Enhancing
lives
Zimmer Holdings, Inc. 2007 Annual Report
Focused
on Patients
Zimmer’s focus on enhancing patients’ lives
is the foundation for our business. Patients measure
the success of their procedures by how quickly and fully
they can return to normal daily activities. Our goal is
to design, make and take to market the products
that deliver those desired outcomes.
We research and
develop with passion
Zimmer’s research and development initiatives result in
far-reaching benefits such as bone-like Trabecular Metal™ Technology,
minimally invasive surgical techniques, and, most recently, Zimmer ®
Gender Solutions™ Knees and Hips. Our R&D programs focus on
unmet needs, which are determined through our market presence and
collaborations with surgeons and other healthcare professionals.
We leverage breakthrough developments by determining
applications across our product lines. Our goal is to introduce
innovations to the market as quickly as practicable to
benefit patients and expand sales.
Page 10
1
We manufacture
with precision
Patients live with our products. That drives our
commitment to quality and excellence. Our manufacturing
processes are setting high standards for quality and
automation. They deliver products to precise specifications
at the same time they meet demanding production and
efficiency targets. Our global operations are designed
to accommodate a steady flow of new products while
keeping up the pace of ongoing production.
Page 12
2
We take products
to market with pride
Education forms the core of how we take products to market.
Our sales representatives, whose extensive knowledge makes them a
Zimmer competitive advantage, and The Zimmer Institute™ Educational
Facility provide information that prepares surgeons to achieve optimal
outcomes for their patients. Our educational initiatives are becoming
more diverse as patients themselves take more responsibility for
initiating conversations with their doctors and participating
in decisions about their healthcare.
Page 14
We help
enhance the lives
of patients
Zimmer hips and knees enable one million patients each year
to return to a productive life including family, leisure, work and
community activities. The stories of improved outcomes that patients
share with us have been confirmed in the objective analysis of data
gathered by national healthcare registries, most recently in Sweden
and Australia. Zimmer’s musculoskeletal expertise extends
to extremities, spine, dental and trauma care, areas in
which we continue to expand market presence.
Page 16
4
Research & Development – Page 10
Manufacturing – Page 12
We innovate across our operations.
We manufacture with consistently high quality.
We help educate patients and their caregivers.
As surgeons around the world successfully use our
innovative technologies and procedures to treat patients,
our employees are motivated to develop new solutions
that address unmet clinical needs for patients as well as
surgeons, payors and hospitals. Our efforts as a company
not only enhance the lives of patients all over the world
but also add value for surgeons in their treatment
of patients, and for Zimmer employees
and stockholders.
Patients – Page 16
To Market – Page 14
Zimmer Holdings, Inc. 2007 Annual Report
5
Financial Highlights
Sales by Geographic Segment (Reported)
2003
2004
2005
2006
% Change
2007 2006-2007
(Dollars in millions except per share amounts)
(cid:25)(cid:28)(cid:9)
(cid:25)(cid:28)(cid:9)
(cid:25)(cid:28)(cid:9)
(cid:22)(cid:28)(cid:9)
(cid:22)(cid:28)(cid:9)
(cid:22)(cid:28)(cid:9)
(cid:21)(cid:24)(cid:9)
(cid:21)(cid:24)(cid:9)
(cid:21)(cid:24)(cid:9)
Americas
Europe
Asia Pacific
Consolidated
$ 1,208
$1,741
$ 1,942
$ 2,076
$ 2,277
366
327
809
431
875
469
931
488
1,081
540
10%
16%
11%
$ 1,901
$ 2,981
$ 3,286
$ 3,495
$ 3,898
12%
Sales by Product Category (Reported)
2003
2004
2005
2006
% Change
2007 2006-2007
Reconstructive
$1,521
$2,456
$2,721
$ 2,906
$ 3,261
Knees
Hips
Extremities
Dental
Trauma
Spine
OSP* and Other
Consolidated
(cid:23)(cid:23)(cid:9)
(cid:23)(cid:23)(cid:9)
(cid:23)(cid:23)(cid:9)
(cid:23)(cid:9)
(cid:23)(cid:9)
(cid:23)(cid:9)
(cid:26)(cid:9)
(cid:26)(cid:9)
(cid:26)(cid:9)
(cid:24)(cid:22)(cid:9)
(cid:24)(cid:22)(cid:9)
(cid:24)(cid:22)(cid:9)
(cid:26)(cid:9)
(cid:26)(cid:9)
(cid:26)(cid:9)
(cid:25)(cid:9)
(cid:25)(cid:9)
(cid:25)(cid:9)
(cid:25)(cid:9)
(cid:25)(cid:9)
(cid:25)(cid:9)
801
645
45
30
150
35
195
1,194
1,366
1,460
1,637
1,079
1,141
1,189
1,299
58
125
173
134
218
66
148
180
160
225
78
179
195
177
217
104
221
206
197
234
$1,901
$2,981
$3,286
$ 3,495
$ 3,898
12%
12%
9%
34%
23%
6%
11%
8%
12%
*Orthopaedic Surgical Products
Net Sales(1)
Operating Profit
Operating Cash Flow
Diluted Earnings per Share
Zimmer recorded net sales of
$3.9 billion in 2007, reflecting
growth across all geographies
and product categories.
Adjusted operating profit
was favorable to 2006 due to
increased sales and controlled
operating expenses.
Our strong cash flow generation
positions us to return value to
stockholders through strategic
acquisitions, investments in our
business and share repurchases.
Zimmer delivered another year
of solid earnings performance.
(cid:15)(cid:21)(cid:22)(cid:9)(cid:4)(cid:54)(cid:73)(cid:84)(cid:83)(cid:86)(cid:88)(cid:73)(cid:72)
(cid:15)(cid:21)(cid:22)(cid:9)(cid:4)(cid:54)(cid:73)(cid:84)(cid:83)(cid:86)(cid:88)(cid:73)(cid:72)
(cid:15)(cid:21)(cid:22)(cid:9)(cid:4)(cid:54)(cid:73)(cid:84)(cid:83)(cid:86)(cid:88)(cid:73)(cid:72)
(cid:23)(cid:16)(cid:24)(cid:29)(cid:25)
(cid:23)(cid:16)(cid:24)(cid:29)(cid:25)
(cid:23)(cid:16)(cid:24)(cid:29)(cid:25)
(cid:23)(cid:16)(cid:22)(cid:28)(cid:26)
(cid:23)(cid:16)(cid:22)(cid:28)(cid:26)
(cid:23)(cid:16)(cid:22)(cid:28)(cid:26)
(cid:22)(cid:16)(cid:29)(cid:28)(cid:21)
(cid:22)(cid:16)(cid:29)(cid:28)(cid:21)
(cid:22)(cid:16)(cid:29)(cid:28)(cid:21)
(cid:22)(cid:16)(cid:25)(cid:29)(cid:20)
(cid:22)(cid:16)(cid:25)(cid:29)(cid:20)
(cid:22)(cid:16)(cid:25)(cid:29)(cid:20)
(cid:21)(cid:16)(cid:29)(cid:20)(cid:21)
(cid:21)(cid:16)(cid:29)(cid:20)(cid:21)
(cid:21)(cid:16)(cid:29)(cid:20)(cid:21)
(cid:15)(cid:21)(cid:23)(cid:9)(cid:4)(cid:37)(cid:72)(cid:78)(cid:89)(cid:87)(cid:88)(cid:73)(cid:72)(cid:12)(cid:22)(cid:13)
(cid:17)(cid:23)(cid:9)(cid:4)(cid:54)(cid:73)(cid:84)(cid:83)(cid:86)(cid:88)(cid:73)(cid:72)
(cid:15)(cid:21)(cid:23)(cid:9)(cid:4)(cid:37)(cid:72)(cid:78)(cid:89)(cid:87)(cid:88)(cid:73)(cid:72)(cid:12)(cid:22)(cid:13)
(cid:17)(cid:23)(cid:9)(cid:4)(cid:54)(cid:73)(cid:84)(cid:83)(cid:86)(cid:88)(cid:73)(cid:72)
(cid:15)(cid:21)(cid:23)(cid:9)(cid:4)(cid:37)(cid:72)(cid:78)(cid:89)(cid:87)(cid:88)(cid:73)(cid:72)(cid:12)(cid:22)(cid:13)
(cid:17)(cid:23)(cid:9)(cid:4)(cid:54)(cid:73)(cid:84)(cid:83)(cid:86)(cid:88)(cid:73)(cid:72)
(cid:23)(cid:16)(cid:28)(cid:29)(cid:28)
(cid:23)(cid:16)(cid:28)(cid:29)(cid:28)
(cid:23)(cid:16)(cid:28)(cid:29)(cid:28)
(cid:29)(cid:20)(cid:24)
(cid:29)(cid:20)(cid:24)
(cid:27)(cid:26)(cid:23)
(cid:29)(cid:20)(cid:24)
(cid:27)(cid:26)(cid:23)
(cid:27)(cid:26)(cid:23)
(cid:25)(cid:28)(cid:24)
(cid:25)(cid:28)(cid:24)
(cid:24)(cid:25)(cid:21)
(cid:25)(cid:28)(cid:24)
(cid:24)(cid:25)(cid:21)
(cid:24)(cid:25)(cid:21)
(cid:21)(cid:16)(cid:23)(cid:22)(cid:23)
(cid:21)(cid:16)(cid:23)(cid:22)(cid:23)
(cid:21)(cid:16)(cid:23)(cid:22)(cid:23)
(cid:21)(cid:16)(cid:21)(cid:22)(cid:28)
(cid:21)(cid:16)(cid:21)(cid:22)(cid:28)
(cid:21)(cid:16)(cid:21)(cid:22)(cid:28)
(cid:21)(cid:16)(cid:21)(cid:27)(cid:21)
(cid:21)(cid:16)(cid:21)(cid:27)(cid:21)
(cid:21)(cid:16)(cid:21)(cid:21)(cid:27)
(cid:21)(cid:16)(cid:21)(cid:27)(cid:21)
(cid:21)(cid:16)(cid:21)(cid:21)(cid:27)
(cid:21)(cid:16)(cid:20)(cid:25)(cid:25)
(cid:21)(cid:16)(cid:20)(cid:25)(cid:25)
(cid:21)(cid:16)(cid:21)(cid:21)(cid:27)
(cid:21)(cid:16)(cid:20)(cid:25)(cid:25)
(cid:21)(cid:16)(cid:21)(cid:26)(cid:25)
(cid:21)(cid:16)(cid:21)(cid:26)(cid:25)
(cid:21)(cid:16)(cid:21)(cid:26)(cid:25)
(cid:15)(cid:24)(cid:9)(cid:4)(cid:54)(cid:73)(cid:84)(cid:83)(cid:86)(cid:88)(cid:73)(cid:72)
(cid:15)(cid:24)(cid:9)(cid:4)(cid:54)(cid:73)(cid:84)(cid:83)(cid:86)(cid:88)(cid:73)(cid:72)
(cid:15)(cid:24)(cid:9)(cid:4)(cid:54)(cid:73)(cid:84)(cid:83)(cid:86)(cid:88)(cid:73)(cid:72)
(cid:28)(cid:26)(cid:22)
(cid:28)(cid:26)(cid:22)
(cid:28)(cid:26)(cid:22)
(cid:28)(cid:27)(cid:28)
(cid:28)(cid:27)(cid:28)
(cid:28)(cid:27)(cid:28)
(cid:15)(cid:21)(cid:28)(cid:9)(cid:4)(cid:37)(cid:72)(cid:78)(cid:89)(cid:87)(cid:88)(cid:73)(cid:72)(cid:12)(cid:22)(cid:13)
(cid:17)(cid:24)(cid:9)(cid:4)(cid:54)(cid:73)(cid:84)(cid:83)(cid:86)(cid:88)(cid:73)(cid:72)
(cid:15)(cid:21)(cid:28)(cid:9)(cid:4)(cid:37)(cid:72)(cid:78)(cid:89)(cid:87)(cid:88)(cid:73)(cid:72)(cid:12)(cid:22)(cid:13)
(cid:17)(cid:24)(cid:9)(cid:4)(cid:54)(cid:73)(cid:84)(cid:83)(cid:86)(cid:88)(cid:73)(cid:72)
(cid:15)(cid:21)(cid:28)(cid:9)(cid:4)(cid:37)(cid:72)(cid:78)(cid:89)(cid:87)(cid:88)(cid:73)(cid:72)(cid:12)(cid:22)(cid:13)
(cid:17)(cid:24)(cid:9)(cid:4)(cid:54)(cid:73)(cid:84)(cid:83)(cid:86)(cid:88)(cid:73)(cid:72)
(cid:21)(cid:16)(cid:20)(cid:28)(cid:24)
(cid:21)(cid:16)(cid:20)(cid:28)(cid:24)
(cid:21)(cid:16)(cid:20)(cid:28)(cid:24)
(cid:21)(cid:16)(cid:20)(cid:24)(cid:21)
(cid:21)(cid:16)(cid:20)(cid:24)(cid:21)
(cid:21)(cid:16)(cid:20)(cid:24)(cid:21)
(cid:24)(cid:29)(cid:25)
(cid:24)(cid:29)(cid:25)
(cid:24)(cid:29)(cid:25)
(cid:22)(cid:18)(cid:24)(cid:21)
(cid:22)(cid:18)(cid:24)(cid:21)
(cid:22)(cid:18)(cid:21)(cid:29)
(cid:22)(cid:18)(cid:21)(cid:29)
(cid:22)(cid:18)(cid:24)(cid:21)
(cid:22)(cid:18)(cid:21)(cid:29)
(cid:21)(cid:18)(cid:28)(cid:20)
(cid:21)(cid:18)(cid:26)(cid:24)
(cid:21)(cid:18)(cid:28)(cid:20)
(cid:21)(cid:18)(cid:26)(cid:24)
(cid:21)(cid:18)(cid:28)(cid:20)
(cid:21)(cid:18)(cid:26)(cid:24)
(cid:24)(cid:18)(cid:20)(cid:25)
(cid:24)(cid:18)(cid:20)(cid:25)
(cid:24)(cid:18)(cid:20)(cid:25)
(cid:23)(cid:18)(cid:22)(cid:26)
(cid:23)(cid:18)(cid:22)(cid:26)
(cid:23)(cid:18)(cid:22)(cid:26)
(cid:23)(cid:18)(cid:24)(cid:20)
(cid:23)(cid:18)(cid:24)(cid:20)
(cid:23)(cid:18)(cid:24)(cid:20)
(cid:23)(cid:18)(cid:24)(cid:24)
(cid:23)(cid:18)(cid:24)(cid:24)
(cid:23)(cid:18)(cid:21)(cid:20)
(cid:23)(cid:18)(cid:24)(cid:24)
(cid:22)(cid:18)(cid:29)(cid:23)
(cid:23)(cid:18)(cid:21)(cid:20)
(cid:22)(cid:18)(cid:29)(cid:23)
(cid:23)(cid:18)(cid:21)(cid:20)
(cid:22)(cid:18)(cid:29)(cid:23)
(cid:20)(cid:23)
(cid:20)(cid:23)
(cid:20)(cid:23)
(cid:20)(cid:24)
(cid:20)(cid:24)
(cid:20)(cid:24)
(cid:20)(cid:25)
(cid:20)(cid:25)
(cid:20)(cid:25)
(cid:20)(cid:26)
(cid:20)(cid:26)
(cid:20)(cid:26)
(cid:20)(cid:27)
(cid:20)(cid:27)
(cid:20)(cid:27)
(cid:20)(cid:23)
(cid:20)(cid:23)
(cid:20)(cid:23)
(cid:20)(cid:24)
(cid:20)(cid:24)
(cid:20)(cid:24)
(cid:20)(cid:25)
(cid:20)(cid:25)
(cid:20)(cid:25)
(cid:20)(cid:26)
(cid:20)(cid:26)
(cid:20)(cid:26)
(cid:20)(cid:27)
(cid:20)(cid:27)
(cid:20)(cid:27)
(cid:20)(cid:23)
(cid:20)(cid:23)
(cid:20)(cid:23)
(cid:20)(cid:24)
(cid:20)(cid:24)
(cid:20)(cid:24)
(cid:20)(cid:25)
(cid:20)(cid:25)
(cid:20)(cid:25)
(cid:20)(cid:26)
(cid:20)(cid:26)
(cid:20)(cid:26)
(cid:20)(cid:27)
(cid:20)(cid:27)
(cid:20)(cid:27)
(cid:20)(cid:23)
(cid:20)(cid:23)
(cid:20)(cid:23)
(cid:20)(cid:24)
(cid:20)(cid:24)
(cid:20)(cid:24)
(cid:20)(cid:25)
(cid:20)(cid:25)
(cid:20)(cid:25)
(cid:20)(cid:26)
(cid:20)(cid:26)
(cid:20)(cid:26)
(cid:20)(cid:27)
(cid:20)(cid:27)
(cid:20)(cid:27)
(1) Net sales for 2003 include pro forma sales of the former Centerpulse for the periods prior to the date we acquired it as reflected in the Net Sales bar above.
(2) “Adjusted” refers to performance measures that exclude in-process R&D write-offs, acquisition, integration and other expenses, inventory step-up, a tax benefit
from decreased Swiss deferred tax, the change in accounting principle for instruments and a one-time $169.5 million settlement paid in the third quarter of 2007.
See the reconciliations of this non-GAAP financial measure to the most directly comparable GAAP measures on page 74.
6
To Our Stockholders:
During 200 Zimmer expanded the innovative Zimmer Gender Solutions Knee into a product platform, extending prospects for better
outcomes by matching products to the unique differences in patients. The elements that distinguish Zimmer products and support
market leadership in our core hip and knee businesses—more adaptable fit, minimally invasive surgery, highly functional implants—
apply as well in our Extremities, Spine, Dental and Trauma business lines. Across Zimmer, solid financial results and market-
changing product innovations demonstrate that our deep-seated commitment to enhancing patients’ lives also represents sound
strategy and the foundation for continuing progress.
Solid Financial Performance
Sales rose 12 percent to $3.9 billion in 2007, with year-over-year
increases in all geographic and product categories. We were
particularly pleased to see evidence in 2007 of accelerating
procedure growth in both U.S. and European markets in our
core hip and knee franchises. Our supply chain and sales and
distribution networks around the world responded well to the
growing demand for procedures.
Just as the aging process creates more need for reconstructive
surgery, minimally invasive techniques make it easier for
patients to choose that option. We have long made less invasive
techniques a priority for Zimmer research and development and
are well positioned to capitalize on market demand for such
procedures. Less time recovering means quicker return to the
activities of daily life, a fundamental goal for Zimmer’s product
development initiatives.
Net income was $773.2 million, or $3.26 per share on a fully
diluted basis, below the previous year’s $834.5 million and
$3.40 per share. Adjusted earnings, which exclude $169.5 million
in settlement costs as well as acquisition-related expenses and
other nonrecurring items, improved 14 percent to $961.6 million
from the year-ago $843.1 million. On a fully diluted basis,
reflecting our ongoing stock repurchase program, adjusted
per share earnings for 2007 were $4.05 compared with $3.44
in 2006, an 18 percent increase.
Our stock repurchase program illustrates Zimmer’s commitment
to returning value to stockholders. We repurchased 7.2 million
shares in 2007 and at year-end had approval to buy up to an
additional $621 million in stock.
Continuing Market Strength
Zimmer’s strengths are particularly well suited to address the
factors driving growth in the markets we serve.
In Europe and the United States, the over-65 age group is
projected to grow to between 15 percent and 20 percent of
the population in 2015, compared with 10 percent to 15 percent
in 2000. Zimmer’s market data shows the average age of
patients receiving total joint replacement is 67 to 68 years old.
This year, the early Baby Boomers are turning 63. They are on
the threshold of age-related degenerative conditions such
as arthritis. Recent studies indicate that this generation will
experience a 40 percent increase in arthritis over the next
two decades.
Another growth driver in the industry and a significant strategic
priority for Zimmer are devices designed for features typical of
a particular gender. The solutions from these products offer
additional options for the treatment of damaged joints in men
and women. Among the new products that we introduced to the
market in 2007 was the Gender Solutions™ Natural-Knee® Flex
System, our second gender knee that builds on the success
of the Gender Solutions™ NexGen® Knee launched in 2006.
Capitalizing on Near-Term Opportunities
We expect new product introductions and further market
penetration by key products launched in 2007 to drive
Zimmer’s growth in the near term.
That is especially true in our two largest product categories,
knees and hips. In knees, growth will come from the Gender
Solutions brand and our Zimmer ® NexGen® LPS-Flex Mobile
Knee, designed to accommodate an increased range of motion.
The Zimmer ® M/L Taper Hip Prosthesis with Kinectiv™ Technology
is a major introduction in hips. It is our first gender hip offering,
provides optimum flexibility for the surgeon, and may be
implanted using minimally invasive techniques.
Our smaller businesses also are well positioned to deliver
growth with new products and technology applications.
The 2007 acquisition of Endius, Inc. added minimally invasive
technologies in Spine. Filling product gaps through internal
and external development efforts in Spine, Dental and Trauma
remains a high priority.
Zimmer Holdings, Inc. 2007 Annual Report
Zimmer Holdings, Inc. 2007 Annual Report
Another component of how we are actively positioning Zimmer
to capture future market growth is substantial investment in the
company’s manufacturing, quality and IT systems and sales force.
Our manufacturing initiatives address not only the need for
additional manufacturing capacity but also efficient distribution.
We have announced plans to add 100,000 square feet of new
manufacturing capacity in Shannon, Ireland, and are consolidating
distribution in Europe.
us to continue to deliver industry-leading products of the highest
quality backed by business practices that inspire confidence
and trust. We will extend these enhanced compliance initiatives
beyond our hip and knee business to apply best practices
throughout the organization—across business units and
geographies. This is an exceptional opportunity for Zimmer to
provide the benchmark for measuring compliance, transparency
and patient-centered innovation for the industry.
Our IT systems update, already under way, will replace legacy
systems with an integrated, global information technology
infrastructure.
The investment in our sales organization recognizes that our
sales representatives have earned the reputation of being
among the most knowledgeable in their markets. Our investment
programs are intended to help preserve that Zimmer competitive
advantage and better equip our field force to meet growing
customer demand.
Committed to Excellence
We have made a broad commitment to the ongoing, continuous
improvement of compliance and business practices concerning
our collaboration with healthcare professionals. These efforts—
which go beyond the requirements of our September 2007
resolution agreements with the U.S. government—will allow
We are pursuing these initiatives with a commitment to ensure
that when our products are chosen, it is because they are the
best solution for patients. That is the sole basis upon which
we want to compete, and the surest path forward to ensuring
confidence and trust in our industry.
Our priorities for 2008 are straightforward. We are committed
to achieving our goals to meet or exceed financial growth targets,
implement infrastructure improvement plans, and define and
institute additional best practices in the areas of compliance and
ethics. With enhancing lives forming the core element in Zimmer’s
strategy, we will continue to expand our leadership position in
hips and knees and grow our other businesses to improve out-
comes that healthcare providers can achieve with their patients.
We appreciate the ongoing commitment of our employees and
the support of our Board of Directors as we take Zimmer to even
higher levels of performance.
David C. Dvorak
President and
Chief Executive Officer
January 31, 2008
Letter from the Chairman
Dear Stockholders:
In 2007, Zimmer executed a seamless change in leadership that flowed from our executive
succession planning process. In May, after a thorough search, the Board of Directors was pleased
to appoint David Dvorak to the position of President and Chief Executive Officer. David possesses
the experience, intellect and drive to lead this company to continued success going forward.
Also, in November 2007, Zimmer’s Board of Directors named the company’s first non-executive
chairman. I am honored to have been elected by the Board to serve in this position.
The Board, the CEO, and Zimmer’s entire management team work closely together in assessing
how we can make a great company better. In a dynamic and increasingly competitive industry, this
means an ongoing process of evolving strategies, aligning resources with emerging opportunities
and leveraging management depth—in short, positioning the company to capture the growth
represented by expanding healthcare markets around the world.
Zimmer products are sold in more than 100 countries and improve the lives of more than one
million patients a year. We are mindful of our commitment to those patients as we consider the
company’s future direction, and we are driven to achieve the highest levels of quality in both
products and business standards. The Board has great confidence in Zimmer’s prospects and ability
to execute solid strategies, and we are fully engaged in helping the company deliver stockholder
returns, while leading in innovative solutions for surgeons and patients, in compliance with the
highest ethical standards of business conduct.
John L. McGoldrick
Chairman
Zimmer Holdings, Inc.
January 31, 2008
Zimmer Holdings, Inc. 2007 Annual Report
Manufacturing
To Market
R&D
Patients
We research with passion...
because the better our products,
the better the opportunity for
excellent patient outcomes.
Members of Zimmer’s R&D team engage in problem-solving discussions in the Innovation
Café next to the research labs in Warsaw. Their top priorities are to focus on unmet clinical
needs and to develop solutions that give surgeons the confidence of delivering positive
long-term results for patients. Among information that the researchers consider are lab
findings, like the result of this tibial nail test in a Zimmer laboratory (left). The technician
is measuring how well the implant structure and the screws that attach it to bone stand
up under the stress of normal use.
10
Research & Development
We have extensive research and
development activities to develop
new surgical techniques, materials,
orthobiologics and product designs.
The research and development
functions work closely with our
strategic brand marketing function.
The rapid commercialization of
innovative new materials, orthobiolog-
ics products, implant and instrument
designs, and surgical techniques
remains one of our core strategies.
Zimmer’s leading-edge technologies and
products start with recognition of unmet
clinical needs and desired outcomes and
take shape with necessary input from
healthcare professionals and Zimmer’s
own rigorous scientific evaluation.
patient outcomes. Trabecular Metal
Technology is an outstanding example
of that approach. Originally applied
in hips and knees, Trabecular Metal
Technology can now be found in our
extremity, spine and trauma products.
An example is the Gender Solutions
Knee, designed to accommodate differ-
ences between men’s and women’s
musculoskeletal structures. In addition
to addressing a previously unmet clinical
need, the implant significantly increases
surgeons’ ability to adapt treatment to
individual patients. It also was engineered
to accommodate minimally invasive
surgery. Minimally invasive surgical tech-
niques can result in a smaller incision
and less disruption of the surrounding
soft tissues.
The pace of product introductions is a
reflection of how ingrained innovation
has become in the Zimmer culture. To
continue to nourish creative problem-
solving, we created the Innovation Café
in our R&D labs at Zimmer’s Warsaw,
Indiana, headquarters. The setting
promotes the exchange of ideas and
information, with conference areas,
resource materials, handy computer
links and tables that serve as wired
whiteboards to quickly capture
diagrams and details.
This space is used by members of
the R&D staff and as a gathering area
for specialists across Zimmer’s business.
Our collaborative approach means that
members of our product brand teams
add awareness of unmet clinical needs
to the R&D discussions, while the
manufacturing staff tracks new-product
development to prepare for production.
At Zimmer, innovation is critical to our
ongoing success, and it percolates across
business practices and throughout our
global operations.
Reflecting the culture of innovation that
applies across Zimmer, our engineers
moved quickly to turn the advanced
thinking behind the Gender Solutions
Knee into a broader product platform.
In addition to the initial implant, the
product line includes the Zimmer Gender
Solutions Natural-Knee Flex System and
the Zimmer ® Gender Solutions™ Patello-
Femoral Joint System. New to the hip
market is the Gender Solutions Zimmer
M/L Taper Hip Prosthesis with Kinectiv
Technology, a product that is designed to
provide even more flexibility in matching
implants to patients and facilitate
minimally invasive surgical approaches.
The expanding Gender Solutions
platform demonstrates another aspect
of Zimmer’s approach to R&D. As soon
as a product or technology takes form,
we are already asking how it can apply
across various lines of business and
distribution channels to improve more
Zimmer Gender Solutions Knee
Challenge: Not only are women’s knees
generally smaller than men’s, but they
also have a different shape.
Solution: The design was developed from
surgeons’ operating room observations,
bone morphology studies at the University
of Tennessee and Zimmer’s research.
Patient Advantage: The implant
accommodates gender differences and
can be inserted with minimally invasive
surgical techniques.
Zimmer Holdings, Inc. 2007 Annual Report
11
because the better our products,
the better the opportunity for
excellent patient outcomes.
To Market
Manufacturing
R&D
Patients
We manufacture with precision...
and assure high quality
across our growing
product portfolio.
Zimmer’s global manufacturing approach balances thorough inspection with automated
processes that improve productivity and efficiency. Above, an optical comparator, sensitive
to the slightest imperfections, checks a hip stem against specifications. Zimmer meets
demanding quality standards through measurements built into the manufacturing process
and hands-on inspections before the implants are shipped. The device at left is used to
measure tooling for a five-axis-movement milling process used in making bone plates.
To meet our own demanding tolerance levels, we often develop tooling on site.
12
Manufacturing
The nature of our products—with
even a slight shift in dimension
potentially making a meaningful
difference in clinical results—requires
attention to detail at every step of the
manufacturing process. That attention
to detail spans not just manufacturing
but also logistics, quality and other
Global Operations functions.
The fact that our replacement hips
and knees and other products improve
the quality of life of approximately
one million patients a year begins to
suggest the scope of our expectations
for manufacturing at Zimmer. Adding
to the complexity is the steady flow
of new products.
demand for products and align resources
with projections to help supply distribu-
tors with inventory and instruments in a
timely manner. Another factor having an
impact on logistics is hospitals’ preference
for scheduling surgeries on Mondays and
Tuesdays in order to start post-surgical
rehabilitation on weekdays.
Along with adherence to demanding
quality and customer service standards,
Zimmer’s manufacturing team focuses
on efficiency. We train managers in the
techniques of “lean” manufacturing to add
value to the overall process. We routinely
cross-train workers in our plants. Their
broader experience represents job
enrichment and enables more staffing
flexibility for improved productivity and
smoother production flow.
Along the production lines, we continue
to automate steps wherever practicable.
We use computer-assisted robots and
multi-axis grinders for precision polishing.
To instill quality controls at every step
of the manufacturing process, we have
developed on-machine measurement
devices and probes which help achieve
the demanding tolerance levels that are
part of our product quality proposition.
The ability to meld manufacturing
savvy with unyielding commitment to
positive patient outcomes and continual
innovation is a valuable asset. For
Zimmer’s manufacturing capabilities,
that mix describes business as usual.
Our worldwide manufacturing capabilities
include plants in the United States,
Puerto Rico and Europe. We are making
a major investment in 2008 in upgrades
as well as additional capacity to meet
anticipated growing demand for hip and
knee replacements from physically active
Baby Boomers.
In 2007, Global Operations and Logistics
accommodated the launch of 20 new
products across Zimmer businesses,
while keeping up the flow of implants
already well established in the market.
The positive reception of the new Gender
Solutions Knee created high demand not
only for the devices themselves but also
for the necessary surgical instruments.
Having the instruments available in the
field helped us respond to the increase
in demand for procedures we experienced
in late 2007.
We have incorporated the technology for
making gender-based implants throughout
our manufacturing processes. The initiative
prepared us for growth in the Gender
Solutions product line and enhanced our
ability to scale technology, cutting lead
time and improving productivity.
Those improvements do not just happen
on the manufacturing floor. Global Opera-
tions is integrated into product discus-
sions all along the continuum. It works
closely with sales and marketing to gauge
Zimmer NexGen LPS-Flex Mobile Knee
Challenge: Many activities of daily living call
for wider range of motion than traditional
knee implants accommodate.
Solution: The polyethylene articulating surface
easily rotates along with natural movement
and allows flexion of up to 155 degrees.
Patient Advantage: Most knee implants are
designed to accommodate a range of motion
up to 120 degrees. Comfort with daily activities
such as climbing stairs, getting up from a
chair and kneeling requires a broader range.
Zimmer Holdings, Inc. 2007 Annual Report
1
To Market
Manufacturing
R&D
Patients
We take products to market with pride...
knowing that they are designed
to improve quality of life for one
million people a year.
Zimmer is committed to being a leader in professional medical education. We involve surgeons
in defining unmet patient needs and sharing feedback on patient results. This information flow
and the precision Zimmer engineers into our products give surgeons confidence in their ability
to deliver excellent outcomes for their patients. We use a variety of instructional methods to
make sure that our sales representatives continue to expand their knowledge as well as that
of medical professionals. Above, Zimmer sales representatives exchange ideas and become
more familiar with our broad product line.
