and onto, the implant surface.
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The Company’s portfolio of MIS Techniques includes the
MIS 2-IncisionTM Hip Replacement Procedure, the Mini-
Incision Posterior Procedure, the Mini-Incision Anterior
Procedure, and the MIS Anterolateral Single Incision
Technique launched in December 2004. The new
anterolateral procedure has the potential to offer similar
patient outcomes as the MIS 2-Incision Procedure. Standard
implants are used in all MIS Procedures. The incision for a
traditional open hip primary replacement may be 12 inches
long. Other less invasive approaches, such as a ‘‘mini’’ incision
for hips, have been in existence for approximately six years.
In January 2004, the first computer image-guided MIS 2-
Incision Hip Replacement Procedure live surgery was
performed utilizing new technology and instrumentation co-
developed by the Company and its MIS Technologies
computer navigation partner, Medtronic, Inc. In January 2004,
the United States Patent and Trademark Office granted the
Company a patent specific to the Company’s MIS 2-Incision
Hip Replacement Procedure, and such patent includes 17
approved claims related to the procedure.
The Company’s key hip replacement products include,
among others:
VerSys˛ Hip System. The VerSys Hip System, a
Zimmer flagship brand, is supported by a common
instrumentation set and is an integrated family of hip
products that offers surgeons design-specific options to meet
varying surgical philosophies and patient needs. The VerSys
Hip System includes the following features: a variety of stem
designs and fixation options for both primary and revision
situations, a modular design that allows for a variety of
femoral heads, optimal sizing selections, and a common
instrumentation set for use with virtually all VerSys Stems.
Zimmer˛ M/L Taper Prosthesis. The M/L Taper
Prosthesis was launched in early 2004 and in a short period
of time has become a key product in the Company’s portfolio.
The prosthesis offers a dual wedge and proximally coated
design that was based on long term clinically proven
concepts. The M/L Taper has become widely used in the
Company’s MIS Procedures due to its overall design and ease
of use. Specific instruments have been developed to facilitate
the insertion of the M/L Taper through the MIS Anterolateral
Technique.
Alloclassic˛ (Zweymueller˛) Hip System. The
Alloclassic (Zweymueller) Hip System has become the most
used, primary, cementless hip in the world. This is one of the
few stems available today that is practically unchanged since
its introduction in 1979. In 2004, the Company celebrated the
25th anniversary of the Alloclassic Stem with a symposium in
Vienna, Austria. A new offset design was added in 2004 and
offers the surgeon increased capability to restore the
patient’s anatomical joint movement.
CLS˛ SpotornoTM Hip System. The CLS Spotorno
Stem is one of the Company’s largest selling hip prostheses,
especially in the European markets. Since the first
implantation in 1984, more than 380,000 stems have been
implanted. Additions to the product line in 2004 provide the
capability for restoration of the physiological center of
rotation. The Company believes that more than 20 years of
experience and excellent clinical results, confirmed by the
2004 Swedish Hip Registry with a 100 percent survivorship
after 11 years, makes the CLS Spotorno Stem one of the
most successful uncemented hip prostheses on the market.
ZMR˛ and Revitan˛ Revision Hip Systems. The
ZMR Revision Hip System, introduced to address the porous
modular revision market, and the Revitan Revision Hip
System, provide the versatility to accommodate varying
fixation and sizing needs. These systems offer straight as well
as bowed stems, and cylindrical and spout proximal bodies.
Trilogy˛ Acetabular System. The Trilogy Acetabular
System, including titanium alloy shells, polyethylene liners,
screws and instruments, is a prominent acetabular cup
system. The Trilogy Family of products offers patients and
surgeons innovative options and versatile component designs
and instrumentation. One option, the Longevity˛ Highly
Crosslinked Polyethylene Liner, is designed to address the
issue of wear in total hip arthroplasty. Polyethylene debris
may cause the degeneration of bone surrounding
reconstructive implants, a painful condition called osteolysis.
The Company has augmented and continues to augment its
offerings of porous reconstructive hip implants through the
introduction of Trabecular Metal Technology. The Company
fully launched the Trabecular Metal Modular Primary
Acetabular Shell in 2004. This particular product incorporates
design features from the Trilogy family of Acetabular shells
augmented with the advanced fixation surface of Trabecular
Metal material. In addition to the Trabecular Metal primary
system, the Company also offers a Trabecular Metal Revision
Acetabular Shell for advanced fixation in acetabulae with
insufficient bone.
Alternative Bearing Technology. The Company has
a broad portfolio of alternative bearing technologies which
include Longevity and Durasul˛ Highly Crosslinked
Polyethylene, Metasul˛ Metal-on-Metal Tribological Solution
and Cerasul˛ and Trilogy AB˛ Ceramic-on-Ceramic
Tribological Solutions. Alternative bearings help to minimize
wear over time, potentially increasing the longevity of the
implant. The Company submitted a pre-market approval
application to the United States Food and Drug
Administration (‘‘FDA’’) in December 2004 and expects to
launch the Trilogy AB System with ceramic-on-ceramic and
metal-on-metal bearing surfaces later in 2005.
DuromTM Hip Resurfacing System. This product is
particularly suited to younger patients since it preserves the
patient’s healthy bone stock. A primary objective of this
system is to allow the patient to return to an active lifestyle.
The Durom System uses the highly wear resistant Metasul
Metal-on-Metal Technology as the bearing surface for the
implant design. Since 1988, Metasul Technology has been
used successfully for total hip replacement. Today’s metal-on-
metal technology is the result of over one and a half decades
of development, research and clinical evaluation. This has
formed the foundation for the latest development – the
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Durom Hip Resurfacing System. The option of the large
diameter heads, which was introduced in 2004, offers the
advantage of a low-wear solution while providing greater joint
stability and high range of motion in combination with the
wide range of cemented and uncemented femoral implants.
This product is not available for commercial distribution in
the United States.
Elbow and Shoulder Implants
Coonrad/Morrey Total Elbow. The Coonrad/Morrey
Total Elbow product line is a family of elbow replacement
implant products which have helped the Company establish
itself in the global elbow implant market.
Bigliani/Flatow˛ Complete Shoulder Solution. The
Bigliani/Flatow product line gives the Company a significant
presence in the global shoulder implant market. The system
is designed to treat arthritic conditions and fractures as well
as to enhance the outcome of primary or revision surgery.
New Bigliani/Flatow Shoulder Instrumentation for fracture
treatment was released in February 2004.
Anatomical ShoulderTM System. The Anatomical
Shoulder system can be tailored to each patient’s individual
anatomy. In March 2004, the functionality was increased by
adding modular rasp instrumentation. This provides the
surgeon more versatility in orienting the head of the humerus
for optimal clinical results.
Dental Products
The Company’s Dental Division manufactures and
distributes (i) dental reconstructive implants – for individuals
who are totally without teeth or are missing one or more
teeth; (ii) dental restorative products – aimed at providing a
more natural restoration to mimic the original teeth; and
(iii) dental regenerative products – for bone grafting
applications. Zimmer Dental also develops and offers a variety
of educational material and courses to support the clinician
in his or her practice. In 2004, Zimmer Dental relocated its
manufacturing operations to Carlsbad, California, and began
construction of a state-of-the-art training facility designed to
provide various educational opportunities for its global
customers.
Dental Reconstructive Implants
The Company’s dental reconstructive implant products
and surgical and restorative techniques include, among
others:
Tapered Screw-Vent˛ Implant System. The
Company’s largest selling dental product line provides the
clinician a tapered geometry which mimics the natural shape
of a tooth root. The Tapered Screw-Vent System, with its
two-stage design, was developed and designed to minimize
valuable chair time for restorations even in the most
challenging locations. Featuring a patented internal hex
1 Trademark of Atlantis Components, Inc.
2 Registered Trademark of Tutogen Medical, Inc.
8
connection, multiple lead threads for reduced insertion time
and selective surface coatings, the Tapered Screw-Vent
Product is a technologically advanced dental implant offering
features which allow the clinician to meet the needs of
patients even in the most demanding circumstances.
AdVent˛ Implant System. Utilizing many features of
the Tapered Screw-Vent System, the AdVent Product is a
transgingival, one stage design that utilizes the same surgical
system as the Tapered Screw-Vent System, allowing the
clinician to use both design concepts without incurring the
added cost of a second surgical system.
Tapered SwissPlus˛ Implant System. Designed to
meet the needs of clinicians who prefer a transgingival, one
stage, dental implant design, the Tapered SwissPlus System
incorporates innovative multiple lead threads for faster
insertion time, and a tapered body to allow it to be placed in
tight interdental spaces. The Tapered SwissPlus System also
incorporates a unique internal connection.
Dental Restorative Products
In 2004, the Company continued development efforts
concerning products for the aesthetic restorative market
aimed at providing a more natural restoration. The following
are the primary restorative dental products of the Company:
AtlantisTM1 Abutment. The Atlantis Abutment
System is marketed by the Company through an agreement
with Atlantis Components, Inc. This product allows for a
custom made restoration improving aesthetic results in dental
implant procedures.
PureFormTM Ceramic System. Utilizing patented
designs, the PureForm System is a ceramic system which
allows clinicians to provide to their patients a more natural
looking restoration. This easy-to-use concept provides the
clinician a product to custom fabricate and color the crown
to each patient’s individual needs.
Dental Regenerative Products
The Company markets the following product lines for
use in regenerative techniques in oral surgery:
Puros˛ Allograft. The Puros Material is an allograft
bone grafting material which utilizes the Tutoplast˛2 Tissue
Processing Technique that provides exceptional bone grafting
material for use in oral surgery. The Puros Allograft material
is recognized as an excellent bone grafting material by
clinicians throughout the world.
Biomend˛3 and Biomend˛ Extend Absorbable
Collagen Membrane Products. Periodontal and oral surgery
often require the use of a membrane to cover the surgical
site. The Biomend Family of collagen based membranes offer
the surgeon excellent handling characteristics while typically
reducing the patient’s surgery to one visit.
3 Registered Trademark of Integra LifeSciences Corporation.
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Spine Implants
Trauma
The primary focus of the Company’s Spine division in
2004 was the establishment of an increased presence in the
spinal market. Zimmer Spine has created a new global
infrastructure that will further focus on introducing products
internationally and it implemented a new U.S. sales
distribution system in 2004. Zimmer Spine is planning to
launch key product offerings in 2005 and initiate or continue
a variety of research and development projects. The
Company’s spine product offerings include, among others:
Dynesys˛4 Dynamic Stabilization System. The
Dynesys Dynamic Stabilization System uses flexible materials
to stabilize the affected lower spine while preserving the
natural anatomy of the spine. The Dynesys System is
indicated as an adjunct to fusion.
NeuGraft˛5 Strip Bone Graft Mix. The NeuGraft
Strip Bone Graft Matrix is a mixture of purified fibrillar
collagen (PFC) and hydroxyapatite/tricalcium phosphate
ceramic (HA/TCP). The NeuGraft Strip, when coated with
autogenous bone marrow, is indicated for use in bony voids
or gaps that are not intrinsic to the stability of the bony
structure. Current distribution rights from NeuColl, Inc. allow
the Company to market this product in the United States.
Trinica˛ Select Anterior Cervical Plate System. The
Trinica Select Anterior Cervical Plate System and All-
Through-One instrumentation is designed to simplify the
surgical procedure while requiring less retraction and
reducing the risk of soft-tissue damage. The Trinica Select
Self-Drilling Screws seek to provide the surgeon with the
option to reduce the amount of instruments, thereby
potentially reducing the amount of retraction and surgical
time to implant the Trinica Select Plate.
Trabecular Metal Technology. Trabecular Metal
Technology has a wide range of spinal applications. In the
United States, Trabecular Metal Materials are cleared for
both Thoracolumbar and Vertebral Body Replacement
procedures as well as bone void fillers.
Puros Allograft Products. The Company continues
to sell traditional and specialty Puros Allograft bone products
through its exclusive U.S. distribution agreement with
Tutogen Medical, GmbH. Puros Products consist of
traditional and specialty grafts which are donated human
tissues, preserved with Tutogen’s patented Tutoplast Process
of tissue preservation and viral inactivation. The Tutoplast
Process is a proprietary tissue processing system designed to
significantly reduce the amount of cells, bone marrow and
lipid components from processed allograft bone and
connective tissue while preserving the extra-cellular matrix
(collagen and mineral components).
4 The Dynesys Dynamic Stabilization Spinal System is cleared in the
United States for use as an adjunct to fusion. The Dynesys Dynamic
Stabilization Spinal System is also currently in an investigational device
study for a non-fusion application and is limited by U.S. federal law to
investigational use only.
Trauma products include devices used primarily to
stabilize damaged bone and tissue to support the body’s
natural healing process. The most common surgical
stabilization of bone fracture involves the internal fixation of
bone fragments. This stabilization can involve the use of a
wide assortment of plates, screws, rods, wires and pins. In
addition, external fixation devices may be used to stabilize
fractures or correct deformities by applying them externally
to the limb. The Company offers a comprehensive line of
cost-effective quality products, including, among others:
M/DN˛ Intramedullary Fixation, ITSTTM
Intertrochanteric/Subtrochanteric Fixation System, and
Sirus˛ Nail System. The M/DN, ITST, and Sirus
Intramedullary Nailing Systems are utilized for the internal
fixation of long bone fractures. Both stainless steel and
titanium are used to accommodate various market
philosophies.
Zimmer˛ Periarticular Plating System. The
periarticular plating system, used to stabilize fractures near
joints, includes recently released locking plates, which are
pre-contoured to closely follow the shape of the bone and
create a fit that requires little or no additional bending.
Zimmer˛ Plates and Screws. The Zimmer Plates
and Screws System is a comprehensive system of stainless
steel plates, screws and instruments for internal fracture
fixation. Because this system is compatible with major
competitive systems, it affords surgeons added flexibility and
value.
WristoreTM6 Distal Radius Fracture Fixator. In early
2003, the Company acquired the design of this new all
polymer external fixator for special application to more
common wrist fractures. The Wristore Fixator was launched
in late 2004 in a sterile pack that provides all of the
necessary instruments and device components in one
convenient package.
TransFxTM External Fixation System. In December
2004, the Company completed the integration of the TransFx
External Fixation System product line that was acquired from
Immedica, Inc. in 2003. The innovative design of the TransFx
Product Line provides excellent fracture reduction and
stability while contributing to efficient inventory management
within the hospital. The TransFx System is comprehensive
with a broad range of sizes capable of treating most any
fracture where external fixation is utilized.
Orthopaedic Surgical Products
The Company manufactures and markets non-implant
surgical products, including tourniquets, blood management
systems, wound debridement products, traction devices and
5 Registered Trademark of NeuColl, Inc.
6 Trademark of Millenium Medical Technologies, Inc.
9
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orthopaedic softgoods. The Company develops and markets
surgical products to support its reconstructive, trauma, spinal
and dental product systems in the operating room
environment with a focus on blood, surgical wound
management, pain management and patient management
products.
The Company’s orthopaedic surgical products include,
among others:
A.T.S.˛ Tourniquet Systems. The A.T.S. Product
Line represents a complete family of tourniquet machines
and cuffs. The family of three machines is designed to meet
the demands of a wide variety of health care facilities and
clinical applications. The range of cuffs which complement
the machines provides the flexibility to occlude blood flow
safely with convenience and accuracy for adult limbs of
virtually every size and shape.
OrthoPAT˛7 Orthopedic Perioperative
Autotransfusion System. This autotransfusion system, which
includes patented disposable components, has been
specifically designed to collect, wash and prepare a patient’s
own blood for re-infusion during and following an orthopaedic
surgical procedure. The Company markets OrthoPAT
Autotransfusion Systems through an exclusive distribution
arrangement in the United States.
Zimmer˛ Blood Reinfusion System (ZBRS). This
new addition to the Company’s portfolio of blood
management products salvages, filters and then reinfuses the
patient’s own blood following surgery.
Pulsavac˛ Plus and Pulsavac Plus LP Wound
Debridement Systems. These Pulsavac Systems are used for
cleaning and debridement of contaminants and foreign matter
from wounds using simultaneous irrigation and suction. Both
Pulsavac systems are completely disposable to reduce the
risk of cross contamination.
Palacos˛8 Bone Cements. Recently, the Company
executed a distribution agreement with Heraeus Kulzer
GmbH, giving Zimmer the U.S. distribution rights to a variety
of Heraeus Kulzer bone cement brands. Included in these
brands are Palacos R and Palacos R G Bone Cements.
Palacos R G Product is a bone cement with the antibiotic
gentamicin pre-mixed in the formulation which is used by the
orthopaedic surgeon to reduce the risk of postoperative
infection. The multi-year agreement is for nonexclusive
distribution rights in 2005, and Zimmer will assume exclusive
U.S. distribution rights in 2006. Zimmer expects to launch the
Palacos Bone Cements in the first half of 2005.
Zimmer˛ Ambulatory Pump. In 2004, the Company
executed a supply agreement with Baxter Healthcare
Corporation, which allows Zimmer to incorporate Baxter’s
MULTIRATE INFUSOR9 Elastomeric Mechanical Device in a
kit10 that will be used for post-surgical pain management.
7 Trademark of Haemonetics Corporation
8 Registered Trademark of Heraeus Kulzer GmbH.
9 MULTIRATE and INFUSOR are Trademarks of Baxter International Inc.
10 Not yet available for commercial distribution.
10
Zimmer expects to launch this product in the United States
in the first half of 2005.
Sports Medicine
The Company markets a limited product line in the area
of sports medicine which is focused on products for the
fixation and repair of soft tissues, including:
Sysorb˛ Bioresorbable Interference Screw System.
The unique design of the Sysorb Bioresorbable Interference
Screws and associated instrumentation accommodate the use
of an amorphous polymer. The benefits of an amorphous
polymer are that it has an excellent biocompatibility and
degrades completely within approximately one year. It
maintains a strong fixation during the entire healing process.
The patented turbine-like drive of the Sysorb Screw
distributes the torque equally over the whole screw length
during its insertion, which helps to prevent screw failure
during screw placement.
In addition, various projects are underway at the
Company to address the repair of cartilage as an early stage
treatment.
PRODUCT DEVELOPMENT
The Company has extensive research and development
activities underway to introduce new surgical techniques,
materials, biologics and product designs intended to advance
the field of orthopaedics. The product development function
works closely with the strategic brand marketing function to
understand and respond quickly to our customers’ needs on a
global basis, and with the research function to incorporate
new technologies in our product pipeline. The rapid
commercialization of innovative new materials, biologics
products, implant and instrument designs, and surgical
techniques remains one of the Company’s core strategies and
continues to be an important driver of sales growth.
Key new products, surgical techniques and instruments
introduced or developed by the Company in 2004 include,
among others:
) MIS Implants, Surgical Techniques and Instrumentation for
knee, hip and trauma:
) MIS THA Instruments and Techniques: MIS Mini-
Incision and MIS 2-Incision Instrument Enhancements,
as well as launch of new Single Anterolateral Incision
Technique and Instruments
) MIS TKA Instruments and Techniques: General releases
for MIS Quad-Sparing Technique and Instruments and
MIS Mini-Incision (Intramedullary and 4-in-1) Technique
and Instruments for NexGen Knee System, as well as
MIS Mini-Incision Technique and Instruments for the
Natural-Knee II System
) MIS TKA Implants: NexGen Mini Keel Tibial Plate
Implants and Instruments (outside U.S. only until FDA
clearance)
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) Zimmer Unicompartmental Knee (Fixed Bearing) –
Implant and MIS Instrumentation Systems
) Zimmer˛ Computer Assisted Solutions: Imageless
NexGen Open Knee developed in conjunction with
partner, Medtronic, Inc.; in addition to the applications
released in 2003, the MIS 2-Incision Hip software and
instrumentation have been improved
) New Materials:
) Trabecular Metal Augments for the knee, including
traditional augment blocks and tibial cones for revision
surgery with substantial bone loss
) NexGen LPS-Flex Prolong Highly Crosslinked
Polyethylene and Molded Polyethylene Tibial Articular
Surfaces (Fixed Bearing)
) New Implant Systems:
) Natural Knee II Patello-Femoral Joint
) Wristore External Fixator – New external fixation
system for the wrist; sold in a sterilized kit
) Zimmer Periarticular Locking Plates, starting with Distal
Lateral Volar Plates for the wrist and a limited release to
developers on the Distal Femoral Plates. Plates for other
anatomical sites will be released throughout 2005.
) Elogenics Finger (Europe only)
) Anatomic Hip Stem
) Constrained Acetabular Cup Liners for the Converge˛
Porous Acetabular Cup System
) Expansions to existing systems:
) NexGen CR-Flex Knee
) NexGen LPS-Flex Trabecular Metal Monoblock Tibial
) VerSys Revision Stems
) TransFx External Fixation System
) VariallTM Cups Line Extension
) AllegrettoTM Unicompartmental Knee
) Sirus Nail System
) CLS Hip Stems
) NexGen Rotating Hinge Knee
) NexGen LPS-Flex Knee
) M/DN Intramedullary Fixation System
These and other new products introduced in the last
3 years accounted for approximately 18 percent of 2004 total
sales, consistent with the Company’s new products sales goal
of 15 to 20 percent of total sales on an annual basis.
The Company is actively broadening its product offerings
in each of the product areas and exploring new technologies
that have applications in multiple areas. For the years ended
December 31, 2004, 2003 and 2002, the Company spent
$166.7 million, $105.8 million, and $80.7 million, respectively,
on research and development. The substantial increases in
research and development expenditures have accelerated the
output of new orthopaedic and dental reconstructive
implants, spine and trauma products, including advanced new
materials, product designs and surgical techniques. The
Company’s primary research and development facility is
located in Warsaw, Indiana, but the Company also has other
research and development personnel based in, among other
places, Dover, Ohio; Austin, Texas; Carlsbad, California;
Minneapolis, Minnesota; Cedar Knolls, New Jersey; and
Winterthur, Switzerland. As of December 31, 2004, the
Company employed more than 540 research and development
employees worldwide.
The Company will continue to identify innovative
technologies and consider acquiring complementary products
or businesses, or establishing technology licensing
arrangements or strategic alliances. The Zimmer Institute,
and the Company’s affiliations with medical teaching
institutions, will continue to play an integral role in
facilitating training for surgeons, sales associates and other
medical professionals on the procedures for applying MIS
Techniques to orthopaedic surgery. In addition, the Company
has developed and maintains close relationships with a
number of orthopaedic surgeons who assist in product
research and development.
ORTHOBIOLOGICS
As part of its focused research and development efforts
and desire to create new orthopaedic treatments, the
Company has established an Orthobiologics group based in
Austin, Texas, with its own full-time staff and dedicated
projects. The Company is actively involved in the field of
biologics and is committed to investing in biologics research
activities. The Company is working on biological solutions to
repair and regenerate damaged or degenerated orthopaedic
tissues. These materials potentially could transform treatment
of damaged joints by biological regeneration rather than
replacement with inert materials.
In 2004, the Company, working with Tissue Science
Laboratories, prepared for the launch of the Zimmer˛
Collagen Repair Patch to treat rotator cuff tears, which is
planned for release in 2005. The Company also continued
collaborating with ISTO Technologies on a project to develop
a chondral and osteochondral cartilage graft for cartilage
tissue repair. The Company continued in 2004 to plan the
release of the Denovo˛-T Autologous Chrondrocyte
Transplantation Graft, which is an autologous cell
implantation service for articular cartilage repair. Moreover,
in the orthobiologics area, the Company has other ongoing
programs and technology survey activities in the areas of soft
tissue repair and regeneration, including tendon, ligament
and meniscus and in bone regeneration, spine and dental
areas.
GOVERNMENT REGULATIONS AND QUALITY SYSTEMS
The Company is subject to government regulation with
regard to its products and operations in the countries in
which it conducts business. It is the policy of the Company to
comply with all regulatory requirements governing its
operations and products, and the Company believes that the
research, development, manufacturing and quality control
procedures that it employs are in material compliance with
all applicable regulations.
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In the United States, numerous regulations govern the
development, testing, manufacturing, marketing and
distribution of medical devices, including, among others, the
Federal Food, Drug and Cosmetic Act and regulations issued
or promulgated thereunder. The FDA regulates product
safety and efficacy, laboratory, clinical and manufacturing
practices, labeling and record keeping for medical devices
and post market surveillance to identify potential problems
with marketed medical devices. A few of the devices
developed and marketed by the Company are in a category
for which the FDA has implemented stringent clinical
investigation and pre-market approval requirements. The
FDA has the authority to halt the distribution of certain
medical devices; detain or seize adulterated or misbranded
medical devices; or order the repair, replacement or refund
of the costs of such devices. There are also certain
requirements of state, local and foreign governments that
must be complied with in the manufacture and marketing of
the Company’s products.
In many of the foreign countries in which the Company
markets its products, the Company is subject to local
regulations affecting, among other things, clinical efficacy,
product standards, packaging requirements and labeling
requirements. Many of the regulations applicable to the
Company’s devices and products in these countries are
similar to those of the FDA. The member countries of the
European Union have adopted the European Medical Device
Directives, which create a single set of medical device
regulations for all member countries. These regulations
require companies that wish to manufacture and distribute
medical devices in European Union member countries to
obtain CE Marks for their products. The Company maintains
a certified status with the European and Canadian Notified
Bodies, which provides for CE marking of products for these
markets.
The Company is subject to various government
regulations pertaining to healthcare fraud and abuse,
including anti-kickback laws and physician self-referral laws.
Violations of these laws are punishable by criminal and/or
civil sanctions, including, in some instances, fines,
imprisonment and, within the United States, exclusion from
participation in government healthcare programs, including
Medicare, Medicaid, Veterans Administration (VA) health
programs and Civilian Health and Medical Program Uniformed
Service (CHAMPUS). The scope and enforcement of these
laws and regulations are uncertain and subject to rapid
change, especially in light of the lack of applicable precedent
and regulations. The Company believes that its operations are
in material compliance with these laws.