14
To Market
Medical education activities are crucial
as we take our products to market.
To better ensure successful outcomes
with our products, we fervently reach
out to seek to educate our sales
representatives, physicians, patients
and other key stakeholders in the
healthcare system.
role in treatment decisions, the survey
findings underscore just how thoroughly
patients prepare for conversations with
their surgeons—and how well informed
they are likely to be when it is time to
make a decision.
The foundation of Zimmer’s go-to-market
strategy is the exchange of knowledge.
In The Zimmer Institute, at the call center,
on the Web and in other outreach
programs, the dialogue revolves around
achieving the best results for the patient
by sharing information on new products
and techniques. In support of that
exchange of information, we continue to
make education a priority across Zimmer,
including expanded e-learning capabilities
to be introduced during 2008.
Concerning our educational outreach
to healthcare professionals, surgeons
represent our connection with patients,
and our goal is to give them confidence
in using our products to deliver excellent
patient outcomes. Through The Zimmer
Institute, we conduct objective-based
medical education that is designed to
ensure surgical skill development in the
safe and effective use of Zimmer products
and procedures. It has facilitated the
training of more than 7,900 surgeons
since 2003. In 2007 alone, nearly 1,700
surgeons received training through
The Zimmer Institute.
We also believe that it is important that
patients are knowledgeable about products
and procedures. Our market research
corroborates growing evidence that
patients increasingly want to be informed
about healthcare options. Patient outreach
initiatives often turn into dialogue through
which patients gain knowledge about
products and procedures and we gain
additional insight into patient priorities.
Those conversations add another dimen-
sion to the long-standing approach of
seeking input from surgeons and other
healthcare professionals to help identify
unmet clinical needs and understand how
to improve surgical procedures.
Expanding our patient education outreach
during 2007, we opened a call center
staffed by specialists who answer questions
about joint replacement and products.
It is isolated from other Zimmer functions
to protect patient privacy. One indicator
of the acceptance the call center quickly
achieved is that four out of five callers
have participated in a short survey about
healthcare priorities. Even allowing for
the fact that patients who contact a call
center are more inclined to take an active
Zimmer M/L Taper Hip Prosthesis
with Kinectiv Technology
Challenge: Better fit means better oppor-
tunities for improved hip surgery outcomes.
Solution: Provide optimal flexibility in
matching hip implants to patients, along
with minimally invasive surgery and
gender-friendly features.
Patient Advantage: The Kinectiv Technology
allows for optimal fit and possibly reduces
the risk of leg-length discrepancies after
hip replacement.
Zimmer Holdings, Inc. 2007 Annual Report
15
Manufacturing
To Market
R&D
Patients
And we help enhance the lives of patients...
by enabling them to
return to the activities
of daily living.
The pain in Helen Fish’s knees had begun interfering with even basic daily activities like
climbing the stairs from the laundry room. When Zimmer’s Mobile Learning Center (left)
was scheduled for a stop near her Bullhead City, Arizona, home, Helen rounded up friends
to tour the exhibits and learn about the implants. The next month she had her first knee
replacement, followed by the second three months later. Her doctor chose a Zimmer Gender
Solutions Knee for its fit with Helen and her lifestyle. With her new knees, Helen went from
taking stairs one painful step at a time to normal walking and more frequent participation
in favorite leisure activities like dancing and water aerobics.
16
Patients
Zimmer’s emphasis on enhancing
patient lives and our scientific collabo-
ration with physicians represent a
compelling combination. Our relentless
focus on improving outcomes spurs
additional innovation as we continue
to look for ways to lessen the invasive
nature of surgery, improve fit and
function, and add longevity to the
performance of our products. It is all
about helping patients get on with
their lives.
feel and act like natural teeth. We have
developed a spectrum of products that
offer solutions for a broad range of
implant cases.
Trauma patients typically are not in
a position to actively research the
products ultimately used to heal their
injuries. Zimmer has developed a
complete line of plates that match
patient anatomy for more efficiency
in these demanding procedures.
Zimmer’s emphasis on enhancing lives
extends to instruments and products that
are essential in the surgical process but
not readily apparent to patients. Bone
cement is one such example. Our share
of that market has increased fivefold in
the past three years, largely driven by
PALACOS® Bone Cement*.
Across our businesses, we pay constant
attention to what happens in the clinical
setting and how we can help improve
the outcome for the patient. It is a collabo-
rative effort, across Zimmer, with medical
professionals and on behalf of patients.
* PALACOS® is a trademark of Heraeus Kulzer GmbH.
Under license from Heraeus Kulzer GmbH, Hanau, Germany.
Zimmer’s emphasis on enhancing patients’
lives takes shape in effective collaboration
with healthcare professionals whose skill
and knowledge directly affect surgical
outcomes. Their input is necessary and
invaluable in our ability to act on unmet
clinical needs. Zimmer’s research and
development organization works with
healthcare professionals to develop
solutions that work well mechanically
and in a clinical setting. Once a new
product has been developed, Zimmer
collects feedback from surgeons to ensure
that the desired results are achieved and
to continue to refine the surgical tech-
niques that will allow reproducible results
for surgeons and patients.
This emphasis on innovation and superior
surgery outcomes involves patients not
only in our core hip and knee businesses
but also in a growing array of other
medical specialties, particularly surgeries
involving spine, dental and trauma
situations. By combining our knowledge
of products and technologies with the
specialists’ clinical observations and skill,
we are able to bring innovative treatments
to more patients. The techniques of
minimally invasive surgery and Trabecular
Metal Technology, valued for its bone-like
qualities, are two excellent examples
of how approaches proven with hip,
shoulder and knee problems can be
applied in other treatment situations.
In 2007 our Spine business expanded
its reach with the acquisition of Endius,
whose emphasis on minimally invasive
surgery fits particularly well with
Zimmer expertise.
From the dental patient’s perspective,
the desired outcome for oral surgery that
involves implants is replacements that
Zimmer ® Trabecular Metal ™ Reverse
Shoulder System
Challenge: Shoulder injuries can severely limit
range of motion and routine daily activities.
Solution: The system’s built-in flexibility
accommodates patient differences. The
Trabecular Metal Technology material
functions as a scaffold for biological ingrowth.
Patient Advantage: After surgery the shoulder
has the potential for greater range of motion
and strength, which makes it easier for the
patient to lift objects.
Zimmer Holdings, Inc. 2007 Annual Report
1
Innovative Products Focused on Improved Patient Outcomes
Zimmer is focused on enhancing patients’ lives through innovative products that address pain and injury associated with knees,
hips, extremities, the spine, dental and trauma-related applications. Our product innovation, pioneering technologies that strengthen
implant performance, and techniques and instruments that accommodate smaller, less-invasive incisions are advancing surgical
solutions toward implants that are adaptable to patients, a significant step forward in improving patient outcomes. An example
is our ground-breaking Zimmer Gender Solutions platform in knees and hips, which addresses differences in the size and shape
of bones and joints. Our emphasis on innovation and improved surgical outcomes applies to all our businesses.
Knees*
Global Market Size:
Global Market Annual Growth:
Zimmer Market Share:
Market Position #1
$5.8 billion
Hips*
Global Market Size:
10%
28%
Global Market Annual Growth:
Zimmer Market Share:
Market Position #1
$5.0 billion
9%
26%
Zimmer Gender Solutions Knee
The Zimmer Gender Solutions Knee brand of implants accounts
for gender differences by addressing key areas of gender
distinction that most affect the fit of knee implants. In late
2007 we introduced the Gender Solutions Natural-Knee Flex
System after the success of our first gender knee in the NexGen
line of implants.
NexGen LPS-Flex Mobile Knee
The NexGen LPS-Flex Mobile Knee not only restores motion
for patients but also extends the range of motion. The innovative
design accommodates wider rotation in the tibial component
and flexion up to 155 degrees.
Zimmer ® NexGen® Trabecular Metal ™ Tibial Tray
The Zimmer NexGen Trabecular Metal Tibial Tray unites stable
fixation with modular Prolong™ Highly Crosslinked Polyethylene
components to meet a growing demand for knees implanted
through smaller incisions. With physical and mechanical
properties similar to bone, Trabecular Metal Technology
achieves stable initial fixation and helps prevent stress
shielding and lift-off.
Zimmer Gender Solutions Natural-Knee Flex System
Zimmer M/L Taper Hip Prosthesis with Kinectiv Technology
The system of modular stem and neck components is
designed to help the surgeon restore the natural hip joint
center intraoperatively by addressing leg length, offset
and version independently.
Durom® Acetabular Cup with Metasul ® LDH ®
Large Diameter Heads
The Durom system is the only metal-on-metal offering that
is wrought, not cast, with a high carbon content producing
a smoother, harder surface that could lead to less wear.
VerSys® Epoch® FullCoat Hip Stem
Designed to combine strength with flexibility similar to the
femur, the VerSys Epoch FullCoat stem provides a combination
of lengths and offsets to address the differences between
men’s and women’s hips.
Zimmer M/L Taper Hip Prosthesis with Kinectiv Technology
Durom Acetabular Cup with
Metasul LDH Large Diameter Heads
Zimmer NexGen Trabecular Metal
Tibial Tray
1
NexGen LPS-Flex Mobile Knee
VerSys Epoch FullCoat Hip Stem
* Market position, size, growth rate and share for the full year 2007 have
been calculated based on company and Wall Street analysts’ estimates.
Zimmer® Minimally Invasive Solutions™ Procedures and Technologies
Cross-Section Comparison
Many Zimmer hip implants are designed to be inserted with
minimally invasive surgical procedures. Zimmer provides training
to surgeons to perform the technically demanding procedures
associated with small incisions by threading the implant and their
instruments around muscles to avoid cutting tissue as much as
possible. For patients, that can mean less blood loss during
surgery, shorter hospital stays, minimal scarring and faster healing.
Pictured right: Images comparing the Traditional/Mini-Incision THA procedure with
the innovative Zimmer ® MIS 2-Incision™ Hip Procedure and Zimmer ® MIS Anterolateral
Hip Procedures.
Left hip cross-section for
Traditional/Mini-Incision THA Procedures
Left hip cross-section for
Zimmer MIS THA Procedures
Traditional/
Mini-Incision
Posterolateral
THA Approach
Traditional/
Mini-Incision
Anterolateral
THA Approach
MIS 2-Incision™
Hip Procedure
(Posterior Incision)
MIS Anterolateral
Hip Procedure
MIS 2-Incision™
Hip Procedure
(Anterior Incision)
Extremities*
Global Market Size:
Global Market Annual Growth:
Zimmer Market Share:
Market Position #2
$0.5 billion
Dental*
Global Market Size:
19%
22%
Global Market Annual Growth:
Zimmer Market Share:
Market Position #4
$2.8 billion
16%
8%
Anatomical Shoulder™ Inverse/Reverse System
The Anatomical Shoulder Inverse/Reverse System offers
the potential for pain relief and restoration of function
using the same humeral stem used for primary, revision
or fracture reconstructions.
Zimmer ® One-Piece Implant
Engineered for strength, stability and simplicity, the one-piece
design allows for a single-stage procedure and fast restoration,
saving time and resulting in less trauma to soft tissue and less
discomfort for patients.
Zimmer® Trabecular Metal™ Reverse Shoulder System
Featuring the proven clinical results of Trabecular Metal
Technology, this shoulder system aids in the restoration of
normal function for patients suffering from loss of rotator
cuff function due to injury or degredation.
Zimmer ® Contour Ceramic Abutments
These abutments provide a natural-colored base for an esthetic
all-ceramic crown. In addition, Contour Restorative Aids for the
Hex-Lock™ Contour Abutment allow for snap-on impressions and
assist with fabrication of the provisional and final restorations.
Zimmer® Trabecular Metal™ Humeral Stem
The advanced design of the Zimmer Trabecular Metal Humeral
Stem combines clinically proven shoulder system elements with
porous fixation technology, creating an innovative shoulder
implant that optimally fits the patient’s anatomy and promotes
biological ingrowth around the implant.
Puros® Dermis Allograft Tissue Matrix
Used for both horizontal and vertical soft-tissue augmentation
to increase volume and provide a highly cosmetic clinical
result. This is the latest addition to the Puros Allograft family
of products.
Anatomical Shoulder Inverse/Reverse System
Zimmer One-Piece Implant
Zimmer Trabecular Metal
Humeral Stem
Zimmer Contour Ceramic Abutments
Zimmer Trabecular Metal
Reverse Shoulder System
Puros Dermis Allograft Tissue Matrix
Zimmer Holdings, Inc. 2007 Annual Report
1
* Market position, size, growth rate and share for the full year 2007 have
been calculated based on company and Wall Street analysts’ estimates.
Innovation Driven, Research Based
Zimmer tackles unmet clinical needs with rigorous research. We are committed to a
process that embraces data, insight, painstaking investigation and constant testing.
We value innovation—but we also make sure that it addresses an unmet need. That
is what makes our Zimmer Gender Solutions Knee a breakthrough idea. Before it was
introduced, surgeons may have had to make compromises to fit female patients. Our
research led to an implant that recognizes differences in size as well as geometries in
human knee structures and offers surgeons more choices in surgery. Our focus on the
composition of our Trabecular Metal Technology is similarly research driven, because
data shows that high porosity allows bone ingrowth.
Spine*
Global Market Size:
Market Position #6
$6.1 billion
Trauma*
Global Market Size:
Market Position #5
$3.7 billion
Global Market Annual Growth:
Zimmer Market Share:
15%
3%
Global Market Annual Growth:
Zimmer Market Share:
10%
5%
Zimmer ® Universal Locking System
With the Universal Locking System
(ULS), Zimmer offers a comprehensive
solution for the treatment of many
types of fractures using one fully
compatible system. ULS includes
both straight and formed plates that
accommodate standard cortical and
cancellous screws, as well as new
locking screw technology.
Zimmer ® NCB ® Plating System
This locking plate system expands a
surgeon’s options in trauma surgery by
delivering the ability to target and lock,
if appropriate, cortical or cancellous
screws with polyaxial freedom at any
time during the procedure.
Zimmer Universal Locking 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 in the U.S.
Atavi ® FlexPosure® and NexPosure®
Retractor Systems
The Atavi System is a comprehensive,
minimally invasive system designed
for use in single and multi-level
discectomy, decompression, fusion
and fixation in the lumbar, upper
thoracic and cervical spine.
Zimmer ® DTO™ Implant
The Zimmer DTO implant provides
surgeons with the flexibility to address
varying patient requirements by match-
ing the degree of stabilization needed
for each of multiple levels of spine
degeneration. The system is indicated
as an adjunct to fusion in the U.S.
Dynesys Dynamic Stabilization System
Orthopaedic Surgical Products 2
Zimmer develops, manufactures and
markets surgical products that support
our reconstructive, spine, dental and
trauma product systems in the
operating room.
PALACOS Bone Cement
This product is used by orthopaedic
surgeons in joint replacement procedures
to securely fix implants to patient bones
and features an antibiotic version.
Zimmer ® A.T.S.® 000
Automatic Tourniquet System
This market leading system uses
patented “Limb Occlusion Pressure
(LOP)” technology to help the physician
determine the recommended pressure
setting for surgery based on the
patient’s specific physiology.
PALACOS Bone Cement
Zimmer A.T.S. 3000
Automatic Tourniquet
System
Zimmer NCB Plating System
Atavi FlexPosure
20
Zimmer DTO Implant
* Market position, size, growth rate and share for the full year
2007 have been calculated based on company and Wall Street
analysts’ estimates.
PALACOS® is a trademark of Heraeus Kulzer GmbH.
Under license from Heraeus Kulzer GmbH, Hanau, Germany.
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, 2007
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¥
No n
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes n
No ¥
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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check One):
Large accelerated filer ¥
Accelerated filer n
Non-accelerated filer n
Smaller reporting company n
(Do not check if a smaller reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined Exchange Act Rule 12b-2). Yes n
No ¥
The aggregate market value of shares held by non-affiliates was $20,033,882,275 (based on the closing price of these shares on the New
York Stock Exchange on June 29, 2007, and assuming solely for the purpose of this calculation that all directors and executive officers
of the registrant are “affiliates”). As of February 13, 2008, 233,185,894 shares of the registrant’s $.01 par value common stock were
outstanding.
Document
Portions of the Proxy Statement with respect to the 2008 Annual Meeting of Stockholders
Form 10-K
Part III
Documents Incorporated by Reference
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
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 the important risks and uncertainties that may affect our future operations that
we describe in Part I, Item 1A – Risk Factors of this report. We may update that discussion in Part II, Item 1A — Risk Factors in
a Quarterly Report on Form 10-Q we file hereafter. Readers of this report are cautioned not to place undue reliance on these
forward-looking statements. While we believe 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.
Table of Contents
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
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, Executive Officers and Corporate Governance
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, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
Page
3
14
19
20
20
20
21
22
23
34
37
63
63
63
64
64
64
64
64
65
66
2
Z I M M E R H O L D I N G S , I N C .
PART I
ITEM 1. Business
OVERVIEW
We are a global leader in the design, development,
manufacture and marketing of reconstructive orthopaedic
implants, including joint and dental, spinal implants, trauma
products and related orthopaedic surgical products. We also
provide other healthcare related services. In this report,
“Zimmer” “we”, “us”, “our” and similar words refer collectively
to Zimmer Holdings, Inc. and its subsidiaries. Zimmer
Holdings refers to the parent company only.
There were several developments in 2007 that we expect
will have a significant impact on our business for the
foreseeable future.
In April 2007, we acquired Endius Incorporated, a
privately held spinal products company based in
Massachusetts. Endius develops and manufactures minimally
invasive spine surgery products, implants and techniques to
treat spine disease. The acquisition of Endius has expanded
our spine product portfolio to include innovative minimally
invasive instruments and implants.
In May 2007, the Board of Directors promoted two of our
senior executives to the offices of chief executive officer and
chief financial officer. This is the first time since we became
an independent public company that new persons are holding
those offices.
In September 2007, we and other major U.S. orthopaedic
manufacturers announced a settlement reached with the
U.S. Department of Justice regarding its ongoing investigation
of financial relationships with consulting surgeons. As part of
that settlement, we paid a $169.5 million civil settlement
amount in the third quarter and entered into a Deferred
Prosecution Agreement (“DPA”) and a Corporate Integrity
Agreement (“CIA”). As part of these agreements, we agreed
to oversight by a federal monitor for 18 months and an
independent review organization for an additional 42 months.
We believe we are in compliance in all material respects with
the requirements of the DPA and CIA. As recently announced,
we intend to further expand our compliance program beyond
the requirements of these agreements to enhance our ability
to compete in an increasingly transparent and regulated
environment.
In November 2007, we acquired ORTHOsoft Inc., a leader
in computer navigation for orthopaedic surgery. The
ORTHOsoft acquisition bolsters our Zimmer SmartTools
strategic initiative designed to bring innovative tools to the
marketplace that will help create better and more
reproducible outcomes for surgeons and patients.
We anticipate further applying both minimally invasive
and computer navigation concepts across our range of
businesses. During 2007, we expanded our Gender
Solutions» platform to additional knee replacement systems
and to hip replacement. We have also announced our
intention to make additional investments in the higher growth
areas of spine and dental products.
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Finally, beginning in 2007, under the direction of our new
senior executives, we undertook an extensive review of our
operations and identified a number of planned improvements
we subsequently announced in 2008. These include
developing a new manufacturing facility in Ireland, upgrading
our sales and distribution capabilities in the U.S., enhancing
our information technology and quality systems and investing
in our spine, dental and trauma business units.
Zimmer Holdings was incorporated in Delaware in 2001.
Our history dates to 1927, when Zimmer Manufacturing
Company, a predecessor, was founded in Warsaw, Indiana. On
August 6, 2001, Zimmer Holdings was spun off from its former
parent and became an independent public company.
CUSTOMERS, SALES AND MARKETING
Our primary customers include musculoskeletal surgeons,
neurosurgeons, 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.
We have operations in more than 25 countries and
market 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. We manage our 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.
We market and sell products through three principal
channels: 1) direct to healthcare institutions, such as
hospitals, or direct channel accounts, 2) through stocking
distributors and, in the Asia Pacific region, healthcare dealers,
and 3) directly to dental practices and dental laboratories.
With direct channel accounts, inventory is generally consigned
to sales agents or customers. With sales to stocking
distributors, healthcare dealers, dental practices and dental
laboratories, title to product passes generally upon shipment.
Direct channel accounts represented approximately 80 percent
of our net sales in 2007. No individual direct channel account,
stocking distributor, healthcare dealer, dental practice or
dental laboratory accounted for more than 1 percent of our
net sales for 2007.
We stock inventory in our warehouse facilities and retain
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
3
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
quantities required to maintain service levels. We also carry
trade accounts receivable balances based on credit terms that
are generally consistent with local market practices.
We utilize a network of sales associates, sales managers
and support personnel, most of whom are employed or
contracted by independent distributors and sales agencies. We
invest a significant amount of time and expense in training
sales associates in how to use specific products and how to
best inform surgeons of product features and uses. Sales force
representatives must have strong technical selling skills and
medical education to provide technical support for surgeons.
In response to the different healthcare systems
throughout the world, our sales and marketing strategies and
organizational structures differ by region. We utilize a global
approach to sales force training, marketing and medical
education to provide consistent, high quality service.
Additionally, we keep current with key surgical developments
and other issues related to musculoskeletal surgeons and the
medical procedures they perform.
Americas. The Americas is our largest geographic
segment, accounting for $2,277.0 million, or 58 percent, of
2007 net sales, with the United States accounting for
94 percent of net sales in this region. The United States sales
force consists primarily of independent sales agents, most of
whom sell 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, we contract with group purchasing
organizations and managed care accounts and have promoted
unit growth by offering volume discounts to customer
healthcare institutions within a specified group. At negotiated
thresholds within a contract buying period, price discounts
increase. Generally, we are designated as one of several
preferred purchasing sources for specified products, although
members are not obligated to purchase our products.
Contracts with group purchasing organizations generally have
a term of three years with extensions as warranted.
A majority of hospitals in the United States belong to at
least one group purchasing organization. In 2007, individual
hospital orders purchased through contractual arrangements
with our three largest group purchasing organizations
accounted for approximately 48 percent of our net sales in
the United States. Contractual sales were highest through
Novation, LLC, Premier Purchasing Partners, L.P., and Health
Trust Purchasing Group, representing 27 percent, 15 percent
and 6 percent, respectively, of net sales in the United States.
No individual end-user, however, accounted for over 1 percent
of our net sales, and the top ten end-users accounted for
approximately 4 percent of our aggregate net sales in the
United States.
In the Americas, we monitor and rank independent sales
agents across a range of performance metrics. We evaluate
independent sales agents based on achieving certain sales
targets and on maintaining efficient levels of working capital.
We set expectations for efficient management of inventory
and provide independent sales agents an incentive to aid in
the collection of receivables.
4
Europe. The European geographic segment accounted
for $1,081.0 million, or 28 percent, of 2007 net sales, with
France, Germany, Italy, Spain, Switzerland and the United
Kingdom collectively accounting for over 75 percent of net
sales in the region. This segment also includes other key
markets, including Benelux, Nordic, Central and Eastern
Europe, the Middle East and Africa. Our sales force in this
region is comprised of independent distributors,
commissioned agents, direct sales associates and sales support
personnel. In Europe, we emphasize the advantages of our
clinically proven, established designs and innovative solutions,
such as minimally invasive surgical procedures and
technologies and new and enhanced materials and surfaces.
Asia Pacific. The Asia Pacific geographic segment
accounted for $539.5 million, or 14 percent, of 2007 net sales,
with Japan being the largest market within this segment,
accounting for approximately 54 percent of the region’s sales.
This segment also includes key markets such as Australia,
New Zealand, Korea, China, Taiwan, India, Thailand,
Singapore, Hong Kong and Malaysia. In Japan and most
countries in the Asia Pacific region, we maintain a network of
dealers, who act as order agents on behalf of hospitals in the
region, and sales associates, who build and maintain
relationships with musculoskeletal surgeons in their markets.
These sales associates cover over 7,000 hospitals in the
region. The knowledge and skills of our sales associates play a
critical role in providing service, product information and
support to surgeons.
SEASONALITY
Our business is somewhat seasonal in nature, as many of
our products are used in elective procedures, which typically
decline during the summer months and holiday seasons.
DISTRIBUTION
We operate distribution facilities domestically 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. We generally ship our orders via expedited
courier. Our operations support local language labeling for
shipments to the European Union member countries. Our
backlog of firm orders is not considered material to an
understanding of our business.
PRODUCTS
Our products include joint and dental reconstructive
orthopaedic implants, spinal implants, trauma products, and
related orthopaedic surgical products. Reconstructive
orthopaedic 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.
Orthopaedic surgeons and neurosurgeons use spinal implants
in the treatment of degenerative diseases, deformities and
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
trauma. Trauma products are used primarily to reattach or
stabilize damaged bone and tissue to support the body’s
natural healing process. Our related orthopaedic surgical
products include supplies and instruments designed to aid in
orthopaedic surgical procedures and post-operation
rehabilitation.
Orthopaedic Reconstructive Implants
Minimally Invasive Solutions Procedures and
Technologies and The Zimmer Institute
In 2007, we continued to expand our efforts to apply
minimally invasive surgical techniques to orthopaedic surgery,
which we refer to as Minimally Invasive SolutionsTM (MIS)
Procedures and Technologies. 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 recovery, pain reduction and lost time from work. We have
used The Zimmer Institute to facilitate the training of over
7,900 surgeons on several MIS Procedures. In 2007, we
trained nearly 1,700 surgeons through The Zimmer Institute.
We intend to continue to conduct validated objective-based
medical education that is designed to ensure surgical skill
development in the safe and effective use of Zimmer products
and procedures.
We continue to work with surgeons to evaluate and refine
our MIS procedures. As refinements occur, they are
incorporated into our course curriculum. We are focused on
commercializing existing MIS Technique approaches and
investigating new ways to apply MIS Technology principles to
additional procedures and products.
Knee Implants
Total knee replacement surgeries typically include a
femoral component, a patella (knee cap), a tibial tray and an
articular surface (placed on the tibial tray). Knee replacement
surgeries include first-time, or primary, 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) and ultracongruent (UC) 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.
Our portfolio of MIS Techniques includes the MIS Mini-
Incision Total Knee Procedure. The MIS Mini-Incision Total
Knee Instruments feature smaller instruments which
accommodate a smaller incision and less disruption of the
surrounding soft tissues.
We offer a wide range of products for specialized knee
procedures, including the following:
NexGen» Complete Knee Solution. The NexGen
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
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 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 NexGen Complete Knee Solution Legacy»
Knee-Posterior Stabilized product line provides stability in the
absence of the posterior cruciate ligament. The PS capabilities
were 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 accommodate
knee flexion up to a 155-degree range of motion in some
patients.
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 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, including
a bone augmentation implant system made from our
Trabecular MetalTM Technology material. These augments are
designed to address significant bone loss in revision surgery.
NexGen Knee Gender Solutions» femorals
represent the first knee implants specifically shaped to offer
fit and function optimized for anatomic features that are more
commonly seen in female patients. Gender implants are an
important strategic focus, as more than half of total knee
arthroplasty patients are female. Gender Solutions femorals
are available in both NexGen CR-Flex and LPS-Flex
configurations.
We offer improved polyethylene performance in the
NexGen Knee System with our conventional polyethylene and
Prolong» Highly Crosslinked Polyethylene, which offers
reduced wear, resistance to oxidation, pitting and cracking.
Prolong Highly Crosslinked Polyethylene is available in both
NexGen CR-Flex and LPS-Flex designs.
The Natural-Knee» II System. The Natural-Knee
II System consists of a range of interchangeable, anatomically
5
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
designed implants which include a proprietary Cancellous-
Structured TitaniumTM (CSTiTM) Porous Coating option for
stable fixation in active patients and Durasul» Highly
Crosslinked Polyethylene.
Gender Solutions» Natural-Knee» Flex System.
The Gender Solutions Natural-Knee Flex System was
released on a limited basis in late 2007. This system adds
Zimmer’s unique High Flex and Gender Solutions design
concepts to the Natural-Knee» System. The Gender
Solutions Natural-Knee Flex System recognizes that two
distinct populations exist in total knee arthroplasty (female
and male) and offers two distinct implant shapes for enhanced
fit. The system is compatible with muscle sparing Zimmer
Minimally Invasive Solutions procedures and offers high
flexion capacity up to 155 degrees. The system features the
proven clinical success of Zimmer’s asymmetric tibial plate,
CSTiTM porous coating and the ultracongruent articular
surface.
The Innex» 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 distributed in Europe and
Asia Pacific, and is not available for commercial distribution in
the United States.
The Zimmer» Unicompartmental Knee System.
The Zimmer Unicompartmental Knee System offers a high
flexion design to unicompartmental knee surgery. The high
flexion product was designed specifically for MIS Procedures
and Technologies. The system offers the surgeon the ability to
conserve bone by replacing only the compartment of the knee
that has had degenerative changes.
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. Approximately 30 percent of hip implant
procedures involve the use of bone cement to attach or affix
the prosthetic components to the surrounding bone. The
remaining are press-fit into bone, which means that they have
a surface that bone affixes to through either ongrowth or
ingrowth technologies.
Our portfolio of MIS Techniques includes the
Zimmer MIS 2-IncisionTM Hip Replacement Procedure, the
MIS Posterior Procedure, and the Zimmer MIS Anterolateral
Techniques. The incision for a traditional open hip primary
replacement may be approximately 12 inches long. Other less
invasive approaches, such as a “mini” incision for hips, have
6
been in existence for some time. Our key hip replacement
products include:
VerSys» Hip System. The VerSys Hip System is
supported by a common instrumentation set and is an
integrated family of hip products with 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.
Trabecular Metal Primary Hip Prosthesis. The
Trabecular Metal Primary Hip Prosthesis product was our
first utilization of Trabecular Metal technology on a hip
prosthesis. The prosthesis utilizes an innovative proximal
design to aggressively lock the prosthesis in the bone and
provide for an optimized environment for biological ingrowth
to occur into the highly porous Trabecular Metal material.
Zimmer» M/L Taper Hip Prosthesis with KinectivTM
Technology. The Zimmer M/L Taper Hip Prosthesis offers a
wedge design and proximally porous coated design that was
based on long term clinically proven concepts. The M/L Taper
has become widely used in MIS Procedures due to its overall
design and ease of use. Specific instruments have been
developed to facilitate the insertion of the Zimmer M/L Taper
Hip Prosthesis through the MIS Anterolateral Technique. The
addition of Kinectiv Technology provides the surgeon with a
wide range of options to address variations in the patient’s
anatomy. The M/L Taper hip product family is our fastest
growing hip stem family.
Alloclassic» (Zweymu¨ ller») Hip System. The
Alloclassic (Zweymu¨ ller) 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. A new offset design was added in
2004 and offers the surgeon increased capability to restore
the patient’s anatomical joint movement.
CLS» Spotorno» Hip System. The CLS Spotorno
Stem is one of our largest selling hip prostheses, especially in
the European markets. Additions to the product line in 2004
provided the capability for restoration of the physiological
center of rotation. The CLS Spotorno Stem has excellent
clinical results, confirmed by the 2004 Swedish Hip Registry
with a 100 percent implant survivorship after 11 years.
Trilogy» Acetabular System. The Trilogy
Acetabular System, including titanium alloy shells,
polyethylene liners, screws and instruments, is our primary
acetabular cup system. The Trilogy family of products offers
versatile component designs and instrumentation. One option,
the Longevity» Highly Crosslinked Polyethylene Liner, is
designed to address the issue of wear and reduce the
generation of debris in total hip arthroplasty. Polyethylene
debris may cause the degeneration of bone surrounding
reconstructive implants, a painful condition called osteolysis.
We began offering the Trabecular Metal Modular Primary
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Acetabular System 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 Acetabular System, we also offer a
Trabecular Metal Revision Acetabular Shell for advanced
fixation in acetabulae with insufficient bone.