The Company is committed to providing high quality
products to its customers. To meet this commitment, the
Company has implemented modern quality systems and
concepts throughout the organization. The quality assurance
department supervises the Company’s quality systems. Senior
management is actively involved in setting quality policies
and managing internal and external quality performance. The
Company’s regulatory affairs and compliance department is
12
responsible for assuring compliance with all applicable
regulations, standards and internal policies.
The Company has initiated numerous quality
improvement programs and all of the Company’s
manufacturing operations are ISO 9000 and/or
ISO 13485/13488 series certified.
The Company’s facilities and operations are also subject
to various government environmental and occupational health
and safety requirements of the United States and foreign
countries, including those relating to discharges of substances
in the air, water and land, the handling, storage and disposal
of wastes and the cleanup of properties by pollutants. The
Company believes it is currently in material compliance with
such requirements.
COMPETITION
The orthopaedics industry is highly competitive. In the
global markets for reconstructive implants, trauma and
orthopaedic surgical products, major competitors include:
DePuy Orthopaedics, Inc. (a subsidiary of Johnson &
Johnson), Stryker Corporation, Biomet, Inc., Synthes, Inc.
and Smith & Nephew plc.
In the Americas geographic segment, DePuy
Orthopaedics, Inc., Stryker Corporation, Biomet, Inc. and
Smith & Nephew, Inc. (a subsidiary of Smith & Nephew plc),
along with the Company, account for a large majority of the
total reconstructive implant sales.
In the Asia Pacific market for reconstructive implant and
trauma products, the Company competes primarily with
DePuy Orthopaedics, Inc. and Stryker Corporation, as well as
regional companies, including Japan Medical Materials
Corporation and Japan Medical Dynamic Marketing, Inc.
Factors, such as the dealer system, complex regulatory
environments and the accompanying inability to compete on
price, make it difficult for smaller companies, particularly
those that are non-regional, to compete effectively with the
market leaders in the Asia Pacific region.
In Europe, the reconstructive implant and trauma
product markets are more fragmented than the Americas or
the Asia Pacific segments. The variety of philosophies held by
European surgeons regarding hip reconstruction, for example,
has fostered the existence of many small, niche European
companies. Today most hip implants sold in Europe are
products developed specifically for Europe, although global
products are gaining acceptance. Therefore, the Company, in
addition to its global products, will continue to develop and
produce specially tailored products to meet specific European
needs.
In the spinal implant area, the Company competes
globally primarily with Medtronic Sofamor Danek, Inc. (a
subsidiary of Medtronic, Inc.), Synthes, Inc., DePuy Spine (a
subsidiary of Johnson & Johnson), Stryker Corporation and
EBI, L.P. (a subsidiary of Biomet, Inc.).
In the dental reconstructive implant area, the Company
competes primarily with Nobel Biocare Holding AG,
Straumann Holding AG, and Implant Innovations, Inc. (a
subsidiary of Biomet, Inc.).
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Competition within the industry is primarily based on
technology, innovation, quality, reputation, customer
relationships and service. A key factor in the Company’s
continuing success in the future will continue to be its ability
to develop new products and improve upon existing products
and technologies. Where possible, the Company will continue
to seek patent, trademark and other intellectual property
protection concerning the surgical techniques, materials,
technologies and products it designs and develops.
suppliers could require significant effort or investment by the
Company in circumstances where the items supplied are
integral to the performance of the Company’s products or
incorporate unique technology, the Company does not believe
that the loss of any existing supply contract would have a
material adverse effect on its financial and operational
performance. To date, the Company has not experienced any
significant difficulty in locating and obtaining the materials
necessary to fulfill its production schedules.
MANUFACTURING AND RAW MATERIALS
INTELLECTUAL PROPERTY
The Company manufactures substantially all of its
products at eight locations in the United States, Puerto Rico,
Switzerland and France. Specifically, the Company presently
conducts manufacturing operations for various product areas
in Warsaw, Indiana; Winterthur, Switzerland; Ponce, Puerto
Rico; Dover, Ohio; Austin, Texas11; Statesville, North Carolina;
Carlsbad, California; and Etupes, France. In 2004, as part of
the execution of the Centerpulse integration plan, the
Company transferred some of its production operations
among its facilities in order to optimize its manufacturing
capacity. The Company believes that its manufacturing
facilities set industry standards in terms of automation and
have the flexibility to accommodate future growth. The
manufacturing operations at these facilities are designed to
incorporate the cellular concept for production and to
implement tenets of a manufacturing philosophy focused on
continuous operational improvement. In addition, at certain
of the Company’s manufacturing facilities, many of the
employees are cross-trained.
The Company generally operates its manufacturing
facilities at its targeted goal of approximately 90 percent of
total capacity. The Company continually evaluates the
potential to in-source products currently purchased from
outside vendors to on-site production. The Company is
currently in the process of expanding certain of its facilities.
Improving manufacturing productivity has been a major
contributor to the Company’s profitability improvements in
recent years. Major areas of improvement have included
utilization of computer-assisted robots to precision polish
medical devices, automation of certain manufacturing
processes, in-sourcing of core products, such as castings and
forgings, high-speed machining, and negotiated reductions in
raw materials costs.
The Company uses a diverse and broad range of raw
materials in the design, development and manufacturing of its
products. The Company purchases all of its raw materials and
select components used in manufacturing its products from
external suppliers. In addition, the Company purchases some
supplies from single sources for reasons of quality assurance,
sole source availability, cost effectiveness or constraints
resulting from regulatory requirements. The Company works
closely with its suppliers to assure continuity of supply while
maintaining high quality and reliability. Although a change in
11 The Company has announced plans to phase-out this facility by the end
of 2005.
The Company believes that patents and other proprietary
rights are important to the continued success of its business
and the Company also relies upon trade secrets, know-how,
continuing technological innovation and licensing
opportunities to develop and maintain its competitive
position. The Company protects its proprietary rights through
a variety of methods, including confidentiality agreements
and proprietary information agreements with vendors,
employees, consultants and others who may have access to
proprietary information.
The Company owns or controls through licensing
arrangements more than 2,130 issued patents and more than
2,106 patent applications throughout the world that relate to
aspects of the technology incorporated in many of the
Company’s products.
EMPLOYEES
The Company employs more than 6,600 employees
worldwide, including more than 540 employees dedicated to
research and development. Approximately 4,100 employees
are located within the United States and more than 2,500
employees are located outside of the United States, primarily
in Japan and throughout Europe. The Company has over
2,400 employees dedicated to the manufacture of its products
worldwide. The Warsaw, Indiana, production facility employs
more than 900 employees. Nearly 200 North American
employees are members of a trade union covered by a
collective bargaining agreement.
In May 2000, the Company renewed a collective
bargaining agreement with the United Steelworkers of
America covering employees at the Dover, Ohio, facility. This
agreement will continue in effect until May 15, 2007. The
agreement automatically renews thereafter on a year-to-year
basis until either party gives written notice of its intent to
terminate the agreement, 60 days prior to a termination date.
The Company believes that its relationship with its employees
and the union that represents them is good.
AVAILABLE INFORMATION
The Company’s Internet website address is
www.zimmer.com. Its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and
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amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act are available or
may be accessed free of charge through the Investor
Relations section of the Company’s Internet website as soon
as reasonably practicable after the Company electronically
files such material with, or furnishes it to, the SEC. The
Company’s Internet website and the information contained
therein or connected thereto are not intended to be
incorporated by reference into this Annual Report on
Form 10-K.
The following corporate governance and related
documents are available through the Company’s website or
may be obtained in print form, without charge, by request to
the Company’s Investor Relations Department: Corporate
Governance Guidelines, Code of Business Conduct, Code of
Ethics for Chief Executive Officer and Senior Financial
Officers, Audit Committee Charter, Compensation and
Management Development Committee Charter, Corporate
Governance Committee Charter, and Science and Technology
Committee Charter.
The Company intends to post on its website any
amendment to, or waiver from, a provision of its Code of
Ethics for Chief Executive Officer and Senior Financial
Officers.
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Executive Officers of the Company
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The following table sets forth certain information with respect to the executive officers of the Company as of January 31, 2005.
Name
J. Raymond Elliott
Sheryl L. Conley
James T. Crines
David C. Dvorak
Richard Fritschi
Jon E. Kramer
Sam R. Leno
Bruno A. Melzi
Age
55
44
45
41
44
58
59
57
Position
Chairman, President and Chief Executive Officer
President, Global Products Group
Senior Vice President, Finance/Controller and Information Technology
Executive Vice President, Corporate Services, Chief Counsel and Secretary
President, Zimmer Europe and Australasia
President, Americas
Executive Vice President, Corporate Finance and Operations and Chief Financial Officer
Chairman, Zimmer International
J. Raymond Elliott was appointed Chairman on August 6, 2001
and President and Chief Executive Officer of the Company on
March 20, 2001. Mr. Elliott was appointed President of
Zimmer, Inc., the Company’s predecessor, in November 1997.
Mr. Elliott has more than 30 years of experience in
orthopaedics, medical devices and consumer products. He
has served as a director on more than 20 business-related
boards in the U.S., Canada, Japan and Europe and has served
on five occasions as Chairman. He has served as a member of
the board of directors and chair of the orthopaedic sector of
the Advanced Medical Technology Association (AdvaMed)
and is currently a director of the State of Indiana Workplace
Development Board, the Indiana Chamber of Commerce, the
American Swiss Foundation, and represents the State of
Indiana on the President’s State Scholars Program. Mr. Elliott
has served as a trustee of the Orthopaedic Research and
Education Foundation (OREF).
Sheryl L. Conley was appointed President, Global Products
Group in October 2003 and she oversees the Company’s Global
Development and Global Brand Management groups, the
Orthopaedic Surgical Products Division and the Dental
Products Division. Ms. Conley has responsibility for, among
other things, strategic planning and market research. From
September 2002 to October 2003, Ms. Conley served as
President, Zimmer Reconstructive and from May 2000 to
August 2002, she served as Vice President, Global Brand
Management and Commercialization, where she was
responsible for the Company’s worldwide branding, marketing
and new product development efforts. Ms. Conley was General
Manager, Zimmer Canada, from 1998 to 2000. Ms. Conley
joined Zimmer, Inc. in 1983 and has held various management
positions in marketing, operations and clinical research.
James T. Crines was appointed Senior Vice President, Finance/
Controller and Information Technology in October 2003 and
he is responsible for a variety of financial functions, including
accounting, corporate reporting, investments and treasury, as
well as for the Company’s worldwide Information Technology
function. From July 2001 to October 2003, Mr. Crines served
as Vice President, Finance/Controller and from September
2000 to July 2001, he served as Vice President, Finance and
Information Technology. Mr. Crines served Zimmer, Inc. as
Director of Finance and Logistics, Japan from May 1999 until
September 2000. Mr. Crines served as Associate Director,
Accounting at Bristol-Myers Squibb, the Company’s former
parent, from September 1995 until he joined Zimmer, Inc. in
1997 as Director of Finance. Mr. Crines has over 20 years of
experience in corporate and operations finance and
accounting, including five years as an auditor.
David C. Dvorak was appointed Executive Vice President,
Corporate Services, Chief Counsel and Secretary in October
2003 and he is responsible for, among other things, legal
affairs, corporate business development, corporate
communications and corporate human resources. Mr. Dvorak
also serves as the Company’s Compliance Officer. From
December 2001 to October 2003, Mr. Dvorak served as Senior
Vice President, Corporate Affairs and General Counsel of the
Company. He has served as Corporate Secretary since
February 2003. Prior to his appointment with the Company,
Mr. Dvorak served as Senior Vice President, General Counsel
and Corporate Secretary and was a member of the Executive
Committee of STERIS Corporation. Prior to joining STERIS in
June 1996, Mr. Dvorak practiced corporate law at two large
Cleveland, Ohio law firms, focusing on mergers and
acquisitions and on securities law.
Richard Fritschi was appointed President, Zimmer Europe and
Australasia in October 2003 and he is responsible for sales in
the European market as well as all European marketing and
the European and Australasia operations group, including the
Winterthur, Switzerland manufacturing facility. From July
2001 to October 2003, Mr. Fritschi served as President of
Centerpulse Orthopedics Europe/Asia/Latin America. He
joined Allo Pro AG (subsequently known as Sulzer Medica
Company) as Controller in 1991 and was promoted to Chief
Financial Officer of Allo Pro AG in 1992 before becoming
General Manager of Sulzer Orthopedics Ltd. in 1999.
Jon E. Kramer was appointed President, Americas in August
2004 and he has responsibilities with respect to the
Company’s business in the United States, Canada and Latin
America. From October 2003 to August 2004, Mr. Kramer
served as Vice President, U.S. Sales, and from 2001 to
October 2003, he was the Company’s Area Vice President for
the Southeast region of the United States. Prior to joining the
Company, Mr. Kramer served as Vice President of Sales for
Implex Corp. The Company acquired Implex on April 23,
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2004, and the company formerly known as Implex now is a
wholly-owned subsidiary of Zimmer. Mr. Kramer has over
20 years of sales experience in the orthopaedics industry.
Sam R. Leno was appointed Executive Vice President,
Corporate Finance and Operations, and Chief Financial
Officer in October 2003 and, in addition to his Chief Financial
Officer role, he is responsible for the Company’s equity
investment portfolio, global operations, which include the
Company’s information technology group, Puerto Rico
operations, global sourcing, global planning and logistics,
global inventory oversight, facilities and facilities planning,
and productivity. From July 2001 to October 2003, Mr. Leno
served as Senior Vice President and Chief Financial Officer of
the Company. Prior to his appointment with the Company,
Mr. Leno served as Senior Vice President and Chief Financial
Officer of Arrow Electronics, Inc., a global distributor of
electronic components, a position he held from March 1999
until he joined the Company. Between 1971 and March 1999,
Mr. Leno held various chief financial officer and other
financial positions with several U.S. based companies and he
previously served as a U.S. Naval Officer.
Bruno A. Melzi was appointed Chairman, Zimmer International
in October 2003 and he is responsible for the Company’s
operations in Europe and Japan, as well as the international
staff functions of finance, human resources, legal and
communications. He joined Zimmer, Inc. in 1990 as Managing
Director, Italy. In March 2000, Mr. Melzi was promoted from
Vice President and Managing Director of Italy, Germany and
Switzerland, a position he held since October of 1997, to the
role of President, Europe/MEA. Mr. Melzi has over 28 years
of experience in the orthopaedics and medical products
industry, including serving as General Manager and member
of the Board of Directors of Johnson & Johnson Italy from
1983 to 1990.
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ITEM 2. Properties
The Company has the following properties:
Location
Warsaw, Indiana
Warsaw, Indiana
Warsaw, Indiana
Statesville, North Carolina
Dover, Ohio
Austin, Texas
Carlsbad, California
Minneapolis, Minnesota
Minneapolis, Minnesota
Cedar Knolls, New Jersey
Memphis, Tennessee
Sydney, Australia
Wemmel, Belgium
Shanghai, China
Etupes, France
Freiburg, Germany
Kiel, Germany
Treviso, Italy
Milan, Italy
Fukuoka, Japan
Gotemba, Japan
Tokyo, Japan
Seoul, Korea
Utrecht, Netherlands
Mississauga, Canada
Ponce, Puerto Rico
Ponce, Puerto Rico
Singapore
Barcelona, Spain
Baar, Switzerland
Winterthur, Switzerland
M ¨unsingen, Switzerland
Swindon, United Kingdom
Use
Owned/Leased
Square Feet
Research & Development, Manufacturing, Warehousing, Marketing and
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Corporate Headquarters and The Zimmer Institute . . . . . . . . . . . . . . . . . . . . . Owned
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Research & Development, Manufacturing & Warehousing . . . . . . . . . . . . . . . . Owned
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . . Owned
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Research & Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices, Service Center & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . .
Leased
Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
796,000
115,000
125,000
156,000
140,000
227,000
85,000
42,000
16,000
25,000
30,000
36,000
15,000
10,000
90,000
44,000
21,000
11,000
36,000
22,000
87,000
24,000
38,000
16,000
52,000
113,000
12,000
10,000
67,000
40,000
251,000
76,000
68,000
The Company has begun to phase-out production in its Austin facility and intends to close the facility in 2005. To
compensate, additions to the facilities in Warsaw, Indiana and Ponce, Puerto Rico of approximately 132,000 and 110,000 square
feet, respectively, have begun and are expected to be completed in 2005.
In addition to the above, the Company maintains more than 100 other offices and warehouse facilities in more than 24
countries around the world, including the United States, Japan, Australia, France, Russia, India, Germany, Italy, Switzerland and
China. The Company believes that all of the facilities and equipment are in good condition, well maintained and able to operate
at present levels.
ITEM 3. Legal Proceedings
Information pertaining to legal proceedings can be found in Note 16 to the Consolidated Financial Statements, which are
included herein under Item 8.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
17
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
Part II
ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
The Company’s common stock is traded on the New York Stock Exchange and the SWX Swiss Exchange under the symbol
‘‘ZMH.’’ The high and low sales prices for the Company’s common stock on the New York Stock Exchange for the calendar
quarters of fiscal years 2004 and 2003 are set forth as follows:
Quarterly High-Low Share Prices
Year Ended December 31, 2004:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2003:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$81.68
$88.95
$89.44
$84.99
$49.90
$49.58
$57.00
$71.85
$68.24
$73.66
$64.40
$67.00
$38.02
$41.20
$43.69
$54.84
The Company has not declared or paid dividends on the common stock since becoming a public company on August 6,
2001. Currently, the Company does not anticipate paying any cash dividends on the common stock in the foreseeable future.
The Company’s credit facility also restricts the payment of dividends under certain circumstances.
The number of beneficial owners of common stock on February 18, 2005 was approximately 594,000. On February 18, 2005,
the closing price of the common stock, as reported on the New York Stock Exchange, was $85.76 per share.
The information required by this Item concerning equity compensation plans is incorporated by reference to Item 12 of this
report.
18
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
ITEM 6. Selected Financial Data
2 0 0 4 F O R M 1 0 - K
The financial information for each of the past five years ended December 31, is set forth below (in millions, except per
share amounts):
Summary of Operations
Net sales
Net earnings
Pro forma net earnings assuming change in accounting principle
for instruments is applied retroactively(2)
Earnings per common share
Basic
Diluted
Pro forma earnings per common share assuming change in
accounting principle for instruments is applied retroactively(2)
Basic
Diluted
Average common shares outstanding(3)
Basic
Diluted
Balance Sheet Data
Total assets
Due to former parent
Short-term debt
Long-term debt
Other long-term obligations
Stockholders’ equity
2004
2003(1)
2002
2001
2000
$2,980.9
541.8
$1,901.0
346.3
$1,372.4
257.8
$1,178.6
149.8
$1,040.6
176.0
541.8
291.2
260.8
156.2
177.1
$
$
2.22
2.19
2.22
2.19
244.4
247.8
$5,695.5
–
27.5
624.0
420.9
3,942.5
$
$
1.67
1.64
1.40
1.38
207.7
211.2
$5,156.0
–
101.3
1,007.8
352.6
3,143.3
$
$
1.33
1.31
1.34
1.33
194.5
196.8
$ 858.9
–
156.7
–
91.8
366.3
$
$
0.77
0.77
0.81
0.80
193.7
194.3
$ 745.0
–
150.0
213.9
79.3
78.7
$
$
0.91
0.91
0.91
0.91
193.6
193.6
$ 597.4
144.0
–
–
5.5
N/A
(1) Includes the results of Centerpulse subsequent to October 2, 2003 and Centerpulse balance sheet data as of December 31, 2003. See Note 3 to the
audited financial statements for more information on the Centerpulse acquisition.
(2) Pro forma net earnings for the year ended December 31, 2003 are before the cumulative effect of an accounting change of $55.1 million. The years
ended December 31, 2002, 2001 and 2000 reflect the retroactive application of a new accounting method for instruments. Effective January 1, 2003,
Zimmer changed its method of accounting for instruments which are owned by Zimmer and used by orthopaedic surgeons during total joint
replacement and other surgical procedures. Instruments are recognized as long-lived assets and are included in property, plant and equipment and
are depreciated using the straight-line method based on estimated useful lives, determined principally in reference to associated product life cycles,
primarily five years. In prior periods, undeployed instruments were carried as a prepaid cost and recognized in selling, general and administrative
expense in the year in which the instruments were placed into service.
(3) For periods ended prior to August 6, 2001, average common shares reflect the number of shares of Company common stock outstanding on August 6,
2001, the date all of the shares of Company common stock were distributed to the stockholders of the Company’s former parent. For periods
subsequent to August 6, 2001, average common shares reflect any new issuances of common stock and the dilutive effect of outstanding stock
options, where appropriate.
19
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction
with the consolidated financial statements and the
corresponding notes included elsewhere in this Form 10-K.
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking
statements.
OVERVIEW
Zimmer Holdings, Inc. is a global leader in the design,
development, manufacture and marketing of reconstructive
orthopaedic implants, including joint and dental, spinal
implants, and trauma products and related orthopaedic
surgical products (‘‘OSP’’). Orthopaedic reconstructive
implants restore joint function lost due to disease or trauma
in joints such as knees, hips, shoulders and elbows. Dental
reconstructive implants restore function and aesthetics in
patients that have lost teeth due to trauma or disease. Spinal
implants are utilized by orthopaedic surgeons and
neurosurgeons in the treatment of degenerative diseases,
deformities and trauma in all regions of the spine. Trauma
products are devices used primarily to reattach or stabilize
damaged bone and tissue to support the body’s natural
healing process. The Company’s related orthopaedic surgical
products include supplies and instruments designed to aid in
orthopaedic surgical procedures. With operations in more
than 24 countries and products marketed in more than 100
countries, operations are managed through three reportable
geographic segments – the Americas, Europe and Asia
Pacific. As used in this discussion, the ‘‘Company’’ means
Zimmer Holdings, Inc. and its subsidiaries.
The Company believes that the following developments
or trends are important to understanding the Company’s
financial condition, results of operations and cash flows for
the year ended December 31, 2004.
Acquisitions of Centerpulse and Implex
The Centerpulse acquisition, completed in the fourth
quarter of 2003, had a significant impact on financial results
for the year ended December 31, 2004. Centerpulse
accounted for 37 percentage points of the Company’s
57 percent sales growth for the year ended December 31,
2004. In addition, for the year ended December 31, 2004, the
Company incurred $81.1 million of Centerpulse and Implex
acquisition and integration expenses. The Company’s gross
profit margin for the year ended December 31, 2004 was also
impacted by the Centerpulse and Implex acquisitions, as an
inventory step-up charge reduced reported gross profit by
$59.4 million (2.0 percent of sales). ‘‘Inventory step-up’’ as
used herein represents the difference between the cost basis
and the fair value of acquired Centerpulse and Implex
inventories. SFAS No. 141 requires the recorded values for
acquired inventories to be adjusted from cost to fair value at
the date of acquisition based upon estimated sales price less
distribution costs and a profit allowance. ‘‘Inventory step-up
charge(s)’’ as used herein represents the amount of non-cash
20
expense that is recorded upon the sale of acquired
inventories.
Net synergies associated with the acquisition and
integration of Centerpulse were approximately $16 million for
the year ended December 31, 2004 compared to an original
estimate of $1 million. As anticipated, only modest synergies
were recognized in cost of goods sold during 2004. More
significant cost of goods synergies are expected to be
recognized in 2005 and 2006 upon depletion of acquired
inventories, upon completion of the transfer of production
from Centerpulse’s U.S. manufacturing facility in Austin,
Texas to other Company manufacturing facilities in Warsaw,
Indiana, Winterthur, Switzerland and Ponce, Puerto Rico and
upon completion of the manufacturing portion of the
integration plan including, for example, in-sourcing forgings
and castings. Operating expense synergies, principally in
selling, general and administrative expenses, have exceeded
the Company’s original expectations, reflecting more rapid
than expected execution and achievement of operational
efficiencies. However, these cost synergies were partially
offset by negative sales synergies (losses), also anticipated,
and increases in other expenses. Estimated sales losses,
including distributor buy backs (accounted for as sales
returns) related to distribution restructuring, were
$51 million for the year ended December 31, 2004. Increases
in other expenses during 2004 include higher distributor
commissions, professional fees connected with corporate
compliance and training programs and relocation and
recruiting to fill open positions. Net synergies for 2005 are
expected to approximate $63 million compared to the
Company’s original estimate of $56 million. Net synergies for
2006 are expected to be in excess of $100 million compared
to the Company’s original estimate of $70 to $90 million.
The Company continues to manage the integration of
Centerpulse. As of December 31, 2004, the Company has
completed over 60 percent of the 3,364 scheduled milestones
required to execute the entire integration. The Company has
made substantial progress in developing global combined
product strategies, in integrating the sales and business
organizations, and in melding essential activities as diverse as
global accounting policies and procedures, manufacturing
processes and E-mail systems. During 2004, the Company,
among other things:
) combined and trained sales organizations
) created common branding worldwide
) created common worldwide financial consolidation and
quality systems
) implemented a global product development system to
improve speed-to-market
) consolidated its orthobiologics research activities in Austin,
Texas
) in-sourced a variety of formerly out-sourced manufacturing
functions
) initiated a worldwide supply chain strategic plan for
manufacturing and distribution networks
) unified professional medical education initiatives
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
) completed the closure of Centerpulse’s former
headquarters in Zurich, Switzerland
) began the transfer of production from Centerpulse’s
U.S. manufacturing facility in Austin, Texas to Warsaw,
Indiana, Winterthur, Switzerland and Ponce, Puerto Rico
) implemented a more tax efficient global business structure
) completed approximately 75 percent of the Warsaw,
Indiana and Ponce, Puerto Rico plant expansions, with
Winterthur, Switzerland expansion plans initiated
) consolidated North American distribution and customer
service functions
Remaining integration milestones relate primarily to the
completion of the manufacturing integration plan, including
the shut-down of manufacturing operations in Austin, Texas
and the in-sourcing of a variety of formerly out-sourced
manufacturing functions, including forging and casting
production. In addition to the remaining manufacturing
integration milestones, other integration activities still to be
completed include the establishment of common information
technology systems and certain warehouse consolidations.
The Company expects to incur approximately $45 million of
integration expenses during 2005 to complete the remaining
integration milestones.