Alternative Bearing Technology. We have a broad
portfolio of alternative bearing technologies which include
Longevity and Durasul Highly Crosslinked Polyethylenes,
Metasul» Metal-on-Metal Tribological Solution, Cerasul»
Ceramic-on-Ceramic Tribological Solutions and the Trilogy
AB» Acetabular System. Alternative bearings are designed to
minimize wear over time, potentially increasing the longevity
of the implant.
Durom» Hip Resurfacing System. This product is
particularly suited to patients who are at risk of requiring
multiple hip replacements over their lifetimes since it
preserves more of 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 nearly two decades of development, research and clinical
evaluation, which formed the foundation for the Durom Hip
Resurfacing System. The option of the large diameter heads
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. The components of the Durom Hip Resurfacing
System are commercially distributed outside the U.S. for use
in Total Hip Arthroplasty (THA), Hemi Arthroplasty (HA),
and/or Total Surface Replacement Arthroplasty (SRA). In the
U.S., Durom components are commercially available for use in
THA (Durom Acetabular component + Metasul LDH» Large
Diameter Heads) or HA, but are not approved for use
together in total SRA.
PALACOS»1 Bone Cement. We have exclusive
United States distribution rights for the PALACOS line of
bone cement products manufactured by Heraeus Kulzer
GmbH, a world leader in the development and production of
orthopaedic bone cement products and other healthcare
technologies. We also have non-exclusive distribution rights in
specific geographies outside of the United States. Included in
these brands are PALACOS R and PALACOS R+G Bone
Cements, as well as PALACOS LV and PALACOS LV+G Bone
Cements. The PALACOS R+G and PALACOS LV+G products
are bone cements with the antibiotic gentamiacin pre-mixed
in the formulation, which is used by the orthopaedic surgeon
to reduce the risk of postoperative infection. The product’s
handling characteristics make it well-suited for minimally
invasive procedures.
1 Registered Trademark of Heraeus Kulzer GmbH
Extremity Implants
Our extremity portfolio, primarily shoulder and
elbow products, are designed to treat arthritic conditions, soft
tissue injuries and fractures, as well as to enhance the
outcome of primary or revision surgery.
Our key products include:
Bigliani/Flatow» Complete Shoulder Solution
Family. The Bigliani/Flatow product line combined with the
Trabecular Metal Humeral Stem gives us a significant
presence in the global shoulder implant market.
Trabecular Metal Reverse Shoulder System. The
Trabecular Metal Reverse Shoulder System incorporates
advanced materials and design to offer improved
orthobiological ingrowth potential through the utilization of
Trabecular Metal technology, while addressing significant loss
of rotator cuff function. The reverse shoulder system is
designed to restore function to patients, who because of
debilitating rotator cuff tears, are not candidates for
traditional shoulder surgery and have exhausted other means
of repair.
Anatomical ShoulderTM System. The Anatomical
Shoulder System can be adjusted to each patient’s individual
anatomy. This portfolio of products was further expanded to
include the Anatomical Shoulder Inverse/Reverse System,
designed to address significant loss of rotator cuff function,
and the fracture stem. Both the primary and fracture shoulder
implants can be converted to a reverse shoulder without
removal of the initial implant.
Coonrad/Morrey Total Elbow. The Coonrad/Morrey
Total Elbow product line is a family of elbow replacement
implant products to address patients with conditions of severe
arthritis or trauma. It remains the largest elbow franchise in
the world.
Dental Products
Zimmer Dental Inc., our dental products division
headquartered in Carlsbad, California, manufactures and
distributes (1) dental reconstructive implants – for individuals
who are totally without teeth or are missing one or more
teeth; (2) dental restorative products – aimed at providing a
more natural restoration to mimic the original teeth; and
(3) dental regenerative products – for soft tissue and bone
rehabilitation.
Dental Reconstructive Implants
Our dental reconstructive implant products and surgical
and restorative techniques include:
Tapered Screw-Vent» Implant System. Our highest
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 to minimize valuable chair time for restorations.
7
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Featuring a patented internal hex 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 designed to allow
the clinician to meet the needs of patients even in the most
demanding circumstances. The Zimmer» One-Piece Implant
System, designed to complement the success of the Tapered
Screw-Vent System, enhances this product line by offering
clinicians a fast, convenient restorative option.
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, the Tapered SwissPlus System
incorporates 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 an
internal connection.
Dental Restorative Products
We commercialize products for the aesthetic market
aimed at providing a more natural restoration. We offer a full
line of prosthetic devices for each of the above dental implant
systems as well as a custom solution, as follows:
Zimmer» Hex-LockTM Contour Abutment and
Restorative Products. Designed to be used with our Tapered
Screw-Vent and One-Piece Implant Systems, our contour lines
are an off-the-shelf solution for immediately addressing the
diversity of patients’ needs. Featuring prepared margins,
titanium and ceramic options, and snap-on impression caps, our
abutments are designed to simplify the restoration process,
save time for clinicians and technicians, and offer versatility.
Dental Regenerative Products
We market the following product lines for use in
regenerative techniques in oral surgery:
Puros» Allograft Products. The Puros Material is
an allograft grafting material which utilizes the Tutoplast»2
Tissue Processing Technique that provides exceptional bone
and soft tissue grafting material for use in oral surgery.
Zimmer Dental offers five distinct Puros Allograft products to
use together or separately for various bone and soft tissue
grafting needs: Puros Cancellous Particulate, Puros Cortical
Particulate, Puros Block Allografts, Puros Pericardium
Membranes, and Puros Dermis Membranes. We market the
Puros Allograft Products through an agreement with Tutogen
Medical, Inc.
During 2007, within our Dental division, we released
the 4.1mm size of the Tapered Screw-Vent Implant as well as
2 Registered Trademark of Tutogen Medical, Inc.
8
straight ceramic abutments for esthetic zone restorations. We
extended the Zimmer One-Piece implant system, a single-
stage line which can make immediate restoration easier and
more convenient for the surgical and restorative team by
adding a 4.7mm version. In 2007, we expanded our
regenerative product portfolio with the addition of a thinner
Dermis Membrane, and we further expanded distribution of
the Puros product lines into Europe and Asia.
Spine Implants
Zimmer Spine, Inc., our spine products division located in
Minneapolis, Minnesota, designs, manufactures and distributes
medical devices and surgical instruments that provide
comprehensive spine care solutions for patients with back pain,
neck pain, degenerative disc conditions and injuries due to
trauma. Zimmer Spine offers orthopaedic surgeons and
neurosurgeons a full range of devices for posterior and anterior
applications of the cervical, thoracic and lumbar spine.
Our spine product offerings include:
Dynesys» Dynamic Stabilization System. The
Dynesys System is used in the treatment of lower back and
leg pain in skeletally mature patients. Developed to bring the
lumbar vertebrae into a more natural anatomical position
while stabilizing the affected segments, the Dynesys System
uses flexible materials threaded through pedicle screws rather
than rigid rods. The Dynesys Dynamic Stabilization Spinal
System is indicated for use as an adjunct to fusion.
TiTLE» 2 Polyaxial Spinal System. The TiTLE
System is designed for both minimally invasive and open
procedures in the thoracic and lumbar spine. Its anti-cross
threading cap screw and built-in friction head aid in the
placement through small surgical openings. The NorthStarTM
Cannulated Screw Delivery System allows for percutaneous
placement of the screws.
Atavi» Atraumatic Spine Surgery System. The
Atavi family of minimally invasive access products includes
the NexPosure» System for cervical applications and the
FlexPosure» Products for lumbar applications.
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 are designed to provide the surgeon with
the option to reduce the amount of instruments, thereby
potentially reducing the amount of retraction and surgical
time required to implant the Trinica Select Plate.
Trabecular Metal Technology. Trabecular Metal
Technology has a wide range of orthopaedic applications. In
the United States, Trabecular Metal Material shapes are
cleared for Vertebral Body Replacement procedures as well as
bone void fillers.
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Puros» Allograft Products. We continue to sell
traditional and specialty Puros Allograft Bone Products
through our exclusive U.S. and Canadian distribution
agreements with Tutogen Medical, Inc.
CopiOs» Bone Void Filler3. CopiOs Bone Void
Filler is a collagen-based synthetic bone graft material formed
into pads of various sizes for surgical implantation. It is
intended for filling bone voids resulting from trauma or
created by a surgeon.
Trauma
Trauma products include devices used to stabilize
damaged or broken bones and their surrounding tissues to
support the body’s natural healing processes. Fractures are
most often stabilized using internal fixation devices such as
plates, screws, nails, wires and pins, but may also be
stabilized using external fixation devices which are applied
externally to the limb. We are focused on addressing unmet
clinical needs, aligning our trauma products with MIS
Procedures and on integrating orthobiologics and other next-
generation technologies into our portfolio of trauma solutions.
In 2007, the new standalone Zimmer Trauma division was
moved to a new office and manufacturing facility in Warsaw,
Indiana. Zimmer Trauma offers a comprehensive line of
trauma products, including:
M/DN» Intramedullary Fixation, Sirus»
Intramedullary Nail System, and I.T.S.T.TM Intertrochanteric/
Subtrochanteric Fixation System. The M/DN, Sirus and
I.T.S.T. Intramedullary Nailing Systems are utilized for the
internal fixation of long bone fractures. The systems include
specialized instrumentation that allow the nails to be put in
using a minimally invasive approach. The I.T.S.T. nail system
helps surgeons treat patients with fractures of the hip and
proximal femur. Instrumentation for the I.T.S.T. system
enables the use of the nail through an MIS approach. Sirus
nails are highly anatomic, designed to match patients of every
size. The nails and associated implants are made from a
titanium alloy, a material which is preferred by many
surgeons. The Sirus nails, originally sold only in Europe and
parts of Asia Pacific, have recently been introduced into the
United States, Japan and other key markets.
NCB» Plating System. The titanium NCB Locking
Plates deliver the ability for surgeons to target screws with
polyaxial freedom and utilize both conventional and locking
technology in the treatment of complex fractures of the distal
femur, proximal humerus and proximal tibia.
Zimmer» Periarticular Locking Plates. The
Zimmer Periarticular Locking Plate System combines
advanced design techniques with locking screw technology to
create constructs for use in comminuted fractures or where
deficient bone stock or poor bone quality is encountered. By
combining locking screw holes with compression slots, the
plates can be used as both locking devices and fracture
3 Manufactured by Kensey Nash Corporation
compression devices. The latest addition to this line is the
Distal Lateral Fibular Locking plate.
Zimmer» Universal Locking System. The Zimmer
Universal Locking System is a comprehensive system of mini
and small fragment stainless steel plates, screws and
instruments for fracture fixation. The Universal Locking
System plates resemble standard plates, but have figure-8
shaped holes that will accommodate standard or locking
screws on either side of the hole. As a result, the plate can be
used, depending upon the fracture situation, as a compression
plate, a locked internal fixator or as an internal fixation
system combining both techniques.
Orthopaedic Surgical Products
We develop, manufacture and market surgical products
that support our reconstructive, trauma, spinal and dental
product systems in the operating room environment with a
focus on blood management, surgical wound site management,
pain management and patient management products. Our
orthopaedic surgical products include:
A.T.S.» Automatic Tourniquet Systems. The A.T.S.
Tourniquet Systems Product Line is a family of tourniquet
machines and cuffs designed to safely create a bloodless
surgical field. The machines include the A.T.S. 3000
Tourniquet, which utilizes patented technology to determine a
patient’s proper “Limb Occlusion Pressure” based on the
patient’s specific physiology. The range of cuffs which
complement the machines provide the flexibility to occlude
blood flow safely with convenience and accuracy for limbs of
virtually every size and shape.
Pulsavac» Plus, Pulsavac Plus AC 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. All three Pulsavac
Systems are completely disposable to reduce the risk of cross
contamination. While Pulsavac Plus and Pulsavac Plus LP
Wound Debridement Systems are both battery powered; the
Pulsavac Plus AC Wound Debridement System is a disposable
system that is powered by a reusable AC power source to
address battery disposal concerns.
HUMAN MOTION INSTITUTE
Our healthcare consulting services subsidiary, commonly
known as the Human Motion Institute (HMI), is based in
Canonsburg, Pennsylvania. HMI consultants work to design a
customized program for each client that promotes the active
participation and collaboration of the physicians and the
hospital-based departments with the goal of consistently
producing a superior outcome in the form of a growing,
efficient, and effective care delivery network. Currently,
revenue related to HMI represents less than 1 percent of our
total net sales.
9
Z I M M E R H O L D I N G S , I N C .
ORTHOBIOLOGICS
Our research and development efforts include an
Orthobiologics group based in Austin, Texas, with its own full-
time staff and dedicated projects centralizing our efforts on
the development of technologies for orthopaedic applications,
including the repair and replacement of damaged tendon,
ligament, meniscus, cartilage, bone and spinal nucleus tissues.
This group works on biological solutions to repair and
regenerate damaged or degenerated musculoskeletal tissues
using biomaterials which offer the possibility of treating
damaged joints by biological repair rather than replacing them
with inert materials. A sampling of some of our key projects in
the Orthobiologics area is set forth below.
We are collaborating with ISTO Technologies, Inc. (ISTO)
to develop chondral and osteochondral grafts for cartilage
repair. ISTO is developing cell-based therapies for cartilage
regeneration using cells from juvenile donor cartilage, with
initial applications focused upon knee joints. Neocartilage is a
living tissue-engineered cartilage graft under investigation for
the restoration of cartilage defects, reestablishment of joint
function and relief of pain in the knee. The Phase I clinical
trial (IND) for Neocartilage has completed patient enrollment
with some patients having reached the 12-month follow-up
milestone. We plan to distribute this product as DeNovo» ET
Engineered Tissue Graft. In addition, we launched the first
Zimmer cartilage repair product (DeNovo» NT Natural Tissue
Graft) in 2007. This product provides juvenile cartilage tissue
pieces for repair of cartilage defects in a variety of anatomical
sites including knee, hip, shoulder and ankle.
Many orthopaedic surgical procedures use bone grafts to
help regenerate lost or damaged bone. As noted above, our
Spine and Trauma divisions introduced a technologically-
advanced synthetic bone graft material, CopiOs Bone Void
Filler, in a paste formulation. This synthetic material has
similarities to human cancellous bone and is used to fill bone
voids or defects. It can be soaked in an individual’s own bone
marrow to localize biologic components necessary for bone
growth to aid in healing. It is then placed into the bone void
where it is completely replaced by natural bone during the
healing process.
RESEARCH AND DEVELOPMENT
We have extensive research and development activities to
develop new surgical techniques, materials, orthobiologics and
product designs. The research and development functions
work closely with our strategic brand marketing function. The
rapid commercialization of innovative new materials,
orthobiologics products, implant and instrument designs, and
surgical techniques remains one of our core strategies and
continues to be an important driver of sales growth.
Among our product launches in 2007, we released the
following, by business segment:
(cid:129) Hips – Zimmer M/L Taper with Kinectiv Technology,
Trabecular Metal Acetabular Revision System, 32mm
Trabecular Metal Natural Cup, Zimmer MIS Anterior
Supine Hip Procedure, Trilogy Longevity Constrained
Liners
10
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
(cid:129) Knees – Zimmer Gender Solutions Patellofemoral
Joint Prosthesis, Zimmer MIS LPS-Mobile Tibial
Components*, Trabecular Metal Tibial Tray, Prolong
LPS-Mobile Articular Surfaces*, NexGen Posterior
Referencing Instruments, Zimmer Segmental Distal
Femurs, Fluted Stems, Trabecular Metal Collars
(cid:129) Extremities – Anatomical Shoulder Fracture Stems,
Bigliani/Flatow Glenoid Reamers
(cid:129) Trauma – Zimmer Periarticular Locking Plates,
Zimmer Universal Locking System
(cid:129) Dental – Puros Dermis, 4.1mm Tapered Screw Vent
Implant, 4.7mm Zimmer One-Piece Implant, Straight
Ceramic Abutments
(cid:129) Spine – Dynesys DTO, ARASTM Retractor
Instrumentation, Puros-C Cervical Composite Allograft,
Trabecular Metal VBR-S, VBR-L, and Vista-S
(cid:129) OSP – Universal Mixer, Glove Liners
(cid:129) Biologics – DeNovo NT Natural Tissue Graft, CopiOs
Paste
*Not available for commercial distribution in the
United States.
Other new product, surgical technique and instrument
introductions in the orthopaedic reconstructive implants,
spine implants, trauma, orthopaedic surgical products and
orthobiologics product categories are more fully described
above under the captions “PRODUCTS” and
“ORTHOBIOLOGICS”. These and other new products
introduced in the last three years accounted for
approximately 25 percent of 2007 total sales.
We are broadening our product offerings in each of the
product categories and exploring new technologies with
possible applications in multiple areas. For the years ended
December 31, 2007, 2006 and 2005, we spent $209.6 million,
$188.3 million, and $175.5 million, respectively, on research
and development. The increased 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. Our primary research and
development facility is located in Warsaw, Indiana. In 2007, we
completed our research and development facility expansion
project in Warsaw. We have other research and development
personnel based in, among other places, Winterthur,
Switzerland; Austin, Texas; Minneapolis, Minnesota; Carlsbad,
California; Dover, Ohio; and Parsippany, New Jersey. As of
December 31, 2007, we employed more than 700 research and
development employees worldwide.
We will continue to identify innovative technologies and
consider acquiring complementary products or businesses, or
establishing technology licensing arrangements or strategic
alliances.
GOVERNMENT REGULATION OF OUR OPERATIONS
We are subject to government regulation in the countries
in which we conduct business. In the United States, numerous
laws and regulations govern all the processes by which
medical devices are brought to market. These include, among
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
others, the Federal Food, Drug and Cosmetic Act and
regulations issued or promulgated thereunder. The U.S. Food
and Drug Administration (FDA) has enacted regulations that
control all aspects of the development, manufacture,
advertising, promotion and postmarket surveillance of medical
products, including medical devices. In addition, the FDA
controls the access of products to market through processes
designed to ensure that only products that are safe and
effective are made available to the public.
Most of our new products fall into FDA classifications
that require the submission of a Premarket Notification
(510(k)) to the FDA. This process requires us to demonstrate
that the device to be marketed is at least as safe and effective
as, that is, substantially equivalent to, a legally marketed
device. We must submit information that supports our
substantial equivalency claims. Before we can market the new
device, we must receive an order from the FDA finding
substantial equivalence and clearing the new device for
commercial distribution in the United States. Other devices
we develop and market are in a category (class) for which the
FDA has implemented stringent clinical investigation and
Premarket Approval (PMA) requirements. The PMA process
requires us to provide clinical and laboratory data that
establishes that the new medical device is safe and effective.
The FDA will approve the new device for commercial
distribution if it determines that the data and information in
the PMA constitute valid scientific evidence and that there is
reasonable assurance that the device is safe and effective for
its intended use(s). All of our devices marketed in the United
States have been cleared or approved by the FDA, with the
exception of certain pre-amendment devices which were in
commercial distribution prior to May 28, 1976. The FDA has
grandfathered these devices, so new FDA submissions are not
required. Some low risk medical devices (including most
instruments) also do not require FDA review and approval or
clearance prior to commercial distribution. 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 of or refund the costs of such
devices. There are also certain requirements of state, local
and foreign governments that we must comply with in the
manufacture and marketing of our products.
In many of the foreign countries in which we market our
products, we are subject to local regulations affecting, among
other things, design and product standards, packaging
requirements and labeling requirements. Many of the
regulations applicable to our 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 Directive, which creates a single set of
medical device regulations for products marketed in all
member countries. Compliance with the Medical Device
Directive and certification to a quality system enable the
manufacturer to place a CE mark on its products. To obtain
authorization to affix the CE mark to a product, a recognized
European Notified Body must assess a manufacturer’s quality
systems and the product’s conformity to the requirements of
the Medical Device Directive. We are subject to inspection by
the Notified Bodies for compliance with these requirements.
Further, we are subject to various federal and state laws
concerning healthcare fraud and abuse, including false claims
laws and anti-kickback laws. These laws are administered by,
among others, the U.S. Department of Justice, the Office of
Inspector General of the Department of Health and Human
Services and state attorneys general. Many of these agencies
have increased their enforcement activities with respect to
medical device manufacturers in recent years. In 2007, we and
other major U.S. orthopaedic manufacturers settled alleged
violations of the federal Anti-Kickback Statute with the
U.S. Department of Justice. As part of this settlement, we
entered into a Deferred Prosecution Agreement and a
Corporate Integrity Agreement and paid a civil settlement
amount. See “Item 1A — Risk Factors — RISKS RELATED TO
OUR BUSINESS” for more information about our obligations
under these agreements. We are continuing to enhance our
Corporate Compliance Program and are applying these
enhancements to all of our businesses on a global basis. We
are monitoring our practices on an ongoing basis to better
ensure that we have proper controls in place to comply with
the laws referenced above. 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 and Veterans
Administration (VA) health programs.
Our facilities and operations are also subject to complex
federal, state, local, and foreign environmental and
occupational safety laws and regulations, 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. We do not expect that the ongoing
costs of compliance with these environmental requirements
will have a material impact on our consolidated earnings,
capital expenditures or competitive position.
COMPETITION
The orthopaedics industry is highly competitive. In the
global markets for reconstructive implants, trauma and
orthopaedic surgical products, our major competitors include:
DePuy Orthopaedics, Inc. (a subsidiary of Johnson &
Johnson), Stryker Corporation, Biomet, Inc., Synthes, Inc.,
Smith & Nephew plc, Wright Medical Group, Inc. and Tornier
Inc.
In the Americas geographic segment, we and DePuy
Orthopaedics, Inc., Stryker Corporation, Biomet, Inc., Smith &
Nephew, Inc. (a subsidiary of Smith & Nephew plc), Wright
Medical Group, Inc. and Synthes, Inc., account for a large
majority of the total reconstructive and trauma implant sales.
In the Asia Pacific market for reconstructive implant and
trauma products, we compete primarily with DePuy
Orthopaedics, Inc., Stryker Corporation, Synthes, Inc. and
Smith & Nephew plc, as well as regional companies, including
Japan Medical Materials Corporation and Japan Medical
Dynamic Marketing, Inc. Factors, such as the dealer system,
11
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
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.
The European 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 regional European
companies, including Mathys AG and Waldemar LINK GmbH &
Co. KG, which compete with us in addition to the global
competitors. Today most hip implants sold in Europe are
products developed specifically for Europe, although global
products are gaining acceptance. Therefore, we will continue
to develop and produce specially tailored products to meet
specific European needs.
In the spinal implant category, we compete globally
primarily with Medtronic Sofamor Danek, Inc. (a subsidiary of
Medtronic, Inc.), DePuy Spine (a subsidiary of Johnson &
Johnson), Synthes, Inc., Stryker Corporation and EBI, L.P.,
now operating as Biomet Trauma and Biomet Spine (a
subsidiary of Biomet, Inc.).
In the dental reconstructive implant category, we
compete primarily with Nobel Biocare Holding AG, Straumann
Holding AG, and Implant Innovations, Inc. (a subsidiary of
Biomet, Inc.).
Competition within the industry is primarily based on
technology, innovation, quality, reputation and customer
service. A key factor in our continuing success in the future
will be our ability to develop new products and improve
existing products and technologies. Where possible, we will
continue to seek patent, trademark and other intellectual
property protection concerning the surgical techniques,
materials, technologies and products we design and develop.
MANUFACTURING AND RAW MATERIALS
We manufacture substantially all of our products at eight
locations including Warsaw, Indiana; Winterthur, Switzerland;
Ponce, Puerto Rico; Dover, Ohio; Statesville, North Carolina;
Carlsbad, California; Parsippany, New Jersey; and Etupes,
France. In February 2008, we announced plans to open a new
manufacturing facility in Shannon, Ireland.
We believe that our manufacturing facilities set industry
standards in terms of automation and productivity 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
our manufacturing facilities, many of the employees are cross-
trained.
We generally target operating our manufacturing facilities
at levels up to 90 percent of total capacity. We continually
evaluate the potential to in-source products currently
purchased from outside vendors to on-site production.
12
Improving manufacturing process capability and
productivity have been major contributors to improvement in
profitability and offset the impact of inflationary costs. Major
areas of improvement have included utilization of computer-
assisted robots and multi-axis grinders to precision polish
medical devices, automation of certain manufacturing and
inspection processes including on-machine inspection and
process controls, state-of-the-art equipment purchases and
upgrades, in-sourcing of core products, such as castings and
forgings, high-speed machining, and negotiated reductions in
third party supplier costs.
We use a diverse and broad range of raw materials in the
manufacturing of our products. We purchase all of our raw
materials and select components used in manufacturing our
products from external suppliers. In addition, we purchase
some supplies from single sources for reasons of quality
assurance, sole source availability, cost effectiveness or
constraints resulting from regulatory requirements. We work
closely with our suppliers to assure continuity of supply while
maintaining high quality and reliability. To date, we have not
experienced any significant difficulty in locating and obtaining
the materials necessary to fulfill our production schedules.
INTELLECTUAL PROPERTY
Patents and other proprietary rights are important to the
continued success of our business. We also rely upon trade
secrets, know-how, continuing technological innovation and
licensing opportunities to develop and maintain our
competitive position. We protect our 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. We own or control through
licensing arrangements more than 4,000 issued patents and
patent applications throughout the world that relate to
aspects of the technology incorporated in many of our
products.
EMPLOYEES
We employ more than 7,600 employees worldwide,
including more than 700 employees dedicated to research and
development. Nearly 4,700 employees are located within the
United States and approximately 2,900 employees are located
outside of the United States, primarily throughout Europe and
in Japan. We have over 3,300 employees dedicated to
manufacturing our products worldwide. The Warsaw, Indiana
production facility employs more than 1,500 employees.
Fewer than 200 North American employees are members of a
trade union covered by a collective bargaining agreement.
In May 2007, we renewed a collective bargaining
agreement with the United Steel, Paper and Forestry, Rubber
Manufacturing, Energy, Allied Industrial and Service Workers
International Union for and on behalf of Local 2737-15
covering employees at the Dover, Ohio, facility which
continues in effect until May 15, 2012.
Z I M M E R H O L D I N G S , I N C .
EXECUTIVE OFFICERS
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
The following table sets forth certain information with respect to our executive officers as of January 31, 2008.
Name
David C. Dvorak
Cheryl R. Blanchard, Ph.D.
Sheryl L. Conley
James T. Crines
Derek M. Davis
Jon E. Kramer
Bruno A. Melzi
Stephen H.L. Ooi
Chad F. Phipps
Age
Position
44
43
47
48
38
61
60
54
36
President and Chief Executive Officer
Senior Vice President, Research and Development and Chief Scientific Officer
Group President, Americas and Global Marketing and Chief Marketing Officer
Executive Vice President, Finance and Chief Financial Officer
Vice President, Finance and Corporate Controller and Chief Accounting Officer
President, U.S. Sales
Chairman, Europe, Middle East and Africa
President, Asia Pacific
Senior Vice President, General Counsel and Secretary
Mr. Dvorak was appointed President, Chief Executive Officer and a
member of the Board of Directors of Zimmer Holdings on May 1,
2007. From December 2005 to April 2007, Mr. Dvorak served as
Group President, Global Businesses and Chief Legal Officer. From
October 2003 to December 2005, Mr. Dvorak served as Executive
Vice President, Corporate Services, Chief Counsel and Secretary,
as well as Chief Compliance Officer. Mr. Dvorak was appointed
Corporate Secretary in February 2003. He joined Zimmer
Holdings in December 2001 as Senior Vice President, Corporate
Affairs and General Counsel.
Dr. Blanchard was appointed Senior Vice President, Research
and Development and Chief Scientific Officer of Zimmer
Holdings in December 2005. She is responsible for global
research, global development, global quality, orthobiologics,
external research and emerging technologies. From October
2003 to December 2005, Dr. Blanchard served as Vice
President, Corporate Research and Clinical Affairs and from
August 2002 to October 2003, she served as Vice President,
Research and Biologics.
Ms. Conley was appointed Group President, Americas and Global
Marketing and Chief Marketing Officer of Zimmer Holdings in
December 2005. She is responsible for all global marketing and
all Western Hemisphere operations, including our business in
the United States, Canada and Latin America. From October
2003 to December 2005, Ms. Conley served as President, Global
Products Group and from September 2002 to October 2003, she
served as President, Zimmer Reconstructive.
Mr. Crines was appointed Executive Vice President, Finance
and Chief Financial Officer of Zimmer Holdings on May 1,
2007. From December 2005 to April 2007, Mr. Crines served as
Senior Vice President, Finance, Operations and Corporate
Controller and Chief Accounting Officer. From October 2003 to
December 2005, Mr. Crines served as Senior Vice President,
Finance/Controller and Information Technology and from July
2001 to October 2003, he served as Vice President, Finance/
Controller.
Mr. Davis was appointed Vice President, Finance and Corporate
Controller and Chief Accounting Officer of Zimmer Holdings in
May 2007. He has responsibility for internal and external
reporting, planning and analysis, and corporate and business
unit accounting. From March 2006 to May 2007, Mr. Davis
served as Director, Financial Planning and Accounting. From
December 2003 to March 2006, Mr. Davis served as Director,
Finance, Operations and Logistics and from April 2003 to
December 2003, he served as Associate Director, Finance.
Prior to joining us, Mr. Davis served as Vice President Finance/
Corporate Controller for International Wire in Fort Wayne,
Indiana.
Mr. Kramer was appointed President, U.S. Sales of Zimmer
Holdings in December 2005. He is responsible for our sales
activities throughout the United States. From August 2004 to
December 2005, Mr. Kramer served as President, Americas.
From October 2003 to August 2004, Mr. Kramer served as Vice
President, U.S. Sales and from 2001 to October 2003, he was
our Area Vice President for the Southeast region of the United
States.
Mr. Melzi was appointed Chairman, Europe, Middle East and
Africa of Zimmer Holdings in October 2003. He is responsible
for the sales, marketing and distribution of products in the
European, Middle Eastern and African regions. From March
2000 to October 2003, Mr. Melzi served as President, Europe/
MEA.
Mr. Ooi was appointed President, Asia Pacific of Zimmer
Holdings in December 2005. He is responsible for the sales,
marketing and distribution of products in the Asia Pacific
region, including responsibility for Japan. From September
2003 to December 2005, Mr. Ooi served as President,
Australasia, where he was responsible for operations in Asia
Pacific, excluding Japan. From September 2002 to September
2003, Mr. Ooi served as President, Asia Pacific region.
Mr. Phipps was appointed Senior Vice President, General
Counsel and Secretary of Zimmer Holdings in May 2007. He
has global responsibility for our legal affairs and he serves as
Secretary to the Board of Directors. From December 2005 to
May 2007, Mr. Phipps served as Associate General Counsel and
Corporate Secretary and from September 2003 to December
2005, he served as Associate Counsel and Assistant Secretary.
Prior to joining us, Mr. Phipps served as Vice President and
General Counsel of L&N Sales and Marketing, Inc. in
Pennsylvania.
13
Z I M M E R H O L D I N G S , I N C .
AVAILABLE INFORMATION
Our Internet website address is www.zimmer.com. Our
annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and 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 our Internet website
as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. Our 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,
among others, are available through our website or may be
obtained in print form, without charge, by request to our 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.
We intend to post on our Internet website any substantive
amendment to, or waiver from, our Code of Ethics for Chief
Executive Officer and Senior Financial Officers or a provision
of our Code of Business Conduct that applies to any of our
directors or executive officers.
ITEM 1A. Risk Factors
Risk factors which could cause actual results to differ
from our expectations and which could negatively impact
our financial condition and results of operations are
discussed below and elsewhere in this report. The risks
and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently
known to us or that are currently not believed to be
significant to our business may also affect our actual
results and could harm our business, financial condition
and results of operations. If any of the risks or
uncertainties described below or any additional risks and
uncertainties actually occur, our business, results of
operations and financial condition could be materially
and adversely affected.
RISKS RELATED TO OUR BUSINESS
If we fail to comply with the terms of the Deferred
Prosecution Agreement and Corporate Integrity
Agreement we entered into in September 2007, we may
be subject to criminal prosecution and/or exclusion
from federal healthcare programs.
As previously reported, on September 27, 2007, we
settled an investigation conducted by the United States
Attorney’s Office for the District of New Jersey (the
“U.S. Attorney”) into financial relationships between major
orthopaedic manufacturers and consulting orthopaedic
surgeons. As part of that settlement, we entered into a
Deferred Prosecution Agreement (the “DPA”) with the
U.S. Attorney and a Corporate Integrity Agreement (the
14
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
“CIA”) with the Office of Inspector General of the Department
of Health and Human Services (the “OIG-HHS”). Copies of the
DPA and CIA are filed as exhibits to this report and a copy of
the DPA is available on our website at www.zimmer.com.
The DPA has a term of 18 months and provides for oversight
by a federally appointed monitor. If we breach the DPA, we could
be subject to prosecution for violations of the federal Anti-
Kickback Statute that the U.S. Attorney alleges we committed
between 2002 and 2006, as well as any new or continuing
violations. We could also be subject to exclusion by OIG-HHS
from participation in federal healthcare programs, including
Medicaid and Medicare. Any of these consequences would have a
material adverse effect on our results of operations.
The CIA requires us to continue our Corporate
Compliance Program and to adhere to certain other provisions,
including reporting requirements. We also agreed to retain an
independent review organization to perform annual reviews to
assist us in assessing our compliance with the CIA to ensure
that arrangements we enter into do not violate the federal
Anti-Kickback Statute. If we breach the CIA, the OIG-HHS
may take further action against us, up to and including
excluding us from participation in federal healthcare programs,
which would have a material adverse effect on our financial
condition, results of operations and cash flows.
Our recent settlement with the Department of
Justice and OIG-HHS could lead to further governmental
investigations or actions by other third parties.
As a result of the publicity surrounding our recent
settlement with the Department of Justice and OIG-HHS,
including the allegations of wrongdoing made by the
U.S. Attorney, other governmental agencies, including state
authorities, could conduct investigations or institute
proceedings that are not precluded by terms of that
settlement. As previously disclosed, the U.S. Securities and
Exchange Commission has commenced an informal
investigation into sales by us and other companies of medical
devices in foreign countries. We are also cooperating with an
investigative demand made by one state attorney general.
While we believe that the pending state investigation is not
likely to have a material adverse effect on our business or
financial condition, similar investigations by other states or
governmental agencies are possible. In addition, in January
2008, we received a written request from the United States
Senate Special Committee on Aging (“Committee”), seeking,
among other things, additional information regarding the
financial relationships we publicly disclosed pursuant to the
DPA. We responded to this request in writing and through
testimony before the Committee in February 2008. Also, as
previously reported, two shareholder derivative actions were
filed purportedly on our behalf against current and two former
directors relating to oversight of the conduct that lead to the
settlement with the U.S. Attorney. In addition, the settlement
with the U.S. Attorney could increase our exposure to lawsuits
by potential whistleblowers under the federal false claims acts,
based on new theories or allegations arising from the
allegations made by the U.S. Attorney. We intend to review
and take appropriate actions with respect to any such
investigations or proceedings; however, we cannot assure that
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
the costs of defending or resolving those investigations or
proceedings would not have a material adverse effect on our
financial condition, results of operations and cash flows.
customers may not buy our products and our revenue
and profitability may decline.
Demand for our products may change, in certain cases, in
If we are not able to fulfill or otherwise resolve our
existing royalty and other payment obligations to
consulting surgeons and institutions, our ability to
maintain our existing intellectual property rights and
obtain future rights may be impaired.
We are reviewing agreements we have entered into with
consulting surgeons and institutions and assessing whether we
can fulfill our obligations under these agreements in view of
the DPA. If we do not perform those obligations or reach some
other resolution acceptable to the affected consulting surgeons
and institutions, our ability to use the intellectual property
covered by those agreements may be adversely affected. In
addition, our ability to enter into new agreements with
consulting surgeons or institutions for the future development
of intellectual property rights may be adversely affected.
Our ongoing efforts to enhance our Corporate
Compliance Program globally will require cooperation
by many employees and others and may divert
substantial financial and human resources from our
other business activities.
We are committed to devoting sufficient resources to
meet our obligations under the DPA and CIA. We have also
announced our intention to further enhance our Corporate
Compliance Program and to expand those enhancements into
all of our businesses on a global basis. Successful
implementation of this enhanced program will require the full
cooperation of our employees, distributors and sales agents
and the healthcare professionals with whom they interact.
These efforts not only involve expense, but also require
management and other key employees to focus extensively on
these matters, preventing them from devoting as much time as
they otherwise would to other business matters.
In addition, if our competitors do not make similar
enhancements to their compliance programs, this may place us
at a competitive disadvantage and adversely affect our results
of operations.
If we fail to retain the independent agents and
distributors upon whom we rely heavily to market our
products, customers may not buy our products and our
revenue and profitability may decline.
Our marketing success in the United States and abroad
depends significantly upon our agents’ and distributors’ sales
and service expertise in the marketplace. Many of these agents
have developed professional relationships with existing and
potential customers because of the agents’ detailed knowledge
of products and instruments. A loss of a significant number of
these agents could have a material adverse effect on our
business and results of operations. If some of the business
practices of our independent sales agents and distributors are
challenged as unlawful, they may have to change these
practices, which could have a material adverse effect on our
business and results of operations.
If we do not introduce new products in a timely
manner, our products may become obsolete over time,
ways we may not anticipate because of:
(cid:129) evolving customer needs;
(cid:129) changing demographics;
(cid:129) slowing industry growth rates;
(cid:129) declines in the reconstructive implant market;
(cid:129) the introduction of new products and technologies;
(cid:129) evolving surgical philosophies; and
(cid:129) evolving industry standards.
Without the timely introduction of new products and
enhancements, our products may become obsolete over time.
If that happens, our revenue and operating results would
suffer. The success of our new product offerings will depend
on several factors, including our ability to:
(cid:129) properly identify and anticipate customer needs;
(cid:129) commercialize new products in a timely manner;
(cid:129) manufacture and deliver instruments and products in
sufficient volumes on time;
(cid:129) differentiate our offerings from competitors’ offerings;
(cid:129) achieve positive clinical outcomes for new products;
(cid:129) satisfy the increased demands by healthcare payors,
providers and patients for shorter hospital stays, faster post-
operative recovery and lower-cost procedures;
(cid:129) innovate and develop new materials, product designs and
surgical techniques; and
(cid:129) provide adequate medical education relating to new products.
In addition, new materials, product designs and surgical
techniques that we develop may not be accepted quickly, in
some or all markets, because of, among other factors:
(cid:129) entrenched patterns of clinical practice;
(cid:129) the need for regulatory clearance; and
(cid:129) uncertainty with respect to third-party reimbursement.
Moreover, innovations generally require a substantial
investment in research and development before we can
determine their commercial viability and we may not have the
financial resources necessary to fund the production. In
addition, even if we are able to successfully develop
enhancements or new generations of our products, these
enhancements or new generations of products may not
produce revenue in excess of the costs of development and
they may be quickly rendered obsolete by changing customer
preferences or the introduction by our competitors of products
embodying new technologies or features.
We conduct a significant amount of our sales
activity outside of the United States, which subjects us
to additional business risks and may cause our
profitability to decline due to increased costs.
Because we sell our products in more than 100 countries,
our business is subject to risks associated with doing business
internationally. In 2007, we derived approximately
$1,757.2 million, or 45% of our total revenue, from sales of our
products outside of the United States. We intend to continue
to pursue growth opportunities in sales internationally, which
could expose us to additional risks associated with
international sales and operations. Our international operations
15
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
are, and will continue to be, subject to a number of risks and
potential costs, including:
(cid:129) changes in foreign medical reimbursement policies and
programs;
(cid:129) unexpected changes in foreign regulatory requirements;
(cid:129) differing local product preferences and product
requirements;
(cid:129) fluctuations in foreign currency exchange rates;
(cid:129) diminished protection of intellectual property in some
countries outside of the United States;
(cid:129) trade protection measures and import or export
requirements that may prevent us from shipping products to
a particular market and may increase our operating costs;
(cid:129) foreign exchange controls that might prevent us from
repatriating cash earned in countries outside the United States;
(cid:129) complex data privacy requirements and labor relations laws;
(cid:129) extraterritorial effects of U.S. laws such as the Foreign
Corrupt Practices Act;
(cid:129) difficulty in staffing and managing foreign operations;
(cid:129) labor force instability;
(cid:129) potentially negative consequences from changes in tax laws;
and
(cid:129) political and economic instability.
Violations stemming from any of the above identified risks
could result in fines, criminal sanctions against us, our officers
or our employees, prohibitions on the conduct of our business
and damage to our reputation.
We are subject to risks arising from currency
exchange rate fluctuations, which can increase our costs
and may cause our profitability to decline.
A substantial portion of our foreign revenues are
generated in Europe and Japan. The United States dollar value
of our foreign-generated revenues varies with currency
exchange rate fluctuations. Significant increases in the value of
the United States dollar relative to the Euro or the Japanese
Yen, as well as other currencies, could have a material adverse
effect on our results of operations. We address currency risk
management through regular operating and financing
activities, and, on a limited basis, through the use of derivative
financial instruments. The derivative financial instruments we
enter into are in the form of foreign exchange forward
contracts with major financial institutions. The 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, and then recognized in earnings
when the hedged item affects net earnings.
We may fail to adequately protect our proprietary
technology and other intellectual property, which would
allow competitors or others to take advantage of our
research and development efforts.
Our long-term success largely depends on our ability to
market technologically competitive products. If we fail to obtain
or maintain adequate intellectual property protection, we may
not be able to prevent third parties from using our proprietary
technologies. Also, our currently pending or future patent
16
applications may not result in issued patents. In the United
States, patent applications are confidential for 18 months
following their filing, and, because third parties may have filed
patent applications for technology covered by our pending
patent applications without our being aware of those
applications, our patent applications may not have priority over
patent applications of others. In addition, our issued patents
may not contain claims sufficiently broad to protect us against
third parties with similar technologies or products, or provide us
with any competitive advantage. If a third party initiates
litigation regarding our patents, our collaborators’ patents, or
those patents for which we have license rights, and is
successful, a court could declare our patents invalid or
unenforceable or limit the scope of coverage of those patents.
The United States Patent and Trademark Office (USPTO)
and the courts have not consistently treated the breadth of
claims allowed or interpreted in orthopaedic reconstructive
implant and biotechnology patents. If the USPTO or the courts
begin to allow or interpret claims more broadly, the incidence
and cost of patent interference proceedings and the risk of
infringement litigation will likely increase. On the other hand, if
the USPTO or the courts begin to allow or interpret claims more
narrowly, the value of our proprietary rights may be reduced. Any
changes in, or unexpected interpretations of, the patent laws may
adversely affect our ability to enforce our patent position.
In addition, intellectual property rights may be unavailable
or limited in some foreign countries, which could make it
easier for competitors to capture market position. Competitors
may also capture market share from us by designing products
that mirror the capabilities of our products or technology
without infringing our intellectual property rights. If we do not
obtain sufficient international protection for our intellectual
property, our competitiveness in international markets could
be impaired, which would limit our growth and future revenue.
We also rely upon trade secrets, proprietary know-how,
and continuing technological innovation to remain competitive.
We attempt to protect this information with security measures,
including the use of confidentiality agreements with our
employees, consultants, and collaborators. These individuals
may breach these agreements and any remedies available to us
may be insufficient to compensate our damages. Furthermore,
our trade secrets, know-how and other technology may
otherwise become known or be independently discovered by
our competitors.
We may be subject to intellectual property litigation
and infringement claims, which could cause us to incur
significant expenses or prevent us from selling our
products.
A successful claim of patent or other intellectual property
infringement against us could adversely affect our growth and
profitability, in some cases materially. From time to time, we
receive notices from third parties of potential infringement and
receive claims of potential infringement. We may be unaware
of intellectual property rights of others that may cover some of
our technology. If someone claims that our products infringed
their intellectual property rights, any resulting litigation could
be costly and time consuming and would divert the attention
of management and key personnel from other business issues.
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
The complexity of the technology involved and the uncertainty
of intellectual property litigation increase these risks. Claims
of intellectual property infringement also might require us to
enter into costly royalty or license agreements. However, we
may be unable to obtain royalty or license agreements on
terms acceptable to us or at all. We also may be subject to
significant damages or an injunction preventing us from
manufacturing, selling or using some of our products in the
event of a successful claim of patent or other intellectual
property infringement. Any of these adverse consequences
could have a material adverse effect on our business, financial
condition and results of operations.
We may complete additional acquisitions, which
could increase our costs or liabilities or be disruptive.
We intend to continue to look for additional strategic
acquisitions of other businesses that are complementary to our
businesses. Acquisition involves risk, including the following:
(cid:129) we may need to divert more management resources to
integration than we planned, which may adversely affect our
ability to pursue other more profitable activities;
(cid:129) the difficulties of integration may be increased if we need to
integrate geographically separated organizations, personnel
with disparate business backgrounds and companies with
different corporate cultures;
(cid:129) we may not eliminate as many redundant costs as we
anticipated in selecting our acquisition candidates; and
(cid:129) one or more of our acquisition candidates also may have
liabilities or adverse operating issues that we failed to
discover through our diligence prior to the acquisition.
If we are unable to form strategic alliances, or if
our strategic alliances fail to achieve their objectives,
our operating results will be negatively impacted.
We have entered into strategic alliances with other
orthopaedic and biotechnology companies. These include our
collaboration with ISTO Technologies, Inc. relating to
regenerative cartilage technology and our distribution
agreement with Heraeus relating to orthopaedic bone cement
products. The success of these and similar arrangements is
largely dependent on technology and other intellectual property
contributed by our strategic partners or the resources, efforts
and skills of these partners. Disputes and difficulties in such
relationships are common, often due to conflicting priorities.
Merger and acquisition activity may exacerbate these issues.
The benefits of these alliances are reduced or eliminated when
strategic partners:
(cid:129) terminate the agreements or limit our access to the
underlying intellectual property;
(cid:129) fail to devote financial or other resources to the alliances
and thereby hinder or delay development, manufacturing or
commercialization activities;
(cid:129) fail to successfully develop, manufacture or commercialize
any products; or
(cid:129) fail to maintain the financial resources necessary to continue
financing their portion of the development, manufacturing,
or commercialization costs or their own operations.
Furthermore, under some of our strategic alliances, we
may make milestone payments well in advance of
commercialization of products with no assurance that we will
ever recoup these payments. We also may make equity
investments in our strategic partners. These investments may
decline in value and result in our incurring financial statement
charges in the future.
We depend on a limited number of suppliers for
some key raw materials and outsourced activities.
We use a number of suppliers for raw materials that we
need to manufacture our products and to outsource some key
manufacturing activities. These suppliers must provide the
materials and perform the activities to our standards for us to
meet our quality and regulatory requirements. Some key raw
materials and outsourced activities can only be obtained from
a single source or a limited number of sources. A prolonged
disruption or other inability to obtain these materials or
outsource key manufacturing activities could materially and
adversely affect our ability to satisfy demand for our products,
which could have a material adverse effect on our business
and results of operations.
Our future profitability may be affected by changes
to our product category and region sales mix.
Reconstructive implants produce the highest operating
profit margins among our product categories. These products
accounted for approximately 84% of 2007 net sales. Sales in
our Americas region accounted for approximately 58% of
2007 net sales. Sales in the Americas region produce the
highest operating profit margins in the geographic markets in
which we operate. While we expect net sales of reconstructive
implants and net sales in the Americas region to remain
strong, changes to our product category mix or our region
sales mix could adversely affect our future profitability.
RISKS RELATED TO OUR INDUSTRY
The ongoing informal investigation by the United
States Securities and Exchange Commission regarding
potential violations of the Foreign Corrupt Practices
Act in the sale of medical devices in a number of foreign
countries by companies in the medical device industry
could have a material adverse effect on our business,
financial condition and cash flows.
We are cooperating fully with the Securities and Exchange
Commission with regard to an ongoing informal investigation
of potential violations of the Foreign Corrupt Practices Act in
the sale of medical devices in a number of foreign countries by
companies in the medical device industry. The Foreign Corrupt
Practices Act prohibits U.S. companies and their officers,
directors, employees, stockholders acting on their behalf and
agents from offering, promising, authorizing or making
payments to foreign officials for the purpose of obtaining or
retaining business abroad or otherwise obtaining favorable
treatment and this law requires companies to maintain records
which fairly and accurately reflect transactions and to maintain
internal accounting controls. In many countries, hospitals and
clinics are government-owned and healthcare professionals
employed by such hospitals and clinics, with whom we
regularly interact, meet the definition of a foreign official for
purposes of the Foreign Corrupt Practices Act. Although we
have adopted policies and procedures designed to prevent
improper payments and we conduct training in this area, there
17
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
can be no assurance that violations of these requirements do
not occur in connection with sales of our medical devices. If
we are found to have violated the Foreign Corrupt Practices
Act, we may face sanctions including fines, criminal penalties,
disgorgement of profits and suspension or debarment of our
ability to contract with governmental agencies or receive
export licenses, which could have a material adverse effect on
our business, financial condition and cash flows.
We are subject to healthcare fraud and abuse
regulations on an ongoing basis that could require us to
change our business practices and restrict our
operations in the future.
Our industry is subject to various federal and state laws
pertaining to healthcare fraud and abuse, including false claims
laws, the federal Anti-Kickback Statute, similar state laws and
physician self-referral laws. We settled alleged violations of the
federal Anti-Kickback Statute in September 2007, but we
remain subject to these laws on an ongoing basis. 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 and
Veterans Administration (VA) health programs. The
interpretation and enforcement of these laws and regulations
are uncertain and subject to rapid change. We are continuing
to enhance our Corporate Compliance Program and monitoring
our practices on an ongoing basis to better ensure that we
have proper controls in place to comply with these laws.
If third-party payors decline to reimburse our
customers for our products or reduce reimbursement
levels, the demand for our products may decline and our
ability to sell our products profitably may be harmed.
We sell our products and services to hospitals, doctors,
dentists and other healthcare providers, all of which receive
reimbursement for the healthcare services provided to their
patients from third-party payors, such as domestic and
international government programs, private insurance plans and
managed care programs. These third-party payors may deny
reimbursement if they determine that a device used in a
procedure was not in accordance with cost-effective treatment
methods, as determined by the third-party payor, or was used
for an unapproved indication. Third-party payors may also
decline to reimburse for experimental procedures and devices.
If our products are not considered cost-effective by third-party
payors, our customers may not be reimbursed for our products.
In addition, third-party payors are increasingly attempting
to contain healthcare costs by limiting both coverage and the
level of reimbursement for medical products and services. For
example, managed care programs often prescribe only those
orthopaedic recovery products that match a patient as to age,
need for mobility and other parameters in an effort to provide
more cost-effective care. If third-party payors reduce
reimbursement levels to hospitals and other healthcare
providers for our products, demand for our products may
decline or we may experience pressure to reduce the prices of
our products, which could have a material adverse effect on
our sales and results of operations.
18
In international markets, where the movement toward
healthcare reform and the development of managed care are
generally not as advanced as in the United States, we have
experienced downward pressure on product pricing and other
effects of healthcare reform. In Japan, for example, a
government-operated insurance system reimburses customers
for our products. Under this system, the Japanese government
periodically reviews and reduces the reimbursement levels for
products. If the Japanese government continues to reduce the
reimbursement level for orthopaedic products, our sales and
results of operations may be adversely affected.
The ongoing cost-containment efforts of healthcare
purchasing organizations may have a material adverse
effect on our results of operations.
Many customers for our products have formed group
purchasing organizations in an effort to contain costs. Group
purchasing organizations negotiate pricing arrangements with
medical supply manufacturers and distributors, and these
negotiated prices are made available to a group purchasing
organization’s affiliated hospitals and other members. If we are
not one of the providers selected by a group purchasing
organization, affiliated hospitals and other members may be
less likely to purchase our products, and, if the group
purchasing organization has negotiated a strict compliance
contract for another manufacturer’s products, we may be
precluded from making sales to members of the group
purchasing organization for the duration of the contractual
arrangement. Our failure to respond to the cost-containment
efforts of group purchasing organizations may cause us to lose
market share to our competitors and could have a material
adverse effect on our sales and results of operations.
Our success depends on our ability to effectively
develop and market our products against those of our
competitors.
We operate in a highly competitive environment. Our
present or future products could be rendered obsolete or
uneconomical by technological advances by one or more of our
present or future competitors or by other therapies, including
orthobiological therapies. To remain competitive, we must
continue to develop and acquire new products and
technologies.
In the global markets for reconstructive orthopaedic
implants, trauma products and other orthopaedic products, a
limited number of competitors, including DePuy Orthopaedics,
Inc. (a subsidiary of Johnson & Johnson), Stryker Corporation,
Biomet, Inc., Wright Medical Group, Inc., Synthes, Inc. and
Smith & Nephew plc, compete with us for the majority of
product sales. In the spinal implant category, we compete
globally primarily with Medtronic Sofamor Danek, Inc. (a
subsidiary of Medtronic, Inc.), DePuy Spine (a subsidiary of
Johnson & Johnson), Synthes, Inc., Stryker Corporation and
EBI, L.P. (a subsidiary of Biomet, Inc.). In the dental
reconstructive implant category, we compete primarily with
Nobel Biocare Holding AG, Straumann Holding AG, and
Implant Innovations, Inc. (a subsidiary of Biomet, Inc.).
Competition is primarily on the basis of:
(cid:129) technology;
(cid:129) innovation;
Z I M M E R H O L D I N G S , I N C .
(cid:129) quality;
(cid:129) reputation; and
(cid:129) customer service.
In markets outside of the United States, other factors
influence competition as well, including:
(cid:129) local distribution systems;
(cid:129) complex regulatory environments; and
(cid:129) differing medical philosophies and product preferences.
Our competitors may:
(cid:129) have greater financial, marketing and other resources than us;
(cid:129) respond more quickly to new or emerging technologies;
(cid:129) undertake more extensive marketing campaigns;
(cid:129) adopt more aggressive pricing policies; or
(cid:129) be more successful in attracting potential customers,
employees and strategic partners.
Any of these factors, alone or in combination, could cause us
to have difficulty maintaining or increasing sales of our products.
We and our customers are subject to various
governmental regulations relating to the manufacturing,
labeling and marketing of our products and we may incur
significant expenses to comply with these regulations
and develop products compatible with these regulations.
The medical devices we design, develop, manufacture and
market are subject to rigorous regulation by the FDA and
numerous other federal, state and foreign governmental
authorities. The process of obtaining regulatory approvals to
market a medical device, particularly from the FDA and
certain foreign governmental authorities, can be costly and
time consuming and approvals might not be granted for future
products on a timely basis, if at all. Delays in receipt of, or
failure to obtain, approvals for future products could result in
delayed realization of product revenues or in substantial
additional costs which could have a material adverse effect on
our business or results of operations.
In addition, if we fail to comply with applicable FDA
medical device or other material regulatory requirements,
including, for example, the Quality System Regulation,
recordkeeping regulations, labeling requirements and adverse
event reporting regulations, that failure could result in, among
other things:
(cid:129) warning letters;
(cid:129) fines or civil penalties;
(cid:129) injunctions;
(cid:129) repairs, replacements or refunds;
(cid:129) recalls or seizures of products;
(cid:129) total or partial suspension of production;
(cid:129) the FDA’s refusal to grant future premarket clearances or
approvals;
(cid:129) withdrawals or suspensions of current product applications;
and
(cid:129) criminal prosecution.
Any of these actions, in combination or alone, could have
a material adverse effect on our business, financial condition
and results of operations.
In many of the foreign countries in which we market our
products, we are subject to regulations affecting, among other
things:
(cid:129) clinical efficacy;
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
(cid:129) product standards;
(cid:129) packaging requirements;
(cid:129) labeling requirements;
(cid:129) import/export restrictions;
(cid:129) tariff regulations;
(cid:129) duties; and
(cid:129) tax requirements.
Many of the regulations applicable to our devices and
products in these countries, such as the European Medical
Devices Directive, are similar to those of the FDA. In addition,
in many countries the national health or social security
organizations require our products to be qualified before they
can be marketed with the benefit of reimbursement eligibility.
Failure to receive, or delays in the receipt of, relevant foreign
qualifications also could have a material adverse effect on our
business, financial condition and results of operations.
As both the FDA and foreign government regulators have
become increasingly stringent, we may be subject to more
rigorous regulation by governmental authorities in the future.
Our products and operations are also often subject to the rules
of industrial standards bodies, such as the International
Standards Organization. If we fail to adequately address any of
these regulations, our business will be harmed.
We may incur product liability losses, and insurance
coverage may be inadequate or unavailable to cover
these losses.
Our business is subject to potential product liability risks
that are inherent in the design, development, manufacture and
marketing of medical devices. Our products are often used in
surgical and intensive care settings. In addition, some of the
medical devices we manufacture and sell are designed to be
implanted in the human body for long periods of time. In the
ordinary course of business, we are the subject of product
liability lawsuits alleging that component failures,
manufacturing flaws, design defects or inadequate disclosure
of product-related risks or product-related information
resulted in an unsafe condition or injury to patients. Product
liability lawsuits and claims, safety alerts or product recalls,
regardless of their ultimate outcome, could have a material
adverse effect on our business and reputation and on our
ability to attract and retain customers.
As part of our risk management policy, we maintain third-
party product liability insurance coverage. However, product
liability claims against us may exceed the coverage limits of
our insurance policies or cause us to record a self-insured loss.
Even if any product liability loss is covered by an insurance
policy, these policies may have substantial retentions or
deductibles that provide that we will not receive insurance
proceeds until the losses incurred exceed the amount of those
retentions or deductibles. We will be responsible for paying
any losses that are below those retentions or deductibles. A
product liability claim in excess of applicable insurance could
have a material adverse effect on our business, financial
condition and results of operations.
ITEM 1B. Unresolved Staff Comments
Not Applicable.
19
Z I M M E R H O L D I N G S , I N C .
ITEM 2. Properties
We have the following properties:
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Location
Warsaw, Indiana
Warsaw, Indiana
Warsaw, Indiana
Carlsbad, California
Plainville, Massachusetts
Minneapolis, Minnesota
Cedar Knolls, New Jersey
Parsippany, New Jersey
Statesville, North Carolina
Dover, Ohio
Dover, Ohio
Memphis, Tennessee
Austin, Texas
Sydney, Australia
Vienna, Austria
Wemmel, Belgium
Mississauga, Canada
Shanghai, China
Etupes, France
Freiburg, Germany
Kiel, Germany
Milan, Italy
Gotemba, Japan
Tokyo, Japan
Seoul, Korea
Utrecht, Netherlands
Ponce, Puerto Rico
Singapore
Barcelona, Spain
Baar, Switzerland
Winterthur, Switzerland
Mu¨ nsingen, Switzerland
Swindon, United Kingdom
Use
Owned/Leased
Square Feet
Research & Development, Manufacturing, Warehousing, Marketing &
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Corporate Headquarters & The Zimmer Institute . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . .
Leased
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Research & Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Research & Development, Manufacturing & Warehousing . . . . . . . . . . . . . . . .
Leased
Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . . Owned
Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Research & Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices, Service Center & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Owned
Offices, Manufacturing & Warehousing
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
1,400,000
117,000
90,000
118,000
22,000
51,000
23,000
115,000
156,000
140,000
61,000
30,000
34,000
36,000
15,000
15,000
52,000
18,000
90,000
51,000
21,000
47,000
87,000
24,000
22,000
16,000
213,000
10,000
16,000
40,000
319,000
76,000
70,000
In February 2008 we announced plans to expand our global manufacturing network by adding 100,000 square feet of
manufacturing capacity at a new facility in Shannon, Ireland. We expect to begin manufacturing operations at this facility in late
2008. We believe the current facilities, including manufacturing, warehousing, research and development and office space,
together with the planned expansion provide sufficient capacity to meet ongoing demands. Once a facility reaches 85 percent
utilization, we examine alternatives for either expanding that facility or acquiring new facilities to meet our ongoing demands.
In addition to the above, we maintain more than 100 other offices and warehouse facilities in more than 25 countries around
the world, including the United States, Japan, Australia, France, Russia, India, Germany, Italy, Switzerland and China. We believe
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 15 to the Consolidated Financial Statements, which are
included in this report under Item 8.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
20
Z I M M E R H O L D I N G S , I N C .
Part II
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our 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 our common stock on the New York Stock Exchange for the calendar quarters of fiscal years 2007
and 2006 are set forth as follows:
Quarterly High-Low Share Prices
Year Ended December 31, 2007:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2006:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$88.18
$94.38
$91.00
$85.91
$72.87
$68.80
$69.44
$79.11
$76.90
$83.67
$75.14
$63.00
$64.87
$55.68
$52.20
$66.93
We have not declared or paid dividends on our common stock since becoming a public company on August 6, 2001.
Currently, we do not anticipate paying any cash dividends on the common stock in the foreseeable future. Our credit facility also
restricts the payment of dividends under certain circumstances.
The number of beneficial owners of our common stock on February 13, 2008 was approximately 439,600. On February 13,
2008, the closing price of the common stock, as reported on the New York Stock Exchange, was $78.51 per share.
The information required by this Item concerning equity compensation plans is incorporated by reference to Item 12 of this
report.
The following table summarizes repurchases of common stock settled during the three months ended December 31, 2007:
October 2007
November 2007
December 2007
Total
Total Number of
Shares Purchased
Average Price
Paid per Share
679,600
945,000
—
1,624,600
$74.89
68.60
—
$71.23
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs(1)
Approximate Dollar Value of
Shares that May Yet Be
Purchased Under Plans
or Programs
18,400,200
19,345,200
19,345,200
19,345,200
$685,963,162
621,139,846
621,139,846
$621,139,846
(1) In December 2005, our Board of Directors authorized the repurchase of up to $1 billion of common stock through December 31, 2007.
2006, our Board of Directors authorized an additional repurchase of up to $1 billion of common stock through December 31, 2008.
In December
21
Z I M M E R H O L D I N G S , I N C .
ITEM 6. Selected Financial Data
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
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
Earnings before cumlative effect of change in accounting
principle(2)
Earnings per common share
Basic
Diluted
Earnings per common share before cumlative effect of change in
accounting principle(2)
Basic
Diluted
Average common shares outstanding
Basic
Diluted
Balance Sheet Data
Total assets
Short-term debt
Long-term debt
Other long-term obligations
Stockholders’ equity
2007
2006
2005
2004
$3,897.5
773.2
$3,495.4
834.5
$3,286.1
732.5
$2,980.9
541.8
2003(1)
$1,901.0
346.3
773.2
834.5
732.5
541.8
291.2
$
3.28
3.26
$
3.43
3.40
$
2.96
2.93
$
2.22
2.19
235.5
237.5
243.0
245.4
247.1
249.8
244.4
247.8
$6,633.7
–
104.3
328.4
5,449.6
$5,974.4
–
99.6
323.4
4,920.5
$5,721.9
–
81.6
348.3
4,682.8
$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) Includes the results of the former Centerpulse AG subsequent to October 2, 2003.
(2) Reflects earnings for the year ended December 31, 2003 before the cumulative effect of an accounting change of $55.1 million related to the January 1,
2003, change in the method of accounting for instruments which we own and are 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.
Prior to 2003, 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.
22
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and
the corresponding notes included elsewhere in this Form 10-K.
OVERVIEW
We are a global leader in the design, development,
manufacture and marketing of reconstructive orthopaedic
implants, including joint and dental, spinal implants, trauma
products and related orthopaedic surgical products
(sometimes referred to in this report as “OSP”). We also
provide other healthcare related services. Reconstructive
orthopaedic 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. OSP include supplies and instruments
designed to aid in orthopaedic surgical procedures and post-
operation rehabilitation. We have operations in more than 25
countries and market products in more than 100 countries.
We manage operations through three reportable geographic
segments — the Americas, Europe and Asia Pacific.
Certain percentages presented in this discussion and
analysis are calculated from the underlying whole-dollar
amounts and therefore may not recalculate from the rounded
numbers used for disclosure purposes. Certain amounts in the
2006 consolidated financial statements have been reclassified
to conform to the 2007 presentation.
We believe the following developments or trends are
important in understanding our financial condition, results of
operations and cash flows for the year ended December 31,
2007.