The Company completed the acquisition of Implex on
April 23, 2004. During 2004, the Company paid approximately
$153.1 million in initial Implex acquisition costs, net of cash
acquired. The acquisition was a culmination of a distribution
and strategic alliance agreement relating to the development
and distribution of reconstructive implant and trauma
products incorporating Trabecular Metal Technology.
Pursuant to the former distribution and strategic alliance
agreement, the Company sold products incorporating
Trabecular Metal Technology. Prior to the acquisition, over
90 percent of Implex sales were Trabecular Metal
Technology sales to the Company. Therefore, the acquisition
did not result in the immediate addition of significant new
customers or sales for the Company. Post acquisition profit
margins on Company products incorporating Trabecular
Metal Technology also did not immediately improve as these
sales consisted primarily of inventory that the Company
already had on hand at the acquisition date. In addition,
during 2004 the Company recorded amortization expense of
approximately $4 million related to acquired technology
intangible assets. Therefore, the acquisition reduced diluted
EPS by an estimated $0.02 for the year ended December 31,
2004. The Company expects to realize significantly improved
future profit margins on Trabecular Metal Technology
product sales as it sells inventory manufactured after the
acquisition date. In addition, due to continued strong demand
for products incorporating Trabecular Metal Technology, the
Company expects to triple its Trabecular Metal Technology
manufacturing capacity, which will lead to future sales
increases and improved profit margins as a result of
manufacturing efficiencies.
Demand (Volume and Mix) Trends
On a pro forma11 basis, volume and mix improvements
contributed 9 percentage points of sales growth during the
year ended December 31, 2004. Orthopaedic procedure
volume on a global basis continues to rise at mid to high
single digit rates driven by an aging global population, proven
clinical benefits, new material technologies, advances in
surgical techniques (such as the Company’s MIS Procedures
and Technologies) and more active lifestyles, among other
factors. In addition, the continued shift in demand to
premium products, such as Longevity and Durasul Highly
Crosslinked Polyethylene Liners, Trabecular Metal
Technology products, high flex knees, knee and hip revision
products and porous hip stems, continue to positively impact
sales growth. For the year ended December 31, 2004,
primary porous hip stems accounted for 63 percent of all
Zimmer standalone primary hip stem units sold, compared to
46 percent, 53 percent and 59 percent of total primary hip
stem units sold for Zimmer standalone in 2001, 2002 and
2003, respectively. ‘‘Zimmer standalone sales’’ as used herein
refers to sales for the period less sales from acquired
Centerpulse businesses.
The Company believes innovative surgical approaches
will continue to significantly impact the orthopaedics
industry. The Company has made significant progress in the
development and introduction of MIS Procedures and
Technologies. During the year ended December 31, 2004, the
Company trained more than 1,400 surgeons at The Zimmer
Institute and its satellite locations in MIS Techniques,
including the MIS 2-Incision Hip Replacement Technique
and MIS Quad-Sparing Knee Replacement Technique.
During the fourth quarter of 2004, the Company estimates
that 50 percent and 36 percent of all Zimmer standalone
U.S. hip and knee sales, respectively, utilized an MIS
Procedure and/or Technology.
Pricing Trends
In the Americas, the Company’s largest operating
segment, the Company realized pro forma average selling
price growth of 4 percent for the year ended December 31,
2004. In Europe, pro forma sales growth reflected flat average
selling prices during the year. However, during the fourth
quarter of 2004, European average selling prices decreased
approximately 1 percent, primarily due to a 6 percent price
decrease in Germany, principally the result of a revised
reimbursement system implemented by the German
government. In the Asia Pacific operating segment on a pro
forma basis, the Company experienced an average selling
price reduction of 2 percent during the year ended
December 31, 2004, principally the result of the Japanese
11 The unaudited pro forma net sales information, including comparisons
to 2004 net sales, contained in this Form 10-K and presented in
accordance with U.S. generally accepted accounting principles has been
derived from the audited financial statements of the Company for the
year ended December 31, 2003 and the financial statements of
Centerpulse for the nine months ended September 30, 2003 to give
effect to the Centerpulse acquisition as if it had occurred on January 1,
2003.
21
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
government’s bi-annual change in reimbursement rates.
Pressure from governmental healthcare cost containment
efforts, group purchasing organizations and potential gain
sharing arrangements between surgeons and hospitals may
negatively affect the Company’s ability to realize global price
increases of 2-3 percent.
Foreign Currency Exchange Rates
A weakened U.S. dollar during the year ended
December 31, 2004 compared to last year contributed
4 percentage points sales growth, on a pro forma basis. The
Company addresses currency risk management through
regular operating and financing activities, and under
appropriate circumstances and subject to proper
authorization, through the use of simple forward contracts
solely for managing foreign currency volatility and risk. The
use of derivative financial instruments for trading or
speculative purposes is prohibited.
RESULTS OF OPERATIONS
New Product Sales
New products, which management defines as products
introduced within the prior 36-month period, accounted for
18 percent, or $541 million, of the Company’s sales during
the year ended December 31, 2004. Adoption rates for new
technologies are a key indicator of industry performance.
Sales have grown with the introduction of new products such
as Prolong Highly Crosslinked Polyethylene for the knee,
which was introduced in 2002, and represented
approximately 49 percent of all cruciate retaining articulating
surface product sales and 12 percent of all knee articulating
surfaces for the year ended December 31, 2004. Adoption
rates for the Company’s new products should continue to
favorably affect the Company’s operating performance.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net Sales by Operating Segment
The following table presents net sales by operating segment and the components of the percentage changes
(dollars in millions):
Americas
Europe
Asia Pacific
Year Ended December 31,
2004
2003
% Inc
Zimmer Standalone
Volume/
Mix
Price
Foreign
Exchange
Impact of
Centerpulse
Acquisition
$1,741.3
808.3
431.3
$1,208.3
366.0
326.7
$2,980.9
$1,901.0
44%
121
32
57
16%
9
10
14
5%
2
(3)
3
–%
23%
10
8
3
100
17
37
‘‘Foreign Exchange’’ as used in the tables herein represents the effect of changes in foreign exchange rates on sales growth.
‘‘Impact of Centerpulse Acquisition’’ as used in the tables herein represents the impact of the Centerpulse acquisition on sales
growth.
The following table presents 2004 net sales by operating segment and 2003 unaudited pro forma net sales by operating
segment and the components of the percentage changes (dollars in millions):
Year Ended December 31,
Reported
2004
$1,741.3
808.3
431.3
$2,980.9
Pro forma
2003
$1,499.1
707.1
383.4
$2,589.6
% Inc
16%
14
13
15
Volume/
Mix
12%
5
7
9
Price
4%
–
(2)
2
Foreign
Exchange
–%
9
8
4
Americas
Europe
Asia Pacific
22
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
Net Sales by Product Category
The following table presents net sales by product category and the components of the percentage changes
(dollars in millions):
Reconstructive
Knees
Hips
Dental
Extremities
Total
Trauma
Spine
OSP
Total
Year Ended December 31,
2004
2003
% Inc
Zimmer Standalone
Volume/
Mix
Price
Foreign
Exchange
Impact of
Centerpulse
Acquisition
$1,194.5
1,079.0
124.7
58.1
$ 800.6
645.5
29.8
45.1
2,456.3
1,521.0
172.9
134.2
217.5
150.1
35.1
194.8
$2,980.9
$1,901.0
49%
67
319
28
62
15
281
12
57
18%
16
–
9
17
2
–
5
14
3%
2
–
5
3
3
–
2
3
3%
3
–
3
3
3
–
2
3
25%
46
319
11
39
7
281
3
37
Knee sales were led by the NexGen Complete Knee Solution product line including the NexGen LPS-Flex Knee, NexGen
Trabecular Metal Tibial Components and the NexGen CR-Flex Knee. In addition, the NexGen Rotating Hinge Knee and the
Innex Total Knee System exhibited strong growth. Hip sales were led by growth in porous stems, including significant growth of
the VerSys Fiber Metal and Zimmer M/L Taper Stems (the stems of choice for MIS Procedures), Trabecular Metal Acetabular
Cups, Trilogy Acetabular Cups, Durom Hip Resurfacing Products, and Longevity and Durasul Highly Crosslinked Polyethylene
Liners. The Alloclassic Hip System and AllofitTM Acetabular Shell also had strong growth. Dental sales were led by sales of
biologicals, surgical products and prosthetic implants, including strong growth of the SwissPlus˛ Implant System and Tapered
Screw-Vent Internal Hex Implant System. Extremities sales were led by the Bigliani/Flatow Shoulder. Trauma sales were led
by sales of Zimmer Periarticular Plates, Cable-Ready˛ Cable Products, Zimmer Plates and Screws System, ITST and Sirius
Intramedullary Nails, TransFx External Fixation System and the Trabecular Metal AVN Rod. Spine sales were led by the
Dynesys Dynamic Stabilization System and Trinica Select Anterior Cervical Plate System. OSP sales were primarily driven by
the continued growth of the OrthoPAT Autotransfusion System and wound management and drainage products.
The following table presents 2004 net sales by product category and 2003 unaudited pro forma net sales by product
category and the components of the percentage changes (dollars in millions):
Reconstructive
Knees
Hips
Dental
Extremities
Total
Trauma
Spine
OSP
Total
Year Ended December 31,
Reported
2004
Pro forma
2003
$1,194.5
1,079.0
124.7
58.1
$1,007.8
937.6
99.9
52.2
2,456.3
2,097.5
172.9
134.2
217.5
161.4
130.9
199.8
$2,980.9
$2,589.6
% Inc
Volume/
Mix
Price
Foreign
Exchange
19%
15
25
11
17
7
3
9
15
12%
9
19
3
11
1
(3)
5
9
3%
1
3
5
2
3
4
1
2
4%
5
3
3
4
3
2
3
4
23
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
The following table presents estimated* 2004 global market size and market share information (dollars in billions):
Reconstructive
Knees
Hips
Dental
Extremities
Total
Trauma
Spine***
Global
Market
Size
$ 4.2
3.9
1.3
0.3
$ 9.7
$ 2.4
$ 3.9
Global
Market
% Growth**
Zimmer
Market
Share
Zimmer
Market
Position
15%
10
20
15
14
11
24
28%
28
9
18
25
7
3
1
1
4
2
1
4
6
* Estimates based on company annual filings, Wall Street equity research and Zimmer management
** Excludes the effect of changes in foreign exchange rates on sales growth
*** Spine includes related orthobiologics
Growth in the Americas was led by strong knee and hip
sales. Knee sales were led by the NexGen Complete Knee
Solution product line, including the NexGen LPS-Flex Knee,
NexGen Trabecular Metal Tibial Components, the NexGen
LCCK Revision Knee, the NexGen CR-Flex Knee and
Prolong Highly Crosslinked Polyethylene. The Natural-Knee
System also made a strong contribution. Hip sales were led
by growth in porous stems, including significant growth of
the VerSys Fiber Metal and Zimmer M/L Taper Stems (the
stems of choice for MIS Procedures), beaded stems,
Trabecular Metal Acetabular Cups and Longevity and
Durasul Highly Crosslinked Polyethylene Liners.
The following table presents 2004 Americas net sales and
2003 Americas unaudited pro forma net sales (dollars
in millions):
Reconstructive
Knees
Hips
Dental
Extremities
Total
Trauma
Spine
OSP
Total
Year Ended December 31,
Reported
2004
Pro forma % Inc
(Dec)
2003
$ 762.0
499.5
75.3
41.1
$ 625.9
425.1
61.0
37.3
1,377.9
1,149.3
105.7
111.0
146.7
100.9
112.0
136.9
$1,741.3
$1,499.1
22%
18
23
10
20
5
(1)
7
16
Pro forma sales growth of 15 percent (12 percent
volume/mix and 3 percent price) and 10 percent (9 percent
volume/mix and 1 percent price) for knees and hips,
respectively, during 2004 was in line with market growth,
despite Centerpulse acquisition sales dis-synergies and
inventory buy backs (accounted for as sales returns) due to
changes in the Company’s distribution network resulting from
the Centerpulse acquisition. Pro forma dental sales growth of
22 percent (19 percent volume/mix and 3 percent price),
outpaced the market due to strong sales of biologicals,
surgical products and prosthetic implants; the continued
rebranding to Zimmer also was a positive factor. The
Company’s pro forma 2004 sales growth rates for extremities,
trauma and spine were below the corresponding estimated
market growth rates, reflecting market share loss. Extremities
and spine lagged the overall market growth rate due to the
fact that the Company does not have a complete product
offering to compete effectively with the product category
market leaders. Trauma is lagging the overall market growth
rate due to delays in new product introductions. Comparison
of the OSP pro forma growth rate to a market growth rate is
not meaningful due to the fragmented nature of the market.
Americas Net Sales
The following table presents Americas net sales (dollars
Year Ended December 31,
2004
2003 % Inc
Impact of
Centerpulse
Acquisition
$ 762.0
499.5
75.3
41.1
1,377.9
105.7
111.0
146.7
$ 523.6
365.6
18.2
34.0
941.4
100.3
29.5
137.1
$1,741.3
$1,208.3
46%
37
314
21
46
5
276
7
44
18%
16
314
5
21
–
249
–
23
in millions):
Reconstructive
Knees
Hips
Dental
Extremities
Total
Trauma
Spine
OSP
Total
24
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
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Europe Net Sales
Asia Pacific Net Sales
The following table presents Europe net sales (dollars
The following table presents Asia Pacific net sales
in millions):
(dollars in millions):
Year Ended December 31,
2004
2003 % Inc
Impact of
Centerpulse
Acquisition
Year Ended December 31,
2004
2003 % Inc
Impact of
Centerpulse
Acquisition
Reconstructive
Knees
Hips
Dental
Extremities
Total
Trauma
Spine
OSP
Total
$ 292.0
398.4
34.8
11.6
$ 162.8
151.7
8.2
7.1
736.8
329.8
29.5
19.8
22.2
16.3
4.6
15.3
$ 808.3
$ 366.0
79%
61%
163
323
62
124
81
330
45
121
137
323
44
103
59
330
29
100
Reconstructive
Knees
Hips
Dental
Extremities
Total
Trauma
Spine
OSP
Total
$ 140.5
181.0
14.6
5.4
$ 114.2
128.3
3.4
4.0
341.5
249.9
37.7
3.4
48.7
33.4
1.0
42.4
$ 431.3
$ 326.7
23%
41
333
34
37
13
213
15
32
9%
25
333
8
22
2
213
–
17
Growth in Europe was led by strong knee and hips sales.
Knee sales were driven by strong sales of the NexGen
Complete Knee Solution product line, including the NexGen
CR Knee, NexGen Trabecular Metal Tibial Components and
the NexGen Rotating Hinge Knee. Hip sales were driven by
strong sales of Longevity and Durasul Highly Crosslinked
Polyethylene Liners, VerSys Porous Stems and Trabecular
Metal Acetabular Cups. The Alloclassic Hip System and
Allofit Acetabular Shell also had strong growth.
The following table presents 2004 Europe net sales and
2003 Europe unaudited pro forma net sales (dollars
in millions):
Growth in Asia Pacific was led by strong knee and hip
sales. Knee sales were driven by the NexGen LPS-Flex Knee,
NexGen Trabecular Metal Tibial Components and the
NexGen CR Knee. The Natural-Knee System also made a
strong contribution. Hip sales were driven primarily by the
continued conversion to porous stems, including VerSys
Porous Stems, and sales of Longevity Highly Crosslinked
Polyethylene Liners.
The following table presents 2004 Asia Pacific net sales
and 2003 Asia Pacific unaudited pro forma net sales (dollars
in millions):
Reconstructive
Knees
Hips
Dental
Extremities
Total
Trauma
Spine
OSP
Total
Year Ended December 31,
Reported
2004
Pro forma
2003 % Inc
$ 292.0
398.4
34.8
11.6
$ 254.4
351.5
27.9
10.3
736.8
644.1
29.5
19.8
22.2
26.0
16.7
20.3
$ 808.3
$ 707.1
15%
13
25
11
14
14
19
9
14
Reconstructive
Knees
Hips
Dental
Extremities
Total
Trauma
Spine
OSP
Total
Year Ended December 31,
Reported
2004
Pro forma
2003 % Inc
$ 140.5
181.0
14.6
5.4
$ 127.5
161.0
11.0
4.6
341.5
304.1
37.7
3.4
48.7
34.5
2.2
42.6
$ 431.3
$ 383.4
10%
12
33
17
12
9
51
15
13
25
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
Gross Profit
Gross profit as a percentage of net sales was
73.8 percent in 2004, compared to 72.8 percent in 2003 and
68.1 percent for the three month period ended December 31,
2003 (the first quarter of combined Zimmer and Centerpulse
operations). The following table reconciles the gross margin
for the year ended December 31, 2004 and for the three
month period ended December 31, 2003.
Three month period ended December 31, 2003
gross margin
Inventory step-up charge
Increased average selling prices
Operating segment and product category mix
Other
Year ended December 31, 2004 gross margin
68.1%
4.1
1.8
0.2
(0.4)
73.8%
Decreased Centerpulse and Implex inventory step-up
charges as a percentage of net sales during 2004
($59.4 million, or 2.0 percent of net sales) compared to the
three month period ended December 31, 2003 ($42.7 million,
or 6.1 percent of net sales) and increases in average selling
prices were the primary contributors to improved gross
margins. In addition, operating segment mix and product
category mix both had a positive impact on gross margins
due to higher sales growth in the more profitable Americas
segment compared to Europe and Asia Pacific, higher sales
growth of reconstructive implants and the continued shift to
premium products. Offsetting these favorable impacts were a
variety of other items, including increased royalty expenses
and higher losses on foreign exchange contracts included in
cost of products sold, partially offset by reduced
manufacturing costs due to automation, vertical integration
and process improvements.
Operating Expenses
R&D as a percentage of net sales was 5.6 percent for
years ended December 31, 2004 and 2003. R&D increased to
$166.7 million from $105.8 million reflecting a full year of
Centerpulse research and development expenses and
increased spending on active projects focused on areas of
strategic significance. The Company’s pipeline includes 146
projects with a total investment equal to or greater than
$1 million. Of the 146 projects, approximately two-thirds
involve new platforms, MIS or other technologies. For
example, the Company’s orthobiological research group in
Austin, Texas is developing innovative solutions for hip
fracture and cartilage regeneration. During 2004, the
Company delivered more than 40 major development projects
to market. The Company has strategically targeted R&D
spending to be at the high end of what management believes
to be an average of 4-6 percent for the industry. The
Company expects over the next few years to invest in
research and development at approximately 5.5 percent to
6 percent of sales.
SG&A as a percentage of net sales was 39.9 percent for
the year ended December 31, 2004 compared to 38.8 percent
26
for the same 2003 period. Amortization expense increased to
$39.1 million, or 1.3 percent of sales, during the year ended
December 31, 2004 compared to $10.9 million, or less than
1 percent of sales, during the year ended December 31, 2003.
The increase was primarily due to amortization expense
related to Centerpulse and Implex finite lived intangible
assets. In addition, during 2004 the Company continued to
introduce or expand strategic programs and activities. In
2004, The Zimmer Institute and its satellite locations were
well utilized with over 1,400 surgeons trained, compared to
500 surgeons trained in 2003. These surgeon training costs
are recognized in SG&A. The Company also recognized
approximately $5 million of Sarbanes-Oxley compliance
expenses, including consultant fees and increased audit fees.
These increases were partially offset by expense synergies
realized from the Centerpulse acquisition and controlled
spending. The Company has begun to realize synergies from
the Centerpulse acquisition and expects to pursue additional
synergy opportunities. The Company estimates that over the
next two years it will be able to reduce annual SG&A as a
percentage of net sales to 38.9 percent or lower, representing
a 200 basis point improvement over the fourth quarter of
2003 (the first quarter of combined Zimmer and Centerpulse
operations).
Acquisition and integration expenses related to the
acquisitions of Centerpulse and Implex were $81.1 million
compared to $79.6 million for the same 2003 period and
included $24.4 million of sales agent and lease contract
termination expenses, $24.2 million of integration consulting
expenses, $9.4 million of employee severance and retention
expenses, $7.8 million of professional fees, $5.2 million of
personnel expenses and travel for full-time integration team
members, $4.3 million of costs related to integrating the
Company’s information technology systems, $2.9 million of
costs related to relocation of facilities, and $2.9 million of
other miscellaneous acquisition and integration expenses.
Operating Profit, Income Taxes and Net Earnings
Operating profit for the year ended December 31, 2004
increased 69 percent to $763.2 million from $450.7 million in
the comparable 2003 period. Operating profit growth was
driven by Zimmer standalone sales growth, operating profit
contributed by Centerpulse, effectively controlled operating
expenses and the absence of in-process research and
development expense in 2004 compared to $11.2 million in
2003. These favorable items were partially offset by
Centerpulse and Implex inventory step-up of $59.4 million in
2004 compared to $42.7 million in 2003 and intangible asset
amortization of $39.1 million in 2004 versus $10.9 million in
2003.
The effective tax rate on earnings before income taxes,
minority interest and cumulative effect of change in
accounting principle decreased to 25.9 percent for the year
ended December 31, 2004 from 33.6 percent for the same
period in 2003. A major component of the decrease
(4.7 percent, or $34.5 million) was the result of revaluing
deferred taxes of acquired Centerpulse operations due to a
reduction in the ongoing Swiss tax rate. The major reasons
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
for the remaining decrease in the effective tax rate were the
ongoing European restructuring initiatives, the successful
negotiation of a lower ongoing Swiss tax rate (from
approximately 24 percent to 12.5 percent) and continued
expansion of operations in lower tax jurisdictions.
Net earnings increased 57 percent to $541.8 million for
the year ended December 31, 2004 compared to
$346.3 million in the same 2003 period. The increase was due
to higher operating profit offset partially by increased interest
expense, $31.7 million in 2004 compared to $13.2 million in
2003. Net earnings for 2003 also included a one-time,
$55.1 million (net of tax), non-cash cumulative effect of a
change in accounting principle for instruments. Net earnings
in 2004 also benefited from the decreased effective income
tax rate. Basic and diluted earnings per share increased
33 percent and 34 percent to $2.22 and $2.19, respectively,
from $1.67 and $1.64 in 2003.
Year Ended December 31, 2003
Compared to Year Ended December 31, 2002
The following table presents the components of the 2003
over 2002 percentage changes in net sales by geographic
segment:
Zimmer Standalone
Volume/
Mix
Foreign
Exchange
Sub-
Total
Price
Impact of
Centerpulse
Acquisition
Americas
Europe
Asia Pacific
Consolidated
15% 4%
19
4
13
2
1
3
–% 19%
17
9
4
38
14
20
11%
77
7
19
Net
Change
30%
115
21
39
Net sales for the year ended December 31, 2003
increased 39 percent to $1,901.0 million. Sales growth was
driven by strong demand for the Company’s reconstructive
implants and additional sales from the October 2, 2003
Centerpulse acquisition. The 39 percent increase was
comprised of a 20 percent increase in Zimmer standalone
sales and a 19 percent increase due to the Centerpulse
acquisition. Favorable demographics, including an aging
population and a continued shift to premium priced products,
contributed to the favorable volume and mix growth. Higher
average selling prices were realized in all three geographic
segments. The continued weakening of the U.S. dollar versus
the Euro and the Japanese yen were the main contributors to
the favorable impact of foreign currency exchange rates on
net sales.
Net sales in the Americas for the year ended
December 31, 2003 increased 30 percent to $1,208.3 million.
Sales growth was driven by strong demand for the Company’s
reconstructive implants and additional sales from the
Centerpulse acquisition. The 30 percent increase was
comprised of a 19 percent increase in Zimmer standalone
sales plus an 11 percent increase due to the Centerpulse
acquisition. Net sales of reconstructive implants increased
33 percent to $941.4 million, 22 percent due to increased
Zimmer standalone sales and 11 percent related to the
Centerpulse acquisition. Knee sales increased 32 percent to
$523.6 million, 24 percent related to increased Zimmer
standalone sales and 8 percent due to the Centerpulse
acquisition. Hip sales increased 27 percent to $365.6 million,
21 percent due to increased Zimmer standalone sales and
6 percent due to the Centerpulse acquisition. Knee sales
growth was led by the NexGen Legacy Knee-Posterior
Stabilized product line, including the LPS-Flex Knee, the
NexGen Trabecular Metal Technology Tibial Components,
the NexGen CR Knee with Prolong Highly Crosslinked
Polyethylene and the NexGen Rotating Hinge Knee. Hip sales
growth was driven by the continued conversion to porous
stems including significant growth of the VerSys Fiber Metal
Taper Stem, which is often used in MIS Hip Replacement
Procedures; Trabecular Metal Acetabular Cups; and
increased sales of Trilogy Acetabular Cups incorporating
Longevity Highly Crosslinked Polyethylene Liners.
Net sales in Europe for the year ended December 31,
2003 increased 115 percent to $366.0 million. Sales growth
was driven by additional sales from the Centerpulse
acquisition and strong demand for the Company’s
reconstructive implants. The 115 percent increase was
comprised of a 77 percent increase due to the Centerpulse
acquisition and a 38 percent increase in Zimmer standalone
sales. Net sales of reconstructive implants increased
119 percent to $329.8 million, 81 percent due to the
Centerpulse acquisition and 38 percent due to increased
Zimmer standalone sales, including 18 percent due to
changes in foreign exchange rates. Knee sales increased
72 percent to $162.8 million, 37 percent due to the
Centerpulse acquisition and 35 percent due to increased
Zimmer standalone sales, including 18 percent due to
changes in foreign exchange rates. Hip sales increased
196 percent to $151.7 million, 152 percent due to the
Centerpulse acquisition and 44 percent due to increased
Zimmer standalone sales, including 17 percent due to
changes in foreign exchange rates. Knee sales were driven by
strong sales of the NexGen Legacy system of knee
prostheses, the NexGen CR Knee, NexGen Trabecular Metal
Components and the NexGen Rotating Hinge Knee. Hip sales
were driven by strong sales of Trilogy Acetabular Cups
incorporating Longevity Highly Crosslinked Polyethylene
Liners, VerSys Porous Stems and Trabecular Metal
Acetabular Cups.