Demand (Volume and Mix) Trends
Increased volume and changes in the mix of product sales
contributed 9 percentage points of 2007 sales growth, which
is 2 percentage points above the rate of growth from 2006
compared to 2005. We believe orthopaedic procedure volume
on a global basis will continue to rise at mid single digit rates
driven by an aging global population, obesity and more active
lifestyles, among other factors. In addition, the continued shift
in demand to premium products, such as Longevity, Durasul
and Prolong Highly Crosslinked Polyethylenes, Trabecular
Metal Technology products, high-flex knees, knee revision
products and porous hip stems, continue to positively affect
sales growth. For example, during 2007, sales of products
incorporating Trabecular Metal Technology were over
$210 million, a year-over-year increase of over 26 percent.
We believe innovative surgical approaches will continue
to significantly affect the orthopaedics industry. In 2007, we
acquired ORTHOsoft Inc., a market leader in surgical
navigation in orthopaedics. Combined with our SmartTools
strategic initiative, we are focused on becoming a leader in
operating room efficiency and enhancing surgical outcomes
through the use of innovative navigation devices and cutting
tools. We continued our significant progress in the
development and introduction of MIS Implants, Procedures
and Technologies. During the year ended December 31, 2007,
The Zimmer Institute trained nearly 1,700 surgeons on
advanced techniques, including approximately 850 surgeons
on MIS Procedures.
We believe innovative products will continue to affect the
orthopaedics industry. In the second half of 2006, we
launched the Zimmer Gender Solutions High-Flex Knee
Femoral Implant. High Flex Knees now make up
approximately 44 percent of our total femoral unit sales on a
global basis, having grown from approximately 28 percent
prior to the launch of the Zimmer Gender Solutions Knee.
Pricing Trends
Selling prices were flat during 2007 compared to a
modest increase during 2006 when compared to 2005. Asia
Pacific selling prices decreased 1 percentage point for the
year ended December 31, 2007, compared to a 2 percent
decrease in 2006 when compared to 2005. As anticipated, the
Japanese government reduced reimbursement rates during
2007. This action affected sales in Japan negatively by
approximately 5 percent for 2007, while other Asia Pacific
markets were flat to positive. Japan represents approximately
7 percent of our sales. The Americas experienced a 1 percent
increase in selling prices during 2007, compared to a 2 percent
increase in 2006. In Europe, selling prices for 2007 decreased
1 percent, the same decrease we saw in 2006 as compared to
2005. Within Europe, Germany and Italy reported decreases in
average selling prices of 4 percent and 2 percent, respectively,
in 2007, as a result of reductions in government implant
reimbursement rates and group purchasing arrangements
while most other European markets were positive to flat.
Germany and Italy combined represent approximately
11 percent of our sales. With the effect of governmental
healthcare cost containment efforts and pressure from group
purchasing organizations, global selling prices are expected to
remain flat in 2008.
Foreign Currency Exchange Rates
For 2007, foreign currency exchange rates had a positive
3 percent effect on global sales growth. If foreign currency
exchange rates remain consistent with the year end rates, we
estimate that the weaker dollar versus foreign currency
exchange rates will have a positive effect in 2008 of
approximately 2 percent on sales. We address currency risk
through regular operating and financing activities, and under
appropriate circumstances and subject to proper
authorization, through the use of forward contracts solely for
managing foreign currency volatility and risk. Changes to
foreign currency exchange rates affect sales growth, but due
to offsetting gains/losses on hedge contracts, which are
23
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
recorded in cost of products sold, the effect on net earnings
in the near term is expected to be minimal.
New Product Sales
New products, which we define as products or stock
keeping units (“SKU’s”) introduced within the prior 36-month
period to a particular market, accounted for 25 percent, or
$961 million, of 2007 sales. Adoption rates for new
technologies are a key indicator of performance in our
industry. Our sales have grown with the introduction of new
products, such as Trabecular Metal Modular Acetabular Cups,
certain SKU’s of the NexGen Complete Knee Solution
including the Gender Solutions Knee Femoral Implant for the
LPS-Flex and CR-Flex Knees, the Dynesys4 Dynamic
Stabilization System, the Zimmer M/L Taper Hip Prosthesis
and PALACOS5 Bone Cement.
18 months. We expect to continue to incur costs of
approximately $6-9 million per quarter, to comply with the
Deferred Prosecution Agreement through the remainder of
the 18 month period.
We settled civil and administrative claims related to the
federal investigation for a cash payment to the United States
government of $169.5 million. We recorded a $169.5 million
expense during the third quarter in connection with the
settlement.
We also entered into a Corporate Integrity Agreement
with the Office of the Inspector General of the
U.S. Department of Health and Human Services, which has a
term of 5 years. For more information regarding the
settlement, see Note 15 to the consolidated financial
statements included elsewhere in this Form 10-K.
We believe new products in our current pipeline should
New Accounting Pronouncements
continue to favorably affect our operating performance.
Products we expect to contribute to new product sales in
2008 include the Gender Solutions Knee Femoral Implant;
Gender Solutions Natural-Knee Flex System; products
incorporating Trabecular Metal Technology, including the
Trabecular Metal Primary Hip Prosthesis, Trabecular Metal
Acetabular Revision System and Trabecular Metal Spine
Implants; Zimmer M/L Taper Hip Prosthesis with Kinectiv
Technology, Durom Acetabular Cups with Metasul LDH Large
Diameter Heads; Versys Epoch Composite Hip Prosthesis;
Zimmer Trabecular Metal Reverse Shoulder System;
Anatomical Shoulder Inverse/Reverse System; Zimmer MIS
Femoral Nailing Solutions; NCB Locking Plate System; and
CopiOs Bone Void Filler6.
Acquisitions
In April 2007, we acquired Endius Incorporated, a
privately held spinal products company for an aggregate value
of approximately $80 million in cash, before adjustments for
debt repayment and other items.
In November 2007, we acquired ORTHOsoft Inc., a leader
in computer navigation for orthopaedic surgery, in a cash
transaction for an aggregate value of approximately
$50 million.
Settlement of Department of Justice Investigation
On September 27, 2007, we and other major
U.S. Orthopaedic manufacturers reached a settlement with
the United States government to resolve all claims related to
an ongoing investigation into financial relationships between
the industry and consulting orthopaedic surgeons. As part of
the settlement, we entered into a Deferred Prosecution
Agreement with the United States Attorney’s Office for the
District of New Jersey. Under the provisions of the Deferred
Prosecution Agreement, we are subject to oversight by a
federal monitor selected by the U.S. Attorney for a period of
4 The Dynesys Dynamic Stabilization Spinal System is indicated for use as
an adjunct to fusion in the U.S.
5 PALACOS» is a trademark of Heraeus Kulzer GmbH
6 Manufactured by Kensey Nash Corporation
24
On January 1, 2007, we adopted FIN 48, which addresses
the determination of whether tax benefits claimed or
expected to be claimed on a tax return should be recorded in
the financial statements. Under FIN 48, the tax benefits from
an uncertain tax position may be recognized only if it is more
likely than not that the tax position will be sustained upon
examination by the taxing authorities, based on the technical
merits of the position. FIN 48 also provides guidance on
derecognition, classification, interest and penalties on income
taxes, accounting in interim periods and requires increased
disclosures.
Prior to the adoption of FIN 48, we had a long term tax
liability for expected settlement of various federal, state and
foreign income tax liabilities that was reflected net of the
corollary tax impacts of these expected settlements of
$102.1 million, as well as a separate accrued interest liability
of $1.7 million. As a result of the adoption of FIN 48, we are
required to present the different components of such liability
gross versus the historical net presentation. The adoption
resulted in the tax liability for unrecognized tax benefits
decreasing by $6.4 million as of January 1, 2007.
This decrease in the tax liability resulted in a reduction
to retained earnings of $4.8 million, a reduction in goodwill of
$61.4 million, the establishment of a tax receivable of
$58.2 million, and the addition of an interest/penalty payable
of $7.9 million, all as of January 1, 2007.
2008 Outlook
Our operating profit for 2008 will be affected by the costs
we will incur to implement a number of recently announced
initiatives that we believe will position us to respond better to
the changing needs of the healthcare market. Additionally,
during 2008 we expect to incur costs of approximately $6-
9 million per quarter to comply with the Deferred Prosecution
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Agreement. The infrastructure and operating initiatives we
plan to implement in 2008 include:
(cid:129) Continuing to enhance our Corporate Compliance
Program and to apply these enhancements to all business
segments;
(cid:129) Opening a new manufacturing facility in Ireland that will
add an additional 100,000 square feet of international
manufacturing capacity;
(cid:129) Improving our quality system infrastructure;
(cid:129) Investing in our global information technology systems,
including improving our field-based U.S. inventory and
instrument tracking systems;
(cid:129) Increasing instrument deployments to permit our sales
and distribution networks to respond more rapidly to
changes in surgical demand patterns and capitalize on
new business opportunities; and
(cid:129) Investing in our sales force, instrumentation and selling-
related activities in our spine, dental and trauma business
segments.
We estimate that these initiatives will add up to
approximately $100 million in operating expenses in 2008,
including the monitoring fees and expenses.
RESULTS OF OPERATIONS
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
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
Total
Year Ended December 31,
2007
2006
% Inc
Volume/
Mix
Foreign
Exchange
Price
$2,277.0
1,081.0
539.5
$2,076.5
931.1
487.8
$3,897.5
$3,495.4
10%
16
11
12
8%
8
9
9
1%
(1)
(1)
–
1%
9
3
3
“Foreign Exchange” as used in the tables in this report represents the effect of changes in foreign exchange rates on sales
growth.
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
Extremities
Dental
Total
Trauma
Spine
OSP and other
Total
Year Ended December 31,
2007
2006
% Inc
Volume/
Mix
Foreign
Exchange
Price
$1,636.9
1,298.9
104.0
221.0
$1,460.5
1,188.9
77.6
179.0
3,260.8
2,906.0
205.8
197.0
233.9
194.7
177.4
217.3
$3,897.5
$3,495.4
12%
9
34
23
12
6
11
8
12
9%
7
30
16
–%
(1)
1
4
9
2
9
5
9
–
1
1
1
–
3%
3
3
3
3
3
1
2
3
The NexGen Complete Knee Solution product line
including the Gender Solutions Knee Femoral Implants, the
NexGen LPS-Flex Knee, the NexGen CR-Flex Knee, the
NexGen Rotating Hinge Knee and the NexGen LCCK Revision
Knee led knee sales. In addition, the Zimmer
Unicompartmental High-Flex Knee and the Innex Total Knee
System exhibited strong growth.
Growth in porous stems, including the Zimmer M/L
Taper Stem, the CLS Spotorno Stem from the CLS Hip
System, and the Alloclassic Zweymu¨ ller Hip Stem led hip
stem sales, but were partially offset by weaker sales of
cemented and revision stems. Sales of bone cement improved
significantly, led by PALACOS Bone Cement. In total, bone
cement sales growth accounted for 1 percent of the 2007 hip
sales growth over prior year. Trabecular Metal Acetabular
Cups, Trabecular Metal Primary Hip Prosthesis, Durom
Acetabular Cups with Metasul LDH Large Diameter Heads,
and Longevity and Durasul Highly Crosslinked Polyethylene
Liners also had strong growth. We expect to face a near term
challenge in hip sales growth with the adoption of hip
25
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
resurfacing in the U.S. market. New products are expected to
contribute to sales growth in the near term but not entirely
offset the lack of a hip resurfacing product within our U.S. hip
portfolio.
The Bigliani/Flatow Complete Shoulder Solution and the
Coonrad/Morrey Total Elbow led extremities sales.
Orthobiologicals and prosthetic implants, including strong
growth of the Tapered Screw-Vent Implant System, led dental
sales. Zimmer Periarticular Locking Plates and Zimmer
Plates and Screws led trauma sales. The Dynesys Dynamic
Stabilization System, the TiTLE 2 lumbar pedicle screw
system, the Trinica Select Anterior Cerival Plate System and
Trabecular Metal Implants led spine sales. Extremity surgical
products led OSP sales.
The following table presents estimated* 2007 global
market size and market share information (dollars in billions):
Zimmer
Market
Position
Global Market
% Growth**
Zimmer
Market
Share
Global
Market
Size
Reconstructive
Knees
Hips
Extremities
Dental
Total
Trauma
Spine***
$ 5.8
5.0
0.5
2.8
$14.1
$ 3.7
$ 6.1
10% 28%
9
19
16
11
10
15
26
22
8
23
5
3
1
1
2
4
1
5
6
* Estimates based on competitor annual filings, Wall Street equity
research and our management
** Excludes the effect of changes in foreign exchange rates on sales
growth
*** Spine includes related orthobiologics
Americas Net Sales
The following table presents Americas net sales
(dollars in millions):
Reconstructive
Knees
Hips
Extremities
Dental
Total
Trauma
Spine
OSP and other
Total
Year Ended December 31,
2007
2006
% Inc
$1,031.5
629.9
73.9
118.9
$ 940.8
579.4
54.2
105.4
1,854.2
1,679.8
122.9
160.3
139.6
117.1
146.9
132.7
$2,277.0
$2,076.5
10%
9
36
13
10
5
9
5
10
The NexGen Complete Knee Solution product line,
including the Gender Solutions Knee Femoral Implants,
NexGen LPS-Flex Knee, NexGen Trabecular Metal Tibial
Components, the NexGen LCCK Revision Knee and the
NexGen CR-Flex Knee led knee sales. The Zimmer
Unicompartmental High-Flex Knee also made a strong
contribution.
Growth in porous stems, including growth of the Zimmer
M/L Taper Stem and Trabecular Metal Primary Hip Prosthesis
led hip stem sales, but were partially offset by weaker sales of
cemented stems. PALACOS Bone Cement, Trabecular Metal
26
Acetabular Cups and Durom Acetabular Cups with Metasul
LDH Large Diameter Heads also exhibited strong growth.
Bone cement sales growth accounted for 2 percent of the
2007 hip sales growth over prior year. As noted above, we
expect that the adoption of hip resurfacing in the U.S. market
will adversely affect our hip sales growth in the near term.
The Bigliani/Flatow Shoulder Solution and the
Trabecular Metal Humeral Stem led extremities sales. The
Tapered Screw-Vent Implant System led dental sales.
Zimmer Periarticular Plates and Zimmer Plates and Screws
led trauma sales, but were offset by declining sales of
intramedullary nails and compression hip screws. The
Dynesys Dynamic Stabilization System, the Trinica Select
Anterior Cervical Plate System and Spinal Trabecular Metal
Implants led spine sales. Extremity surgical products led OSP
sales.
Europe Net Sales
The following table presents Europe net sales (dollars in
millions):
Reconstructive
Knees
Hips
Extremities
Dental
Total
Trauma
Spine
OSP and other
Total
Year Ended December 31,
2007
2006
% Inc
$ 408.2
467.8
23.2
71.3
970.5
41.1
31.2
38.2
$352.2
417.8
17.9
47.2
835.1
38.2
24.8
33.0
$1,081.0
$931.1
16%
12
30
51
16
8
26
16
16
Changes in foreign exchange rates positively affected
knee sales by 9 percent and hip sales by 8 percent. Excluding
these foreign exchange rate effects, the following product
categories experienced positive sales growth in our Europe
region: the NexGen Complete Knee Solution product line,
including the NexGen LPS-Flex Knee, NexGen Trabecular
Metal Tibial Components, the NexGen CR-Flex Knee, and the
Innex Total Knee System. Growth in porous stems, including
the CLS Spotorno Stem, led hip stem sales. Longevity and
Durasul Highly Crosslinked Polyethylene Liners, the Durom
Hip Resurfacing System, Trabecular Metal Acetabular Cups
and the Allofit Hip Acetabular System also contributed to hip
sales.
The Anatomical Shoulder System, the Anatomical
Shoulder Inverse/Reverse System and the Coonrad/Morrey
Total Elbow led extremities sales. The addition of a direct
sales force in Italy as a result of a distributor acquisition
contributed to growth in dental sales and the Tapered Screw-
Vent Implant System led dental sales. The Cable-Ready»
Cable Grip System, Zimmer Periarticular Plates and the NCB
Plating System led trauma sales, which were offset by weaker
sales of our intramedullary fixation systems. The Dynesys
Dynamic Stabilization System and Trabecular Metal Implants
led spine sales. Wound management products led OSP sales.
Z I M M E R H O L D I N G S , I N C .
Asia Pacific Net Sales
The following table presents Asia Pacific net sales
(dollars in millions):
Reconstructive
Knees
Hips
Extremities
Dental
Total
Trauma
Spine
OSP and Other
Total
Year Ended December 31,
2007
2006
% Inc (Dec)
$197.2
201.2
6.9
30.8
436.1
41.8
5.5
56.1
$167.5
191.7
5.5
26.4
391.1
39.4
5.7
51.6
$539.5
$487.8
18%
5
27
17
12
6
(4)
8
11
Changes in foreign exchange rates positively affected
knee sales by 5 percent and positively affected hip sales by
2 percent. Reported decreases in average selling prices
negatively affected hip sales by 3 percent. The NexGen
Complete Knee Solution product line, including NexGen
Trabecular Metal Tibial Components, the NexGen CR-Flex
Knee and the NexGen LPS-Flex Knee led knee sales. Launch
of the Gender Solutions Knee Femoral Implant in Australia
also contributed to strong knee sales for the year. The
continued conversion to porous stems, including the Fiber
Metal Taper Stem from the VerSys Hip System, the
Alloclassic Zweymu¨ ller Hip System and the CLS Spotorno
Stem led hip stem sales. Sales of Longevity Highly
Crosslinked Polyethylene Liners and Trabecular Metal
Acetabular Cups also exhibited growth.
Extremities sales increased due to stronger sales of our
shoulder and elbow products. The Tapered Screw-Vent
Implant System led dental sales. Trauma sales were led by
strong growth in Zimmer Periarticular Plates and Zimmer
Plates and Screws, but were partially offset by a reported
5 percent decrease in average selling prices during 2007. A
registration issue with the ST360» Spinal Fixation System in
Japan resulted in a decrease in sales of this device,
contributing to the negative growth in Spine sales for 2007.
Powered surgical instruments led OSP sales.
Gross Profit
Gross profit as a percentage of net sales was 77.5 percent
in 2007, compared to 77.7 percent in 2006. The following
table reconciles the gross margin for 2006 to 2007:
Year ended December 31, 2006 gross margin
Foreign exchange impact, net
Other
Year ended December 31, 2007 gross margin
77.7%
(0.3)
0.1
77.5%
The unfavorable effect of year over year changes in
foreign currency hedge gains and losses were partially offset
by lower unit manufacturing costs due to productivity gains as
well as favorable geographic sales mix. These gains were
further offset by increased inventory charges due to the
impact of our newer products on aging product lines.
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Operating Expenses
Research and Development, or R&D, as a percentage of
net sales was 5.4 percent for 2007, which is unchanged from
2006. R&D increased to $209.6 million for 2007 from
$188.3 million in 2006, reflecting increased spending on new
product development across all of our product segments. In
2007, we continued to make investments in our research and
development facilities in Warsaw, Indiana. We continued
working with our third party partners on genetically
engineered tissues for regenerative therapies, including soft
tissue biological repair and replacement. New products, which
we define as those introduced into a market in the preceding
thirty-six months, accounted for approximately 25 percent of
net sales in 2007 compared with 24 percent in 2006. In the
fourth quarter of 2007, we announced FDA approval of the
Zimmer NexGen LPS-Flex Mobile Knee. Additionally, in the
second half of 2007, we launched several new products,
including the Gender Solutions Natural-Knee Flex System,
and the Zimmer M/L Taper Prosthesis with Kinectiv
Technology. We continue to target our R&D spending at the
high end of what we believe to be an industry average of 4-
6 percent.
Selling, general and administrative, or SG&A, as a
percentage of net sales was 38.2 percent for 2007, compared
to 38.8 percent in 2006. The improvement in SG&A as a
percent of net sales from the prior year is due to sales growth
and well controlled spending.
Settlement expense of $169.5 million for 2007 relates to
the settlement of the federal investigation into financial
relationships between major orthopaedic manufacturers and
consulting orthopaedic surgeons. Acquisition, integration and
other items for 2007 were $25.2 million compared to
$6.1 million in 2006. The acquisition, integration and other
expenses recorded during 2007 reflect in-process research
and development write-offs related to acquisitions, costs
related to the integration of acquired U.S. distributors,
estimated settlements for certain pre-acquisition product
liability claims, integration consulting fees and costs for
integrating information technology systems. The acquisition,
integration and other expenses recorded during 2006 included
$27.7 million of income related to three unrelated matters –
the sale of the former Centerpulse Austin land and facilities
for a gain of $5.1 million and the favorable settlement of two
pre-acquisition contingent liabilities.
Operating Profit, Income Taxes and Net Earnings
Operating profit for 2007 decreased 3 percent to
$1,127.6 million, from $1,165.2 million in 2006. The decrease
is due principally to the $169.5 million settlement expense.
Without the settlement expense, operating profit would have
been favorable to 2006 due to increased sales and controlled
operating expenses.
The effective tax rate on earnings before income taxes
and minority interest increased to 31.6 percent for 2007, up
from 28.6 percent in 2006. The increase in the effective tax
rate is primarily due to the effect of the $169.5 million
settlement expense in 2007 for which no tax benefit has been
27
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
recognized. Without the effect of the settlement expense, the
effective tax rate for 2007 would have been favorable to 2006
due to increased profitability in lower tax jurisdictions.
Net earnings decreased 7 percent to $773.2 million for 2007,
compared to $834.5 million in 2006. The decrease was due to
the $169.5 million settlement expense and the higher effective
tax rate that resulted from the settlement expense. Basic and
diluted earnings per share decreased 4 percent to $3.28 and
$3.26, respectively, from $3.43 and $3.40 in 2006 due to fewer
outstanding shares as a result of our stock repurchase program.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
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
Total
Year Ended December 31,
2006
2005
% Inc
Volume/
Mix
Foreign
Exchange
Price
$2,076.5
931.1
487.8
$1,941.8
874.8
469.5
$3,495.4
$3,286.1
7%
6
4
6
5%
7
9
7
2%
(1)
(2)
–
–%
–
(3)
(1)
Net Sales by Product Category
The following table presents net sales by product category and the components of the percentage changes (dollars in
Year Ended December 31,
2006
2005
% Inc (Dec)
Volume/
Mix
Foreign
Exchange
Price
$1,460.5
1,188.9
77.6
179.0
$1,366.2
1,140.6
66.1
148.1
2,906.0
2,721.0
194.7
177.4
217.3
179.8
160.4
224.9
$3,495.4
$3,286.1
7%
4
17
21
7
8
11
(4)
6
7%
5
13
16
7
7
10
(3)
7
–%
(1)
4
4
–
1
1
–
–
–%
–
–
1
–
–
–
(1)
(1)
experienced strong growth while sales of Compression Hip
Screws continued to decline. The Dynesys Dynamic
Stabilization System and Spinal Trabecular Metal Implants
led the growth in spine sales while sales of cages for
interbody fusion declined. As a result of the termination of
the OrthoPAT 7 distribution arrangement in February 2006,
sales for this device fell by over $25 million, accounting for
the decline in OSP product sales.
millions):
Reconstructive
Knees
Hips
Extremities
Dental
Total
Trauma
Spine
OSP and other
Total
The NexGen Complete Knee Solution product line
including the NexGen LPS-Flex Gender Knee, NexGen CR-
Flex Gender Knee, NexGen Trabecular Metal Tibial
Components and NexGen MIS Tibial Components, as well as
Prolong crosslinked polyethylene articular surface
components, led knee sales. In addition, strong growth in the
Zimmer Unicompartmental High Flex Knee and the Innex
Total Knee System was offset, in part, by declining sales of
the Natural-Knee II System.
Growth in porous stems, including the new Trabecular
Metal Primary Hip Prosthesis, Zimmer M/L Taper Stem, and
the CLS Spotorno Stem from the CLS Hip System led hip
sales. Trabecular Metal Acetabular Cups and Metasul LDH
experienced strong growth offset by declining sales of
Cemented Stems.
Orthobiologicals and prosthetic implants, including strong
growth of the Tapered Screw-Vent and Internal Hex Implant
Systems, led dental sales. Trabecular Metal Shoulder Stems
led extremities sales. Zimmer Periarticular Plates, the
Zimmer NCB Plating system, the Sirus IM Nail and I.T.S.T.
Intertrochanteric/Subtrochanteric Fixation System
7 Trademark of Haemonetics Corporation
28
Z I M M E R H O L D I N G S , I N C .
Americas Net Sales
The following table presents Americas net sales (dollars
in millions):
Reconstructive
Knees
Hips
Extremities
Dental
Total
Trauma
Spine
OSP and other
Total
Year Ended December 31,
2006
2005
% Inc (Dec)
$ 940.8
579.4
54.2
105.4
$ 880.5
538.1
46.2
88.8
1,679.8
1,553.6
117.1
146.9
132.7
107.5
132.7
148.0
$2,076.5
$1,941.8
7%
8
17
19
8
9
11
(10)
7
The period was characterized by balanced growth in hips
and knees augmented by strong growth in other product lines.
Growth in porous stems, including the new Trabecular Metal
Primary Hip Prosthesis and the Zimmer M/L Taper Stem, led
hip sales. Trabecular Metal Acetabular Cups, and Metasul
LDH experienced strong growth offset by declining sales of
Cemented Stems. The NexGen Complete Knee Solution
product line including the NexGen LPS-Flex Gender Knee,
NexGen CR-Flex Gender Knee, NexGen Trabecular Metal
Tibial Components and the NexGen MIS Stemmed Tibial Plate
as well as Prolong Highly Crosslinked Polyethylene articular
surface components led knee sales offset, in part, by declining
sales of the Natural-Knee II System.
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Innex Total Knee System led knee sales. Hip sales growth was
negatively affected by reduced selling prices in Germany, Italy,
Portugal and the United Kingdom. The CLS Spotorno Stem,
Longevity Highly Crosslinked Polyethylene Liners, Metasul
LDH and Trabecular Metal Acetabular Cups led hip sales.
Dental, extremities, trauma, spine and OSP again
experienced double digit percentage growth compared to the
prior year. Dental sales were led by the Tapered Screw-Vent
Implant System. The Anatomical Shoulder System led
extremities sales. Zimmer Periarticular Plates and the
Zimmer NCB Plating System led trauma sales. Trabecular
Metal Implants led spine sales. Strong sales of wound
management products contributed to the OSP sales
performance.
Asia Pacific Net Sales
The following table presents Asia Pacific net sales
(dollars in millions):
Reconstructive
Knees
Hips
Extremities
Dental
Total
Trauma
Spine
OSP and other
YearEndedDecember31,
2006
2005
% Inc (Dec)
$167.5
191.7
5.5
26.4
$158.7
192.2
6.2
19.2
391.1
376.3
39.4
5.7
51.6
39.2
5.3
48.7
$487.8
$469.5
6%
–
(13)
37
4
1
9
6
4
Dental, extremities and spine experienced double digit
Total
percentage growth compared to the prior year. The Tapered
Screw-Vent Implant System led dental sales. The Trabecular
Metal Shoulder Stems led extremities sales. The Dynesys
Dynamic Stabilization System and Spinal Trabecular Metal
Implants led spine sales while trauma sales returned to solid
growth behind Zimmer Periarticular Plates, the Zimmer NCB
Plating system, the Sirus IM Nail and I.T.S.T
Intertrochanteric/Subtrochanteric Fixation System.
Europe Net Sales
The following table presents Europe net sales (dollars in
millions):
Reconstructive
Knees
Hips
Extremities
Dental
Total
Trauma
Spine
OSP and other
Total
YearEndedDecember31,
2006
2005
% Inc
$352.2
417.8
17.9
47.2
$327.0
410.3
13.7
40.1
835.1
791.1
38.2
24.8
33.0
33.1
22.4
28.2
$931.1
$874.8
8%
2
31
18
6
15
11
12
6
Strong knee sales continued to drive growth in Europe.
Eight percent volume and mix growth was offset by a
2 percent drop in average selling prices for knees in Europe.
The NexGen Complete Knee Solution product line and the
A stronger U.S. dollar in the first half of the year resulted
in a negative 3 percent effect on sales for Asia Pacific,
including a 3 percent drop in knee sales and a negative
4 percent impact on hip sales. A reduction in reimbursement
prices for orthopaedic implants in Japan went into effect
April 1, 2006. Together with other price changes in this
segment this action led to a negative 2 percent effect on sales,
including negative 2 percent on knees and negative 4 percent
on hips. Volume and mix growth more than offset the negative
effects of price and currency in knees while netting out to
result in flat sales in hips. Strong knee sales drove growth in
Asia Pacific. The NexGen CR-Flex Knee and the NexGen
LPS-Flex Knee led knee sales. The continued conversion to
porous stems, including the VerSys Hip System and the CLS
Spotorno Stem led hip sales. Sales of Longevity Highly
Crosslinked Polyethylene Liners and Trabecular Metal
Acetabular Cups also exhibited strong growth.
Dental experienced double digit percentage growth
compared to the prior year. The Tapered Screw-Vent Implant
System and the Spline» Implant System led dental sales.
Extremity sales were impacted by lower sales of the Bigliani/
Flatow Shoulder Solution. Strong powered instrument sales
contributed to the OSP sales performance.
29
Z I M M E R H O L D I N G S , I N C .
Gross Profit
Gross profit as a percentage of net sales was 77.7 percent
in 2006, compared to 77.5 percent in 2005. The following
table reconciles the gross margin for 2005 to 2006:
Year ended December 31, 2005 gross margin
Increased selling prices
Share-based compensation
Other
Year ended December 31, 2006 gross margin
77.5%
0.1
(0.3)
0.4
77.7%
Higher average selling prices in our largest operating
segment offset by lower prices in Europe and Asia Pacific
contributed to the modest improvement in gross margin.
Other primary contributors to the improvement in gross profit
margin were the net favorable effect of year over year
changes in foreign currency hedge gains and losses and
manufacturing productivity gains offset by underlying
exposure gains and losses, increased inventory charges due to
the impact of our newer products on aging product lines and
increased royalty expenses as a percentage of sales due to a
higher mix of royalty bearing sales.
Operating Expenses
Research and Development, or R&D, as a percentage of
net sales was 5.4 percent for 2006, compared to 5.3 percent in
2005. R&D increased to $188.3 million for 2006 from
$175.5 million in 2005, reflecting increased spending on
projects focused on our redefined corporate strategies.
Selling, general and administrative, or SG&A, as a
percentage of net sales was 38.8 percent for 2006, compared
to 38.3 percent in 2005. Share-based compensation added
$55.9 million of expense for the year ended December 31,
2006, or an additional 1.6 percentage points when compared
with 2005 due to the adoption of SFAS 123(R) in 2006.
Absent share-based compensation, SG&A as a percentage of
net sales decreased. The decrease was primarily due to sales
growth, realized expense synergies and well controlled
spending.
Acquisition, integration and other items for 2006 were
$6.1 million compared to $56.6 million in 2005, and included
$27.7 million of income related to three unrelated matters –
the sale of the former Centerpulse Austin land and facilities
for a gain of $5.1 million and the favorable settlement of two
pre-acquisition contingent liabilities. A reduction in product
liability accounted for $4.9 million of income. Expense items
included a $13.4 million impairment charge for certain
Centerpulse tradename and trademark intangibles based
principally in our Europe operating segment, $8.8 million of
integration consulting expenses, $3.3 million of employee
severance and retention costs, $3.0 million of costs related to
integrating our information technology systems, $2.9 million of
in-process research and development, $2.5 million of
personnel expenses and travel for full-time integration team
members and $4.8 million of other expenses.
30
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Operating Profit, Income Taxes and Net Earnings
Operating profit for 2006 increased 10 percent to
$1,165.2 million, from $1,055.0 million in 2005. Increased
sales, improved gross profit margins, realized operating
expense synergies, controlled operating expenses and
decreased acquisition and integration expenses offset
$76.0 million of share-based compensation expense to drive
the increase in operating profit.
The effective tax rate on earnings before income taxes
and minority interest decreased to 28.6 percent for 2006,
down from 29.5 percent in 2005. The reasons for the lower
effective tax rate were the implementation of several
European restructuring initiatives, the successful negotiation
of a lower ongoing Swiss tax rate (from approximately
24 percent to 12.5 percent) and the continued expansion of
operations in lower tax jurisdictions, including Puerto Rico.
Net earnings increased 14 percent to $834.5 million for
2006, compared to $732.5 million in 2005. The increase was
due to higher operating profit, lower acquisition, integration
and other expenses, decreased interest expense due to a
lower average outstanding debt balance and a lower effective
tax rate, offset by $54.5 million of share-based compensation
expense, net of tax. Basic and diluted earnings per share
increased 16 percent to $3.43 and $3.40, respectively, from
$2.96 and $2.93 in 2005.
OPERATING PROFIT BY SEGMENT
Management evaluates operating segment performance
based upon segment operating profit exclusive of operating
expenses pertaining to global operations and corporate
expenses, share-based compensation expense, settlement
expense, acquisition, integration and other 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, and human resource functions, and U.S. and Puerto
Rico based manufacturing operations and logistics.
Intercompany transactions have been eliminated from
segment operating profit. For more information regarding our
segments, see Note 13 to the consolidated financial
statements included in Item 8 of this Form 10-K.
The following table sets forth the operating profit as a
percentage of sales by segment for 2007, 2006 and 2005:
Percent of net sales
Americas
Europe
Asia Pacific
Year Ended December 31,
2007
2006
2005
52.0% 52.7% 52.6%
41.4
40.0
47.5
48.2
36.3
45.2
Year Ended December 31, 2007
Compared to Year Ended December 31, 2006
In the Americas, operating profit as a percentage of net
sales decreased due to increased spending for advertising as
well as increased sales force related expenses due to the
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
expansion of our U.S. distributor network. These increases
were partially offset by improved gross margins.
Europe operating profit as a percentage of net sales
decreased primarily as a result of decreased gross margins
from the impact of losses from foreign currency hedges. The
decrease in gross margin was partially offset by controlled
spending.
Asia Pacific operating profit as a percentage of net sales
increased primarily due to improved gross margins. Gross
margins increased throughout many Asia Pacific markets,
including Japan, despite decreases in average selling prices in
Japan as a result of reductions in government controlled
reimbursement prices. The improvement in gross margins in
Asia Pacific is due to favorable product sales mix and lower
unit manufacturing costs.
Year Ended December 31, 2006
Compared to Year Ended December 31, 2005
In the Americas, operating profit as a percentage of sales
increased due to the effective control of operating expenses,
including realized expense synergies and controlled selling,
general and administrative spending.
European operating profit as a percentage of net sales
improved due to improved gross margin and the realization of
expense synergies related to the elimination of redundant
functions and controlled selling, general and administrative
spending.
Asia Pacific operating profit as a percentage of net sales
increased primarily due to product category mix, and
controlled selling, general and administrative spending.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were
$1,084.4 million in 2007 compared to $1,040.7 million in 2006.
The principal source of cash was net earnings of
$773.2 million. In 2007, cash provided from net earnings was
reduced by $169.5 million as a result of the settlement with
the Department of Justice. Non-cash charges included in net
earnings accounted for another $364.5 million of operating
cash. All other items of operating cash flows accounted for a
use of $53.3 million of cash pertaining principally to
investments in working capital in support of sales growth.
Also included in operating cash flows for 2007 is
approximately $23 million related to accrued but unpaid
amounts under various contractual arrangements with
healthcare professionals or institutions. Operating cash flows
were increased and cash flows used in financing activities
were decreased by $13.6 million when compared with
amounts furnished in the current report filed on Form 8-K
dated January 29, 2008.
We continue to focus on working capital management. At
December 31, 2007, we had 52 days of sales outstanding in
trade accounts receivable, a decrease of 3 days when
compared to December 31, 2006. The improvement was
achieved through improvement in all reporting segments. At
December 31, 2007, we had 258 days of inventory on hand,
favorable to December 31, 2006 by 19 days. This decrease
reflects higher cost of goods sold and strong underlying
demand in the fourth quarter of 2007. Our inventory levels
have improved from a third quarter high of 330 days as a
result of seasonal demand patterns.
Cash flows used in investing activities were $491.5 million
in 2007, compared to $287.0 million in 2006. The most
significant contributor to the increase in cash flows used in
investing activities were the payments related to the
acquisitions of Endius and ORTHOsoft as well as additions to
our global distributor network. Cash payments related to
acquisitions for 2007 was $160.3 million compared to
$34.9 million in 2006. Additions to instruments during 2007
were $138.5 million compared to $126.2 million in 2006.
Additions to instruments increased in 2007 compared to 2006
due to an increase in instrument deployments related to new
product launches. In 2008, we expect to spend approximately
$155 – $170 million on instruments to support new products,
sales growth and MIS Procedures. Additions to other property,
plant and equipment during 2007 were $192.7 million
compared to $142.1 million in 2006. Increases were related to
facility expansions in Warsaw, Indiana; Ponce, Puerto Rico;
and Winterthur, Switzerland; and investment in new
information technology systems. These facility expansions
improved working conditions and capabilities for our research
and development organization, responded to increased
demand and the transfer of production to our other
manufacturing sites. During 2008, we expect to purchase
approximately $315-$330 million in other property, plant and
equipment, under our planned infrastructure improvements
and international manufacturing expansion.
Cash flows used in financing activities were $399.5 million
for 2007, compared to $730.7 million in 2006. We repurchased
$576.3 million of our common stock in 2007 as compared with
$798.8 million in 2006 under our stock repurchase programs.
We utilized cash generated from operating activities and
$149.8 million in cash proceeds received from employee stock
compensation plans to fund the repurchases. We may use
excess cash to fund future purchases, if any, under our stock
repurchase programs.
We have a five year $1,350 million revolving, multi-
currency, senior unsecured credit facility maturing
November 30, 2012 (the “Senior Credit Facility”). We had
$104.3 million outstanding under the Senior Credit Facility at
December 31, 2007, and an availability of $1,245.7 million.
The $104.3 million is for use in Japan and carries a low
interest rate. The Senior Credit Facility contains provisions by
which we can increase the line to $1,750 million and request
that the maturity date be extended for two additional one-
year periods.
We and certain of our wholly owned foreign subsidiaries
are the borrowers under the Senior Credit Facility.
Borrowings under the Senior Credit Facility are used for
general corporate purposes and bear interest at a LIBOR-
based rate plus an applicable margin determined by reference
to our senior unsecured long-term credit rating and the
amounts drawn under the Senior Credit Facility, at an
alternate base rate, or at a fixed rate determined through a
competitive bid process. The Senior Credit Facility contains
31
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
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. 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 we fall below an investment grade credit
rating, additional restrictions would result, including
restrictions on investments, payment of dividends and stock
repurchases. We were in compliance with all covenants under
the Senior Credit Facility as of December 31, 2007.
Commitments under the Senior Credit Facility are subject to
certain fees, including a facility and a utilization fee. The
Senior Credit Facility is rated A- by Standard & Poor’s Ratings
Services and is not rated by Moody’s Investors’ Service, Inc.
We also have available uncommitted credit facilities
totaling $70.4 million.
Management believes that cash flows from operations,
together with available borrowings under the Senior Credit
Facility, are sufficient to meet our expected working capital,
capital expenditure and debt service needs. Should
investment opportunities arise, we believe that our earnings,
balance sheet and cash flows will allow us to obtain additional
capital, if necessary.
CONTRACTUAL OBLIGATIONS
We have entered into contracts with various third parties
in the normal course of business which will require future
payments. The following table illustrates our contractual
obligations (in millions):
Contractual Obligations
Total
2008
2009
and
2010
2011
and
2012
2013
and
Thereafter
Long-term debt
Operating leases
Purchase Obligations
Long-term income taxes
payable
Other long-term liabilities
$104.3
$
–
$
–
$104.3
$
–
134.3
24.6
35.4
23.2
137.0
191.4
–
–
50.0
1.4
57.7
47.3
28.6
20.3
–
–
53.9
17.1
25.4
127.0
Total contractual
obligations
$591.6
$58.6
$156.4
$203.9
$172.7
CRITICAL ACCOUNTING ESTIMATES
Our financial results 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 – We must
determine as of each balance sheet date how much, if any, of
our inventory may ultimately prove to be unsaleable or
unsaleable at our carrying cost. Similarly, we must also
determine if instruments on hand will be put to productive
use or remain undeployed as a result of excess supply.
Reserves are established to effectively adjust inventory and
instruments to net realizable value. To determine the
appropriate level of reserves, we evaluate current stock levels
32
in relation to historical and expected patterns of demand for
all of our products and instrument systems and components.
The basis for the determination is generally the same for all
inventory and instrument items and categories except for
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 (cid:2) We estimate income tax expense
and income tax liabilities and assets by taxable jurisdiction.
Realization of deferred tax assets in each taxable jurisdiction
is dependent on our ability to generate future taxable income
sufficient to realize the benefits. We evaluate deferred tax
assets on an ongoing basis and provide valuation allowances 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. We operate within
numerous taxing jurisdictions. We are subject to regulatory
review or audit in virtually all of those jurisdictions and those
reviews and audits may require extended periods of time to
resolve. We make use of all available information and make
reasoned judgments regarding matters requiring interpretation
in establishing tax expense, liabilities and reserves. We believe
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. We use an actuarial
model 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
equate to less than 5 percent of total liabilities and represent
management’s best estimate of the ultimate costs that we will
incur under the various contingencies.
Goodwill and Intangible Assets – We evaluate the
carrying value of goodwill and indefinite life intangible assets
annually, or whenever events or circumstances indicate the
carrying value may not be recoverable. We evaluate 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. As
such, these fair valuation measurements use significant
unobservable inputs as defined under Statement of Financial
Accounting Standards No. 157, Fair Value Measurements.
Changes to these assumptions could require us to record
impairment charges on these assets.
Share-based Payment – We account for share-based
payment expense in accordance with the fair value
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
recognition provisions of SFAS 123(R). Under the fair value
recognition provisions of SFAS 123(R), share-based payment
expense is measured at the grant date based on the fair value
of the award and is recognized over the requisite service
period. Determining the fair value of share-based awards at
the grant date requires judgment, including estimating the
expected life of stock options and the expected volatility of
our stock. Additionally, we must estimate the amount of
share-based awards that are expected to be forfeited. We
estimate expected volatility based upon the implied volatility
of our actively traded options. The expected life of stock
options and estimated forfeitures are based upon our
employees’ historical exercise and forfeiture behaviors. The
assumptions used in determining the grant date fair value and
the expected forfeitures represent management’s best
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
Information about recent accounting pronouncements is
included in Note 2 to the Consolidated Financial Statements,
which are included in this report under Item 8.
33
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
We are exposed to certain market risks as part of our
ongoing business operations, including risks from changes in
foreign currency exchange rates, interest rates and
commodity prices that could affect our financial condition,
results of operations and cash flows. We manage our exposure
to these and other market risks through regular operating and
financing activities, and through the use of derivative financial
instruments. We use derivative financial instruments solely as
risk management tools and not for speculative investment
purposes.
FOREIGN CURRENCY EXCHANGE RISK
We operate on a global basis and are exposed to the risk
that our financial condition, results of operations and cash
flows could be adversely affected by changes in foreign
currency exchange rates. We are primarily exposed to foreign
currency exchange rate risk with respect to transactions and
net assets denominated in Euros, Swiss Francs, Japanese Yen,
British Pounds, Canadian Dollars, Australian Dollars and
Korean Won. We manage the foreign currency exposure
centrally, on a combined basis, which allows us to net
exposures and to take advantage of any natural offsets. To
reduce the uncertainty of foreign exchange rate movements
on transactions denominated in foreign currencies, we enter
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.
For contracts outstanding at December 31, 2007, we had
obligations to purchase U.S. Dollars and sell Euros, Japanese
Yen, British Pounds, Canadian Dollars, Australian Dollars and
Korean Won or purchase Swiss Francs and sell U.S. Dollars at
set maturity dates ranging from January 2008 through May
2010. The notional amounts of outstanding forward contracts
entered into with third parties to purchase U.S. Dollars at
December 31, 2007 and 2006, were $1,244.6 million and
$1,169.3 million, respectively. The notional amounts of
outstanding forward contracts entered into with third parties
to purchase Swiss Francs at December 31, 2007 and 2006
were $138.4 million and $205.0 million, respectively. The
weighted average contract rates outstanding are Euro:USD
1.34, USD:Swiss Franc 1.19, USD:Japanese Yen 109, British
Pound:USD 1.92, USD:Canadian Dollar 1.09, Australian
Dollar:USD 0.78 and USD:Korean Won 929.
We maintain written policies and procedures governing
our risk management activities. Our policy requires that
critical terms of hedging instruments are the same as hedged
forecasted transactions. On this basis, with respect to cash
34
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 our
risk management program, we also perform sensitivity
analyses to assess potential changes in revenue, operating
results, cash flows and financial position relating to
hypothetical movements in currency exchange rates. A
sensitivity analysis of changes in the fair value of foreign
exchange forward contracts outstanding at December 31,
2007, 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, Australian
Dollar and Korean Won, with no change in the interest
differentials, the fair value of those contracts would increase
or decrease earnings before income taxes in periods through
2010, depending on the direction of the change, by an average
approximate amount of $78.4 million, $13.1 million,
$20.4 million, $14.6 million, $5.3 million, $6.5 million and
$2.0 million for the Euro, Swiss Franc, Japanese Yen, British
Pound, Canadian Dollar, Australian Dollar and Korean Won
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 us to material
risk due to exchange rate movements because gains and
losses on these contracts offset gains and losses on the assets,
liabilities, and transactions being hedged.
We had net investment exposures to net foreign currency
denominated assets and liabilities of approximately
$1,869.1 million at December 31, 2007, primarily in Swiss
Francs, Japanese Yen and Euros. Approximately $1,178 million
of the net asset exposure at December 31, 2007 relates to
goodwill recorded in the Europe and Asia Pacific geographic
segments.
We enter 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
We purchase raw material commodities such as cobalt
chrome, titanium, tantalum, polymer and sterile packaging.
We enter into supply contracts generally with terms of 12 to
24 months, where available, on these commodities to alleviate
the effect of market fluctuation in prices. As part of our risk
management program, we perform sensitivity analyses related
to potential commodity price changes. A 10 percent price
change across all these commodities would not have a
material effect on our consolidated financial position, results
of operations or cash flows.
Z I M M E R H O L D I N G S , I N C .
INTEREST RATE RISK
In the normal course of business, we are exposed to
market risk from changes in interest rates that could affect
our results of operations and financial condition. We manage
our exposure to interest rate risks through our regular
operations and financing activities.
Presently, we invest our cash and equivalents primarily in
U.S. government treasury funds and bank deposits. The
primary investment objective is to ensure capital preservation
of our invested principal funds by limiting default and market
risk. Currently, we do not use derivative financial instruments
in our investment portfolio.
Our principal exposure to interest rate risk arises from
the variable rates associated with our credit facilities. We are
subject to interest rate risk through movements in interest
rates on the committed Senior Credit Facility and our
uncommitted credit facilities. Presently, all of our debt
outstanding bears interest at short-term rates. We currently
do not hedge our interest rate exposure, but may do so in the
future. Based upon our overall interest rate exposure as of
December 31, 2007, a change of 10 percent in interest rates,
assuming the amount outstanding remains constant, would
not have a material effect on interest expense. 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 us to
concentrations of credit risk, are primarily cash, cash
equivalents, counterparty transactions, and accounts
receivable.
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
We place our investments in highly rated financial
institutions and money market instruments, and limit the
amount of credit exposure to any one entity. We believe we
do not have any significant credit risk on our cash and
equivalents and investments.
We are exposed to credit loss if the financial institutions
with which we conduct business fail to perform. However, this
loss is limited to the amounts, if any, by which the obligations
of the counterparty to the financial instrument contract
exceed our obligation. We also minimize exposure to credit
risk by dealing with a diversified group of major financial
institutions. We manage credit risk by monitoring the financial
condition of our counterparties using standard credit
guidelines. We do 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
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 our 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
healthcare systems. Exposure to credit risk is controlled
through credit approvals, credit limits and monitoring
procedures and we believe that reserves for losses are
adequate. There is no significant net exposure due to any
individual customer or other major concentration of credit
risk.
35
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
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:
(cid:129) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the company;
(cid:129) 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
(cid:129) 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, 2007. 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 that assessment, management has concluded that, as of December 31, 2007, the company’s internal control over
financial reporting is effective based on those criteria.
The company’s independent registered public accounting firm has audited the effectiveness of the company’s internal control
over financial reporting as of December 31, 2007, as stated in their report which appears in Item 8 of this Annual Report on
Form 10-K.
36
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
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, 2007, 2006 and 2005
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
Page
38
39
40
41
42
43
44
37
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Zimmer Holdings, Inc.:
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, 2007 and 2006, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 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. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule,
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s
internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements
included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 11 to the consolidated financial statements, the Company changed the manner in which it accounts for
uncertain tax positions in 2007. As discussed in Notes 3 and 10, respectively, to the consolidated financial statements, the
Company changed the manner in which it accounts for share-based compensation in 2006 and defined benefit pension and other
postretirement plans effective December 31, 2006.
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.
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, Illinois
February 29, 2008
38
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
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
Settlement (Note 15)
Acquisition, integration and other
Operating expenses
Operating Profit
Interest income (expense)
Earnings before income taxes and minority interest
Provision for income taxes
Minority interest
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.
(in millions, except per share amounts)
2007
2006
2005
$3,897.5
875.9
$3,495.4
780.1
$3,286.1
739.4
3,021.6
2,715.3
2,546.7
209.6
1,489.7
169.5
25.2
188.3
1,355.7
–
6.1
175.5
1,259.6
–
56.6
1,894.0
1,550.1
1,491.7
1,127.6
4.0
1,131.6
357.9
(0.5)
1,165.2
3.8
1,169.0
334.0
(0.5)
1,055.0
(14.3)
1,040.7
307.3
(0.9)
$ 773.2
$ 834.5
$ 732.5
$
$
3.28
3.26
$
$
3.43
3.40
$
$
2.96
2.93
235.5
237.5
243.0
245.4
247.1
249.8
39
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
(in millions)
2007
2006
$ 463.9
2.5
674.3
727.8
59.4
154.8
2,082.7
971.9
2,621.4
743.8
213.9
$ 265.7
2.4
625.5
638.3
55.1
159.2
1,746.2
807.1
2,515.6
712.6
192.9
$6,633.7
$5,974.4
$ 174.1
85.1
489.4
748.6
328.4
104.3
$ 158.0
106.5
363.7
628.2
323.4
99.6
1,181.3
1,051.2
2.8
2.7
2.5
2,999.1
3,536.9
290.3
(1,379.2)
2.5
2,743.2
2,768.5
209.2
(802.9)
5,449.6
4,920.5
$6,633.7
$5,974.4
Z I M M E R H O L D I N G S , I N C .
Consolidated Balance Sheets
December 31,
ASSETS
Current Assets:
Cash and equivalents
Restricted cash
Accounts receivable, less allowance for doubtful accounts
Inventories, net
Prepaid expenses and other current assets
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
Other current liabilities
Total Current Liabilities
Other long-term liabilities
Long-term debt
Total Liabilities
Commitments and Contingencies (Note 15)
Minority Interest
Stockholders’ Equity:
Common stock, $0.01 par value, one billion shares authorized,
252.2 million (248.9 million in 2006) issued
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, 19.3 million shares (12.1 million shares in 2006)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements.
40
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Consolidated Statements of Stockholders’ Equity
Balance January 1, 2005
Net earnings
Other comprehensive loss
Stock compensation plans, including tax
benefits
Share repurchases
Other
Balance December 31, 2005
Net earnings
Other comprehensive income
Impact of adoption of FAS 158
Stock compensation plans, including tax
benefits
Share repurchases
Other
Balance December 31, 2006
Net earnings
Other comprehensive income
Impact of adoption of FIN 48
Stock compensation plans, including tax
benefits
Share repurchases
Other
Accumulated
Other
Comprehensive
Income
Treasury Shares
Number
Amount
(in millions)
Total
Stockholders’
Equity
$ 253.3
–
(104.0)
$
–
–
–
–
–
–
$3,942.5
732.5
(104.0)
Paid-in
Capital
$2,485.2
–
–
Retained
Earnings
$1,201.5
732.5
–
111.0
–
4.9
2,601.1
–
–
–
137.9
–
4.2
2,743.2
–
–
–
254.3
–
1.6
–
–
–
1,934.0
834.5
–
–
–
–
–
2,768.5
773.2
–
(4.8)
–
–
–
–
–
–
149.3
–
95.3
(35.4)
–
–
–
209.2
–
81.1
–
–
–
–
–
(0.1)
–
(0.1)
–
–
–
–
(12.0)
–
(12.1)
–
–
–
–
(7.2)
–
–
(4.1)
–
(4.1)
–
–
–
–
(798.8)
–
(802.9)
–
–
–
–
(576.3)
–
111.0
(4.1)
4.9
4,682.8
834.5
95.3
(35.4)
137.9
(798.8)
4.2
4,920.5
773.2
81.1
(4.8)
254.3
(576.3)
1.6
Common Shares
Number
Amount
245.5
–
–
2.3
–
–
247.8
–
–
–
1.1
–
–
248.9
–
–
–
3.3
–
–
$2.5
–
–
–
–
–
2.5
–
–
–
–
–
–
2.5
–
–
–
–
–
–
Balance December 31, 2007
252.2
$2.5
$2,999.1
$3,536.9
$ 290.3
(19.3)
$(1,379.2)
$5,449.6
The accompanying notes are an integral part of these consolidated financial statements.
41
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
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
Share-based compensation
Inventory step-up
Deferred income tax provision
Income tax benefit from stock option exercises
Excess income tax benefit from stock option exercises
Changes in operating assets and liabilities, net of
acquired assets and liabilities
Income taxes payable
Receivables
Inventories
Accounts payable and accrued liabilities
Other assets and liabilities
(in millions)
2007
2006
2005
$ 773.2
$ 834.5
$ 732.5
230.0
70.1
0.5
63.9
40.8
(27.0)
6.1
(12.5)
(58.0)
61.9
(64.6)
197.4
76.0
–
43.8
11.6
(8.0)
24.9
(76.9)
(39.2)
(29.9)
6.5
185.7
–
5.0
53.8
34.3
–
31.2
(35.3)
(79.2)
(40.1)
(9.7)
Net cash provided by operating activities
1,084.4
1,040.7
878.2
Cash flows provided by (used in) investing activities:
Additions to instruments
Additions to other property, plant and equipment
Proceeds from sale of property, plant and equipment
Acquisitions, net of acquired cash
Net cash used in investing activities
Cash flows provided by (used in) financing activities:
Net proceeds (payments) on lines of credit
Payments on term loans
Proceeds from employee stock compensation plans
Excess income tax benefit from stock option exercises
Debt issuance costs
Repurchase of common stock
Net cash used in financing activities
Effect of exchange rates on cash and equivalents
Increase 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.
(138.5)
(192.7)
–
(160.3)
(126.2)
(142.1)
16.2
(34.9)
(150.0)
(105.3)
–
(55.8)
(491.5)
(287.0)
(311.1)
–
–
149.8
27.0
–
(576.3)
18.8
–
41.3
8.0
–
(798.8)
(5.3)
(550.0)
76.7
–
(1.9)
(4.1)
(399.5)
(730.7)
(484.6)
4.8
198.2
265.7
9.5
32.5
233.2
(3.9)
78.6
154.6
$ 463.9
$ 265.7
$ 233.2
42
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
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 gains/(losses), net of tax effects of
$11.5 in 2007, $7.6 in 2006 and $(17.8) in 2005
Reclassification adjustments on foreign currency hedges, net of tax effects of
$(1.3) in 2007, $(1.8) in 2006 and $(12.7) in 2005
Unrealized gains/(losses) on securities, net of tax effects of $0.9 in 2007,
$0.9 in 2006 and $0.9 in 2005
Prior service cost and unrecognized (gain)/loss in actuarial assumptions,
net of tax effects of $(0.4) in 2007
Minimum pension liability adjustment, net of tax effects of $(0.6) in 2006
Other comprehensive income (loss)
Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements.
(in millions)
2007
2006
2005
$773.2
$834.5
$ 732.5
101.1
143.8
(201.3)
(49.8)
(56.7)
71.2
27.0
8.7
27.6
(1.4)
(1.4)
(1.5)
4.2
–
–
0.9
–
–
81.1
95.3
(104.0)
$854.3
$929.8
$ 628.5
43
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements
1.
BUSINESS
We design, develop, manufacture and market
reconstructive orthopaedic implants, including joint and
dental, spinal implants, trauma products and related
orthopaedic surgical products. We also provide other
healthcare related services. 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. Our related
orthopaedic surgical products include surgical supplies and
instruments designed to aid in orthopaedic surgical
procedures and post-operation rehabilitation. We have
operations in more than 25 countries and market our products
in more than 100 countries. We operate in a single industry
but have three reportable geographic segments, the Americas,
Europe and Asia Pacific.
The words “we”, “us”, “our” and similar words refer to
Zimmer Holdings, Inc. and its subsidiaries. Zimmer Holdings
refers to the parent company only.
2.
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation – The consolidated financial
statements include the accounts of Zimmer Holdings and its
subsidiaries in which it holds a controlling equity position.
Investments in companies in which we exercise significant
influence over the operating and financial affairs, but do not
control, are accounted for under the equity method. Under
the equity method, we record the investment at cost and
adjust the carrying amount of the investment by our
proportionate share of the investee’s net earnings or losses.
All significant intercompany accounts and transactions are
eliminated. Certain amounts in the 2006 consolidated financial
statements have been reclassified to conform to the 2007
presentation.
Use of Estimates – The consolidated financial statements
are prepared in conformity with accounting principles
generally accepted in the United States and 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 our 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. When a
transaction is denominated in a currency other than the
subsidiary’s functional currency, we recognize a transaction
gain or loss when the transaction is settled. Foreign currency
44
transaction gains and losses included in net earnings for the
years ended December 31, 2007, 2006 and 2005 were not
significant.
Revenue Recognition – We sell product through three
principal channels: 1) direct to healthcare institutions,
referred to as direct channel accounts, 2) through stocking
distributors and healthcare dealers and 3) directly to dental
practices and dental laboratories. The direct channel accounts
represent approximately 80 percent of our net sales. 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 we retain title
and maintain the inventory on our balance sheet. Upon
implantation, we issue 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
healthcare institutions within a specified group. At negotiated
thresholds within a contract buying period, price discounts
may increase. Revenue is recognized on sales to stocking
distributors, healthcare dealers, dental practices and dental
laboratories, which account for approximately 20 percent of
our net sales, when title to product passes to them, generally
upon shipment. Product is generally sold to distributors at
fixed prices for specified periods. A distributor may return
product in the event that we terminate the relationship.
Under those circumstances, we record an estimated sales
return in the period in which constructive notice of
termination is given to a distributor. Product returns were not
significant for the years ended December 31, 2007, 2006 and
2005.
The reserves for doubtful accounts were $21.7 million
and $20.4 million as of December 31, 2007 and 2006,
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 and were $104.1 million,
$95.5 million and $91.6 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
Acquisition, Integration and Other – We recognize
incremental expenses resulting directly from our business
combinations and significant nonrecurring items as
“Acquisition, integration and other” expenses. Acquisition,
integration and other expenses for the years ended
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2006 and 2005, included (in millions):
Software Costs – We capitalize certain computer software
(Gain)/loss on disposition or impairment of
acquired assets and obligations
$(1.2)
$(19.2)
$ 3.2
2007
2006
2005
Consulting and professional fees
Employee severance and retention
Information technology integration
In-process research & development
Integration personnel
Facility and employee relocation
Distributor acquisitions
Sales agent and lease contract
terminations
Other
1.0
1.6
2.6
6.5
–
–
4.1
5.4
5.2
8.8
3.3
3.0
2.9
2.5
1.0
–
0.2
3.6
5.6
13.3
6.9
–
3.1
6.2
–
12.7
5.6
Acquisition, integration and other
$25.2
$ 6.1
$56.6
In-process research and development charges for 2007
are related to the acquisitions of Endius and ORTHOsoft.
Included in the gain/loss on disposition or impairment of
acquired assets and obligations for 2006 is the sale of the
former Centerpulse Austin land and facilities for a gain of
$5.1 million and the favorable settlement of two pre-
acquisition contingent liabilities. These gains were offset by a
$13.4 million impairment charge for certain Centerpulse
tradename and trademark intangibles based principally in our
Europe operating segment.
Cash and Equivalents – We consider 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. Restricted cash is
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 using the straight-line method
based on 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,” we review
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.
and software development costs incurred in connection with
developing or obtaining computer software for internal use
when both the preliminary project stage is completed and it is
probable that the software will be used as intended.
Capitalized software costs generally include external direct
costs of materials and services utilized in developing or
obtaining computer software and compensation and related
benefits for employees who are directly associated with the
software project. Capitalized software costs are included in
property, plant and equipment on our balance sheet and
amortized on a straight-line basis when placed into service
over the estimated useful lives of the software, which
approximate three to seven years.
Instruments – Instruments are hand held devices 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.
Undeployed instruments are carried at cost, net of allowances
for excess and obsolete instruments. 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. We review instruments for impairment in
accordance with SFAS No. 144. Depreciation of instruments is
recognized as selling, general and administrative expense.
Goodwill – We account for goodwill in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets”.
Goodwill is not amortized but is subject to annual impairment
tests. Goodwill has been assigned to reporting units, which
are consistent with our operating segments. We perform
annual impairment tests by comparing each reporting unit’s
fair value to its carrying amount to determine if there is
potential impairment. We perform this test in the fourth
quarter of the year. 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 market
multiples.
Intangible Assets – We account for intangible assets in
accordance with SFAS No. 142. Intangible assets are initially
measured at their fair value. We have determined the fair
value of our intangible assets either by the fair value of the
consideration exchanged for the intangible asset, or the
estimated after-tax discounted cash flows expected to be
generated from the intangible asset. 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,
45
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
customer related intangibles and patents and licenses are
amortized on a straight-line basis over their estimated useful
life, ranging from three to forty 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.
The useful lives of intangible assets range from 3 to
40 years. In determining the useful lives of intangible assets,
we consider 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, we consider the expected 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, we assign useful lives based upon historical levels of
customer attrition.
Research and Development – We expense 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 – We account for income taxes in
accordance with SFAS No. 109, “Accounting for Income
Taxes” and related interperations, including FIN 48. 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 – We account 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
46
reported as assets or liabilities on the balance sheet and
measured at fair value. We maintain 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 by our policy. We are exposed to market risk due
to changes in currency exchange rates. As a result, we utilize
foreign exchange forward contracts to offset the effect of
exchange rate fluctuations on anticipated foreign currency
transactions, generally intercompany sales and purchases
expected to occur within the next twelve to thirty months.
Derivative instruments that qualify as cash flow hedges are
designated as such from inception. We maintain formal
documentation regarding our 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. Our policy requires
that critical terms of a hedging instrument are effectively 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. We, therefore, perform quarterly
assessments of hedge effectiveness by verifying and
documenting those critical terms of the hedge instrument and
that forecasted transactions have not changed. We also assess
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, 2007, 2006 and 2005, due to
ineffectiveness and amounts excluded from the assessment of
hedge effectiveness, was not significant.
For contracts outstanding at December 31, 2007, we have
an obligation to purchase U.S. Dollars and sell Euros,
Japanese Yen, British Pounds, Canadian Dollars, Australian
Dollars and Korean Won and purchase Swiss Francs and sell
U.S. Dollars at set maturity dates ranging from January 2008
through May 2010. The notional amounts of outstanding
forward contracts entered into with third parties to purchase
U.S. Dollars at December 31, 2007 were $1,244.6 million. The
notional amounts of outstanding forward contracts entered
into with third parties to purchase Swiss Francs at
December 31, 2007, were $138.4 million. The fair value of
outstanding derivative instruments recorded on the balance
sheet at December 31, 2007, together with settled derivatives
where the hedged item has not yet affected earnings, was a
net unrealized loss of $55.8 million, or $45.4 million net of
taxes, which is deferred in other comprehensive income, of
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
which, $44.9 million, or $38.2 million, net of taxes, is
expected to be reclassified to earnings over the next twelve
months.