Net sales in Asia Pacific for the year ended
December 31, 2003 increased 21 percent to $326.7 million.
Sales growth was driven by strong demand for the Company’s
reconstructive implants and additional sales from the
Centerpulse acquisition. The 21 percent increase was
comprised of a 14 percent increase in Zimmer standalone
sales and a 7 percent increase due to the Centerpulse
acquisition. Net sales of reconstructive implants increased
25 percent to $249.8 million, 14 percent due to increased
Zimmer standalone sales, including 9 percent due to changes
in foreign exchange rates, and 11 percent due to the
Centerpulse acquisition. Knee sales increased 21 percent to
$114.2 million, 16 percent due to increased Zimmer
standalone sales, including 10 percent due to changes in
foreign exchange rates, and 5 percent due to the Centerpulse
acquisition. Hip sales increased 25 percent to $128.2 million,
13 percent due to increased Zimmer standalone sales,
27
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
including 9 percent due to changes in foreign exchange rates,
and 12 percent due to the Centerpulse acquisition. Knee
sales were driven by the NexGen LPS-Flex Knee, NexGen
Trabecular Metal Technology Tibial Components and the
NexGen CR Knee. Hip sales were driven primarily by the
continued conversion to porous stems and sales of Trilogy
Acetabular Cups incorporating Longevity Highly Crosslinked
Polyethylene Liners.
The following table presents the components of the 2003
over 2002 percentage changes in net sales by product
category:
Zimmer Standalone
Volume/
Mix
Foreign
Exchange
Sub-
Total
Price
Impact of
Centerpulse
Acquisition
Net
Change
Reconstructive
implants
Trauma
Spine(1)
Orthopaedic
surgical
products
Consolidated
16% 3%
4
–
5
13
3
–
2
3
4% 23%
3
–
10
–
20%
3
N/A
43%
13
N/A
3
4
10
20
–
19
10
39
Overall, worldwide reconstructive implant sales increased
43 percent to $1,521.0 million. The 43 percent increase was
comprised of a 23 percent increase in Zimmer standalone
sales and a 20 percent increase due to the Centerpulse
acquisition. Knee sales increased 37 percent to
$800.5 million, 24 percent due to increased Zimmer
standalone sales, including 4 percent due to changes in
foreign exchange rates and 13 percent due to the
Centerpulse acquisition. Knee sales were led by the NexGen
Legacy Knee Posterior Stabilized product line including the
LPS-Flex Knee, NexGen Trabecular Metal Tibial
Components and the NexGen CR Knee with Prolong Highly
Crosslinked Polyethylene. Hip sales increased 46 percent to
$645.6 million, 24 percent due to the Centerpulse acquisition
and 22 percent due to increased Zimmer standalone sales,
including 5 percent due to changes in foreign exchange rates.
Hip sales were driven by continued conversion to porous
stems, Trabecular Metal Acetabular Cups, and increased
sales of Trilogy Acetabular Cups incorporating Longevity
Highly Crosslinked Polyethylene Liners. Dental sales were
$29.8 million, reflecting solid growth in both standard and
tapered SwissPlus Implants. Trauma sales increased
13 percent to $151.6 million, 10 percent due to increased
Zimmer standalone sales, including 3 percent due to changes
in foreign exchange rates, and 3 percent due to the
Centerpulse acquisition. Trauma sales were led by sales of
the Zimmer Periarticular Plating System. Spine sales were
$33.6 million due to sales from Centerpulse. OSP sales
increased 10 percent, including 3 percent due to changes in
foreign currency, to $194.8 million, primarily driven by the
continued growth of the OrthoPAT Orthopedic Perioperative
Autotransfusion System.
Gross profit as a percentage of net sales was
72.8 percent in 2003 compared to 74.9 percent in 2002.
(1) Spine was a new product category as a result of the Centerpulse
acquisition.
28
Gross profit for 2003 was reduced $42.7 million, or
2.2 percent of net sales, as a result of an inventory step-up
charge recognized in connection with the Centerpulse
acquisition. Sales and gross profit from Centerpulse also
reduced reported gross margins as Centerpulse has a greater
percentage of sales based in Europe, where gross margins are
historically lower than the U.S. and Japan. Increased Zimmer
standalone average selling prices in all geographic segments,
the continued conversion from cemented implants to higher
margin porous implants and the ongoing efforts to reduce
manufacturing costs through automation, in-sourcing and
process improvements had positive impacts on gross profit.
The Company’s operating plans annually call for reductions in
unit manufacturing cost of its products as a direct result of a
number of factors, including but not limited to, increased
volume, improvements in material technology, replacement of
used machinery and equipment with higher speed equipment,
changes in the configuration of manufacturing cells designed
to increase throughput, labor automation as well as in-
sourcing. Focus on inventory cost reduction is a strategic
imperative. The Company will continue to direct efforts on
driving down costs of products sold, general and
administrative expenses and holding costs associated with
working capital.
Research and development as a percentage of net sales
was 5.6 percent in 2003 compared to 5.9 percent in 2002, as
research and development expenses increased 31 percent
from the prior year compared to a 39 percent increase in
sales. Research and development expense increased to
$105.8 million from $80.7 million reflecting research and
development expenses from Centerpulse and increased
spending on active projects focused on areas of strategic
significance, including MIS Technologies, innovative materials
such as Trabecular Metal Technology and Highly Crosslinked
Polyethylene, lifestyle designs, revision implants and
biological solutions. The Company has strategically targeted
R&D spending to be at the high end of what management
believes to be an average of 4-6 percent for the industry.
Maintaining a robust product development pipeline has
enabled Zimmer to achieve significant contributions in
revenue from new products, which management defines as
products introduced within the prior 36 month period. For
example, in the fourth quarter, new product revenue,
excluding Centerpulse, represented 18.9 percent of sales, at
the high end of the Company’s stated quarterly and annual
goal of 15-20 percent, in place since 1999. Management
expects over the next year or two to continue to invest in
R&D at almost 6 percent of sales on a higher revenue base as
investments in spine, biologics and new technology increase.
Selling, general and administrative expenses (‘‘SG&A’’) as
a percentage of net sales were 38.8 percent in 2003
compared to 39.8 percent (39.4 percent assuming the change
in accounting principle for instruments is applied
retroactively) in 2002. Low cost inflation accompanied with
double digit revenue growth has driven the overall expense
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
ratio lower for the year. Detailed planning, monitoring and
control over these expenses have also contributed to the
improvement. While well managed, the Company introduced
programs and activities in 2003 that involved significant
investments, which, in part, are reflected in SG&A. As an
example, The Zimmer Institute saw very active use in 2003.
The Zimmer Institute, which is used for surgeon training,
product development activities such as prototype evaluations
and product and instrument training for independent field
sales representatives, provided training for over 500 surgeons,
physician assistants and nurses on the MIS 2-Incision Hip
Replacement Procedure and the MIS Quad-Sparing Total
Knee Procedure over the course of 2003. The cost of training
is borne by the Company and reported in SG&A. The
acquisition of Centerpulse resulted in higher SG&A as a
percentage of sales in the fourth quarter of 2003. The change
in accounting principle for instruments favorably impacted
SG&A by $26.8 million, or 1.4 percent of net sales, in 2003.
Acquisition and integration expenses related to the
acquisition of Centerpulse and InCentive were $79.6 million,
including $36.1 million of sales agent and lease contract
termination expenses, $15.4 million of integration consulting
expenses, $10.2 million of employee severance and retention
expenses, $6.4 million of professional fees, $5.3 million of
costs for meetings and activities associated with the initial
cross-training of employees and independent sales
representatives, $2.4 million of investment banking fees
incurred by Centerpulse, $2.0 million of personnel expenses
and travel for full-time integration team members,
$0.6 million of employee relocation expenses and $1.2 million
of other miscellaneous acquisition and integration expenses.
Operating profit increased 12 percent to $450.7 million.
Operating profit growth was driven by strong organic sales
growth, operating profit contributed by Centerpulse and
effectively controlled operating expenses. In addition, the
change in accounting principle for instruments favorably
impacted operating profit by $26.8 million. These favorable
items were offset by Centerpulse inventory step-up of
$42.7 million, Centerpulse in-process research and
development write-offs of $11.2 million and Centerpulse
acquisition and integration expenses of $79.6 million.
The Company’s effective tax rate for the year ended
December 31, 2003 was 33.6 percent, compared to
33.7 percent in 2002. The decrease from 33.7 percent to
33.6 percent was due to expanded operations in Puerto Rico
and the implementation of certain business strategies in 2002
which resulted in reducing taxes in certain jurisdictions and
increased credits, offset by non-deductible in-process
research and development charges.
Net earnings increased 34 percent to $346.3 million from
$257.8 million in 2002, driven by strong organic sales growth,
earnings contributed by Centerpulse, leveraged operating
expenses and the one-time, non-cash cumulative effect of
change in accounting principle for instruments of
$55.1 million (net of tax), offset by Centerpulse inventory
step-up of $28.0 million (net of tax), Centerpulse in-process
research and development write-offs of $11.2 million and
Centerpulse acquisition and integration expenses of
$51.1 million (net of tax). Basic and diluted earnings per
share increased 26 percent and 25 percent to $1.67 and
$1.64, respectively, from $1.33 and $1.31 in 2002.
OPERATING PROFIT BY SEGMENT
Company management evaluates operating segment
performance based upon segment operating profit exclusive
of operating expenses pertaining to global operations and
corporate expenses, acquisition and integration expenses,
inventory step-up, in-process research and development
write-offs and intangible asset amortization expense. Global
operations include research, development engineering,
medical education, brand management, corporate legal,
finance, human resource functions and the Americas
operations and logistics functions. For more information
regarding the Company’s segments, see Note 14 to the
consolidated financial statements included elsewhere in this
Form 10-K.
The following table sets forth the operating profit as a
percentage of sales by segment for the years ended
December 31, 2004, 2003 and 2002:
Percent of net sales
Year Ended December 31,
Americas
Europe
Asia Pacific
2004
2003
2002
51.3%
34.6
42.3
51.2%
26.3
45.3
48.3%
24.4
46.1
Year Ended December 31, 2004
Compared to Year Ended December 31, 2003
In the Americas, operating profit as a percentage of sales
improved slightly due to improved gross margins and
controlled operating expenses. Gross profit margins increased
as a result of improved average selling prices, lower royalty
expenses as a percentage of net sales and the impact of a
more favorable product sales mix. Product sales mix made
favorable contributions as the Company sold a higher
concentration of more profitable reconstructive implants and
spinal implants, while less profitable trauma and OSP
products became a smaller percentage of net sales. Royalties
as a percentage of net sales declined as certain royalty
contracts have fixed components and caps, or ceilings, on
payments. In addition to improved gross margins, the
Company effectively controlled operating expenses, including
general and administrative expenses. These improvements
were offset primarily by increased selling expenses as a
percentage of net sales due to the restructuring of certain
distributor contracts.
In Europe, operating profit as a percentage of net sales
improved due to improved gross margins, controlled
operating expenses and the favorable impact of the
Centerpulse acquisition. Gross profit margins increased
principally due to improved average selling prices, a more
favorable product and country sales mix and the favorable
impact of the Centerpulse acquisition. Product sales mix
made favorable contributions as the Company sold a higher
concentration of more profitable reconstructive implants and
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spinal implants, while less profitable trauma and OSP
products became a smaller percentage of net sales. Country
sales mix made favorable contributions as the profitable
German market represented a greater percentage of total
Europe sales.
Asia Pacific operating profit as a percentage of net sales
declined primarily due to decreased average selling prices,
principally the result of the 4.9 percent decrease in
government reimbursement rates in Japan, and increased
selling expenses as a percentage of net sales due to the
restructuring of certain dealer contracts in Japan.
Year Ended December 31, 2003
Compared to Year Ended December 31, 2002
Operating profit for the Americas as a percentage of net
sales increased due to improved gross margins driven by
higher average selling prices and increased sales of higher
margin products, leveraged operating expenses and the
favorable impact of the change in accounting principle for
instruments. The change in accounting principle for
instruments increased operating profit by 1.7 percentage
points. With respect to sales growth, increased Zimmer
standalone average selling prices of 4 percent in 2003 and
favorable effects of volume and mix, 15 percent increase in
2003, represent the most significant factors in improved
operating profit in the Americas. As reconstructive implant
sales grow at a higher rate than trauma and OSP, operating
profit margins generally tend to improve since reconstructive
product sales generally earn higher gross margins. This was
the case in 2003, with Zimmer standalone reconstructive
implant sales growth of 22 percent as compared with total
Zimmer standalone sales growth of 19 percent. In the fourth
quarter, the Company reported operating profit as a percent
of net sales of 50.4 percent for the Americas.
Operating profit for Europe as a percentage of net sales
increased due to improved gross profit margins driven by
higher Zimmer standalone average selling prices and
favorable product and country mix, leveraged operating
expenses and the favorable impact of the change in
accounting principle for instruments. The change in
accounting for instruments increased operating profit by
1.4 percentage points. Increases in Zimmer standalone
average selling prices in Europe of 2 percent in 2003 and the
effect of volume and mix, 19 percent increase in 2003, were
the key factors in improved operating profit. Also
contributing to the improvement was significantly lower
growth in operating expenses. In the fourth quarter of 2003,
the Company reported operating profit as a percent of net
sales of 24.7 percent for Europe.
Operating profit for Asia Pacific as a percentage of net
sales decreased primarily due to less favorable rates on hedge
contracts during the year compared to the prior year,
partially offset by increased Zimmer standalone average
selling prices and leveraged operating expenses. The change
in accounting for instruments had an immaterial effect on
operating profit for Asia Pacific. Increases in Zimmer
standalone average selling prices in Asia Pacific of 1 percent
and volume and mix improvements of 4 percent in 2003
30
contributed modest improvement but was offset by higher
cost of products sold. Included in cost of product sold are
losses on foreign exchange hedge contracts, which increased
in 2003 relative to 2002. In the fourth quarter, the Company
reported operating profit as a percent of net sales of
47.1 percent for Asia Pacific.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were
$862.2 million in 2004 compared to $494.8 million in 2003.
The principal source of cash was net earnings of
$541.8 million. Non-cash expenses for the period included
depreciation and amortization expense of $181.3 million and
Centerpulse and Implex inventory step-up of $59.4 million.
Included in operating cash flow is approximately $112 million
of payments related to the Centerpulse and Implex
integration. Income taxes generated $139.2 million of
operating cash flow, primarily due to reduced U.S. federal
income tax payments resulting from the utilization of
acquired Centerpulse net operating losses and exercises of
stock options by Company employees, which are deductible
expenses in the U.S. In addition, during 2004 the Company
received a $55 million tax refund related to the overpayment
of U.S. federal income taxes during 2003.
Working capital, including the management of inventory
and accounts receivable, continues to be a key management
focus. At December 31, 2004, the Company had 59 days of
sales outstanding in accounts receivable, favorable to
December 31, 2003 by 3 days and unfavorable to
December 31, 2002 by 7 days. Acquired Centerpulse
businesses accounted for the decline from December 31,
2002, as Centerpulse’s business mix has a greater proportion
of European sales with payment terms generally longer than
those in the U.S. The improvement from the prior year is due
to the Europe operating segment reducing its days of sales
outstanding by 6 days due to improved collections in larger
markets, such as Germany and France, and the factoring of
receivables in Italy. At December 31, 2004, the Company had
258 days of inventory on hand, unfavorable to the prior year
by 26 days. Inventory balances have increased due to the
acquisition of Implex and to support new product launches.
The 258 days of inventory on hand at December 31, 2004 is
in line with the Company’s anticipated levels of 250-260 days.
Cash flows used in investing activities declined to
$388.3 million in 2004 compared to $1,102.7 million in 2003.
During 2003 the Company made $927.7 million of cash
payments, net of acquired cash, for the Centerpulse and
InCentive Capital acquisitions, compared to $18.2 million
during 2004 to complete the compulsory acquisition process.
During 2004 the Company also completed the acquisition of
Implex for cash consideration of $153.1 million, comprised of
$98.6 million of initial cash consideration, earn-out payments
of $51.9 million and direct acquisition costs of $2.6 million.
Additions to other property, plant and equipment during
2004 were $100.8 million compared to $44.9 million in 2003.
Increases were primarily to support the acquired Centerpulse
businesses, to support sales growth and new product
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
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launches and to fund the facility expansions in Warsaw,
Indiana, Ponce, Puerto Rico, and Parsippany, New Jersey.
Additions to instruments during 2004 were $139.6 million
compared to $113.6 million in 2003. Increases in instrument
purchases were primarily to support acquired Centerpulse
businesses and to support new product launches. Also,
additional instrument purchases were made during 2004 to
support MIS Procedure growth, including the placement of
over 2,000 MIS Quad-Sparing Knee Replacement and Mini-
Incision Knee Replacement instrument sets in the field.
During 2005 the Company expects purchases of other
property, plant and equipment to increase to approximately
$125 million to $135 million, as a result of ongoing facility
expansions in Warsaw, Indiana, Ponce, Puerto Rico,
Winterthur, Switzerland and Parsippany, New Jersey. Facility
expansions are due to increased demand, the closure of the
Austin, Texas, facility and the tripling of Trabecular Metal
Technology production capacity. During 2005 the Company
expects purchases of instruments to be approximately
$145 million to $150 million as the Company continues to
invest in instruments to support new products, sales growth
and MIS procedures.
plus an applicable margin determined by reference to the
Company’s senior unsecured long-term credit rating and the
amounts drawn under the Senior Credit Facility. The Senior
Credit Facility contains customary affirmative and negative
covenants and events of default for an unsecured financing
arrangement, including, among other things, limitations on
consolidations, mergers and sales of assets, as defined in the
Senior Credit Facility. Financial covenants include a
maximum leverage ratio of 3.0 to 1.0 and a minimum interest
coverage ratio of 3.5 to 1.0. If the Company falls below an
investment grade credit rating, additional restrictions would
result, including restrictions on investments and payment of
dividends, as defined in the Senior Credit Facility. The
Company intends to maintain a capital structure that is
consistent with an investment grade credit rating. The
Company was in compliance with all covenants under the
Senior Credit Facility as of December 31, 2004. Commitments
under the $400 million 364-day revolving credit facility and
the $800 million three-year revolving credit facility are
subject to certain fees, including a facility and a utilization
fee.
The Company also has available uncommitted credit
Cash flows used in financing activities were
facilities totaling $50 million.
$402.0 million in 2004 compared to $664.8 million provided
by financing activities in 2003. The Company repaid
$461.4 million of debt in 2004 utilizing cash on hand, cash
generated from operating activities and $65.0 million in cash
proceeds received from the exercise of Company stock
options.
As of December 31, 2004, the Company has the following
committed financing arrangements: (i) $400 million 364-day
revolving credit facility maturing May 2005, (ii) $800 million
three-year revolving credit facility maturing June 2006 and
(iii) $550 million five-year term loan facility maturing June
2008 (collectively, the ‘‘Senior Credit Facility’’). Available
borrowings under the Senior Credit Facility at December 31,
2004, were approximately $1.1 billion.
On May 24, 2004, the Company renewed its $400 million
364-day revolving credit facility and amended its five-year
term loan facility to $550 million and reduced its term loan
pricing by 25 basis points.
The Company and certain of its wholly owned foreign
and domestic subsidiaries are the borrowers and its wholly
owned domestic subsidiaries are the guarantors of the Senior
Credit Facility. Borrowings may bear interest at the
appropriate LIBOR-based rate, or an alternative base rate,
The terms of the Implex acquisition include additional
cash earn-out payments that are contingent on the year-over-
year growth of Implex product sales through 2006. The
Company estimates total earn-out payments, including
payments already made, to be in a range from $120 to
$160 million. The Company expects to pay future earn-out
payments, if any, with cash flows from operations and
borrowings available under its Senior Credit Facility.
The Company had $154.6 million in cash and
equivalents, $18.9 million in restricted cash and total debt of
$651.5 million as of December 31, 2004. At December 31,
2004, $70.2 million of cash and equivalents was held at
Company locations outside the U.S. The Company expects
cash on hand to be in excess of total outstanding debt by
June 30, 2006, absent any cash requirements for acquisitions.
Management believes that cash flows from operations,
together with available borrowings under the Senior Credit
Facility, will be sufficient to meet the Company’s working
capital, capital expenditure and debt service needs. Should
investment opportunities arise, the Company believes that its
earnings, balance sheet and cash flows will allow the
Company to obtain additional capital, if necessary.
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CONTRACTUAL OBLIGATIONS
The Company has entered into contracts with various third parties in the normal course of business which will require
future payments. The following table illustrates the Company’s contractual obligations:
Total
2005
$ 651.5
103.0
16.1
420.9
$27.5
23.5
15.5
–
2006
and
2007
$449.0
34.2
0.6
135.7
2008
and
2009
2010
and
Thereafter
$175.0
17.7
–
30.5
$
–
27.6
–
254.7
$1,191.5
$66.5
$619.5
$223.2
$282.3
adequate provisions exist for income taxes for all periods and
jurisdictions subject to review or audit.
Commitments and Contingencies – Accruals for
product liability and other claims are established with
internal and external legal counsel based on current
information and historical settlement information for claims,
related fees and for claims incurred but not reported. An
actuarial model is used by the Company to assist
management in determining an appropriate level of accruals
for product liability claims. Historical patterns of claim loss
development over time are statistically analyzed to arrive at
factors which are then applied to loss estimates in the
actuarial model. The amounts established represent
management’s best estimate of the ultimate costs that it will
incur under the various contingencies.
Goodwill and Intangible Assets – The Company
evaluates the carrying value of goodwill and indefinite life
intangible assets annually, or whenever events or
circumstances indicate the carrying value may not be
recoverable. The Company evaluates 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.
Changes to these assumptions could result in the Company
being required to record impairment charges on these assets.
RECENT ACCOUNTING PRONOUNCEMENTS
Information about recent accounting pronouncements is
included in Note 2 to the Consolidated Financial Statements,
which are included herein under Item 8.
Contractual Obligations
Debt obligations
Operating leases
Purchase obligations
Other long-term liabilities
Total contractual obligations
CRITICAL ACCOUNTING ESTIMATES
The financial results of the Company are affected by the
selection and application of accounting policies and methods.
Significant accounting policies which require management’s
judgment are discussed below.
Excess Inventory and Instruments – The Company
must determine as of each balance sheet date how much, if
any, of its inventory may ultimately prove to be unsaleable or
unsaleable at its carrying cost. Similarly, the Company must
also determine if instruments on hand will be put to
productive use or remain undeployed as a result of excess
supply. Reserves are established to effectively adjust
inventory and instruments to net realizable value. To
determine the appropriate level of reserves, the Company
evaluates current stock levels in relation to historical and
expected patterns of demand for all of its 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 work-in-progress
inventory, which is recorded at cost. Obsolete or
discontinued items are generally destroyed and completely
written off. Management evaluates the need for changes to
valuation reserves based on market conditions, competitive
offerings and other factors on a regular basis.
Income Taxes – The Company estimates income tax
expense and income tax liabilities and assets by taxable
jurisdiction. Realization of deferred tax assets in each taxable
jurisdiction is dependent on the Company’s ability to
generate future taxable income sufficient to realize the
benefits. The Company evaluates deferred tax assets on an
ongoing basis and provides valuation allowances if it is
determined to be ‘‘more likely than not’’ that the deferred tax
benefit will not be realized. Federal income taxes are
provided on the portion of the income of foreign subsidiaries
that is expected to be remitted to the U.S. The Company
operates within numerous taxing jurisdictions. The Company
is 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. The Company makes use
of all available information and makes reasoned judgments
regarding matters requiring interpretation in establishing tax
expense, liabilities and reserves. The Company believes
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ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
The Company is exposed to certain market risks as part
of its ongoing business operations, including risks from
changes in foreign currency exchange rates, interest rates
and commodity prices that could impact its financial
condition, results of operations and cash flows. The Company
manages its exposure to these and other market risks
through regular operating and financing activities, and on a
limited basis, through the use of derivative financial
instruments. Derivative financial instruments are used solely
as risk management tools and not for speculative investment
purposes.
FOREIGN CURRENCY EXCHANGE RISK
The Company operates on a global basis and is exposed
to the risk that its financial condition, results of operations
and cash flows could be adversely affected by changes in
foreign currency exchange rates. The Company is primarily
exposed to foreign currency exchange rate risk with respect
to its transactions and net assets denominated in Euros,
Swiss Francs, Japanese Yen, British Pounds, Canadian Dollars
and Australian Dollars. The Company manages the foreign
currency exposure centrally, on a combined basis, which
allows the Company to net exposures and to take advantage
of any natural offsets. In order to reduce the uncertainty of
foreign exchange rate movements on transactions
denominated in foreign currencies, the Company enters into
derivative financial instruments in the form of foreign
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 other comprehensive income, then
recognized in cost of products sold when the hedged item
affects net earnings.
The notional amounts of outstanding foreign exchange
forward contracts, principally Euros, Swiss Francs, Japanese
Yen, British Pounds, Canadian Dollars and Australian Dollars,
entered into with third parties, at December 31, 2004 and
2003, were $1,052 million and $506 million, respectively. For
contracts outstanding at December 31, 2004, the Company
has an obligation to purchase U.S. Dollars and sell Euros,
Swiss Francs, Japanese Yen, British Pounds, Canadian Dollars
and Australian Dollars or purchase Swiss Francs and sell U.S.
Dollars at set maturity dates ranging from January 2005
through December 2006. The weighted average contract rates
outstanding are Euro: USD 1.20, USD: Swiss Franc 1.25, USD:
Yen 110, British Pound: USD 1.76, USD: Canadian Dollar 1.37
and Australian Dollar: USD 0.65.
The Company maintains written policies and procedures
governing its risk management activities. The Company’s
policy requires that critical terms of hedging instruments are
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 completely offset by changes in the fair value of hedge
instruments. As part of its risk management program, the
Company also performs 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 exchange forward contracts
outstanding at December 31, 2004, indicated that, if the
U.S. Dollar uniformly changed in value by 10 percent relative
to the Euro, Swiss Franc, Japanese Yen, British Pound,
Canadian Dollar and Australian Dollar, with no change in the
interest differentials, the fair value of those contracts would
increase or decrease earnings before income taxes in periods
through 2007, depending on the direction of the change, by
an average approximate amount of $62.1 million,
$21.8 million, $20.3 million, $6.3 million, $4.4 million and
$3.7 million for the Euro, Swiss Franc, Japanese Yen, British
Pound, Canadian Dollar and Australian Dollar contracts,
respectively. Any change in the fair value of foreign 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
exchange contracts would not subject the Company 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.
The Company had net investment exposures to net
foreign currency denominated assets and liabilities of
approximately $1,860 million at December 31, 2004, primarily
in Swiss Francs, Japanese Yen and Euros. Approximately
$1,140 million of the net asset exposure at December 31,
2004 relates to goodwill recorded in the Europe and Asia
Pacific geographic segments.
The Company enters into foreign currency forward
exchange contracts with terms of one month to manage
currency exposures for assets and liabilities denominated in a
currency other than an entity’s functional currency. As a
result, foreign currency translation gains/losses recognized in
earnings under SFAS No. 52, ‘‘Foreign Currency Translation’’
are generally offset with gain/losses on the foreign currency
forward exchange contracts in the same reporting period.
COMMODITY PRICE RISK
The Company purchases raw material commodities such
as cobalt chrome, titanium, tantalum, polymer and sterile
packaging. The Company enters into 12 to 24 month supply
contracts, where available, on these commodities to alleviate
the impact of market fluctuation in prices. As part of the
Company’s risk management program, sensitivity analyses
related to potential commodity price changes are performed. A
10 percent price change across all these commodities would
not have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
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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. However, essentially all of
the Company’s trade receivables are concentrated in the
public and private hospital and healthcare industry in the
U.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. Repayment is dependent upon the financial
stability of these industry sectors and the respective
countries’ national economic and health care systems.
Exposure to credit risk is controlled through credit approvals,
credit limits and monitoring procedures and the Company
believes that reserves for losses are adequate. There is no
significant net exposure due to any individual customer or
other major concentration of credit risk.
INTEREST RATE RISK
In the normal course of business, the Company is
exposed to market risk from changes in interest rates that
could impact its results of operations and financial condition.
The Company manages its exposure to interest rate risks
through its regular operations and financing activities.
Presently, the Company invests its cash and equivalents
in money market and investment-grade short-term debt
instruments. The primary investment objective is to ensure
capital preservation of its invested principal funds by limiting
default and market risk. Currently, the Company does not
use derivative financial instruments in its investment
portfolio.
The Company’s exposure to interest rate risk arises
principally from the variable rates associated with its credit
facilities. The Company is subject to interest rate risk
through movements in interest rates on the committed Senior
Credit Facility and its uncommitted credit facilities.
Presently, all of its debt outstanding bears interest at short-
term rates. The Company currently does not hedge its
interest rate exposure, but may do so in the future. Based
upon the Company’s overall interest rate exposure as of
December 31, 2004, a change of 10 percent in interest rates
(or 25 basis points), assuming the amount outstanding
remains constant, would result in an annual increase of
interest expense of approximately $1.0 million. However, due
to the uncertainty of the actions that would be taken and
their possible effects, this analysis assumes no such action,
nor management actions to mitigate interest rate changes.
Further, this analysis does not consider the effect of the
change in the level of overall economic activity that could
exist in such an environment.
CREDIT RISK
Financial instruments, which potentially subject the
Company to concentrations of credit risk, are primarily cash,
cash equivalents, counterparty transactions, and accounts
receivable.
The Company places its investments in highly rated
financial institutions and money market instruments, and
limits the amount of credit exposure to any one entity. The
Company does not believe it is exposed to any significant
credit risk on its cash and equivalents and investments.
The Company is exposed to credit loss in the event of
nonperformance by the financial institutions with which it
conducts business. However, this loss is limited to the
amounts, if any, by which the obligations of the counterparty
to the financial instrument contract exceed the obligation of
the Company. The Company also minimizes exposure to
credit risk by dealing with a diversified group of major
financial institutions. Credit risk is managed through the
monitoring of counterparty financial condition and by the use
of standard credit guidelines. The Company does not
anticipate any nonperformance by any of the counterparties.
Concentration of credit risk with respect to trade
accounts receivable is limited due to the large number of
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Management’s Report on Internal Control Over Financial Reporting
The management of Zimmer Holdings, Inc. is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) promulgated under the
Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and
principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of the Company; and
) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2004. In making this assessment, the Company’s management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, management has concluded that, as of December 31, 2004, the Company’s internal control over
financial reporting is effective based on those criteria.
The Company’s independent auditors have audited our assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2004, as stated in their report which appears in Item 8 of this Annual Report on
Form 10-K.
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ITEM 8. Financial Statements and Supplementary Data
Zimmer Holdings, Inc.
Index to Consolidated Financial Statements
FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
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Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Zimmer Holdings, Inc.:
We have completed an integrated audit of Zimmer Holdings, Inc.’s 2004 consolidated financial statements and of its internal
control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all
material respects, the financial position of Zimmer Holdings, Inc. and its subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity
with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 4, the Company changed its method of accounting for instruments effective January 1, 2003.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial
Reporting appearing at the conclusion of Item 7A, that the Company maintained effective internal control over financial
reporting as of December 31, 2004 based on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued
by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on
management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our
audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control,
and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company’s assets that could have a material effect on the financial statements.
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Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Chicago, IL
March 9, 2005
38
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
Consolidated Statements of Earnings
For the Years Ended December 31,
Net Sales
Cost of products sold
Gross Profit
Research and development
Selling, general and administrative
In-process research and development
Acquisition and integration
Operating expenses
Operating Profit
Interest expense
Earnings before income taxes, minority interest and
cumulative effect of change in accounting principle
Provision for income taxes
Minority interest
Earnings before cumulative effect of change
in accounting principle
Cumulative effect of change in accounting principle, net of tax
Net Earnings
Earnings Per Common Share – Basic
Earnings before cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle, net of tax
Earnings Per Common Share – Basic
Earnings Per Common Share – Diluted
Earnings before cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle, net of tax
Earnings Per Common Share – Diluted
Pro Forma Amounts Assuming the New Accounting Principle is Applied Retroactively
Net Earnings
Earnings Per Common Share – Basic
Earnings Per Common Share – Diluted
Weighted Average Common Shares Outstanding
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
2 0 0 4 F O R M 1 0 - K
(in millions, except per share amounts)
2004
2003
2002
$2,980.9
779.9
$1,901.0
516.2
$1,372.4
344.8
2,201.0
1,384.8
1,027.6
166.7
1,190.0
–
81.1
1,437.8
763.2
31.7
731.5
189.6
(0.1)
541.8
–
105.8
737.5
11.2
79.6
934.1
450.7
13.2
437.5
146.8
0.5
291.2
55.1
80.7
546.0
–
–
626.7
400.9
12.0
388.9
131.1
–
257.8
–
$ 541.8
$ 346.3
$ 257.8
$
$
$
$
2.22
–
2.22
2.19
–
2.19
$
$
$
$
1.40
0.27
1.67
1.38
0.26
1.64
$
$
$
$
1.33
–
1.33
1.31
–
1.31
$ 541.8
2.22
$
2.19
$
$ 291.2
1.40
$
1.38
$
$ 260.8
1.34
$
1.33
$
244.4
247.8
207.7
211.2
194.5
196.8
39
2 0 0 4 F O R M 1 0 - K
(in millions, except share amounts)
2004
2003
$ 154.6
18.9
524.8
536.0
54.0
272.6
1,560.9
628.5
2,528.9
794.8
182.4
$
77.5
14.5
486.4
527.7
43.5
189.1
1,338.7
525.2
2,291.8
760.5
239.8
$5,695.5
$5,156.0
$ 131.6
34.2
507.7
27.5
701.0
420.9
624.0
$ 127.6
(59.0)
475.4
101.3
645.3
352.6
1,007.8
1,745.9
2,005.7
7.1
7.0
2.5
2,485.2
1,201.5
253.3
2.4
2,342.5
659.7
138.7
3,942.5
3,143.3
$5,695.5
$5,156.0
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
Consolidated Balance Sheets
December 31,
ASSETS
Current Assets:
Cash and equivalents
Restricted cash
Accounts receivable, less allowance for doubtful accounts
Inventories, net
Prepaid expenses
Deferred income taxes
Total Current Assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Income taxes payable (receivable)
Other current liabilities
Short-term debt
Total Current Liabilities
Other long-term liabilities
Long-term debt
Total Liabilities
Commitments and Contingencies (Note 16)
Minority Interest
Stockholders’ Equity:
Common stock, $0.01 par value, one billion shares authorized,
245.5 million (242.4 million in 2003) issued and outstanding
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Stockholders’ Equity
Balance January 1, 2002
Net earnings
Other comprehensive income
Stock option exercises
Other
Balance December 31, 2002
Net earnings
Other comprehensive income
Centerpulse and InCentive Exchange Offers net of $(11.9) million
equity issuance costs
Stock option exercises
Other
Balance December 31, 2003
Net earnings
Other comprehensive income
Centerpulse and InCentive compulsory acquisition
Stock option exercises
Other
Common Shares
Number
Amount
Paid-in
Capital
Retained
Earnings
193.9
–
–
1.3
–
195.2
–
–
44.5
2.7
–
242.4
–
–
0.6
2.5
–
$1.9
–
–
0.1
–
2.0
–
–
0.4
–
–
2.4
–
–
–
0.1
–
$
4.4
–
–
30.9
1.6
36.9
–
–
2,211.6
88.1
5.9
2,342.5
–
–
28.1
104.3
10.3
$
55.6
257.8
–
–
–
313.4
346.3
–
–
–
–
659.7
541.8
–
–
–
–
Accumulated
Other
Comprehensive
Income
(in millions)
Total
Stockholders’
Equity
$ 16.8
–
(2.8)
–
–
14.0
–
124.7
–
–
–
138.7
–
114.6
–
–
–
$
78.7
257.8
(2.8)
31.0
1.6
366.3
346.3
124.7
2,212.0
88.1
5.9
3,143.3
541.8
114.6
28.1
104.4
10.3
Balance December 31, 2004
245.5
$2.5
$2,485.2
$1,201.5
$253.3
$3,942.5
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Cash Flows
For the Years Ended December 31,
Cash flows provided by (used in) operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
Inventory step-up
Write off of in-process research and development
Cumulative effect of change in accounting principle
Changes in operating assets and liabilities, net of acquired assets and liabilities
Income taxes
Receivables
Inventories
Accounts payable and accrued liabilities
Other assets and liabilities
(in millions)
2004
2003
2002
$ 541.8
$ 346.3
$ 257.8
181.3
59.4
–
–
139.2
(10.6)
(44.7)
(3.1)
(1.1)
103.3
42.7
11.2
(89.1)
117.8
(39.0)
(53.0)
75.9
(21.3)
25.3
–
–
–
29.9
(25.0)
(59.7)
(12.2)
4.1
Net cash provided by operating activities
862.2
494.8
220.2
Cash flows provided by (used in) investing activities:
Additions to instruments
Additions to other property, plant and equipment
Centerpulse and InCentive acquisitions, net of acquired cash
Implex acquisition, net of acquired cash
Proceeds from note receivable
Investments in other assets
Net cash used in investing activities
Cash flows provided by (used in) financing activities:
Net proceeds/(payments) on lines of credit
Proceeds from term loans
Payments on term loans
Proceeds from exercise of stock options
Debt issuance costs
Equity issuance costs
Net cash provided by (used in) financing activities
Effect of exchange rates on cash and equivalents
Increase (decrease) in cash and equivalents
Cash and equivalents, beginning of year
Cash and equivalents, end of year
The accompanying notes are an integral part of these consolidated financial statements.
(139.6)
(100.8)
(18.2)
(153.1)
25.0
(1.6)
(113.6)
(44.9)
(927.7)
–
–
(16.5)
–
(33.7)
–
–
–
(2.0)
(388.3)
(1,102.7)
(35.7)
(561.4)
100.0
–
65.0
(0.6)
(5.0)
170.6
550.0
(100.0)
70.5
(19.4)
(6.9)
(212.8)
–
–
23.9
–
–
(402.0)
664.8
(188.9)
5.2
77.1
77.5
4.9
61.8
15.7
1.7
(2.7)
18.4
$ 154.6
$
77.5
$ 15.7
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Consolidated Statements of Comprehensive Income
For the Years Ended December 31,
Net Earnings
Other Comprehensive Income (Loss):
Foreign currency cumulative translation adjustments
Unrealized foreign currency hedge losses, net of tax effects of
$10.0 in 2004, $21.6 in 2003 and $7.5 in 2002
Reclassification adjustments on foreign currency hedges, net of tax
effects of $(9.6) in 2004, $(2.1) in 2003 and $2.1 in 2002
Unrealized gains on securities, net of tax effect of $(1.5)
Minimum pension liability, net of tax effects of $0.2 in 2004 and $0.4 in 2002
Other comprehensive income (loss)
Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements.
(in millions)
2004
2003
2002
$541.8
$346.3
$257.8
145.5
156.6
13.5
(48.7)
(35.3)
(12.2)
15.7
2.4
(0.3)
3.4
–
–
114.6
124.7
(3.5)
–
(0.6)
(2.8)
$656.4
$471.0
$255.0
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Notes to Consolidated Financial Statements
1.
BUSINESS
Zimmer Holdings, Inc. and its subsidiaries (individually
and collectively the ‘‘Company’’) design, develop,
manufacture and market reconstructive orthopaedic implants,
including joint and dental, spinal implants, and trauma
products. Joint reconstructive implants restore function lost
due to disease or trauma in joints such as knees, hips,
shoulders and elbows. Dental reconstructive implants restore
function and aesthetics in patients that have lost teeth due to
trauma or disease. Spinal implants are utilized by orthopaedic
surgeons and neurosurgeons in the treatment of degenerative
diseases, deformities and trauma in all regions of the spine.
Trauma products are devices used primarily to reattach or
stabilize damaged bone and tissue to support the body’s
natural healing process. The Company’s related orthopaedic
surgical products include surgical supplies and instruments
designed to aid in orthopedic surgical procedures. The
Company also has a limited array of sports medicine
products.
The Company has operations in more than 24 countries
and markets its products in more than 100 countries. The
Company operates in a single industry but has three
reportable geographic segments, the Americas, Europe and
Asia Pacific.
2.
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation – The consolidated financial
statements include the accounts of Zimmer Holdings, Inc. and
its subsidiaries in which it holds a controlling equity position.
Investments in companies in which the Company exercises
significant influence over the operating and financial affairs,
but does not control, are accounted for under the equity
method. Under the equity method, the Company records the
investment at cost and adjusts the carrying amount of the
investment by its proportionate share of the investee’s net
earnings or losses. All significant intercompany accounts and
transactions are eliminated. Certain amounts in the 2003 and
2002 consolidated financial statements have been reclassified
to conform to the 2004 presentation.
Use of Estimates – The consolidated financial statements
are prepared in conformity with accounting principles
generally accepted in the United States and, accordingly,
include amounts that are based on management’s best
estimates and judgments. Actual results could differ from
those estimates.
Foreign Currency Translation – The financial
statements of the Company’s foreign subsidiaries are
translated into U.S. dollars using period-end exchange rates
for assets and liabilities and average exchange rates for
operating results. Unrealized translation gains and losses are
included in accumulated other comprehensive income in
stockholders’ equity. Foreign currency transaction gains and
losses included in net earnings are not material.
44
Revenue Recognition – The Company sells product
through three principal channels: 1) direct to health care
institutions, 2) through stocking distributors and healthcare
dealers and 3) directly to dental practices and dental
laboratories. The direct channel accounts for greater than
80 percent of the Company’s revenue. Through this channel,
inventory is generally consigned to sales agents or customers
so that products are available when needed for surgical
procedures. No revenue is recognized upon the placement of
inventory into consignment as the Company retains title and
maintains the inventory on the Company’s balance sheet.
Upon use, the Company issues an invoice and revenue is
recognized. Pricing for products is generally predetermined
by contracts with customers, agents acting on behalf of
customer groups or by government regulatory bodies,
depending on the market. Price discounts under group
purchasing contracts are generally linked to volume of
implant purchases by customer health care institutions within
a specified group. At negotiated thresholds within a contract
buying period, price discounts increase. The Company tracks
sales volumes by contract and as contractual volume
thresholds are achieved, the higher discounts are applied at
an item level on customer invoices. As such, discounts are
reflected in revenue as earned. The Company also accrues for
anticipated price adjustments, which can occur subsequent to
invoicing, based on reasonable estimates derived from past
experience. Revenue is recognized on sales to stocking
distributors, healthcare dealers, dental practices and dental
laboratories, which account for less than 20 percent of the
Company’s revenue, when title to product passes to the
distributor, healthcare dealer, dental practice or dental
laboratory, generally upon shipment. Product is generally sold
to distributors on secured credit terms at fixed prices for
specified periods. A distributor may return product in the
event that the Company terminates the relationship. Under
those circumstances, the Company records an estimated sales
return in the period in which constructive notice of
termination is given to a distributor.
The reserves for doubtful accounts were $28.4 million
and $29.5 million as of December 31, 2004 and 2003,
respectively.
Shipping and Handling – Amounts billed to customers
for shipping and handling of products are reflected in net
sales, and are not significant. Expenses incurred related to
shipping and handling of products are reflected in selling,
general and administrative.
Acquisition and Integration – The Company recognizes
incremental expenses resulting directly from the acquisitions
of Centerpulse and Implex as ‘‘Acquisition and integration’’
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
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Notes to Consolidated Financial Statements (Continued)
expenses. Acquisition and integration expenses for the years
ended December 31, 2004 and 2003, included (in millions):
For the Years Ended December 31,
2004
2003
Sales agent and lease contract terminations
Integration consulting
Employee severance and retention
Professional fees
Integration personnel
Information technology integration
Other
$24.4
24.2
9.4
7.8
5.2
4.3
5.8
$36.1
15.4
10.2
6.4
2.0
–
9.5
$81.1
$79.6
Cash and Equivalents – The Company considers all
highly liquid investments with an original maturity of three
months or less to be cash equivalents. The carrying amounts
reported in the balance sheet for cash and equivalents are
valued at cost, which approximates their fair value. The
Company has restricted cash primarily composed of cash held
in escrow related to certain insurance coverage.
Inventories – Inventories, net of allowances for obsolete
and slow-moving goods, are stated at the lower of cost or
market, with cost determined on a first-in first-out basis.
Property, Plant and Equipment – Property, plant and
equipment is carried at cost less accumulated depreciation.
Depreciation is computed on a straight-line method based on
the estimated useful lives of ten to forty years for buildings
and improvements, three to eight years for machinery and
equipment and generally five years for instruments.
Maintenance and repairs are expensed as incurred. In
accordance with Statement of Financial Accounting Standards
(‘‘SFAS’’) No. 144, ‘‘Accounting for the Impairment or
Disposal of Long-Lived Assets,’’ the Company reviews
property, plant and equipment for impairment whenever
events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. An impairment loss
would be recognized when estimated future undiscounted
cash flows relating to the asset are less than its carrying
amount. An impairment loss is measured as the amount by
which the carrying amount of an asset exceeds its fair value.
Goodwill – The Company accounts for goodwill in
accordance with SFAS No. 142, ‘‘Goodwill and Other
Intangible Assets’’. Under SFAS 142, goodwill is not amortized
but is subject to annual impairment tests. Goodwill has been
assigned to reporting units, which are consistent with the
Company’s reportable operating segments. The Company
performs annual impairment tests in accordance with SFAS
No. 142 by comparing each reporting unit’s fair value to its
carrying amount to determine if there is potential
impairment. If the fair value of the reporting unit is less than
its carrying value, an impairment loss is recorded to the
extent that the implied fair value of the reporting unit
goodwill is less than the carrying value of the reporting unit
goodwill. The fair value of the reporting unit and the implied
fair value of goodwill are determined based upon discounted
cash flows, market multiples or appraised values as
appropriate.
Intangible Assets – The Company accounts for intangible
assets in accordance with SFAS No. 142. Intangible assets
with an indefinite life, including certain trademarks and trade
names, are not amortized. The useful lives of indefinite life
intangible assets are assessed annually to determine whether
events and circumstances continue to support an indefinite
life. Intangible assets with a finite life, including core and
developed technology, certain trademarks and trade names,
customer related intangibles and patents and licenses are
amortized over their estimated useful life, ranging from seven
to thirty years. Intangible assets with an indefinite life are
tested for impairment annually, or whenever events or
circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognized if the carrying
amount exceeds the estimated fair value of the asset. The
amount of the impairment loss to be recorded would be
determined based upon the excess of the asset’s carrying
value over its fair value. Intangible assets with a finite life are
tested for impairment whenever events or circumstances
indicate that the carrying amount may not be recoverable.
Research and Development – The Company expenses all
research and development costs as incurred. Research and
development costs include salaries, prototypes, depreciation
of equipment used in research and development, consultant
fees and amounts paid to collaborative partners.
Income Taxes – The Company accounts for income taxes
in accordance with SFAS No. 109, ‘‘Accounting for Income
Taxes.’’ Under this method, deferred tax assets and liabilities
are determined based on differences between financial
reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates in effect for the years
in which the differences are expected to reverse. Federal
income taxes are provided on the portion of the income of
foreign subsidiaries that is expected to be remitted to
the U.S.
Derivative Financial Instruments – The Company
accounts for all derivative financial instruments in accordance
with SFAS No. 133, ‘‘Accounting for Derivative Instruments
and Hedging Activities,’’ as amended by SFAS No. 138,
‘‘Accounting for Certain Derivative Instruments and Certain
Hedging Activities (an amendment of FASB Statement
No. 133)’’ and SFAS No. 149, ‘‘Amendment of Statement 133
on Derivative Instruments and Hedging Activities’’. SFAS
No. 133 requires that all derivative instruments be reported
as assets or liabilities on the balance sheet and measured at
fair value. The Company maintains written policies and
procedures that permit, under appropriate circumstances and
subject to proper authorization, the use of derivative financial
instruments solely for hedging purposes. The use of
derivative financial instruments for trading or speculative
purposes is prohibited. The Company is exposed to market
risk due to changes in currency exchange rates. As a result,
the Company utilizes foreign exchange forward contracts to
offset the effect of exchange rate fluctuations on anticipated
foreign currency transactions, generally intercompany sales
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Notes to Consolidated Financial Statements (Continued)
and purchases expected to occur within the next twelve to
twenty-four months. Derivative instruments that qualify as
cash flow hedges are designated as such from inception.
Formal documentation is maintained of the Company’s
objectives, the nature of the risk being hedged, identification
of the instrument, the hedged transaction, the hedging
relationship and how effectiveness of the hedging instrument
will be assessed. The Company’s policy requires that critical
terms of a hedging instrument are essentially the same as a
hedged forecasted transaction. On this basis, with respect to
a cash flow hedge, changes in cash flows attributable to the
hedged transaction are generally expected to be completely
offset by the cash flows attributable to hedge instruments.
The Company, therefore, performs quarterly assessments of
hedge effectiveness by verifying and documenting those
critical terms of the hedge instrument and that forecasted
transactions have not changed. The Company also assesses
on a quarterly basis whether there have been adverse
developments regarding the risk of a counterparty default.
For derivatives which qualify as hedges of future cash flows,
the effective portion of changes in fair value is temporarily
recorded in other comprehensive income and then recognized
in cost of products sold when the hedged item affects net
earnings. The ineffective portion of a derivative’s change in
fair value, if any, is reported in cost of products sold
immediately. The net amount recognized in earnings during
the years ended December 31, 2004, 2003 and 2002, due to
ineffectiveness and amounts excluded from the assessment of
hedge effectiveness, was not significant.
The notional amounts of outstanding foreign exchange
forward contracts, principally Euros, Swiss Francs, Japanese
Yen, British Pounds, Canadian Dollars and Australian Dollars,
entered into with third parties, at December 31, 2004, were
$1,052.3 million. The fair value of outstanding derivative
instruments recorded on the balance sheet at December 31,
2004, together with settled derivatives where the hedged
item has not yet affected earnings, was a net unrealized loss
of $97.3 million, or $73.4 million net of taxes, which is
deferred in other comprehensive income, of which,
$57.9 million, or $46.2 million, net of taxes, is expected to be
reclassified to earnings over the next twelve months.
The Company also enters into foreign currency forward
exchange contracts with terms of one month to manage
currency exposures for assets and liabilities denominated in a
currency other than an entity’s functional currency. As a
result, any foreign currency translation gains/losses
recognized in earnings under SFAS No. 52, ‘‘Foreign Currency
Translation’’ are generally offset with gains/losses on the
foreign currency forward exchange contracts in the same
reporting period.
Stock Compensation – At December 31, 2004, the
Company had three stock-option compensation plans for
employees, which are described more fully in Note 13, an
employee stock purchase plan and a restricted stock plan for
certain key members of management. The Company accounts
46
for those plans under the recognition and measurement
principles of APB Opinion No. 25, ‘‘Accounting for Stock
Issued to Employees,’’ and related Interpretations. No
compensation cost is reflected in net income for the stock-
option compensation plans, as all options granted under those
plans had exercise prices equal to the market value of the
underlying common stock on the date of grant. No
compensation cost is reflected in net income for the employee
stock purchase plan under the provisions of APB 25, which
allows a discounted purchase price under Section 423 of the
Internal Revenue Code. Compensation cost related to
restricted stock is recognized in earnings over the vesting
period of the stock, which is generally five years.
Compensation cost related to restricted stock was not
significant for the years ended December 31, 2004, 2003 and
2002. The following table illustrates the effect on net earnings
and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123, ‘‘Accounting for
Stock Based Compensation,’’ to the above plans.