We also enter 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.
Other 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. Other comprehensive income is
comprised of foreign currency translation adjustments,
unrealized foreign currency hedge gains and losses, unrealized
gains and losses on available-for-sale securities and
amortization of prior service costs and unrecognized gains and
losses in actuarial assumptions.
The components of accumulated other comprehensive income are as follows (in millions):
Foreign currency translation
Foreign currency hedges
Unrealized gains (losses) on securities
Unrecognized prior service cost and unrecognized (gain) / loss in actuarial assumptions
Accumulated other comprehensive income
Balance at
December 31,
2006
Other
Comprehensive
Income (Loss)
Balance at
December 31,
2007
$267.7
$101.1
$368.8
(22.6)
(0.5)
(35.4)
(22.8)
(1.4)
4.2
(45.4)
(1.9)
(31.2)
$209.2
$ 81.1
$290.3
Treasury Stock – We account for repurchases of common
stock under the cost method and present treasury stock as a
reduction of shareholders equity. We may reissue common
stock held in treasury only for limited purposes.
Accounting Pronouncements – In June 2006, the FASB
issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an interpretation of FAS 109, Accounting for
Income Taxes” (FIN 48), to create a single model to address
accounting for uncertainty in tax positions. See our income
tax disclosures in Note 11 for more information regarding the
adoption of FIN 48.
In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106 and 132(R).” This Statement
requires recognition of the funded status of a benefit plan in
the statement of financial position. SFAS No. 158 also requires
recognition in other comprehensive income of certain gains
and losses that arise during the period but are deferred under
pension accounting rules, as well as modifies the timing of
reporting and adds certain disclosures. The Statement
provides recognition and disclosure elements to be effective
as of the end of the fiscal year after December 15, 2006 and
measurement elements to be effective for fiscal years ending
after December 15, 2008. We adopted SFAS No. 158 on
December 31, 2006. See our pension and other postretirement
disclosures in Note 10.
In December 2004, the FASB issued SFAS No. 123(R),
“Share-Based Payment”, which is a revision to SFAS No. 123.
SFAS 123(R) requires all share-based payments to employees,
including stock options, to be expensed based on their fair
values. We adopted SFAS 123(R) on January 1, 2006 using the
modified prospective method and did not restate prior
periods.
In September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements”, which defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. This Statement does not require any new fair
value measurements, but provides guidance on how to
measure fair value by providing a fair value hierarchy used to
classify the source of the information. SFAS No. 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within
those fiscal years. In February 2008, the FASB issued FASB
Staff Position (FSP) No. SFAS 157-2, which delays the
effective date of certain provisions of SFAS No. 157 relating to
non-financial assets and liabilities measured at fair value on a
non-recurring basis until fiscal years beginning after
November 15, 2008. The adoption of SFAS No. 157 is not
expected to have a material impact on our consolidated
financial statements or results of operations.
In February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial
Liabilities – Including an amendment of FASB Statement
No. 115” (SFAS No. 159). SFAS No. 159 creates a “fair value
option” under which an entity may elect to record certain
financial assets or liabilities at fair value upon their initial
recognition. Subsequent changes in fair value would be
recognized in earnings as those changes occur. The election of
the fair value option would be made on a contract-by-contract
basis and would need to be supported by concurrent
documentation or a preexisting documented policy.
SFAS No. 159 requires an entity to separately disclose the fair
47
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
value of these items on the balance sheet or in the footnotes
to the financial statements and to provide information that
would allow the financial statement user to understand the
impact on earnings from the changes in the fair value.
SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. We do not expect the adoption of
SFAS No. 159 will have a material impact on our financial
position or results of operations.
In December 2007, the FASB issued SFAS No. 141(R),
“Business Combinations”, which is a revision of SFAS 141.
SFAS 141(R) will change the way in which we account for
business combinations. The Statement introduces new
purchase accounting concepts, expands the use of fair value
accounting related to business combinations and changes the
subsequent period accounting for certain acquired assets and
liabilities, among other things. SFAS No. 141(R) will be
applied prospectively on business combinations with
acquisition dates in fiscal years beginning on or after
December 15, 2008, and therefore this statement will not
affect our financial statements for business combinations that
preceded the effective date. For deferred tax assets and
income tax reserves recorded as part of business
combinations, these assets will be accounted for under
SFAS 109 and FIN 48 after the effective date regardless of the
acquisition date. Therefore, if a remeasurement of those
assets and liabilities is warranted after the effective date of
this statement, it may affect our income tax expense in the
period in which the remeasurement occurs.
In December 2007, the FASB also issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51”. SFAS No. 160 will
change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS No. 160 requires
retroactive adoption of the presentation and disclosure
requirements for existing minority interests. SFAS No. 160 is
effective for fiscal years beginning on or after December 15,
2008 and interim periods within those fiscal years. We do not
expect that the adoption of SFAS No. 160 will have a material
impact on our consolidated financial statements or results of
operations.
3.
SHARE-BASED COMPENSATION
Our share-based payments primarily consist of stock
options, restricted stock, restricted stock units (RSUs),
performance shares and an employee stock purchase plan. We
did not grant any RSUs or performance shares until 2006.
Prior to January 1, 2006, we accounted for share-based
payments under APB Opinion No. 25, “Accounting for Stock
Issued to Employees,” and related Interpretations (“APB 25”).
Under APB 25, share-based payment expense was not
significant because the exercise price of the stock options
generally equaled the market price of the underlying stock on
the measurement date of the stock options and we had
48
awarded few shares of restricted stock and no RSUs or
performance shares. No share-based payment expense was
reflected in net income for the employee stock purchase plan
under the provisions of APB 25, as the employee purchase
price discount met the acceptable thresholds under
Section 423 of the Internal Revenue Code.
We have elected the modified prospective method for
adopting SFAS 123(R). Under the modified prospective
method, the provisions of SFAS 123(R) apply to all share-
based payments granted or modified after the date of
adoption. For share-based payments granted prior to the date
of the adoption, the unrecognized expense related to the
unvested portion at the date of adoption will be recognized in
net earnings under the grant date fair value provisions used
for our pro forma disclosures under SFAS 123. For the year
ended December 31, 2007, share-based payment expense was
$70.1 million or $48.1 million net of the related tax benefits.
For the year ended December 31, 2006, share-based payment
expense was $76.0 million or $54.5 million net of the related
tax benefits. Share-based payment expense for the year ended
December 31, 2005 under APB 25 was not significant. The
following is the pro forma expense disclosure under SFAS 123
for the year ended December 31, 2005 (in millions, except per
share amounts):
Net earnings, as reported
Deduct: Total share-based payment expense determined
under SFAS 123 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
2005
$732.5
(46.1)
$686.4
$ 2.96
2.78
2.93
2.75
Prior to adopting SFAS 123(R), we classified all tax
benefits of deductions resulting from the exercise of non-
qualified stock options as operating cash flows. SFAS 123(R)
requires the cash flows resulting from excess tax benefits
(i.e., tax deductions realized for stock options exercised in
excess of the tax benefit recognized on the related share-
based payment expense) to be classified as financing cash
flows.
Stock Options
We had three equity compensation plans in effect at
December 31, 2007: the 2006 Stock Incentive Plan (the “2006
Plan”), the TeamShare Stock Option Plan and the Stock Plan
for Non-Employee Directors. The 2006 Plan replaced the 2001
Stock Incentive Plan (the “2001 Plan”), which by its terms
expired in August 2006. Following stockholder approval of the
2006 Plan in May 2006, no further awards were granted under
the 2001 Plan. However, vested and unvested stock options
previously granted under the 2001 Plan remained outstanding
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
as of December 31, 2007. We have reserved the maximum
number of shares of common stock available for award under
the terms of each of these plans and have registered
52.9 million shares of common stock. The 2006 Plan provides
for the grant of nonqualified stock options and incentive stock
options, long-term performance awards in the form of
performance shares or units, restricted stock, restricted stock
units and stock appreciation rights. The Compensation and
Management Development Committee of the Board of
Directors determines the grant date for annual grants under
our equity compensation plans. The date for annual grants
under the 2006 Plan to our executive officers is expected to
occur in February of each year following the earnings
announcements for the previous quarter and full year. 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. It
has been our practice to issue shares of common stock upon
exercise of stock options from previously unissued shares.
The total number of awards which may be granted in a given
year and/or over the life of the plan under each of our equity
compensation plans is limited. At December 31, 2007, an
aggregate of 14.4 million shares were available for future
grants and awards under these plans.
Stock options granted to date under our plans generally
vest over four years. We recognize expense related to stock
options on a straight-line basis over the vesting period for the
entire award, less awards expected to be forfeited using
estimated forfeiture rates. Stock options are granted with an
exercise price equal to the market price of our common stock
on the date of grant, except in limited circumstances where
local law may dictate otherwise. In the past, certain options
have had price thresholds, which affect exercisability. All such
price thresholds have been satisfied. The total number of
awards which may be granted in a given year and/or over the
life of the plan under each of our stock option plans is limited
to control dilution.
A summary of stock option activity for the year ended
December 31, 2007 is as follows (options in thousands):
Outstanding at December 31, 2006
Options granted
Options exercised
Options cancelled
Outstanding at December 31, 2007
Stock Options
Weighted Average
Exercise Price
14,184
3,641
(3,134)
(584)
14,107
$59.75
81.92
45.91
75.22
$67.94
The following table summarizes information about stock options outstanding at December 31, 2007 (options in thousands):
Range of Exercise Prices
$19.50 – $27.50
$27.51 – $37.50
$39.50 – $51.00
$55.00 – $70.50
$71.00 – $91.00
We use a Black-Scholes option-pricing model to
determine the fair value of our stock options. For stock
options granted during the years ended December 31, 2007
and 2006, expected volatility was derived from the implied
volatility of our traded options that were actively traded
around the grant date of the stock options with exercise
prices similar to the stock options and maturities of over one
year. In periods prior to January 1, 2006, expected volatility
was derived based upon historical volatility of our common
stock. The change in determining the expected volatility
assumption was based upon our traded options with
maturities over one year being more actively traded than in
the past along with the guidance provided by the Securities
and Exchange Commission in Staff Accounting
Bulletin No. 107. The expected term of the stock options has
Outstanding
Weighted
Average
Remaining
Contractual Life
2.20
3.21
5.10
6.96
8.28
7.12
Weighted
Average
Exercise Price
$24.62
31.04
42.83
68.71
78.70
Options
298
1,317
1,115
1,890
2,122
Exercisable
Weighted
Average
Exercise Price
$24.62
31.04
42.83
69.64
77.04
$67.94
6,742
$58.01
Options
298
1,317
1,115
3,298
8,079
14,107
been derived from historical employee exercise behavior. The
risk-free interest rate is determined using the implied yield
currently available for zero-coupon U.S. government issues
with a remaining term equal to the expected life of the
options. A dividend yield of zero percent has been used as we
have not paid a dividend since becoming a public company in
2001.
The weighted average fair value of the options granted in
the years ended December 31, 2007, 2006 and 2005 were
determined using the following assumptions:
Dividend Yield
Volatility
Risk-free interest rate
Expected life (years)
2007
2006
2005
–%
–%
–%
23.8% 25.7% 30.2%
4.4% 4.5% 4.1%
5.1
5.1
5.3
49
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
The weighted average fair value for options granted
during 2007, 2006 and 2005 were $22.60, $22.32 and $28.11,
respectively. The total intrinsic value of stock options
exercised during the years ended December 31, 2007, 2006
and 2005 were $124.5 million, $40.5 million and $109.2 million,
respectively. For the years ended December 31, 2007 and
2006, share-based payment expense related to stock options
was $73.4 million and $66.3 million, respectively, or
$50.4 million and $47.7 million net of the related tax benefits,
respectively. For the year ended December 31, 2006, the
impact on basic and diluted EPS related to share-based
payment expense on stock options was $0.19. Since prior to
adoption of SFAS 123(R) the exercise price of stock options
granted generally equaled the market price of the underlying
stock on the measurement date, the expense related to stock
options represents the impact of adopting this standard.
Summarized information about outstanding stock options
as of December 31, 2007 that are already vested and that we
expect to vest, as well as stock options that are currently
exercisable, is as follows:
Number of outstanding options (in
thousands)
Weighted average remaining
contractual life
Weighted average exercise price per
share
Intrinsic value (in millions)
Outstanding Stock
Options Already
Vested and Expected
to Vest*
Options
that are
Exercisable
13,484
6,742
7.1 years
5.7 years
$67.50
$85.3
$58.01
$83.4
of these awards will be converted into one share of our
common stock upon vesting.
A summary of nonvested performance share and RSU
activity for the year ended December 31, 2007 is as follows
(Performance shares and RSUs in thousands):
Performance
Shares and RSUs
Weighted Average
Grant Date
Fair Value
Outstanding at January 1, 2007
Granted
Forfeited
Outstanding at December 31, 2007
905
348
(106)
1,147
$67.86
72.78
67.86
$69.35
The fair value of the awards was determined based upon
the fair market value of our common stock on the date of
grant. SFAS 123(R) requires us to estimate the number of
performance shares and RSUs that will vest, and recognize
share-based payment expense on a straight line basis over the
requisite service period. As of December 31, 2007, we
estimate that approximately 418,000 performance shares and
RSUs will vest. If our estimate were to change in the future,
the cumulative effect of the change in estimate will be
recorded in that period. Based upon the number of
performance shares and RSUs that we expect to vest, the
unrecognized share-based payment expense as of
December 31, 2007 was $20.4 million, and is expected to be
recognized over a period of 1.8 years. For the years ended
December 31, 2007 and 2006, pre-tax expense (income)
related to these awards was $(3.3) million and $9.7 million,
respectively, or $(2.3) million and $6.8 million net of the
related tax benefits, respectively.
* Includes effects of estimated forfeitures
4.
ACQUISITIONS
As of December 31, 2007, there was $111.4 million of
unrecognized share-based payment expense related to
nonvested stock options granted under our plans. That
expense is expected to be recognized over a weighted average
period of 2.8 years.
Performance Shares and RSUs
We granted performance shares in 2006, the vesting of
which depends on our achievement of objective performance
targets over a three year period ended December 31, 2008. In
addition, we granted performance-based RSUs in July 2007,
the vesting of which depends on our achievement of objective
performance targets over an 18 month period ended
December 31, 2008. To the extent our actual performance
meets or exceeds the respective performance targets and the
performance shares and/or RSUs are earned, they will
generally vest at the end of the performance period ending
December 31, 2008. We also granted RSUs in December 2007.
These RSUs are not tied to our performance and will vest
ratably on the first and second anniversaries of the date of
grant, provided that the recipient is still our employee. Each
50
We have made acquisitions that took place during the
years 2007 and 2006, certain of which are described below.
These acquisitions were accounted for under the purchase
method of accounting pursuant to SFAS No. 141, “Business
Combinations” (SFAS No. 141). Accordingly, the results of
operations of the acquired companies have been included in
our consolidated results of operations subsequent to the
transaction dates, and the respective assets and liabilities of
the acquired companies have been recorded at their estimated
fair values in our consolidated statement of financial position
as of the transaction dates, with any excess purchase price
being allocated to goodwill. Pro forma financial information
and other information required by SFAS No. 141 have not
been included as the acquisitions did not have a material
impact upon our financial position or results of operations.
ORTHOsoft Inc.
In November 2007, we acquired ORTHOsoft Inc.
(ORTHOsoft), a leader in computer navigation for orthopaedic
surgery, in a cash transaction for an aggregate value of
approximately $50 million. We recorded $31.4 million in
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
goodwill in connection with the acquisition. The acquisition of
ORTHOsoft bolsters our SmartTools strategic initiative to
bring innovative tools to the marketplace that will help create
better and more reproducible outcomes for surgeons and
patients.
Endius Incorporated
In April 2007, we acquired Endius Incorporated (Endius),
a privately held spinal products company based in
Massachusetts, for an aggregate value of approximately
$80 million in cash, before adjustments for debt repayment
and other items. We recorded $42.3 million in goodwill in
connection with the acquisition. Endius develops and
manufactures minimally invasive spine surgery products,
implants and techniques to treat spine disease. The
acquisition of Endius has expanded our spine product
portfolio to include innovative minimally invasive instruments
and implants.
Musculoskeletal Management Systems, LLC
In June 2006, we acquired Musculoskeletal Management
Systems, LLC, more commonly known as the Human Motion
Institute (HMI), a privately-held, hospital-focused consulting
company based in Pennsylvania for a cash purchase price of
$15.0 million. We recorded $13.0 million of goodwill in
connection with the acquisition.
5.
INVENTORIES
Inventories at December 31, 2007 and 2006, consist of
the following (in millions):
Finished goods
Work in progress
Raw materials
Inventories, net
2007
2006
$564.2
50.3
113.3
$727.8
$489.1
46.4
102.8
$638.3
Reserves for excess and obsolete inventory were
$143.7 million and $129.5 million at December 31, 2007 and
2006, respectively.
6.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2007 and
2006, was as follows (in millions):
Land
Building and equipment
Capitalized software costs
Instruments
Construction in progress
Accumulated depreciation
$
2007
19.4
855.3
98.7
903.8
98.7
$
2006
17.6
724.6
59.1
768.5
105.3
1,975.9
(1,004.0)
1,675.1
(868.0)
Property, plant and equipment, net
$
971.9
$ 807.1
Depreciation expense was $182.6 million, $155.0 million
and $144.0 million for the years ended December 31, 2007,
2006 and 2005, 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,
2007 and 2006 (in millions):
Americas
Europe
Asia Pacific
Total
Balance at January 1,
2006
Change in fair value
estimates of
Centerpulse related
to:
Income taxes
Integration liability
Change in fair value
estimates of Implex
related to:
Earn-out payment
Integration liability
Purchase of
Musculoskeletal
Management
Systems
Currency translation
Balance at December 31,
2006
Change in fair value
estimates of
Centerpulse related
to:
Integration liability
Income taxes
Impact of FIN 48
adoption
Change in fair value
estimates of
Musculoskeletal
Management
Systems related to:
Earn-out payment
liability
Integration liability
Purchase of Endius
Purchase of
ORTHOsoft Inc.
Other
Currency translation
$1,426.2
$ 896.9
$105.7
$2,428.8
(51.5)
(0.2)
–
(1.7)
–
(0.2)
(51.5)
(2.1)
28.0
(0.5)
–
–
–
–
28.0
(0.5)
12.1
–
–
98.7
–
2.1
12.1
100.8
1,414.1
993.9
107.6
2,515.6
(0.1)
16.3
(61.4)
0.3
0.6
42.3
31.4
–
–
(1.0)
–
(0.1)
–
(1.2)
16.3
–
–
–
–
–
9.9
63.5
–
(61.4)
–
–
–
–
–
4.1
0.3
0.6
42.3
31.4
9.9
67.6
Balance at December 31,
2007
$1,443.5
$1,066.3
$111.6
$2,621.4
During the year ended December 31, 2007, goodwill was
reduced by $61.4 million related to the adoption of FIN 48
and increased by $83.6 million related to the acquisitions of
Endius, ORTHOsoft and a foreign-based distributor. During
the year ended December 31, 2006, goodwill was reduced by
$51.5 million related to changes in the fair value estimates of
Centerpulse. $46.0 million of this reduction was a decrease to
the long term tax liability related to the expiration of the
applicable statute of limitations. The remaining reduction
primarily relates to the release of valuation allowances.
51
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
The components of identifiable intangible assets are as follows (in millions):
Core
Technology
Developed
Technology
Trademarks and
Trade Names
Customer
Relationships
Other
Total
As of December 31, 2007:
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, 2006:
Intangible assets subject to amortization:
Gross carrying amount
Accumulated amortization
Intangible assets not subject to amortization:
Gross carrying amount
Total identifiable intangible assets
$144.8
(27.9)
$ 433.3
(116.4)
–
–
$116.9
$ 316.9
$119.1
(20.5)
$ 417.3
(88.1)
–
–
$ 98.6
$ 329.2
$ 35.6
(13.1)
199.9
$222.4
$ 33.4
(9.8)
201.2
$224.8
$44.5
(6.2)
–
$38.3
$35.5
(4.0)
–
$31.5
$ 75.7
(26.4)
$ 733.9
(190.0)
–
199.9
$ 49.3
$ 743.8
$ 48.7
(20.2)
$ 654.0
(142.6)
–
201.2
$ 28.5
$ 712.6
Total amortization expense for finite-lived intangible
assets was $47.4 million, $42.4 million and $41.7 million for
the years ended December 31, 2007, 2006 and 2005,
respectively, and was recorded as part of selling, general and
administrative. Estimated annual amortization expense for the
years ending December 31, 2008 through 2012 is $49.8 million,
$50.4 million, $49.9 million, $47.2 million and $46.8 million,
respectively.
8.
OTHER CURRENT AND LONG-TERM LIABILITIES
Other current and long-term liabilities at December 31,
2007 and 2006, consist of the following (in millions):
2007
Other current liabilities:
License and service agreements
Fair value of derivatives
Salaries, wages and benefits
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
$149.9
50.0
59.3
230.2
$489.4
$137.0
191.4
$328.4
2006
$115.0
24.1
49.3
175.3
$363.7
$102.1
221.3
$323.4
We have a five year $1,350 million senior credit
agreement (the “Senior Credit Facility”). The Senior Credit
Facility is a revolving, multi-currency, senior unsecured credit
facility maturing November 30, 2012. Available borrowings
under the Senior Credit Facility at December 31, 2007, were
$1,245.7 million. The Senior Credit Facility contains provisions
whereby borrowings may be increased to $1,750 million and
the maturity date may be extended for up to two one-year
periods.
We and certain of our wholly owned foreign subsidiaries
are the borrowers under the Senior Credit Facility.
52
Borrowings under the Senior Credit Facility bear interest at a
LIBOR-based rate plus an applicable margin determined by
reference to our senior unsecured long-term credit rating and
the amounts drawn under the Senior Credit Facility, at an
alternate base rate, or at a fixed rate determined through a
competitive bid process. 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. 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 we fall below an investment grade credit
rating, additional restrictions would result, including
restrictions on investments, payment of dividends and stock
repurchases. We were in compliance with all covenants under
the Senior Credit Facility as of December 31, 2007.
Commitments under the Senior Credit Facility are subject to
certain fees, including a facility and a utilization fee.
Outstanding long-term debt as of December 31, 2007 was
$104.3 million and $99.6 million as of December 31, 2006. We
had no current debt as of December 31, 2007 or 2006.
We also have available uncommitted credit facilities
totaling $70.4 million.
The weighted average interest rate for borrowings under
the Senior Credit Facility was 1.17 percent at December 31,
2007. Borrowings under the Senior Credit Facility at
December 31, 2007 and 2006 are Japanese Yen based
borrowings. We paid $8.5 million, $5.8 million and $15.3 million
in interest during 2007, 2006 and 2005, respectively.
Debt issuance costs of $22.8 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 facility. At December 31, 2007,
unamortized debt issuance costs were $4.4 million.
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
10. RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
We have 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. defined benefit plans. Employees who
had not become a member of the Puerto Rico defined benefit
plans by March 1, 2004 are not part of the Puerto Rico
defined benefit plans. The employees who are not
participating in the defined benefit plans do receive additional
benefits under our defined contribution plans. Plan benefits
are primarily based on years of credited service and the
participant’s average eligible compensation. In addition to the
U.S. and Puerto Rico defined benefit pension plans, we
sponsor various non-U.S. pension arrangements, including
retirement and termination benefit plans required by local law
or coordinated with government sponsored plans.
Prepaid pension
Other assets
Short-term accrued benefit liability
Long-term accrued benefit liability
Accumulated other comprehensive income
Defined Benefit Plans
We also provide comprehensive medical and group life
insurance benefits to certain U.S. and Puerto Rico eligible
retirees who elect to participate in our 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.
We use a December 31 measurement date for our benefit
plans.
We adopted SFAS 158 (see Note 2 – Accounting
Pronouncements) as of December 31, 2006. The adoption of
SFAS 158 had the following effects on our consolidated
balance sheet as of December 31, 2006 as we recognized the
funded status of our defined benefit and postretirement
benefit plans with a corresponding adjustment to
Accumulated Other Comprehensive Income:
Prior to Additional Minimum
Liability Adjustment and
SFAS 158 Adoption
Additional
Minimum Liability
Adjustments
SFAS 158
Adjustments
$ 21.1
173.8
(10.5)
(34.8)
3.0
$ 3.0
$(23.0)
–
–
–
(3.0)
19.1
8.9
(40.2)
35.4
Post
SFAS 158
$
1.1
192.9
(1.6)
(75.0)
35.4
The components of net pension expense for the years ended December 31, 2007, 2006 and 2005 for our 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
U.S. and Puerto Rico
2007
$ 13.0
8.9
(11.0)
–
2.9
2006
$13.1
7.4
(8.2)
–
3.7
2005
$11.4
5.6
(6.4)
(0.1)
2.1
2007
$10.8
5.7
(8.0)
–
0.2
Non-U.S.
2006
$10.2
4.8
(6.6)
0.1
0.2
Net periodic benefit cost
$ 13.8
$16.0
$12.6
$ 8.7
$ 8.7
2005
$ 8.7
4.9
(6.0)
–
0.6
$ 8.2
The weighted average actuarial assumptions used to determine net pension expense for our 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
2007
2006
2005
2007
6.14%
3.84%
8.00%
5.84%
3.84%
8.25%
6.25%
3.82%
8.50%
3.64%
3.12%
4.73%
Non-U.S.
2006
3.20%
2.27%
4.70%
2005
3.78%
2.28%
4.77%
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. We believe 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 .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
Discount rates were determined for each of our defined benefit retirement plans at their measurement date to reflect the
yield of a portfolio of high quality bonds matched against the timing and amounts of projected future benefit payments.
Changes in projected benefit obligations and plan assets, for the years ended December 31, 2007 and 2006 for our defined
benefit retirement plans, were (in millions):
U.S. and Puerto Rico
Non-U.S.
Projected benefit obligation – beginning of year
2007
$144.2
2006
$130.4
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
Actual return on plan assets
Company contributions
Employee contributions
Benefits paid
Expenses
Translation gain
0.9
13.0
8.8
–
(2.8)
1.9
–
$166.0
$115.3
6.7
28.0
–
(2.8)
–
–
0.6
13.1
7.4
–
(1.5)
(5.8)
–
$144.2
$ 85.6
11.2
20.0
–
(1.5)
–
–
2007
$167.9
(1.2)
10.8
5.7
12.2
(16.4)
(5.7)
8.3
$181.6
$159.7
3.4
13.3
12.2
(16.4)
–
8.2
2006
$146.5
–
10.2
4.8
10.4
(17.3)
1.5
11.8
$167.9
$135.7
10.5
9.9
10.4
(17.3)
–
10.5
Plan assets at fair market value – end of year
$147.2
$115.3
$180.4
$159.7
Funded status
$(18.8)
$(28.9)
$ (1.2)
$ (8.1)
Amounts recognized in consolidated balance sheet:
Prepaid pension
Short-term accrued benefit liability
Long-term accrued benefit liability
Net amount recognized
Amounts recognized in accumulated other comprehensive income:
Unrecognized prior service cost
Unrecognized actuarial loss
Net amount recognized
$
–
(5.6)
(13.2)
$
1.1
(0.7)
(29.3)
$
7.1
$
–
(8.3)
–
–
(8.1)
$(18.8)
$(28.9)
$ (1.2)
$ (8.1)
$
1.0
43.2
$ 44.2
$
0.2
39.8
$ 40.0
$ (1.1)
6.0
$
4.9
$
–
7.3
$
7.3
We estimate the following amounts recorded as part of accumulated other comprehensive income will be recognized as part
of our net pension expense during 2008:
Unrecognized prior service cost
Unrecognized actuarial loss
54
U.S. and
Puerto Rico
$0.1
2.5
$2.6
Non-U.S.
$(0.1)
0.2
$ 0.1
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
The weighted average actuarial assumptions used to determine the projected benefit obligation for our defined benefit
retirement plans were as follows:
Discount rate
Rate of compensation increase
U.S. and Puerto Rico
2007
2006
2005
2007
6.16%
3.84%
6.14%
3.84%
5.84%
3.82%
3.71%
3.15%
Non-U.S.
2006
3.23%
2.28%
2005
3.15%
2.27%
Plans with projected benefit obligations in excess of plan assets as of December 31, 2007 and 2006 were as follows (in
millions):
Benefit obligation
Plan assets at fair market value
U.S. and Puerto Rico
Non-U.S.
2007
2006
2007
$166.0
147.2
$136.8
106.7
$163.0
155.5
2006
$152.0
140.3
Plans with accumulated benefit obligations in excess of plan assets as of December 31, 2007 and 2006 were as follows (in
millions):
Accumulated benefit obligation
Plan assets at fair market value
The accumulated benefit obligation for U.S. and Puerto
Rico defined benefit retirement pension plans was
$116.8 million and $94.5 million as of December 31, 2007 and
2006, respectively. The accumulated benefit obligation for
non-U.S. defined benefit retirement plans was $150.9 million
and $150.3 million as of December 31, 2007 and 2006,
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,
2008
2009
2010
2011
2012
2013-2017
U.S. and
Puerto Rico
Non-U.S.
$ 7.2
$11.6
2.9
3.7
4.9
6.3
51.7
12.8
14.1
14.5
11.6
61.2
Our weighted-average asset allocations at December 31,
2007 and 2006, by asset category are as follows:
Asset Category
Equity Securities
Debt Securities
Real Estate
Cash Funds
Other
Total
U.S. and
Puerto Rico
Non-U.S.
2007
2006
2007
2006
65%
35
–
–
–
65%
35
–
–
–
37%
38
15
4
6
34%
38
15
4
9
100%
100%
100%
100%
U.S. and Puerto Rico
Non-U.S.
2007
$20.5
8.8
2006
$9.2
–
2007
$5.5
4.5
2006
$22.6
18.3
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. We have 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, 2007 and 2006, our defined benefit
pension plans’ assets did not hold any direct investment in
Zimmer Holdings common stock.
We expect that we will have no minimum funding
requirements by law in 2008 for the qualified U.S. and Puerto
Rico defined benefit retirement plans. However, we expect to
voluntarily contribute between $20 million to $24 million to
these plans during 2008. Additionally, we expect to contribute
55
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
approximately $6 million million to our non-qualified defined
benefit retirement plan during 2008. Contributions to
non-U.S. defined benefit plans are estimated to be
approximately $10 million in 2008. We do not expect the plan
assets in any of our plans to be returned to us in the next
year.
Defined Contribution Plans
Plan amendments
Service cost
Interest cost
Changes in benefit obligations for our postretirement
benefit plans were (in millions):
Benefit obligation – beginning of year
$ 38.5
$ 39.8
2007
2006
We also sponsor defined contribution plans for
Employee contributions
substantially all of the U.S. and Puerto Rico employees and
certain employees in other countries. The benefits of these
plans relate to local customs and practices in the countries
concerned. We expensed $12.8 million, $12.6 million and
$11.3 million related to these plans for the years ended
December 31, 2007, 2006 and 2005, respectively.
Postretirement Benefit Plans
The components of net periodic expense for the year
ended December 31, 2007, 2006 and 2005 for our unfunded
postretirement benefit plans are as follows (in millions):
Benefits paid
Actuarial gain
Benefit obligation – end of year
Funded status
Amounts recognized in consolidated balance sheet:
Short-term accrued benefit liability
Long-term accrued benefit liability
Net amount recognized
Amounts recognized in accumulated other
2007
2006
2005
comprehensive income:
Service cost
Interest cost
Amortization of prior service cost
Amortization of unrecognized actuarial loss
0.5
0.8
$ 1.6
$ 1.6
$1.6
2.2
2.2
(0.5)
(0.4)
2.0
–
0.3
Unrecognized prior service cost
Unrecognized actuarial loss
Net amount recognized
–
1.6
2.2
0.1
(0.9)
(2.2)
(3.6)
1.6
2.2
0.1
(0.6)
(1.0)
$ 39.3
$ 38.5
$(39.3)
$(38.5)
$ (1.3)
$ (0.9)
(38.0)
(37.6)
$(39.3)
$(38.5)
$ (2.9)
$ (3.3)
8.0
10.5
$ 5.1
$ 7.2
Net periodic benefit cost
$ 3.8
$ 4.2
$3.9
A one percentage point change in the assumed healthcare
The weighted average actuarial assumptions used in
accounting for our postretirement benefit plans were as
follows:
2007
2006
2005
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 we
pay.