For the Years Ended December 31,
2004
2003
2002
(in millions, except per share amounts)
Net earnings, as reported
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of tax
Pro forma net earnings
Earnings per share:
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
Weighted average shares outstanding:
Basic
Diluted
$541.8
$346.3
$257.8
(26.0)
(14.3)
(12.7)
$515.8
$332.0
$245.1
$ 2.22
2.11
2.19
2.08
$ 1.67
1.60
1.64
1.57
$ 1.33
1.26
1.31
1.25
244.4
247.8
207.7
211.2
194.5
196.8
The fair value of each option granted is estimated on the
date of grant using the Black-Scholes option-pricing model
with the following assumptions:
2004
2003
2002
Dividend Yield
Volatility
Risk-free interest rate
Expected life (years)
–%
–%
–%
28.0% 27.1% 30.3%
4.6%
3.1%
5
5
3.4%
5
The weighted average fair value for options granted
during 2004, 2003 and 2002 was $21.85, $12.85 and $10.63,
respectively.
Comprehensive Income – Other comprehensive income
refers to revenues, expenses, gains and losses that under
generally accepted accounting principles are included in
comprehensive income but are excluded from net earnings as
these amounts are recorded directly as an adjustment to
stockholders’ equity. The Company’s other comprehensive
income is comprised of unrealized foreign currency hedge
gains and losses, minimum pension liability adjustments,
unrealized gains (losses) on available-for-sale securities, and
foreign currency translation adjustments.
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Notes to Consolidated Financial Statements (Continued)
The components of accumulated other comprehensive income are as follows (in millions):
Beginning balance at January 1, 2004
Other comprehensive income (loss)
Balance at December 31, 2004
Accounting Pronouncements – In November 2004, the
FASB issued FASB Staff Position (‘‘FSP’’) 109-1, ‘‘Application
of FASB Statement No. 109, Accounting for Income Taxes, to
the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004’’ and
FSP 109-2, ‘‘Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004’’. FSP 109-1 states that a
company’s deduction under the American Jobs Creation Act
of 2004 (the ‘‘Act’’) should be accounted for as a special
deduction in accordance with SFAS No. 109 and not as a tax
rate reduction. FSP 109-2 provides accounting and disclosure
guidance for repatriation provisions included under the Act.
FSP 109-1 and FSP 109-2 were both effective upon issuance.
The adoption of these FSP’s did not have a material impact
on the Company’s financial position, results of operations or
cash flows in 2004.
In November 2004, the FASB issued SFAS No. 151,
‘‘Inventory Costs’’ to clarify the accounting for abnormal
amounts of idle facility expense. SFAS No. 151 requires that
fixed overhead production costs be applied to inventory at
‘‘normal capacity’’ and any excess fixed overhead production
costs be charged to expense in the period in which they were
incurred. SFAS No. 151 is effective for fiscal years beginning
after June 15, 2005. The company does not expect SFAS
No. 151 to have a material impact on its financial position,
results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 153,
‘‘Exchanges of Nonmonetary Assets’’, which is effective for
fiscal years beginning after June 15, 2004. The Company does
not routinely engage in exchanges of nonmonetary assets; as
such, SFAS No. 153 is not expected to have a material impact
on the Company’s financial position, results of operations or
cash flows.
In May 2004, the FASB issued FSP 106-2 ‘‘Accounting
and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of
2003’’, which is effective for the first interim or annual period
beginning after June 15, 2004. The Company does not expect
to be eligible for the federal subsidy available pursuant to the
Medicare Prescription Drug Improvement and Modernization
Act of 2003; therefore, this staff position did not have a
material impact on the Company’s results of operations,
financial position or cash flow.
In December 2004, the FASB issued SFAS No. 123(R),
‘‘Share-Based Payment’’, which is a revision to SFAS No. 123,
‘‘Accounting for Stock Based Compensation’’. SFAS
Foreign
Currency
Translation
$179.7
145.5
$325.2
Foreign
Currency
Hedges
$(40.4)
(33.0)
$(73.4)
Minimum
Pension
Liability
$(0.6)
(0.3)
$(0.9)
Unrealized
Gains on
Securities
$ –
2.4
$2.4
Accumulated
Other
Comprehensive
Income
$138.7
114.6
$253.3
No. 123(R) requires all share-based payments to employees,
including stock options, to be expensed based on their fair
values. The Company has disclosed the effect on net earnings
and earnings per share if the Company had applied the fair
value recognition provisions of SFAS 123. SFAS 123(R)
contains three methodologies for adoption: 1) adopt
SFAS 123(R) on the effective date for interim periods
thereafter, 2) adopt SFAS 123(R) on the effective date for
interim periods thereafter and restate prior interim periods
included in the fiscal year of adoption under the provisions of
SFAS 123, or 3) adopt SFAS 123(R) on the effective date for
interim periods thereafter and restate all prior interim
periods under the provisions of SFAS 123. The Company has
not determined an adoption methodology. The Company is in
the process of assessing the impact that SFAS 123(R) will
have on its financial position, results of operations and cash
flows. SFAS 123(R) is effective for the Company on July 1,
2005.
3.
ACQUISITIONS
Centerpulse AG and InCentive Capital AG
On October 2, 2003 (the ‘‘Closing Date’’), the Company
closed its exchange offer for Centerpulse, a global
orthopaedic medical device company headquartered in
Switzerland that services the reconstructive joint, spine and
dental implant markets. The Company also closed its
exchange offer for InCentive, a company that, at the Closing
Date, owned only cash and beneficially owned 18.3 percent of
the issued Centerpulse shares. The primary reason for
making the Centerpulse and InCentive exchange offers (the
‘‘Exchange Offers’’) was to create a global leader in the
design, development, manufacture and marketing of
orthopaedic reconstructive implants, including joint and
dental, spine implants, and trauma products. The strategic
compatibility of the products and technologies of the
Company and Centerpulse is expected to provide significant
earnings power and a strong platform from which it can
actively pursue growth opportunities in the industry. For the
Company, Centerpulse provides a unique platform for growth
and diversification in Europe as well as in the spine and
dental areas of the medical device industry. As a result of the
Exchange Offers, the Company beneficially owned
98.7 percent of the issued Centerpulse shares (including the
Centerpulse shares owned by InCentive) and 99.9 percent of
the issued InCentive shares on the Closing Date.
47
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Notes to Consolidated Financial Statements (Continued)
Pursuant to Swiss law, the Company initiated the
The following table summarizes the fair values of the
compulsory acquisition process to acquire all of the shares of
Centerpulse and InCentive that remained outstanding
following the Exchange Offers, and completed this process on
April 29, 2004. The aggregate consideration paid by the
Company for shares acquired pursuant to the compulsory
acquisition process was $42.3 million, consisting of Company
common stock valued at $28.1 million (562,870 shares
exchanged) and $14.2 million of cash. In accordance with
EITF 99-12, ‘‘Determination of the Measurement Date for the
Market Price of Acquirer Securities Issued in a Purchase
Business Combination’’, the fair value of the Company’s
common stock issued pursuant to the compulsory acquisition
process was determined to be $49.93 per share based upon
the average closing price of the Company’s common stock
two days before and after the date when sufficient
Centerpulse and InCentive shares had been tendered to make
the Exchange Offers binding (August 27, 2003). The
aggregate consideration paid by the Company in the
Exchange Offers, including amounts paid pursuant to the
compulsory acquisition process, was $3,495.7 million,
consisting of Company common stock valued at
$2,252.0 million (45,101,640 shares exchanged),
$1,201.3 million of cash and $42.4 million of direct acquisition
costs.
The Exchange Offers were accounted for under the
purchase method of accounting pursuant to SFAS No. 141,
‘‘Business Combinations’’. Accordingly, Centerpulse and
InCentive results of operations have been included in the
Company’s consolidated results of operations subsequent to
the Closing Date, and their respective assets and liabilities
were recorded at their estimated fair values in the Company’s
consolidated statement of financial position as of the Closing
Date, with the excess purchase price being allocated to
goodwill.
The Company finalized the purchase price allocation in
2004 in accordance with U.S. generally accepted accounting
principles. During the year ended December 31, 2004, the
Company adjusted certain estimates included in the
preliminary purchase price allocation, including estimated fair
values of certain acquired investments, intangible assets,
inventory, fixed assets, income tax liabilities, product
liabilities and other legal liabilities. In accordance with SFAS
No. 141, all adjustments to the purchase price allocation have
been reflected as changes to goodwill. See Note 7 for the
changes in the carrying amount of goodwill during the year
ended December 31, 2004.
The purchase price allocation was based on information
available to the Company, and expectations and assumptions
deemed reasonable by the Company’s management. No
assurance can be given, however, that the underlying
assumptions used to estimate expected technology based
product revenues, development costs or profitability, or the
events associated with such technology, will occur as
projected.
48
assets acquired and liabilities assumed at the Closing Date.
Current assets
Property, plant and equipment
Intangible assets not subject to amortization:
Trademarks and trade names
Intangible assets subject to amortization:
Core technology
Developed technology
Trademarks and trade names
Customer relationships
In-process research and development
Deferred taxes
Other assets
Goodwill
Total assets acquired
Short-term debt
Deferred taxes
Other current liabilities
Integration liability
Long-term liabilities
Total liabilities assumed
Net assets acquired
(in millions)
As of
October 2, 2003
$ 793.6
179.3
207.4
110.6
303.0
30.4
44.0
11.2
579.5
75.7
2,293.5
4,628.2
306.3
250.3
299.7
67.6
208.6
1,132.5
$3,495.7
In 2003, the Company recorded a $75.7 million
integration liability consisting of $49.7 million of employee
termination benefits, $22.6 million of sales agent and lease
contract termination costs and $3.4 million of employee
relocation costs. In accordance with EITF 95-3 ‘‘Recognition
of Liabilities Assumed in a Purchase Business Combination’’,
these liabilities were included in the allocation of the
purchase price. Reductions to the integration liability of
$8.1 million during the purchase price allocation period were
recorded as adjustments to goodwill. Increases to the liability
subsequent to the completion of the allocation period are
expensed in the financial statements, and were not
significant. Reductions in the liability subsequent to the
completion of the allocation period are recorded as
adjustments to goodwill.
The Company’s integration plan covers all functional
business areas, including sales force, research and
development, manufacturing and administrative.
Approximately 830 Centerpulse employees have been or will
be involuntarily terminated through the Company’s
integration plan. The Company began phasing-out production
at its Austin, Texas manufacturing facility in 2004. The
phase-out will result in the involuntary termination of
approximately 550 employees, including 390 employees
involved in manufacturing. Products previously manufactured
at the Austin facility will be sourced from the Company’s
other manufacturing facilities. The Company has begun to
hire additional manufacturing employees at its other
manufacturing facilities to handle increased production
schedules. The Austin phase-out is expected to be completed
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
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Notes to Consolidated Financial Statements (Continued)
in 2005. As of December 31, 2004, approximately 420
Centerpulse employees had been involuntarily terminated.
With a few exceptions, the Company’s integration plan is
expected to be completed by the end of 2005. Reconciliation
of the integration liability, as of December 31, 2004, is as
follow (in millions):
Employee
Termination
Employee
Contract
Benefits Terminations Relocation
Total
Balance, Closing Date
Cash Payments
$ 49.7
(20.7)
$ 22.6
(0.2)
$ 3.4 $ 75.7
(20.9)
–
Balance, December 31, 2003
Cash Payments
Additions /(Reductions)
29.0
(19.2)
2.1
22.4
(2.3)
(11.8)
3.4
54.8
(1.3) (22.8)
(8.1)
1.6
Balance, December 31, 2004
$ 11.9
$ 8.3
$ 3.7 $ 23.9
The $11.8 million reduction in contract terminations
during the year ended December 31, 2004 primarily resulted
due to the assignment of $5.2 million of lease obligations
related to closed Centerpulse facilities and a $7.9 million
reduction in estimated Centerpulse distributor contract
termination payments, offset by $1.3 million of miscellaneous
adjustments related to the restructuring or termination of
certain Centerpulse contractual obligations. The $2.1 million
and $1.6 million increases in employee termination benefits
and employee relocation, respectively, during the year ended
December 31, 2004 is a result of the finalization of the
integration plan, including decisions on management
structure and consolidation of facilities.
The $11.2 million assigned to in-process research and
development was written off as of the Closing Date in
accordance with FASB Interpretation No. 4, ‘‘Applicability of
FASB Statement No. 2 to Business Combinations Accounted
for by the Purchase Method’’. The fair value of acquired in-
process research and development was determined in
accordance with the AICPA practice aid entitled ‘‘Assets
Acquired in a Purchase Business Combination to be used in
Research and Development Activities’’ and was primarily
based upon the estimated present value of future after-tax
cash flows of acquired in-process research and development
projects.
Goodwill of $1,316.2 million, $870.5 million and
$106.8 million was assigned to the Americas, Europe and Asia
Pacific geographic segments, respectively. None of the
goodwill is deductible for tax purposes. See Note 7 for more
information related to goodwill and acquired intangible
assets.
The following sets forth unaudited pro forma financial
information (i) derived from the financial statements of the
Company for the years ended December 31, 2003 and 2002
and (ii) derived from the financial statements of Centerpulse
for the year ended December 31, 2002 and the nine month
period ended September 30, 2003. The unaudited pro forma
financial information is based on the financial statements of
the Company and the financial statements of Centerpulse and
has been adjusted to give effect to the Exchange Offers as if
they had occurred on January 1 of the respective years:
(Unaudited; in millions, except per share amounts)
Year Ended December 31,
Net Sales
Earnings before cumulative effect of change
in accounting principle
Net Earnings
Earnings Per Share, before cumulative effect
of change in accounting principle – Diluted
Earnings Per Share – Diluted
2003
2002
$2,589.6
$2,167.9
453.5
508.6
312.6
312.6
$
$
1.85
2.08
$
$
1.30
1.30
These unaudited pro forma results have been prepared
for comparative purposes only and include adjustments such
as amortization of acquired intangible assets and interest
expense on debt incurred to finance the Exchange Offers.
The unaudited pro forma results for 2003 exclude
$11.2 million of in-process research and development write-
offs, $170.0 million ($121.3 million net of tax) of investment
banking fees, legal and accounting fees, break-up fee,
compensation expense related to the accelerated vesting of
certain Centerpulse stock options, distributor terminations,
integration related consulting and professional fees, severance
and other acquisition and integration related expenses, and
inventory step-up of $95.3 million ($62.1 million net of tax).
The unaudited pro forma results for 2003 include
$90.4 million of expense related to Centerpulse hip and knee
litigation, $54.4 million of cash income tax benefits as a result
of Centerpulse electing to carry back its 2002 U.S. federal net
operating loss for 5 years versus 10 years, which resulted in
more losses being carried forward to future years and less
tax credits going unutilized due to the shorter carry back
period and an $8.0 million gain on sale of Orquest Inc., an
investment previously held by Centerpulse. The unaudited
pro forma results are not necessarily indicative either of the
results of operations that actually would have resulted had
the Exchange Offers been in effect at the beginning of the
respective years or of future results.
Implex Corp.
On April 23, 2004, the Company acquired Implex, a
privately held orthopaedics company based in New Jersey,
pursuant to an Amended and Restated Merger Agreement
(‘‘Merger Agreement’’). The Company acquired 100 percent
of the shares of Implex for an initial cash consideration of
approximately $108.0 million, before adjustments for debt
repayment, certain payments previously made by Zimmer to
Implex pursuant to their existing alliance agreement and
other items. The aggregate cash consideration paid by the
Company through December 31, 2004 was $153.1 million,
consisting of a $98.6 million payment at closing (including
$9.8 million delivered to an escrow agent to be held for
eighteen months, subject to possible indemnification claims of
the Company), $2.6 million of direct acquisition costs and
$51.9 million of earn-out payments made pursuant to the
Merger Agreement. The acquisition is a culmination of a
distribution and strategic alliance agreement, under which
49
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Notes to Consolidated Financial Statements (Continued)
the Company and Implex had been operating since 2000,
relating to the development and distribution of reconstructive
implant and trauma products incorporating Trabecular Metal
Technology.
The Merger Agreement contains provisions for additional
annual cash earn-out payments that are based on year-over-
year sales growth through 2006 of certain products that
incorporate Trabecular Metal Technology. The Company
estimates total earn-out payments, including payments
already made, to be in a range from $120 to $160 million.
These earn-out payments represent contingent consideration
and, in accordance with SFAS No. 141 and EITF 95-8
‘‘Accounting for Contingent Consideration Paid to the
Shareholders of an Acquired Enterprise in a Purchase
Business Combination’’, are recorded as an additional cost of
the transaction upon resolution of the contingency and
therefore increase goodwill.
The Implex acquisition was accounted for under the
purchase method of accounting pursuant to SFAS No. 141.
Accordingly, Implex results of operations have been included
in the Company’s consolidated results of operations
subsequent to April 23, 2004, and its respective assets and
liabilities have been recorded at their estimated fair values in
the Company’s consolidated statement of financial position as
of April 23, 2004, with the excess purchase price being
allocated to goodwill. Pro forma financial information has not
been included as the acquisition did not have a material
impact upon the Company’s financial position, results of
operations or cash flows.
The Company completed the preliminary purchase price
allocation in accordance with U.S. generally accepted
accounting principles. The process included interviews with
management, review of the economic and competitive
environment and examination of assets including historical
performance and future prospects. The preliminary purchase
price allocation was based on information currently available
to the Company, and expectations and assumptions deemed
reasonable by the Company’s management. No assurance can
be given, however, that the underlying assumptions used to
estimate expected technology based product revenues,
development costs or profitability, or the events associated
with such technology, will occur as projected. The final
purchase price allocation may vary from the preliminary
purchase price allocation. The final valuation and associated
purchase price allocation is expected to be completed as
soon as possible, but no later than one year from the date of
acquisition. To the extent that the estimates need to be
adjusted, the Company will do so.
50
The following table summarizes the estimated fair values
of the assets acquired and liabilities assumed at the date of
the Implex acquisition:
Current assets
Property, plant and equipment
Intangible assets subject to amortization:
Core technology (30 year useful life)
Developed technology (30 year useful life)
Other assets
Goodwill
Total assets acquired
Current liabilities
Deferred taxes
Total liabilities assumed
Net assets acquired
(in millions)
As of
April 23, 2004
$ 23.1
4.5
3.6
103.9
14.4
61.0
210.5
14.1
43.3
57.4
$153.1
4.
CHANGE IN ACCOUNTING PRINCIPLE
Instruments are hand held devices used by orthopaedic
surgeons during total joint replacement and other surgical
procedures. Effective January 1, 2003, instruments are
recognized as long-lived assets and are included in property,
plant and equipment. Undeployed instruments are carried at
cost, net of allowances for obsolescence. Instruments in the
field are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method
based on average estimated useful lives, determined
principally in reference to associated product life cycles,
primarily five years. In accordance with SFAS No. 144, the
Company reviews instruments for impairment whenever
events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows
relating to the asset are less than its carrying amount.
Depreciation of instruments is recognized as selling, general
and administrative expense, consistent with the classification
of instrument cost in periods prior to January 1, 2003.
Prior to January 1, 2003, undeployed instruments were
carried as a prepaid expense at cost, net of allowances for
obsolescence ($54.8 million, net, at December 31, 2002), and
recognized in selling, general and administrative expense in
the year in which the instruments were placed into service.
The new method of accounting for instruments was adopted
to recognize the cost of these important assets of the
Company’s business within the consolidated balance sheet
and meaningfully allocate the cost of these assets over the
periods benefited, typically five years.
The effect of the change during the year ended
December 31, 2003 was to increase earnings before
cumulative effect of change in accounting principle by
$26.8 million ($17.8 million net of tax), or $0.08 per diluted
share. The cumulative effect adjustment of $55.1 million (net
of income taxes of $34.0 million) to retroactively apply the
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
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Notes to Consolidated Financial Statements (Continued)
new capitalization method as if applied in years prior to 2003
is included in earnings during the year ended December 31,
2003. The pro forma amounts shown on the consolidated
statement of earnings have been adjusted for the effect of
the retroactive application on depreciation and related
income taxes.
5.
INVENTORIES
Inventories at December 31, 2004 and 2003, consist of
the following (in millions):
Finished goods
Raw materials and work in progress
Inventory step-up (primarily finished goods)
Inventories, net
2004
$420.5
112.2
3.3
$536.0
2003
$384.3
90.8
52.6
$527.7
Reserves for obsolete and slow-moving inventory were
$124.1 million and $129.1 million at December 31, 2004 and
2003, respectively. Inventory step-up includes $3.3 million
from the Implex acquisition at December 31, 2004 and
$52.6 million from the Centerpulse acquisition at
December 31, 2003. Both the Centerpulse step-up and Implex
step-up values were based upon estimated sales prices less
distribution costs and a profit allowance.
6.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2004
and 2003, was as follows (in millions):
Land
Building and equipment
Instruments
Construction in progress
Accumulated depreciation
$
2004
20.0
677.1
557.8
57.9
$
2003
22.0
600.3
431.4
20.1
1,312.8
(684.3)
1,073.8
(548.6)
Depreciation expense was $142.2 million, $92.4 million
and $25.3 million for the years ended December 31, 2004,
2003 and 2002, respectively.
7.
GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the changes in the
carrying amount of goodwill for the years ended
December 31, 2004 and 2003 (in millions):
Americas
Europe
Asia
Pacific
Balance at January 1, 2003
$
–
$
–
$
–
$
Total
–
Acquisition of Centerpulse
and InCentive
Acquisition of TransFx
Currency translation
Balance at December 31,
1,263.6
11.9
–
836.3
104.8
69.7
5.5
2,204.7
11.9
75.2
2003
1,275.5
906.0
110.3
2,291.8
Completion of Centerpulse
and InCentive
compulsory acquisition
process
Acquisition of Implex
Change in preliminary fair
value estimates of
Centerpulse related to:
Intangible assets
Income taxes
Property, plant and
equipment
Inventories
Integration liability
Other assets
Preacquisition
contingencies
Other
Currency translation
Balance at December 31,
24.3
61.0
16.0
–
10.7
(33.7)
26.5
6.6
(5.3)
6.5
4.9
10.3
37.9
(3.0)
–
(3.1)
1.8
(12.8)
–
–
(0.8)
83.0
2.0
–
–
0.3
–
–
(0.2)
–
–
(0.1)
4.3
42.3
61.0
37.2
(26.8)
(8.4)
8.3
(8.1)
10.3
37.9
(3.9)
87.3
2004
$1,389.1
$1,023.2
$116.6
$2,528.9
Property, plant and equipment, net
$ 628.5
$ 525.2
The components of identifiable intangible assets are as follows (in millions):
As of December 31, 2004:
Intangible assets subject to amortization:
Gross carrying amount
Accumulated amortization
Intangible assets not subject to amortization:
Gross carrying amount
Total identifiable intangible assets
As of December 31, 2003:
Intangible assets subject to amortization:
Gross carrying amount
Accumulated amortization
Intangible assets not subject to amortization:
Gross carrying amount
Total identifiable intangible assets
Core
Technology
Developed
Technology
Trademarks
and Trade
Names
Customer
Relationships
Other
Total
$117.9
(8.0)
$417.3
(31.9)
–
–
$109.9
$385.4
$118.9
(1.6)
$318.8
(5.5)
–
–
$117.3
$313.3
$ 31.7
(3.8)
218.1
$246.0
$ 33.1
(0.8)
251.3
$283.6
$34.4
(1.3)
$ 34.1
(13.7)
$635.4
(58.7)
–
–
$33.1
$ 20.4
218.1
$794.8
$34.4
(0.3)
$ 23.6
(11.4)
$528.8
(19.6)
–
–
$34.1
$ 12.2
251.3
$760.5
51
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
Notes to Consolidated Financial Statements (Continued)
Total amortization expense for finite-lived intangible
assets was $39.1 million and $10.9 million for the years
ended December 31, 2004 and 2003, respectively, and was
recorded as part of selling, general and administrative.
Amortization expense for the year ended December 31, 2002
was not significant. Estimated annual amortization expense
for the years ending December 31, 2005 through 2009 is
$38.2 million, $38.1 million, $37.9 million, $37.9 million and
$37.9 million, respectively.
The useful lives of intangible assets range from 11 to
30 years. In determining the useful lives of intangible assets,
the Company considers the expected use of the assets and
the effects of obsolescence, demand, competition, anticipated
technological advances, changes in surgical techniques,
market influences and other economic factors. For technology
based intangible assets, the Company considers the expected
product life cycles of products, absent unforeseen
technological advances, which incorporate the corresponding
technology. Trademarks and trade names that do not have a
wasting characteristic (i.e. there are no legal, regulatory,
contractual, competitive, economic or other factors which
limit the useful life) are assigned an indefinite life.
Trademarks and trade names that are related to products
expected to be phased out are assigned lives consistent with
the period in which the products bearing each brand are
expected to be sold. For customer relationship intangible
assets, the Company assigns useful lives based upon historical
levels of customer attrition.
8.
OTHER CURRENT AND LONG-TERM LIABILITIES
Other current and long-term liabilities at December 31,
2004 and 2003, consist of the following (in millions):
Other current liabilities:
Service arrangements
Fair value of derivatives
Salaries, wages and benefits
Litigation liability
Integration liability
Accrued liabilities
Total other current liabilities
Other long-term liabilities:
Long-term income tax payable
Other long-term liabilities
Total other long-term liabilities
9.
DEBT
2004
2003
$114.3
72.8
54.7
38.3
23.9
203.7
$ 92.9
56.4
60.5
59.5
54.8
151.3
$507.7
$475.4
$156.7
264.2
$128.9
223.7
$420.9
$352.6
The Company has the following committed financing
arrangements: (i) $400 million 364-day revolving credit
facility maturing May 2005, (ii) $800 million three-year
revolving credit facility maturing June 2006 and
(iii) $550 million five-year term loan facility maturing June
2008 (collectively, the ‘‘Senior Credit Facility’’). There is no
prepayment penalty included in the Senior Credit Facility.
The $800 million three-year revolving credit facility has a
52
multi-currency option of up to an aggregate principal amount
of $350 million. In addition to the Senior Credit Facility, the
Company has uncommitted, unsecured revolving lines of
credit totaling $50 million.
The Company and certain of its wholly owned foreign
and domestic subsidiaries are the borrowers and its wholly
owned domestic subsidiaries are the guarantors of the Senior
Credit Facility. Borrowings may bear interest at the
appropriate LIBOR-based rate, or an alternative base rate,
plus an applicable margin determined by reference to the
Company’s senior unsecured long-term credit rating and the
amounts drawn under the Senior Credit Facility. The Senior
Credit Facility contains customary affirmative and negative
covenants and events of default for an unsecured financing
arrangement. Financial covenants include a maximum
leverage ratio and a minimum interest coverage ratio. The
Company was in compliance with all covenants under the
Senior Credit Facility as of December 31, 2004. Commitments
under the $400 million 364-day revolving credit facility and
the $800 million three-year revolving credit facility are
subject to certain fees, including a facility and a utilization
fee.
Outstanding debt as of December 31, 2004 and 2003
consists of the following (in millions):
Senior Credit Facility
364-day revolving credit facility
Three-year revolving credit facility
Five-year term loan
Uncommitted credit facilities
Other
Total debt
Less: Current Portion
Total Long-Term Debt
2004
2003
$
–
97.8
550.0
1.1
2.6
651.5
27.5
$ 100.0
552.4
450.0
0.6
6.1
1,109.1
101.3
$ 624.0
$1,007.8
The weighted average interest rates for borrowings
under the five year term loan and three-year revolving credit
facility were 3.42 percent and 0.58 percent, respectively, at
December 31, 2004. Borrowings under the three-year
revolving credit facility at December 31, 2004 are Japanese
Yen based borrowings. The Company paid $27.9 million,
$6.3 million and $13.0 million in interest during 2004, 2003
and 2002, respectively.
Maturities of obligations outstanding under the five-year
term loan at December 31, 2004, are $25.0 million,
$100.0 million, $250.0 million and $175.0 million for the years
ended December 31, 2005 through 2008, respectively. The
carrying value of the Company’s borrowings approximates fair
value due to their short-term interest rates.
Debt issuance costs of $20.5 million were incurred to
obtain the Senior Credit Facility arrangement. These costs
were capitalized and are amortized to interest expense over
the lives of the related facilities. At December 31, 2004,
unamortized debt issuance costs were $9.1 million.
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
Notes to Consolidated Financial Statements (Continued)
10. RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
The Company has defined benefit pension plans covering
certain U.S. and Puerto Rico employees who were hired
before September 2, 2002. Employees hired after
September 2, 2002 are not part of the U.S. and Puerto Rico
defined benefit plans, but do receive additional benefits under
the Company’s defined contribution plans. Plan benefits are
primarily based on years of credited service and the
participant’s average eligible compensation or a monthly
retirement benefit amount. In addition to the U.S. and Puerto
Rico defined benefit pension plans, the Company sponsors
various non-U.S. pension arrangements, including retirement
and termination benefit plans required by local law or
coordinated with government sponsored plans. As a result of
the consummation of the Exchange Offers, the Company
acquired the obligations and assets of certain Centerpulse
defined benefit plans as of the Closing Date.
The Company also provides comprehensive medical and
group life insurance benefits to certain U.S. and Puerto Rico
eligible retirees who elect to participate in the Company’s
comprehensive medical and group life plans. The medical
plan is contributory, and the life insurance plan is non-
contributory. No similar plans exist for employees outside the
U.S. and Puerto Rico. Employees hired after September 2,
2002, are not eligible for retiree medical and life insurance
benefits.
The Company uses a December 31 measurement date for
its benefit plans.
The components of net pension expense for the years ended December 31 for the Company’s defined benefit retirement
plans are as follows (in millions):
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of unrecognized actuarial loss
Net periodic benefit cost
U.S. and Puerto Rico
2004
$ 9.7
4.2
(4.8)
(0.1)
0.9
$ 9.9
2003
$ 8.6
3.1
(2.8)
(0.2)
0.5
$ 9.2
2002
$ 7.2
2.0
(1.2)
0.1
0.1
$ 8.2
2004
$13.1
4.8
(5.8)
0.4
0.6
$13.1
Non-U.S.
2003
$ 4.9
2.0
(2.2)
1.9
0.4
$ 7.0
2002
$ 2.0
0.7
(1.0)
–
0.2
$ 1.9
The weighted average actuarial assumptions used to determine net pension expense for the Company’s defined benefit
retirement plans were as follows:
Discount rate
Rate of compensation increase
Expected long-term return on plan assets
U.S. and Puerto Rico
2004
6.75%
3.60%
8.75%
2003
7.00%
3.62%
9.00%
2002
7.25%
3.60%
9.00%
2004
3.81%
1.57%
4.83%
Non-U.S.
2003
4.08%
2.27%
4.77%
2002
4.25%
3.17%
5.95%
The expected long-term rates of return on plan assets is based on the period expected benefits will be paid and the
historical rates of return on the different asset classes held in the plans. The expected long-term rate of return is the weighted
average of the target asset allocation of each individual asset class. The Company believes that historical asset results
approximate expected market returns applicable to the funding of a long-term benefit obligation.
53
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
Notes to Consolidated Financial Statements (Continued)
Changes in projected benefit obligations and plan assets, for the years ended December 31, 2004 and 2003 for the
Company’s pension plans, were (in millions):
U.S. and Puerto Rico
Non-U.S.
2004
2003
2004
2003
Projected benefit obligation – beginning of year
Obligation assumed from Centerpulse
Plan amendments
Service cost
Interest cost
Employee contributions
Benefits paid
Actuarial (gain) loss
Translation loss
Projected benefit obligation – end of year
Plan assets at fair market value – beginning of year
Assets contributed by Centerpulse
Actual return on plan assets
Company contributions
Employee contributions
Benefits paid
Expenses
Translation gain
Plan assets at fair market value – end of year
Funded status
Unrecognized prior service cost
Unrecognized actuarial (gain) loss
Net amount recognized
Amounts recognized in consolidated balance sheet:
Prepaid pension
Accrued benefit liability
Accumulated other comprehensive income
Net amount recognized
$ 63.8
–
(0.1)
9.7
4.2
–
(0.7)
12.3
–
$ 89.2
$ 45.5
–
5.4
16.5
–
(0.7)
(0.6)
–
$ 66.1
$(23.1)
(0.6)
26.4
$ 2.7
$ 5.8
(4.6)
1.5
$ 2.7
$ 42.5
–
0.7
8.6
3.1
–
(0.6)
9.5
–
$ 63.8
$ 21.4
–
6.8
18.1
–
(0.6)
(0.2)
–
$ 45.5
$(18.3)
(0.7)
15.0
$ (4.0)
$ 2.1
(7.2)
1.1
$ (4.0)
$130.2
–
–
13.1
4.8
4.3
(20.9)
0.6
10.9
$ 21.6
101.1
–
4.9
2.0
2.3
(7.8)
(6.4)
12.5
$143.0
$130.2
$128.0
–
2.3
9.1
7.8
(20.9)
–
10.9
$137.2
$ (5.8)
1.2
0.8
$ 17.3
94.3
4.8
6.3
3.2
(7.8)
–
9.9
$128.0
$ (2.2)
–
(0.6)
$ (3.8)
$ (2.8)
$
6.1
(9.9)
–
$
6.9
(9.7)
–
$ (3.8)
$ (2.8)
The weighted average actuarial assumptions used to determine the projected benefit obligation for the Company’s defined
benefit retirement plans were as follows:
Discount rate
Rate of compensation increase
U.S. and Puerto Rico
2004
6.25%
3.84%
2003
6.75%
3.62%
2002
7.00%
3.60%
2004
3.75%
2.22%
Non-U.S.
2003
4.03%
2.27%
2002
4.17%
3.17%
Plans with projected benefit obligations in excess of plan assets as of December 31, 2004 and 2003 were as follows
(in millions):
Benefit obligation
Plan assets at fair market value
U.S. and Puerto Rico
Non-U.S.
2004
$82.9
58.1
2003
$58.8
39.7
2004
$38.9
30.2
Plans with accumulated benefit obligations in excess of plan assets as of December 31, 2004 and 2003 were as follows
(in millions):
Accumulated benefit obligation
Plan assets at fair market value
54
U.S. and Puerto Rico
Non-U.S.
2004
$4.0
–
2003
$ –
–
2004
$16.2
12.5
2003
$32.1
24.3
2003
$10.6
9.1
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
Notes to Consolidated Financial Statements (Continued)
The accumulated benefit obligation for U.S. and Puerto
The Company expects that it will have no minimum
Rico defined benefit retirement pension plans was
$53.0 million and $35.1 million as of December 31, 2004 and
2003, respectively. The accumulated benefit obligation for
non-U.S. defined benefit retirement plans was $126.6 million
and $115.6 million as of December 31, 2004 and 2003,
respectively.
The benefits expected to be paid out in each of the next
five years and for the five years combined thereafter are as
follows (in millions):
For the Years Ending December 31,
2005
2006
2007
2008
2009
2010 – 2014
U.S. and
Puerto Rico
$
0.8
1.1
1.5
2.1
2.9
30.4
Non-U.S.
$ 9.1
10.5
13.1
12.6
12.8
54.5
funding requirements by law for the U.S. and Puerto Rico
defined benefit retirement plans. However, the Company
expects to voluntarily contribute between $10 million to
$13 million to these plans during 2005. Contributions to non-
U.S. defined benefit are estimated to be approximately
$9 million in 2005.
The Company also sponsors defined contribution plans
for substantially all of the U.S. and Puerto Rico employees
and employees in other countries. The benefits of these plans
relate to local customs and practices in the countries
concerned. The Company expensed $6.4 million, $4.8 million
and $3.5 million to these plans for the years ended
December 31, 2004, 2003 and 2002, respectively.
The components of net periodic expense for the year
ended December 31 for the Company’s postretirement benefit
plans are as follows (in millions):
The Company’s weighted-average asset allocations at
December 31,
December 31, 2004 and 2003, by asset category are as
follows:
U.S. and
Puerto Rico
Non-U.S.
Net periodic benefit cost
Service cost
Interest cost
Amortization of unrecognized actuarial loss
2004
2003
2002
$ 1.4
1.7
0.2
$ 3.3
$ 1.3
1.5
0.1
$ 2.9
$ 1.1
1.2
–
$ 2.3
Asset Category
Equity Securities
Debt Securities
Real Estate
Cash Funds
Other
Total
2004
2003
2004
2003
65%
35
–
–
–
65%
35
–
–
–
37%
35
15
5
8
36%
35
15
5
9
100% 100% 100% 100%
The U.S. and Puerto Rico defined benefit retirement
plans’ overall investment strategy is to maximize total returns
by emphasizing long-term growth of capital while avoiding
risk. The Company has established target ranges of assets
held by the plans of 50 to 75 percent for equity securities
and 25 to 50 percent for debt securities. The plans strive to
have sufficiently diversified assets so that adverse or
unexpected results from one asset class will not have an
unduly detrimental impact on the entire portfolio. The
investments in the plans are rebalanced quarterly based upon
the target asset allocation of the plans.
The investment strategies of non-U.S. based plans vary
according to the plan provisions and local laws. The majority
of the assets in non-U.S. based plans are located in
Switzerland based plans. These assets are held in trusts and
are commingled with the assets of other Swiss companies,
with representatives of all the companies making the
investment decisions. The overall strategy is to maximize
total returns while avoiding risk. The trustees of the assets
have established target ranges of assets held by the plans of
30 to 50 percent in debt securities, 20 to 37 percent in
equity securities, 15 to 24 percent in real estate, 3 to
15 percent in cash funds and 0 to 12 percent in other funds.
As of December 31, 2004 and 2003, the Company’s
defined benefit pension plans’ assets did not hold any direct
investment in the Company’s common stock.
The weighted average actuarial assumptions used in
accounting for the Company’s postretirement benefit plans
were as follows:
December 31,
Discount rate – Benefit obligation
Discount rate – Net periodic benefit cost
Initial health care cost trend rate
Ultimate health care cost trend rate
First year of ultimate trend rate
2004
2003
2002
6.25%
6.75%
9.50%
5.00%
2014
7.00%
6.75%
7.00%
7.25%
9.00% 10.00%
5.00%
5.00%
2012
2012
Changes in benefit obligations for the Company’s
postretirement benefit plans were (in millions):
December 31,
Benefit obligation – beginning of year
Service cost
Interest cost
Benefits paid
Actuarial loss
Benefit obligation – end of year
Funded status
Unrecognized prior service cost
Unrecognized actuarial loss
Net amount recognized
Accrued benefit liability recognized
2004
$ 25.0
1.4
1.7
(0.4)
3.5
$ 31.2
$(31.2)
(0.1)
7.0
2003
$ 20.5
1.3
1.5
–
1.7
$ 25.0
$(25.0)
(0.1)
3.7
$(24.3)
$(21.4)
$(24.3)
$(21.4)
As of December 31, 2004 and 2003, the Company had no
assets set aside in a trust for its postretirement benefit plans.
A one percentage point change in the assumed health
care cost trend rates would have no significant effect on the
service and interest cost components of net postretirement
benefit expense and the accumulated postretirement benefit
obligation. The effect of a change in the healthcare cost
trend rate is tempered by an annual cap that limits medical
costs to be paid by the Company.
55
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
Notes to Consolidated Financial Statements (Continued)
The benefits expected to be paid out in each of the next
The components of deferred income taxes consisted of
five years and for the five years combined thereafter are as
follows (in millions):
the following (in millions):
For the Years Ending December 31,
2005
2006
2007
2008
2009
2010 – 2014
11.
INCOME TAXES
$ 0.5
0.8
1.1
1.5
1.9
15.3
Inventory
Fixed assets
Net operating loss carryover
Capital loss carryover
Tax credit carryover
Accrued liabilities
Intangible assets
Valuation allowances
Other
2004
2003
$ 102.4
(31.8)
297.9
11.5
76.5
158.4
(201.4)
(67.6)
22.4
$ 77.6
(12.3)
336.6
11.5
8.2
156.9
(206.3)
(58.0)
36.1
$ 368.3
$ 350.3
The components of earnings before taxes consist of the
following (in millions):
United States operations
Foreign operations
Total
2004
2003
2002
$385.7
345.8
$307.6
129.9
$292.0
96.9
$731.5
$437.5
$388.9
The provision for income taxes consists of (in millions):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
$122.7
17.1
114.9
254.7
$(14.3)
3.8
60.6
$ 79.9
12.9
34.4
50.1
127.2
(20.2)
(9.6)
(35.3)
(65.1)
116.0
6.1
(25.4)
96.7
3.3
(1.3)
1.9
3.9
$189.6
$146.8
$131.1
Income taxes paid by the Company during 2004, 2003
and 2002 were $143.3 million, $116.1 million and
$114.2 million, respectively.
A reconciliation of the U.S. statutory income tax rate to
the Company’s effective tax rate is as follows:
2004
2003
2002
U.S. statutory income tax rate
State taxes, net of federal deduction
Foreign income taxes at rates different
from the U.S. statutory rate, net of
foreign tax credits
Tax benefit from decreased deferred taxes
of acquired Centerpulse operations; due
to Swiss tax rate reduction
Tax benefit relating to operations in
Puerto Rico
Tax benefit relating to U.S. export sales
R&D credit
Non-deductible expenses
In-process research & development
Other
35.0% 35.0% 35.0%
1.5
0.7
3.0
(2.3)
(4.7)
(1.7)
(1.3)
(0.7)
0.6
–
0.3
–
–
(2.7)
(0.3)
(0.4)
0.1
0.9
(0.5)
–
–
(2.6)
(1.1)
(0.6)
–
–
–
Effective income tax rate
25.9% 33.6% 33.7%
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
56
At December 31, 2004, the vast majority of the net
operating loss is available to reduce future federal and state
taxable earnings of the U.S. companies. These losses
generally expire within a period of 1 to 19 years.
$24.7 million of state losses are subject to valuation
allowances and certain restrictions. The tax credits are
entirely available to offset future federal and state tax
liabilities of the U.S. companies. These credits generally
expire within a 1 to 15 year period. $11.1 million of the tax
credits are subject to valuation allowances and certain
restrictions. The capital loss carryover is also available to
reduce future federal taxable earnings of the U.S. companies;
however, the entire carryover is subject to a valuation
allowance and expires in 2005 and 2006.
The Company’s former parent received a ruling from the
Internal Revenue Service (‘‘IRS’’), that the spin-off of the
Company would qualify as a tax-free transaction. Such a
ruling, while generally binding upon the IRS, is subject to
certain factual representations and assumptions. The
Company has agreed to certain restrictions on its future
actions to provide further assurances that the spin-off will
qualify as tax-free. If the Company fails to abide by such
restrictions and, as a result, the spin-off fails to qualify as a
tax-free transaction, the Company will be obligated to
indemnify its former parent for any resulting tax liability.
During 2004, the Company’s tax provision included a
deferred tax benefit of $34.5 million as a result of revaluing
deferred taxes of acquired Centerpulse operations due to a
reduction in the ongoing Swiss tax rate (from approximately
24 percent to 12.5 percent).
The Company has a long-term tax liability of
$156.7 million at December 31, 2004 for expected settlement
of various U.S. and foreign income tax liabilities.
At December 31, 2004, the Company had an aggregate of
approximately $270 million of unremitted earnings of foreign
subsidiaries that have been, or are intended to be,
permanently reinvested for continued use in foreign
operations. If the total undistributed earnings of foreign
subsidiaries were remitted, a significant amount of the
additional tax would be offset by the allowable foreign tax
credits. It is impractical for the Company to determine the
additional tax of remitting these earnings.
As a result of recent changes to U.S. tax rules regarding
foreign earnings repatriation, the Company may repatriate
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
2 0 0 4 F O R M 1 0 - K
Notes to Consolidated Financial Statements (Continued)
earnings of foreign subsidiaries at reduced U.S. tax rates. The
Company believes the impact of such repatriation will not be
material and expects to complete its evaluation by
December 31, 2005.
12. CAPITAL STOCK AND EARNINGS PER SHARE
On September 13, 2004, the Company amended its
Rights Agreement to have the rights expire on September 16,
2004. The stockholder rights plan had been established in
2001 and was scheduled to expire in 2011. The Company has
authorized for issuance 2 million shares of Series A
Participating Cumulative Preferred Stock (‘‘Series A Preferred
Stock’’). No shares of the Series A Preferred Stock have been
issued as of December 31, 2004.
The numerator for both basic and diluted earnings per
share is net earnings available to common stockholders. The
denominator for basic earnings per share is the weighted
average number of common shares outstanding during the
period. The denominator for diluted earnings per share is
weighted average shares outstanding adjusted for the effect
of dilutive stock options. The following is a reconciliation of
weighted average shares for the basic and diluted share
computations for the years ending December 31 (in millions):
2002
2004
2003
Weighted average shares outstanding for
basic net earnings per share
Effect of dilutive stock options
Weighted average shares outstanding for
244.4
3.4
207.7
3.5
194.5
2.3
diluted net earnings per share
247.8
211.2
196.8
13. STOCK OPTION AND COMPENSATION PLANS
The Company had three stock option plans in effect at
December 31, 2004: the 2001 Stock Incentive Plan, the
TeamShare Stock Option Plan, and the Stock Plan for Non-
Employee Directors. The Company has reserved the
maximum number of shares of common stock available for
award under the terms of each of these plans and has
registered 34.3 million shares of common stock. Options may
be granted under these plans at a price of not less than the
fair market value of a share of common stock on the date of
grant. The 2001 Stock Incentive Plan provides for the grant
of nonqualified stock options and incentive stock options,
long-term performance awards, restricted stock awards and
deferred stock units. Options granted under the 2001 Stock
Incentive Plan may include stock appreciation rights. The
TeamShare Stock Option Plan provides for the grant of non-
qualified stock options and, in certain jurisdictions, stock
appreciation rights, while the Stock Plan for Non-Employee
Directors provides for awards of stock options, restricted
stock and restricted stock units to non-employee directors.
Options granted under these plans generally vest over
four years, although in no event in less than one year, and
expire ten years from the date of grant. In the past, certain
options have had price thresholds, which affect exercisability.
All such price thresholds have been satisfied.
Under the 2001 Stock Incentive Plan, the total number
of awards which may be granted in a given year pursuant to
options and other awards under the plan may not exceed
1.9 percent of the outstanding shares of the Company’s stock
on the effective date of the Plan for 2001 or January 1 of
each subsequent year, plus the number of shares from the
prior year that were available for grant but not granted, that
were granted but subsequently terminated, expired, cancelled
or surrendered without being exercised or tendered in the
prior year to pay for options or satisfy tax withholding
requirements. No participant may receive options or awards
which in the aggregate exceed 2 million shares of stock over
the life of the Plan.
A summary of the status of all options granted to
employees and non-employee directors for the years ended
December 31, 2004, 2003 and 2002 is presented below:
Outstanding at January 1, 2002
Options granted
Options exercised
Options cancelled
Outstanding at December 31, 2002
Options granted
Options exercised
Options cancelled
Outstanding at December 31, 2003
Options granted
Options exercised
Options cancelled
Outstanding at December 31, 2004
Options
(in thousands)
Weighted
Average
Exercise Price
10,727
1,833
(1,262)
(263)
11,035
2,395
(2,688)
(272)
10,470
3,407
(2,450)
(136)
11,291
$25.01
30.34
18.94
28.73
26.51
43.06
23.80
34.76
30.77
70.41
25.90
50.81
$43.60
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Notes to Consolidated Financial Statements (Continued)
The following table summarizes information about stock options outstanding at December 31, 2004:
Range of Exercise Prices
$6.25 – $17.00
$19.50 – $27.50
$27.51 – $37.50
$39.50 – $51.00
$69.00 – $87.50
Options exercisable at December 31, 2004, 2003 and
2002, were 4.8 million, 4.9 million and 4.7 million,
respectively, with average exercise prices of $29.30, $25.97
and $22.81, respectively.
See Note 2 for the effect on net earnings and earnings
per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock based
employee compensation.
14. SEGMENT DATA
The Company designs, develops, manufactures and
markets reconstructive orthopaedic implants, including joint
and dental, spinal implants, and trauma products and
orthopaedic surgical products which include surgical supplies
and instruments designed to aid in orthopaedic surgical
procedures. Operations are managed through three major
geographic segments – the Americas, which is comprised
principally of the United States and includes other North,
Central and South American markets; Europe, which is
comprised principally of Europe and includes the Middle East
Outstanding
Weighted
Average
Remaining
Contractual Life
Exercisable
Weighted
Average
Exercise Price
Options
(in thousands)
Weighted
Average
Exercise Price
1.22
4.95
6.22
8.22
9.22
7.19
$11.86
24.80
30.70
43.10
70.50
$43.60
259
1,373
2,667
478
3
4,780
$11.86
24.50
30.90
42.70
78.30
$29.30
Options
(in thousands)
259
1,583
4,012
2,082
3,355
11,291
and Africa; and Asia Pacific, which is comprised primarily of
Japan and includes other Asian and Pacific markets. This
structure is the basis for the Company’s reportable segment
information discussed below. Company management evaluates
operating segment performance based upon segment
operating profit exclusive of operating expenses pertaining to
global operations and corporate expenses, acquisition and
integration expenses, inventory step-up, in-process research
and development write-offs and intangible asset amortization
expense. Global operations include research, development
engineering, medical education, brand management,
corporate legal, finance, human resource functions, and
U.S. and Puerto Rico based operations and logistics.
Intercompany transactions have been eliminated from
segment operating profit. Company management reviews
accounts receivable, inventory, property, plant and
equipment, goodwill and intangible assets by reportable
segment exclusive of U.S. and Puerto Rico based operations
and logistics and corporate assets.
Net sales, segment operating profit and year-end assets are as follows (in millions):
Americas
Europe
Asia Pacific
Net sales
Inventory step-up
Acquisition and integration
In-process research and development
Global operations and corporate functions
Operating profit
Total assets
Net Sales
Operating Profit
Year-End Assets
2004
2003
2002
2004
2003
2002
2004
2003
$1,741.3
808.3
431.3
$1,208.3
366.0
326.7
$ 932.9
169.9
269.6
$ 893.1
279.4
182.3
$ 619.2
96.4
148.1
$ 450.2
41.4
124.3
$2,430.9
1,824.4
310.6
$2,181.1
1,731.7
300.4
$2,980.9
$1,901.0
$1,372.4
(59.4)
(81.1)
–
(451.1)
(42.7)
(79.6)
(11.2)
(279.5)
–
–
–
(215.0)
$ 763.2
$ 450.7
$ 400.9
1,129.6
942.8
$5,695.5
$5,156.0
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Notes to Consolidated Financial Statements (Continued)
Depreciation and amortization used in determining
operating segment profit for the years ended December 31,
2004, 2003 and 2002 was as follows (in millions):
Americas
Europe
Asia Pacific
Global operations and corporate
2004
2003
2002
functions
2004
2003
2002
$ 46.1
50.5
17.9
$ 36.8
23.4
16.8
$ 0.1
1.1
1.4
66.8
26.3
22.7
$181.3
$103.3
$25.3
U.S. sales were $1,664.5 million, $1,152.0 million and
$892.3 million for the years ended December 31, 2004, 2003
and 2002, respectively. The Company’s sales to any individual
country outside of the U.S. were not significant. Sales are
attributable to a country based upon the customer’s country
of domicile.
Net sales by product category are as follows (in millions):
Reconstructive implants
Trauma
Spine
Orthopaedic surgical products
Total
$2,456.3
172.9
134.2
217.5
$1,521.0
150.1
35.1
194.8
$1,061.7
133.8
–
176.9
$2,980.9
$1,901.0
$1,372.4
Long-lived tangible assets as of December 31, 2004 and
2003 are as follows:
Americas
Europe
Asia Pacific
2004
2003
$416.8
170.9
40.8
$344.9
143.8
36.5
$628.5
$525.2
The Americas long-lived tangible assets are located
primarily in the U.S. Approximately $70 million of Europe
long-lived tangible assets are located in Switzerland.
Capital expenditures by operating segment for the years
ended December 31, 2004, 2003 and 2002 were as follows (in
millions):
Americas
Additions to instruments
Additions to other property, plant and
equipment
Europe
Additions to instruments
Additions to other property, plant and
equipment
Asia Pacific
Additions to instruments
Additions to other property, plant and
equipment
Global operations and corporate
functions
Additions to instruments
Additions to other property, plant and
0.3
14.0
24.4
1.4
3.2
0.8
4.0
5.4
1.0
3.5
0.1
–
1.4
–
1.3
124.2
107.1
–
equipment
For segment reporting purposes, deployed instruments
35.2
72.9
30.9
are included in the measurement of operating segment assets
while undeployed instruments at U.S. and Puerto Rico based
operations and logistics are included in global operations and
corporate functions. The majority of instruments are
purchased by U.S. and Puerto Rico based operations and
logistics and are deployed to the operating segments as
needed for the business.
2004
2003
2002
16. COMMITMENTS AND CONTINGENCIES
$
–
$
1.5
$
–
As a result of the Centerpulse transaction, the Company
The increase in deprecation and amortization in 2004
from 2003 was primarily caused by a full year of depreciation
and amortization on Centerpulse acquired assets in 2004
versus one quarter of depreciation and amortization in 2003.
The increase in depreciation and amortization in 2003 from
2002 was primarily caused by the change in accounting
principle for instruments.
15. LEASES
Future minimum rental commitments under non-
cancelable operating leases in effect as of December 31, 2004
were $23.5 million for 2005, $19.6 million for 2006,
$14.6 million for 2007, $9.5 million for 2008, $8.2 million for
2009 and $27.6 million thereafter. Total rent expense for the
years ended December 31, 2004, 2003 and 2002 aggregated
$24.2 million, $15.7 million and $9.1 million, respectively.
acquired the entity involved in Centerpulse’s hip and knee
implant litigation matter. The litigation was a result of a
voluntary recall of certain hip and knee implants
manufactured and sold by Centerpulse. On March 13, 2002, a
U.S. Class Action Settlement Agreement (‘‘Settlement
Agreement’’) was entered into by Centerpulse that resolved
U.S. claims related to the affected products and a settlement
trust (‘‘Settlement Trust’’) was established and funded for the
most part by Centerpulse. The court approved the settlement
arrangement on May 8, 2002. Under the terms of the
Settlement Agreement, the Company will reimburse the
Settlement Trust a specified amount for each revision surgery
over 4,000 and revisions on reprocessed shells over 64. As of
March 4, 2005, the claims administrator has received 4,136
likely valid claims for hips (cut-off date June 5, 2003) and
knees (cut-off date November 17, 2003) and 198 claims for
reprocessed shells (cut-off date September 8, 2004). The
Company believes the litigation liability recorded as of
December 31, 2004 is adequate to provide for any future
claims regarding the hip and knee implant litigation.
On February 6, 2004, BTG International Limited (‘‘BTG’’)
filed an action against the Company and two unrelated
parties in the United States District Court for the District of
Delaware alleging infringement by the defendants of
U.S. Patent No. 6,352,559 (the ‘‘559 Patent’’). The Company’s
Trilogy˛ Acetabular System is specifically accused of
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Notes to Consolidated Financial Statements (Continued)
infringement, as well as Centerpulse’s Converge˛ and
AllofitTM Acetabular Systems. BTG’s complaint seeks
unspecified damages and injunctive relief. On March 4, 2004,
the Company filed an answer to the complaint denying
infringement, and asserting a counterclaim alleging that the
‘‘559 Patent is invalid. The Company believes that its
defenses are valid and meritorious and the Company intends
to continue to defend the BTG lawsuit vigorously.
On February 15, 2005, Howmedica Osteonics Corp.
(‘‘Howmedica’’) filed an action against the Company and an
unrelated party in the United States District Court for the
District of New Jersey alleging infringement by the
defendants of U.S. Patent Nos. 6,174,934; 6,372,814;
6,664,308; and 6,818,020. Howmedica’s complaint seeks
unspecified damages and injunctive relief. The Company
believes that its defenses are valid and meritorious and the
Company intends to defend the Howmedica lawsuit
vigorously.
The Company is also subject to product liability and
other claims and lawsuits arising in the ordinary course of
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in millions, except per share amounts)
business, for which the Company maintains insurance, subject
to self-insured retention limits. The Company establishes
accruals for product liability and other claims in conjunction
with outside counsel based on current information and
historical settlement information for open claims, related fees
and for claims incurred but not reported. While it is not
possible to predict with certainty the outcome of these cases,
it is the opinion of management that, upon ultimate
resolution, these cases will not have a material adverse effect
on the consolidated financial position, results of operations or
cash flows of the Company.
On July 25, 2003, the Staff of the Securities and
Exchange Commission informed Centerpulse that it was
conducting an informal investigation of Centerpulse relating
to certain accounting issues. The Company is continuing to
cooperate with the Securities and Exchange Commission in
this matter.
Net sales
Gross profit
Earnings before cumulative effect of change in
accounting principle(1)
Net earnings
Earnings per common share before cumulative effect
of change in accounting principle
Basic
Diluted
Net earnings per common share(1)
Basic
Diluted
2004 Quarter Ended
2003 Quarter Ended
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec(2)
$742.2
522.7
$737.4
535.5
$700.2
531.1
$801.1
611.7
$390.1
293.2
$411.1
312.7
$398.2
301.4
$701.6
477.5
97.6
97.6
116.3
116.3
127.9
127.9
200.0
200.0
80.2
135.3
89.0
89.0
85.0
85.0
37.0
37.0
0.40
0.40
0.40
0.40
0.48
0.47
0.48
0.47
0.52
0.52
0.52
0.52
0.82
0.81
0.82
0.81
0.41
0.41
0.69
0.68
0.45
0.45
0.45
0.45
0.43
0.43
0.43
0.43
0.15
0.15
0.15
0.15
(1) The three month period ended March 31, 2003 includes a cumulative effect of a change in accounting principle for instruments as discussed in
Note 4 of these audited financial statements.
(2) The three month period ended December 31, 2003 includes the results of Centerpulse subsequent to the Closing Date, as discussed in Note 3 of
these audited financial statements.
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ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
ITEM 9A. Controls and Procedures
The Company has established disclosure controls and
procedures and internal controls over financial reporting to
provide reasonable assurance that material information
relating to the Company, including its consolidated
subsidiaries, is made known on a timely basis to management
and the Board of Directors. However, any control system, no
matter how well designed and operated, cannot provide
absolute assurance that the objectives of the control system
are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if
any, within a company have been detected.
Based on their evaluation, the Company’s principal
executive officer and principal financial officer have
ITEM 9B. Other Information
None
concluded that the Company’s disclosure controls and
procedures as of the end of the period covered by this report
are effective.
Management’s report on internal control over financial
reporting appears in this report at the conclusion of Item 7A.
There was no change in the Company’s internal control
over financial reporting (as defined in Rule 13a-15(f)) that
occurred during the fourth quarter of 2004 that has
materially affected, or is reasonably likely to materially affect,
the Company’s internal control over financial reporting.
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Part III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this Item concerning directors and executive officers of the Company is incorporated herein by
reference from the Company’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders which will be filed with
the Commission pursuant to Regulation 14A and the information included under the caption ‘‘Executive Officers of the
Company’’ in Part I hereof.
ITEM 11. Executive Compensation
The information required by this Item concerning remuneration of the Company’s officers and directors and information
concerning material transactions involving such officers and directors is incorporated herein by reference from the Company’s
definitive Proxy Statement for its 2005 Annual Meeting of Stockholders which will be filed with the Commission pursuant to
Regulation 14A within 120 days after the end of the Company’s most recent fiscal year.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item concerning the stock ownership of management and five percent beneficial owners
and related stockholder matters, including equity compensation plan information, is incorporated herein by reference from the
Company’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders which will be filed with the Commission
pursuant to Regulation 14A within 120 days after the end of the Company’s most recent fiscal year.
ITEM 13. Certain Relationships and Related Transactions
The information required by this Item concerning certain relationships and related transactions is incorporated herein by
reference from the Company’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders which will be filed with
the Commission pursuant to Regulation 14A within 120 days after the end of the Company’s most recent fiscal year.
ITEM 14. Principal Accounting Fees and Services
The information required by this Item concerning principal accounting fees and services is incorporated herein by reference
from the Company’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders which will be filed with the
Commission pursuant to Regulation 14A within 120 days after the end of the Company’s most recent fiscal year.
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Part IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) 1.
Financial Statements
The following consolidated financial statements of the Company and its subsidiaries are set forth in Part II, Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
Schedule II. Valuation and Qualifying Accounts
Other financial statement schedules are omitted because they are not applicable or the required information is shown
in the financial statements or the notes thereto.
3. Exhibits
A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately
precedes such exhibits, and is incorporated herein by reference.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
ZIMMER HOLDINGS, INC.
By:
/s /
J. RAYMOND ELLIOTT
J. Raymond Elliott
Chairman of the Board
President and Chief Executive Officer
Dated: March 11, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/
J. RAYMOND ELLIOTT
J. Raymond Elliott
Chairman of the Board, President, Chief Executive
Officer and Director (Principal Executive Officer)
March 11, 2005
/s/ SAM R. LENO
Sam R. Leno
Executive Vice President, Corporate Finance and
Operations and Chief Financial Officer
(Principal Financial Officer)
March 11, 2005
/s/
JAMES T. CRINES
James T. Crines
Senior Vice President, Finance/Controller and
Information Technology (Principal Accounting Officer)
March 11, 2005
/s/ LARRY C. GLASSCOCK
Director
March 11, 2005
Larry C. Glasscock
/s/ REGINA E. HERZLINGER
Director
March 11, 2005
Regina E. Herzlinger
/s/
JOHN L. MCGOLDRICK
Director
March 11, 2005
John L. McGoldrick
/s/ AUGUSTUS A. WHITE, III
Director
March 11, 2005
Augustus A. White, III
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Index to Exhibits
Exhibit No
Description
3.1
3.2
3.3
4.1
10.1*
10.2*
10.3*
10.4*
10.5
10.6
10.7
10.8*
10.9*
10.10*
10.11*
10.12*
10.13
10.14
10.15
10.16
10.17
Restated Certificate of Incorporation of Zimmer Holdings, Inc. (incorporated herein by reference to Exhibit 3.1 to
Current Report on Form 8-K dated November 13, 2001)
Certificate of Designations of Series A Participating Cumulative Preferred Stock of Zimmer Holdings, Inc., dated as of
August 6, 2001 (incorporated herein by reference to Exhibit 3.2 to Current Report on Form 8-K dated November 13,
2001)
Restated By-Laws of Zimmer Holdings, Inc., together with Amendment No. 1 to the Restated By-Laws of Zimmer
Holdings, Inc. (incorporated herein by reference to Exhibit 3 to Quarterly Report on Form 10-Q dated November 14,
2003)
Specimen Common Stock certificate (incorporated herein by reference to Exhibit 4.1 to Amendment No. 3 to
Registration Statement on Form 10 dated July 6, 2001)
Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s
definitive Proxy Statement on Schedule 14A dated March 24, 2003)
Zimmer Holdings, Inc. Executive Performance Incentive Plan, effective August 6, 2001 (incorporated herein by
reference to Appendix C to the Registrant’s definitive Proxy Statement on Schedule 14A dated March 24, 2003)
Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors, effective August 6, 2001 (incorporated by reference to
Exhibit 10.6 to Current Report on Form 8-K dated August 6, 2001)
Zimmer Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors, effective August 6, 2001
(incorporated herein by reference to Exhibit 10.7 to Current Report on Form 8-K dated August 6, 2001)
Three Year Competitive Advance and Revolving Credit Facility among Zimmer Holdings, Inc., Zimmer, Inc., Zimmer
K.K., Zimmer LTD. and the lenders named therein, dated as of July 31, 2001 (incorporated herein by reference to
Exhibit 10.1 to Current Report on Form 8-K dated August 6, 2001)
First Amendment to Three Year Competitive Advance and Revolving Credit Facility among Zimmer Holdings, Inc.,
Zimmer, Inc., Zimmer K.K., Zimmer LTD. and the lenders named therein, dated as of December 10, 2001
(incorporated herein by reference to Exhibit 10.26 to Annual Report on Form 10-K dated March 13, 2002)
Guarantee Assumption Agreement, dated as of June 24, 2002, made by each of the signatories thereto in favor of the
lenders named in the Three Year Competitive Advance and Revolving Credit Facility Agreement dated as of July 31,
2001 (incorporated herein by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q dated August 9, 2002)
Zimmer Holdings, Inc. Long-Term Disability Income Plan for Highly Compensated Employees (incorporated herein by
reference to Exhibit 10.15 to Current Report on Form 8-K dated November 13, 2001)
Change in Control Severance Agreement with J. Raymond Elliott (incorporated herein by reference to Exhibit 10.2 to
Quarterly Report on Form 10-Q dated May 8, 2002)
Change in Control Severance Agreement with Sam R. Leno, Bruno A. Melzi, Bruce E. Peterson and David C. Dvorak
(incorporated herein by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q dated May 8, 2002)
Change in Control Severance Agreement with James T. Crines (incorporated herein by reference to Exhibit 10.4 to
Quarterly Report on Form 10-Q dated May 8, 2002)
Change in Control Severance Agreement with Sheryl L. Conley (incorporated herein by reference to Exhibit 10.2 to
Quarterly Report on Form 10-Q dated August 8, 2003)
$26,000,000 Uncommitted Standard Instrument Line of Credit between Zimmer, Inc. and subsidiaries and Bank of
America, N.A. and its affiliates and subsidiaries dated July 17, 2001 (incorporated herein by reference to
Exhibit 10.23 to Annual Report on Form 10-K dated March 13, 2002)
Amendment No. 1 to Letter Agreement dated July 17, 2001 between Zimmer, Inc. and Bank of America, N.A. dated
July 26, 2001 (incorporated herein by reference to Exhibit 10.24 to Annual Report on Form 10-K dated March 13,
2002)
Amendment No. 2 to Letter Agreement dated July 17, 2002 between Zimmer, Inc. and Bank of America, N.A. dated
February 5, 2002 (incorporated herein by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q dated May 8,
2002)
Amendment No. 3 to Letter Agreement dated as of July 31, 2003 between Zimmer Holdings, Inc. and Bank of
America, N.A. (incorporated herein by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q dated
November 14, 2003)
Uncommitted Credit Agreement between Zimmer, Inc. and Sumitomo Mitsui Banking Corporation dated October 29,
2001 (incorporated herein by reference to Exhibit 10.25 to Annual Report on Form 10-K dated March 13, 2002)
65
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Index to Exhibits (Continued)
Exhibit No
Description
2 0 0 4 F O R M 1 0 - K
10.18
10.19
10.20
10.21
10.22
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
First Amendment dated July 15, 2002 to the Uncommitted Credit Agreement dated October 29, 2001 between
Zimmer, Inc. and Sumitomo Mitsui Banking Corporation (incorporated herein by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q dated November 12, 2002)
$20,000,000 Uncommitted Line of Credit between Zimmer Holdings, Inc. and Fleet National Bank dated October 16,
2002 (incorporated herein by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q dated November 12, 2002)
Tender Agreement, dated as of August 31, 2003, between Ren ´e Braginsky, Hans Kaiser, Z ¨urich Versicherungs-
Gesellschaft, III Institutional Investors International Corp. and Zimmer Holdings, Inc. (incorporated by reference to
Exhibit 99.1 to the Registrant’s Form 8-K dated September 2, 2003)
$1,350,000,000 Amended and Restated Revolving Credit and Term Loan Agreement among Zimmer Holdings, Inc.,
Zimmer, Inc., Zimmer K.K., Zimmer Ltd., the borrowing subsidiaries and the lenders named therein, dated as of
May 24, 2004 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q dated
August 5, 2004)
$400,000,000 364-Day Credit Agreement among Zimmer Holdings, Inc., Zimmer, Inc., the borrowing subsidiaries and
the lenders named therein, dated as of May 24, 2004 (incorporated by reference to Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q dated August 5, 2004)
Zimmer Holdings, Inc. Supplemental Performance Incentive Plan (incorporated by reference to Exhibit 10.3 to the
Registrant’s Quarterly Report on Form 10-Q dated August 5, 2004)
Change in Control Severance Agreement with Jon E. Kramer (incorporated by reference to the Registrant’s Quarterly
Report on Form 10-Q dated November 8, 2004)
Change in Control Severance Agreement with Richard Fritschi (incorporated by reference to the Registrant’s
Quarterly Report on Form 10-Q dated November 8, 2004)
Employment Contract with Richard Fritschi (incorporated by reference to the Registrant’s Quarterly Report on
Form 10-Q dated November 8, 2004)
Confidentiality, Non-Competition and Non-Solicitation Employment Agreement with Richard Fritschi (incorporated by
reference to the Registrant’s Quarterly Report on Form 10-Q dated November 8, 2004)
Form of Nonqualified Stock Option Grant Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated January 12, 2005)
Form of Restricted Stock Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K dated January 12, 2005)
Form of Nonqualified Performance-Conditioned Stock Option Grant Award Letter under the Zimmer Holdings, Inc.
Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated January 21,
2005)
10.31*
Summary Compensation Sheet
21
23
31.1
31.2
32
99
List of Subsidiaries of Zimmer Holdings, Inc.
Consent of PricewaterhouseCoopers LLP
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive
Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial
Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Annual CEO Certification filed with the New York Stock Exchange on June 8, 2004
* indicates management contracts or compensatory plans or arrangements
66
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
Valuation and Qualifying Accounts
Description
Doubtful Accounts:
Year Ended December 31, 2002
Year Ended December 31, 2003
Year Ended December 31, 2004
Excess and Obsolete Inventory:
Year Ended December 31, 2002
Year Ended December 31, 2003
Year Ended December 31, 2004
2 0 0 4 F O R M 1 0 - K
Schedule II
(in millions)
Balance at
Beginning
of Period
Additions
Charged to
Expense
Deductions
to Reserve
Effects of
Foreign
Currency
Acquired
Centerpulse
Allowances
Balance
Sheet
Reclass*
Balance at
End of
Period
$
6.5
7.2
29.5
$ 1.1
2.6
4.9
$ (0.8)
(1.5)
(7.4)
$ 43.3
45.5
129.1
$ 6.0
11.6
30.8
$ (7.1)
(11.7)
(14.1)
$ 0.4
1.7
1.4
$ 3.3
2.0
2.9
$
$
–
19.5
–
–
81.7
–
$
–
–
–
$
7.2
29.5
28.4
$
–
–
(24.6)
$ 45.5
129.1
124.1
* In 2004, a balance sheet reclassification between gross inventory and the reserve for excess and obsolete inventory was recorded which had no effect
on the net inventory balance.
67
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
Certification
2 0 0 4 F O R M 1 0 - K
Exhibit 31.1
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, J. Raymond Elliott, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Zimmer Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 11, 2005
J. Raymond Elliott
Chairman, President and
Chief Executive Officer
68
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
Certification
2 0 0 4 F O R M 1 0 - K
Exhibit 31.2
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Sam R. Leno, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Zimmer Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 11, 2005
Sam R. Leno
Executive Vice President,
Corporate Finance and Operations
and Chief Financial Officer
69
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
Certification
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
2 0 0 4 F O R M 1 0 - K
Exhibit 32
In connection with the Annual Report of Zimmer Holdings, Inc. (the ‘‘Company’’) on Form 10-K for the period ending
December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), each of the
undersigned certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
J. Raymond Elliott
Chairman, President and Chief Executive Officer
March 11, 2005
Sam R. Leno
Executive Vice President, Corporate Finance
and Operations and Chief Financial Officer
March 11, 2005
70
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
Certification
Annual CEO Certification (Section 303A.12(a))
2 0 0 4 F O R M 1 0 - K
Exhibit 99
As the Chief Executive Officer of Zimmer Holdings, Inc. (‘‘Company’’), and as required by Section 303A.12(a) of the New York
Stock Exchange Listed Company Manual, I hereby certify that as of the date hereof I am not aware of any violation by the
Company of NYSE’s Corporate Governance listing standards, other than has been notified to the Exchange pursuant to
Section 303A.12(b) and disclosed as an attachment hereto.
By:
/s/
J. RAYMOND ELLIOTT
Print Name: J. Raymond Elliott
Title: Chairman, President and Chief Executive Officer
Date: June 8, 2004
71
Z I M M E R H O L D I N G S , I N C . A N D S U B S I D I A R I E S
Reconciliations of Non-GAAP Financial Measures
ZIMMER HOLDINGS, INC.
RECONCILIATION OF OPERATING PROFIT TO ADJUSTED OPERATING PROFIT
FOR THE YEARS ENDED DECEMBER 31, 2004 and 2003
(in millions, unaudited)
Operating Profit
Acquisition and integration
Inventory step-up
In-process research and development
Adjusted Operating Profit
RECONCILIATION OF DILUTED EPS TO ADJUSTED DILUTED EPS
FOR THE YEARS ENDED DECEMBER 31, 2004 and 2003
(unaudited)
Diluted EPS
Acquisition and integration
Inventory step-up
In-process research and development
Tax benefit of acquisition and integration, inventory step-up and in-process research and
development
Tax benefit from decreased deferred taxes of acquired Centerpulse operations; due to Swiss tax
rate reduction
Cumulative effect of change in accounting principle, net of tax
Adjusted Diluted EPS
RECONCILIATION OF GROSS MARGIN TO ADJUSTED GROSS MARGIN
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004
(unaudited)
Gross Margin
Inventory step-up
Adjusted Gross Margin
RECONCILIATION OF EFFECTIVE TAX RATE TO ADJUSTED EFFECTIVE TAX RATE
FOR THE YEARS ENDED DECEMBER 31, 2004 and 2003
(in millions, unaudited)
Effective tax rate
Impact of acquisition and integration
Impact of inventory step-up
Impact of in-process research and development
Impact of decreased deferred taxes of acquired Centerpulse operations; due to Swiss tax rate
reduction
Adjusted effective tax rate
72
For the Years Ended December 31,
2004
$763.2
81.1
59.4
—
$903.7
2003
$450.7
79.6
42.7
11.2
$584.2
For the Years Ended December 31,
2004
$ 2.19
0.32
0.24
—
(0.20)
(0.14)
—
$ 2.41
2003
$ 1.64
0.38
0.20
0.05
(0.21)
—
(0.26)
$ 1.80
76.4%
0.4
76.8%
For the Years Ended December 31,
2004
25.9%
0.6
0.3
4.7
31.5%
2003
33.6%
0.6
0.1
(0.9)
—
33.4%
BOARD OF DIRECTORS
J. Raymond Elliott
Chairman, President and
Chief Executive Officer
Zimmer Holdings, Inc.
Larry C. Glasscock
President and
Chief Executive Officer
WellPoint, Inc.
Regina E. Herzlinger, D.B.A.
The Nancy R. McPherson
Professor of Business
Administration Chair
Harvard Business School
John L. McGoldrick
Executive Vice President
and General Counsel
Bristol-Myers Squibb Company
Augustus A. White, III, M.D., Ph.D.
Ellen and Melvin Gordon
Professor of Medical Education,
Professor of Orthopaedic Surgery,
Master, Oliver Wendell Holmes Society,
Harvard Medical School
OFFICERS AND KEY MANAGEMENT
J. Raymond Elliott
Chairman, President and
Chief Executive Officer
Todd O. Davis
Senior Vice President,
Sales, Americas
Jon E. Kramer
President,
Americas
Cheryl R. Blanchard, Ph.D.
Vice President,
Corporate Research
and Clinical Affairs
David C. Dvorak
Executive Vice President,
Corporate Services,
Chief Counsel and Secretary
Sheryl L. Conley
President,
Global Products Group
James T. Crines
Senior Vice President,
Finance/Controller and
Information Technology
Richard Fritschi
President,
Zimmer Europe and
Australasia
Christopher J. Jefferis
Vice President,
Global Integration
Sam R. Leno
Executive Vice President,
Corporate Finance and
Operations and
Chief Financial Officer
Bruno A. Melzi
Chairman,
Zimmer International
Stephen H. L. Ooi
President,
Australasia Region
Renee P. Rogers, Ph.D.
Vice President,
Human Resources
Terry D. Schlotterback
President,
Zimmer Spine
James P. Simpson
Vice President,
Quality, Regulatory and
Government Affairs
Richard C. Stair
Vice President,
Global Operations
and Logistics
STOCKHOLDER INFORMATION
Headquarters
Zimmer Holdings, Inc.
345 East Main Street
Warsaw, IN 46580, USA
+1-574-267-6131
www.zimmer.com
Stock Listing
Zimmer is listed on the
New York Stock Exchange
and the SWX Swiss Exchange
under the symbol ZMH.
Transfer Agent
Communications concerning
stock transfer requirements,
loss of certificates and change
of address should be directed
to Zimmer’s Transfer Agent:
The Bank of New York
P.O. Box 11258
New York, NY 10286, USA
+1-888-552-8493 (Domestic)
+1-610-382-7833 (International)
shareowner-svcs@bankofny.com
www.stockbny.com
Investor Relations
Zimmer invites stockholders,
security analysts, portfolio
managers and other interested
parties to contact:
Marc S. Ostermann
Manager, Investor Relations
+1-574-371-8515
marc.ostermann@zimmer.com
Sam R. Leno
Executive Vice President,
Corporate Finance and
Operations and
Chief Financial Officer
+1-574-372-4790
sam.leno@zimmer.com
To obtain a free copy of Zimmer’s
annual report including form
10-K, quarterly reports on form
10-Q, news releases, earnings
releases, proxy statements, or
to obtain Zimmer’s financial
calendar, access SEC filings,
listen to earnings calls, or to
look up Zimmer stock quotes,
please visit investor.zimmer.com
or call +1-866-688-7656.
Independent Auditors
PricewaterhouseCoopers LLP
Chicago, IL, USA
“Strong management, relentless innovation, sensible
acquisitions, and the ability to understand the needs
of all stakeholders in orthopedic surgery are among
the reasons MD&DI has chosen Zimmer as one of its
Medical Manufacturers of the Year.”
— Medical Device and Diagnostics Industry Magazine, November 2004 issue.
The magazine annually names a large and a small company for the award,
and Zimmer was selected in the large company category.
Zimmer Holdings, Inc., 345 East Main Street, P.O. Box 708, Warsaw, IN 46580, U.S.A. www.zimmer.com