Discount rate – Benefit obligation
6.16% 6.14% 5.84%
Discount rate – Net periodic benefit cost
6.14% 5.84% 6.25%
Initial healthcare cost trend rate
Ultimate healthcare cost trend rate
8.00% 8.50% 9.00%
5.00% 5.00% 5.00%
Amounts recorded as part of accumulated other
comprehensive income that will be recognized as part of our
postretirement benefit expense during 2008 are not expected
to be material.
First year of ultimate trend rate
2014
2014
2014
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,
2008
2009
2010
2011
2012
2013–2017
$ 1.4
1.9
2.3
2.8
3.2
17.5
56
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
11.
Income Taxes
The components of deferred taxes consisted of the
The components of earnings before taxes consist of the
following (in millions):
For the Years Ended December 31,
2007
2006
2005
United States operations
$ 597.0
$ 727.3
$ 706.5
Foreign operations
534.6
441.7
334.2
Total
$1,131.6
$1,169.0
$1,040.7
The provision for income taxes consists of (in millions):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
$ 173.0
$ 178.5
$ 150.5
25.0
96.0
22.2
89.5
22.7
80.3
294.0
290.2
253.5
39.0
19.0
5.9
63.9
31.7
5.0
7.1
43.8
63.0
–
(9.2)
53.8
Provision for income taxes
$ 357.9
$ 334.0
$ 307.3
Income taxes paid during 2007, 2006 and 2005 were
$255.9 million, $257.6 million and $189.2 million, respectively.
A reconciliation of the U.S. statutory income tax rate to
our effective tax rate is as follows:
For the Years Ended December 31,
2007
2006
2005
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 relating to operations in Puerto
Rico
Tax benefit relating to U.S. manufacturer’s
deduction and export sales
R&D credit
Non-deductible expenses
Department of Justice Settlement
In-process research and development
charges
Other
35.0% 35.0% 35.0%
1.3
2.7
0.9
(7.0)
(4.3)
(3.9)
(3.1)
(2.0)
(1.3)
(1.2)
(0.4)
0.2
5.2
0.2
–
(1.2)
(0.1)
0.1
–
–
(0.2)
(0.8)
(0.5)
0.1
–
–
–
Effective income tax rate
31.6% 28.6% 29.5%
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. We have established
valuation allowances for deferred tax assets when the amount
of expected future taxable income is not likely to support the
use of the deduction or credit.
following (in millions):
December 31,
Deferred tax assets:
Inventory
Fixed assets
Net operating loss carryover
Tax credit carryover
Capital loss carryover
Accrued liabilities
Share-based compensation
Unremitted earnings of foreign subsidiaries
Other
Total deferred tax assets
Less: Valuation allowances
Total deferred tax assets after valuation
Deferred tax liabilities:
Fixed assets
Intangible assets
Accrued liabilities
Other
Total deferred tax liabilities
Total net deferred tax assets
2007
2006
$ 118.6
–
101.4
20.7
1.7
97.3
35.7
94.0
24.4
$ 114.7
1.8
138.6
88.4
1.7
95.3
21.4
36.4
20.9
493.8
(55.7)
438.1
519.2
(35.5)
483.7
$ (36.3)
(174.8)
(1.4)
(3.0)
$ (26.9)
(167.7)
(5.4)
(0.9)
(215.5)
(200.9)
$ 222.6
$ 282.8
The vast majority of the net operating loss carryover is
available to reduce future federal and state taxable earnings.
At December 31, 2007, these net operating loss carryovers
generally expire within a period of 1 to 19 years. Valuation
allowances for net operating loss carryovers have been
established in the amount of $16.3 million and $10.4 million at
December 31, 2007 and December 31, 2006, respectively. The
tax credit carryovers are entirely available to offset future
federal and state tax liabilities. At December 31, 2007, these
tax credit carryovers generally expire within a period of 1 to
15 years. We have established valuation allowances for certain
tax credit carryovers in the amount of $20.2 million and
$15.0 million at December 31, 2007 and December 31, 2006,
respectively. The entire capital loss carryover is also available
to reduce future federal taxable earnings; however, the capital
loss carryover is subject to a valuation allowance and expires
in 2 years. The remaining valuation allowances of $17.5 million
and $8.4 million at December 31, 2007 and December 31,
2006, respectively, relate primarily to potential capital losses.
We have established valuation allowances related to certain
business combination transactions that, if not ultimately
required, will result in a reduction of goodwill. These
allowances were approximately $33.9 million and $29.0 million
at December 31, 2007 and December 31, 2006, respectively.
At December 31, 2007, we had an aggregate of
approximately $493 million of unremitted earnings of foreign
subsidiaries that have been, or are intended to be, indefinitely
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 not practical for us to
determine the additional tax of remitting these earnings.
57
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
In September 2007, we reached a settlement with the
A reconciliation of the beginning and ending amounts of
United States Department of Justice in an ongoing
investigation into financial relationships between major
orthopaedic manufacturers and consulting orthopaedic
surgeons. Under the terms of the settlement, we paid a civil
settlement amount of $169.5 million and we recorded an
expense in that amount. No tax benefit has been recorded
related to the settlement expense due to the uncertainty as to
the tax treatment. We intend to pursue resolution of this
uncertainty with taxing authorities, but are unable to
ascertain the outcome or timing for such resolution at this
time. For more information regarding the settlement, see
Note 15.
In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109, Accounting for Income Taxes (FIN 48).
FIN 48 addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, we may
recognize the tax benefit from an uncertain tax position only
if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits
recognized in the financial statements from such a position
should be measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon
ultimate settlement. FIN 48 also provides guidance on
derecognition, classification, interest and penalties on income
taxes, accounting in interim periods and requires increased
disclosures.
We adopted FIN 48 on January 1, 2007. Prior to the
adoption of FIN 48 we had a long term tax liability for
expected settlement of various federal, state and foreign
income tax liabilities that was reflected net of the corollary
tax impact of these expected settlements of $102.1 million, as
well as a separate accrued interest liability of $1.7 million. As
a result of the adoption of FIN 48, we are required to present
the different components of such liability on a gross basis
versus the historical net presentation. The adoption resulted
in the financial statement liability for unrecognized tax
benefits decreasing by $6.4 million as of January 1, 2007. The
adoption resulted in this decrease in the liability as well as a
reduction to retained earnings of $4.8 million, a reduction in
goodwill of $61.4 million, the establishment of a tax receivable
of $58.2 million, which was recorded in other current and
non-current assets on our consolidated balance sheet, and an
increase in an interest/penalty payable of $7.9 million, all as of
January 1, 2007. Therefore, after the adoption of FIN 48, the
amount of unrecognized tax benefits is $95.7 million as of
January 1, 2007, of which $28.6 million would impact our
effective tax rate, if recognized. The amount of unrecognized
tax benefits is $135.2 million as of December 31, 2007. Of this
amount, $41.0 million would impact our effective tax rate, if
recognized.
58
unrecognized tax benefits is as follows (in millions):
Balance at January 1, 2007
Increases related to prior periods
Decreases related to prior periods
Increases related to current period
Decreases related to settlements with taxing authorities
Decreases related to lapse of statue of limitations
Balance at December 31, 2007
$ 95.7
27.4
(5.5)
21.9
(1.3)
(3.0)
$135.2
We recognize accrued interest and penalties related to
unrecognized tax benefits in income tax expense in the
Consolidated Statements of Earnings, which is consistent with
the recognition of these items in prior reporting periods. As of
January 1, 2007, we recorded a liability of $9.6 million for
accrued interest and penalties, of which $7.5 million would
impact our effective tax rate, if recognized. The amount of
this liability is $19.6 million as of December 31, 2007. Of this
amount, $14.7 million would impact our effective tax rate, if
recognized.
We expect that the amount of tax liability for
unrecognized tax benefits will change in the next twelve
months; however, we do not expect these changes will have a
significant impact on our results of operations or financial
position.
The U.S. federal statute of limitations remains open for
the year 2003 and onward with years 2003 and 2004 currently
under examination by the IRS. It is reasonably possible that a
resolution with the IRS for the years 2003 through 2004 will
be reached within the next twelve months, but we do not
anticipate this would result in any material impact on our
financial position. In addition, for the 1999 tax year of
Centerpulse, which we acquired in October 2003, one issue
remains in dispute. The resolution of this issue would not
impact our effective tax rate, as it would be recorded as an
adjustment to goodwill.
State income tax returns are generally subject to
examination for a period of 3 to 5 years after filing of the
respective return. The state impact of any federal changes
remains subject to examination by various states for a period
of up to one year after formal notification to the states. We
have various state income tax returns in the process of
examination, administrative appeals or litigation. It is
reasonably possible that such matters will be resolved in the
next twelve months, but we do not anticipate that the
resolution of these matters would result in any material
impact on our results of operations or financial position.
Foreign jurisdictions have statutes of limitations generally
ranging from 3 to 5 years. Years still open to examination by
foreign tax authorities in major jurisdictions include Australia
(2003 onward), Canada (1999 onward), France (2005
onward), Germany (2005 onward), Italy (2003 onward), Japan
(2001 onward), Puerto Rico (2005 onward), Singapore (2003
onward), Switzerland (2004 onward), and the United
Kingdom (2005 onward).
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
Our tax returns are currently under examination in
various foreign jurisdictions. The major foreign tax
jurisdictions under examination include Germany, Italy and
Switzerland. It is reasonably possible that such audits will be
resolved in the next twelve months, but we do not anticipate
that the resolution of these audits would result in any material
impact on our results of operations or financial position.
12. CAPITAL STOCK AND EARNINGS PER SHARE
We have 2 million shares of Series A Participating
Cumulative Preferred Stock authorized for issuance, none of
which were outstanding as of December 31, 2007.
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 and other equity awards. The following
is a reconciliation of weighted average shares for the basic
and diluted share computations for the years ending
December 31 (in millions):
2007
2006
2005
Weighted average shares outstanding for
basic net earnings per share
235.5
243.0
247.1
Effect of dilutive stock options and other
equity awards
2.0
2.4
2.7
Weighted average shares outstanding for
diluted net earnings per share
237.5
245.4
249.8
For the year ended December 31, 2007, an average of
3.1 million options to purchase shares of common stock were
not included in the computation of diluted earnings per share
as the exercise prices of these options were greater than the
average market price of the common stock. For the years
ended December 31, 2006 and 2005, an average of 7.6 million
and 2.9 million options, respectively, were not included.
In December 2005, our Board of Directors authorized a
stock repurchase program of up to $1 billion through
December 31, 2007. In December 2006, our Board of
Directors authorized an additional stock repurchase program
of up to $1 billion through December 31, 2008. As of
December 31, 2007 we had acquired approximately
19,345,200 shares at a cost of $1,378.9 million, before
commissions.
13. SEGMENT DATA
We design, develop, manufacture and market
reconstructive orthopaedic implants, including joint and
dental, spinal implants, trauma products and related
orthopaedic surgical products which include surgical supplies
and instruments designed to aid in orthopaedic surgical
procedures and post-operation rehabilitation. We also provide
other healthcare related services. Revenue related to these
services currently represents less than 1 percent of our total
net sales. We manage 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. This
structure is the basis for our reportable segment information
discussed below. Management evaluates operating segment
performance based upon segment operating profit exclusive of
operating expenses pertaining to global operations and
corporate expenses, share-based compensation expense,
settlement, acquisition, integration and other 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, and human resource functions, and U.S. and Puerto
Rico based manufacturing operations and logistics.
Intercompany transactions have been eliminated from
segment operating profit. Management reviews accounts
receivable, inventory, property, plant and equipment, goodwill
and intangible assets by reportable segment exclusive of U.S
and Puerto Rico based manufacturing operations and logistics
and corporate assets.
59
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
Net sales, segment operating profit and year-end assets are as follows (in millions):
Net Sales
Operating Profit
Year-End Assets
2007
2006
2005
2007
2006
2005
2007
2006
$2,277.0
1,081.0
539.5
$2,076.5
931.1
487.8
$1,941.8
874.8
469.5
$1,184.2
432.6
260.1
$1,093.7
385.9
231.5
$1,020.8
317.9
212.4
$2,552.6
1,999.2
348.3
$2,444.9
1,864.7
314.1
$3,897.5
$3,495.4
$3,286.1
Americas
Europe
Asia Pacific
Net sales
Share-based payment expense
Inventory step-up
Settlement
Acquisition, integration and other
Global operations and corporate
functions
Operating profit
Total assets
U.S. sales were $2,140.3 million, $1,962.5 million and
$1,845.6 million for the years ended December 31, 2007, 2006
and 2005, respectively. 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
Knees
Hips
Extremities
Dental
Total
Trauma
Spine
OSP and other
Total
2007
2006
2005
$1,636.9
1,298.9
104.0
221.0
3,260.8
205.8
197.0
233.9
$1,460.5
1,188.9
77.6
179.0
2,906.0
194.7
177.4
217.3
$1,366.2
1,140.6
66.1
148.1
2,721.0
179.8
160.4
224.9
$3,897.5
$3,495.4
$3,286.1
(70.1)
(0.5)
(169.5)
(25.2)
(74.8)
–
–
(6.1)
–
(5.0)
–
(56.6)
(484.0)
(465.0)
(434.5)
1,733.6
1,350.7
$1,127.6
$1,165.2
$1,055.0
$6,633.7
$5,974.4
Capital expenditures by operating segment for the years
ended December 31, 2007, 2006 and 2005 were as follows (in
millions):
2007
2006
2005
Americas
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
$
0.7
$
0.7
$
0.7
25.4
20.0
8.3
24.6
25.9
20.0
1.2
2.4
1.7
2.5
2.4
1.0
111.9
104.5
139.3
Long-lived tangible assets as of December 31, 2007 and
equipment
165.0
113.0
83.6
2006 are as follows:
Americas
Europe
Asia Pacific
Total
2007
2006
$707.3
211.8
52.8
$558.5
203.6
45.0
$971.9
$807.1
The Americas long-lived tangible assets are located
primarily in the U.S. Approximately $195.3 million of Europe
long-lived tangible assets are located in Switzerland.
60
For segment reporting purposes, deployed instruments
are included in the measurement of operating segment assets
while undeployed instruments at U.S. and Puerto Rico based
manufacturing operations and logistics are included in global
operations and corporate functions. The majority of
instruments are purchased by U.S. and Puerto Rico based
manufacturing operations and logistics and are deployed to
the operating segments as needed for the business.
Depreciation and amortization included in operating
segment profit for the years ended December 31, 2007, 2006
and 2005 was as follows (in millions):
Americas
Europe
Asia Pacific
Global operations and corporate
functions
2007
2006
2005
$ 66.9
60.7
22.7
$ 56.7
46.5
18.7
$ 51.0
40.8
14.8
79.7
75.5
79.1
$230.0
$197.4
$185.7
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
14. LEASES
Future minimum rental commitments under non-
cancelable operating leases in effect as of December 31, 2007
were $35.4 million for 2008, $28.5 million for 2009,
$21.5 million for 2010, $16.1 million for 2011, $12.5 million for
2012 and $20.3 million thereafter. Total rent expense for the
years ended December 31, 2007, 2006 and 2005 aggregated
$37.1 million, $31.1 million and $27.9 million, respectively.
15. COMMITMENTS AND CONTINGENCIES
Product Liability and Intellectual Property-Related Litigation
As a result of our acquisition of Centerpulse in 2003, we
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 was entered into by
Centerpulse that resolved U.S. claims related to the affected
products and a 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, we will reimburse the settlement
trust a specified amount for each revision surgery over 4,000
and revisions on reprocessed shells over 64. As of
December 31, 2007, the claims administrator has received
4,133 likely valid claims for hips (cut-off date June 5,
2003) and knees (cut-off date November 17, 2003) and 200
claims for reprocessed shells (cut-off date September 8,
2004). We believe the litigation liability recorded as of
December 31, 2007 is adequate to provide for any future
claims regarding the hip and knee implant litigation.
On February 15, 2005, Howmedica Osteonics Corp.
(“Howmedica”) filed an action against us and an unrelated
party in the United States District Court for the District of
New Jersey alleging infringement of U.S. Patent Nos.
6,174,934; 6,372,814; 6,664,308; and 6,818,020. On June 13,
2007, the Court granted our motion for summary judgment on
the invalidity of the asserted claims of U.S. Patent Nos.
6,174,934; 6,372,814; and 6,664,308 by ruling that all of the
asserted claims are invalid for indefiniteness. We continue to
believe that our defenses are valid and meritorious, and we
intend to defend the Howmedica lawsuit vigorously.
We are also subject to product liability and other claims
and lawsuits arising in the ordinary course of business, for
which we maintain insurance, subject to self-insured retention
limits. We establish 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 our consolidated financial position, results of
operations or cash flows.
Government Investigations and Related Litigation
In March 2005, the United States Department of Justice
through the United States Attorney’s Office in Newark, New
Jersey commenced an investigation of us and four other
orthopaedic companies pertaining to consulting contracts,
professional service agreements and other agreements by
which remuneration is provided to orthopaedic surgeons. On
September 27, 2007, we reached a settlement with the
government to resolve all claims related to this investigation.
As part of the settlement, we entered into a settlement
agreement with the United States of America through the
United States Department of Justice and on behalf of the
Office of Inspector General of the Department of Health and
Human Services (the “OIG-HHS”). In addition, we entered
into a Deferred Prosecution Agreement (the “DPA”) with the
United States Attorney’s Office for the District of New Jersey
(the “U.S. Attorney”) and a Corporate Integrity Agreement
(the “CIA”) with the OIG-HHS. We did not admit any
wrongdoing, plead guilty to any criminal charges or pay any
criminal fines as part of the settlement.
We settled civil and administrative claims related to the
federal investigation for a cash payment to the United States
government of $169.5 million. We recorded a $169.5 million
expense during the third quarter of 2007 in connection with
the settlement.
Under the terms of the DPA, the U.S. Attorney filed a
criminal complaint in the United States District Court for the
District of New Jersey charging us with conspiracy to commit
violations of the Anti-Kickback Statute (42 U.S.C. § 1320a-7b)
during the years 2002 through 2006. The court deferred
prosecution of the criminal complaint during the 18-month
term of the DPA. The U.S. Attorney will seek dismissal of the
criminal complaint after the 18-month period if we comply
with the provisions of the DPA. The DPA provides for
oversight by a federally appointed monitor. Under the CIA,
which has a term of five years, we agreed, among other
provisions, to continue the operation of our enhanced
Corporate Compliance Program, designed to promote
compliance with federal healthcare program requirements, in
accordance with the terms set forth in that agreement. We
also agreed to retain an independent review organization
(“IRO”) to perform annual reviews to assist us in assessing
our compliance with the obligations set forth in the CIA to
ensure that arrangements we enter into do not violate the
Anti-Kickback Statute. Our obligation to retain an IRO is
suspended during the 18-month term of the DPA. A material
breach of the DPA or the CIA may subject us to further
criminal or civil action and/or to exclusion by OIG-HHS from
participation in all federal healthcare programs, which would
have a material adverse effect on our financial position,
results of operations and cash flows.
61
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
In November 2007, we received a civil investigative
demand from the Massachusetts Attorney General’s office
seeking additional information regarding the financial
relationships we publicly disclosed pursuant to the DPA with a
number of Massachusetts healthcare providers. We are
cooperating fully with the investigators with regard to this
matter. We understand that similar inquiries were directed to
other companies in the orthopaedics industry.
In June 2006, we received a subpoena from the United
States Department of Justice, Antitrust Division, requesting
that we produce documents for the period beginning January
2001 through June 2006, pertaining to an investigation of
possible violations of federal criminal law, including possible
violations of the antitrust laws, involving the manufacture and
sale of orthopaedic implant devices. We are cooperating fully
with federal authorities with regard to this matter. We
understand that similar inquiries were directed to at least four
other companies in the orthopaedics industry.
On September 25, 2007, the Staff of the SEC informed us
that it was conducting an informal investigation regarding
potential violations of the Foreign Corrupt Practices Act in
the sale of medical devices in a number of foreign countries
by companies in the medical device industry. We understand
that at least four other medical device companies received
similar letters. We are fully cooperating with the SEC with
regard to this informal investigation.
Following announcement of our entry into the DPA and
CIA and commencement of the informal SEC investigation
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in millions, except per share data)
described above, two shareholder derivative actions were filed
in Kosciusko Superior Court in Warsaw, Indiana. The first
action, captioned Bottner v. Dvorak et al., was filed on
October 16, 2007. The second action, captioned Capizzi v.
Dvorak et al., was filed on October 30, 2007. On
November 19, 2007, these two cases were consolidated under
the caption In re Zimmer, Inc. Derivative Litigation. The
plaintiffs seek to maintain the action purportedly on our
behalf against all of our current directors and two former
directors. On December 10, 2007, the plaintiffs filed a
consolidated amended derivative complaint, which claims,
among other things, breaches of fiduciary duty by the
individual defendants which allegedly allowed misconduct to
occur, including alleged illegal payments to doctors, and
caused us financial harm, including the cost of the settlement
with the federal government described above. The plaintiffs
do not seek damages from us, but instead request damages of
an unspecified amount on our behalf. The plaintiffs also
request that the court order (i) disgorgement of profits,
benefits and other compensation obtained by the individual
defendants and (ii) certain matters of corporate governance
be placed before our stockholders for a vote. On January 16,
2008, we and the individual defendants filed separate motions
to dismiss the complaint and memoranda in support. We and
the individual defendants also filed a joint motion to stay
discovery pending a ruling on the motions to dismiss. The
motions are currently pending with the court.
Net sales
Gross profit
Net earnings
Net earnings per common share
Basic
Diluted
2007 Quarter Ended
2006 Quarter Ended
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
$950.2
743.8
233.4
$970.6
754.2
231.5
$903.2
704.0
44.5
$1,073.5
819.6
263.8
$860.4
671.0
205.6
$881.6
681.6
200.9
$819.8
636.6
183.3
$933.6
726.1
244.7
0.99
0.98
0.98
0.97
0.19
0.19
1.13
1.12
0.83
0.82
0.82
0.81
0.76
0.76
1.03
1.02
62
Z I M M E R H O L D I N G S , I N C .
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
ITEM 9A. Controls and Procedures
We have established disclosure controls and procedures
and internal controls over financial reporting to provide
reasonable assurance that material information relating to us,
including our consolidated subsidiaries, is made known on a
timely basis to management and the Board of Directors.
However, no control system, no matter how well designed and
operated, can 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.
Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934). Based upon that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
as of the end of the period covered by this report are
effective.
There was no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) of the Securities
Exchange Act of 1934) that occurred during the quarter
ended December 31, 2007, that has materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting. Management’s report on internal control
over financial reporting appears in this report at the
conclusion of Part II, Item 7A.
ITEM 9B. Other Information
During the fourth quarter of 2007, the Audit Committee
of the Board of Directors was not asked to and did not
approve the engagement of PricewaterhouseCoopers LLP, our
independent registered public accounting firm, to perform any
non-audit services. This disclosure is made pursuant to
Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002.
We submitted the Annual CEO Certification for 2007
required by the New York Stock Exchange to the exchange on
June 4, 2007.
63
Z I M M E R H O L D I N G S , I N C .
PART III
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by this Item concerning our directors and executive officers is incorporated herein by reference
from our definitive Proxy Statement for our 2008 Annual Meeting of Stockholders which will be filed with the Commission
pursuant to Regulation 14A within 120 days after the end of our most recent fiscal year and the information included under the
caption “Executive Officers” in Part I of this report.
ITEM 11. Executive Compensation
The information required by this Item concerning remuneration of our officers and directors and information concerning
material transactions involving such officers and directors is incorporated herein by reference from our definitive Proxy
Statement for our 2008 Annual Meeting of Stockholders which will be filed with the Commission pursuant to Regulation 14A
within 120 days after the end of our 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 our
definitive Proxy Statement for our 2008 Annual Meeting of Stockholders which will be filed with the Commission pursuant to
Regulation 14A within 120 days after the end of our most recent fiscal year.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item concerning certain relationships and related transactions is incorporated herein by
reference from our definitive Proxy Statement for our 2008 Annual Meeting of Stockholders which will be filed with the
Commission pursuant to Regulation 14A within 120 days after the end of our 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 our definitive Proxy Statement for our 2008 Annual Meeting of Stockholders which will be filed with the Commission
pursuant to Regulation 14A within 120 days after the end of our most recent fiscal year.
64
Z I M M E R H O L D I N G S , I N C .
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
The following consolidated financial statements of Zimmer Holdings, Inc. 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, 2007, 2006 and 2005
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2007, 2006 and 2005
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.
65
Z I M M E R H O L D I N G S , I N C .
Signatures
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
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/ DAVID C. DVORAK
David C. Dvorak
President and Chief Executive Officer
Dated: February 29, 2008
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/ DAVID C. DVORAK
David C. Dvorak
President, Chief Executive Officer and Director
(Principal Executive Officer)
February 29, 2008
/s/
JAMES T. CRINES
James T. Crines
/s/ DEREK M. DAVIS
Derek M. Davis
/s/
John L. McGoldrick
JOHN L. MCGOLDRICK
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
February 29, 2008
Vice President, Finance, and Corporate Controller
and Chief Accounting Officer
(Principal Accounting Officer)
February 29, 2008
Director
February 29, 2008
/s/ STUART M. ESSIG
Director
February 29, 2008
Stuart M. Essig
/s/ LARRY C. GLASSCOCK
Director
February 29, 2008
Larry C. Glasscock
/s/ ARTHUR J. HIGGINS
Director
February 29, 2008
Arthur J. Higgins
/s/ AUGUSTUS A. WHITE, III
Director
February 29, 2008
Augustus A. White, III
66
Z I M M E R H O L D I N G S , I N C .
Index to Exhibits
Exhibit No
Description
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
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*
10.18*
10.19*
Restated Certificate of Incorporation of Zimmer Holdings, Inc. dated July 28, 2001, together with Certificate of
Amendment of Restated Certificate of Incorporation of Zimmer Holdings, Inc. dated May 9, 2007 (incorporated by
reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 7, 2007)
Certificate of Designations of Series A Participating Cumulative Preferred Stock of Zimmer Holdings, Inc., dated as of
August 6, 2001 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed
November 13, 2001)
Restated By-Laws of Zimmer Holdings, Inc. effective November 30, 2007 (incorporated by reference to Exhibit 3.1 to
the Registrant’s Current Report on Form 8-K filed November 27, 2007)
Specimen Common Stock certificate (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration
Statement on Form S-8 filed January 20, 2006)
Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Appendix B to the Registrant’s
definitive Proxy Statement on Schedule 14A filed March 24, 2003)
First Amendment to the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K filed December 15, 2005)
Zimmer Holdings, Inc. 2006 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed December 13, 2006)
Zimmer Holdings, Inc. Executive Performance Incentive Plan, effective August 6, 2001 (incorporated by reference to
Appendix C to the Registrant’s definitive Proxy Statement on Schedule 14A filed March 24, 2003)
Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors, effective August 6, 2001 (incorporated by reference to
Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed August 6, 2001)
First Amendment to the Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors (incorporated by reference to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed December 15, 2005)
Restated Zimmer Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors, effective January 1, 2005
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed December 15, 2005)
Restated Zimmer, Inc. Long-Term Disability Income Plan for Highly Compensated Employees (incorporated by
reference to Exhibit 10.9 to the Registrant’s Annual Report on form 10-K filed February 28, 2007)
Employment Agreement with J. Raymond Elliott (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed November 20, 2006)
Change in Control Severance Agreement with David C. Dvorak (incorporated by reference to Exhibit 10.4 to the
Registrant’s Quarterly Report on Form 10-Q filed November 9, 2007)
Form of Change in Control Severance Agreement with Bruno A. Melzi (incorporated by reference to Exhibit 10.3 to
the Registrant’s Quarterly Report on Form 10-Q filed May 8, 2002)
Change in Control Severance Agreement with Sheryl L. Conley (incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q dated filed August 8, 2003)
Form of Change in Control Severance Agreement with James T. Crines and Cheryl R. Blanchard (incorporated by
reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed May 8, 2007)
Form of Change in Control Severance Agreement with Chad F. Phipps and Derek M. Davis (incorporated by reference
to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed November 9, 2007)
Change in Control Severance Agreement with Jon E. Kramer (incorporated by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q filed November 8, 2004)
Change in Control Severance Agreement with Stephen Hong Liang, Ooi (incorporated by reference to Exhibit 10.21 to
the Registrant’s Annual Report on Form 10-K filed March 12, 2003)
Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the
Zimmer Holdings, Inc. Savings and Investment Program (incorporated by reference to Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q filed August 9, 2005)
Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the
Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan (incorporated by
reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed August 9, 2005)
First Amendment of Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliate Corporations
Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan
(incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed August 9, 2005)
67
Z I M M E R H O L D I N G S , I N C .
Index to Exhibits (Continued)
Exhibit No
Description
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
10.31*
10.32*
10.33*
10.34*
10.35*
10.36*
10.37*
Second Amendment of Benefit Equalization Plan of Zimmer Holdings, Inc. and its Subsidiary or Affiliate Corporations
Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed May 4, 2006)
Form of Non-Disclosure, Non-Competition and Non-Solicitation Employment Agreement (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 27, 2006)
Non-Disclosure, Non-Competition and Non-Solicitation Employment Agreement with Stephen Hong Liang, Ooi
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed March 27, 2006)
Confidentiality, Non-Competition and Non-Solicitation Agreement with Bruno A. Melzi (incorporated by reference to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed March 27, 2006)
Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan
(incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed January 11, 2006)
Form of Restricted Stock Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed January 12, 2005)
Form of Nonqualified Performance-Conditioned Stock Option Grant Award Letter under the Zimmer Holdings, Inc.
2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed January 21, 2005)
Form of Performance Share Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 11, 2006)
Form of Performance Share Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (for Non-U.S.
employees) (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed
January 11, 2006)
Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. Stock Plan for Non-Employee
Directors (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed April 5,
2005)
Form of Restricted Stock Unit Award Letter under the Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 21, 2006)
Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed December 13, 2006)
Form of Nonqualified Stock Option Award Letter for Non-U.S. Employees under the Zimmer Holdings, Inc. 2006 Stock
Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed
December 13, 2006)
Form of Restricted Stock Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (five-year vesting)
(incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed December 13, 2006)
Form of Restricted Stock Unit Award Letter for Non-U.S. Employees under the Zimmer Holdings, Inc. 2006 Stock
Incentive Plan (five-year vesting) (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on
Form 8-K filed December 13, 2006)
Form of Restricted Stock Unit Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (two-year
vesting) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 11,
2007)
Form of Restricted Stock Unit Award Letter for Non-US Employees under the Zimmer Holdings, Inc. 2006 Stock
Incentive Plan (two-year vesting) (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on
Form 8-K filed December 11, 2007)
Form of Performance-Based Restricted Stock Unit Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive
Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 7,
2007)
10.38*
Summary Compensation Sheet
10.39
$1,350,000,000 Amended and Restated Credit Agreement dated as of November 30, 2007 (incorporated by reference
to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 6, 2007)
68
Z I M M E R H O L D I N G S , I N C .
Index to Exhibits (Continued)
Exhibit No
Description
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
10.40
10.41
10.42
10.43
10.44
21
23
31.1
31.2
32
Settlement Agreement dated September 27, 2007, among the United States of America, acting through the United
States Department of Justice and on behalf of the Office of Inspector General of the Department of Health and Human
Services, and Zimmer Holdings, Inc. on behalf of its wholly owned subsidiary Zimmer, Inc. (incorporated by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed November 9, 2007)
Corporate Integrity Agreement dated September 27, 2007, among Zimmer Holdings, Inc., Zimmer, Inc. and the Office
of Inspector General of the Department of Health and Human Services (incorporated by reference to Exhibit 10.2 to
the Registrant’s Quarterly Report on Form 10-Q filed November 9, 2007)
Deferred Prosecution Agreement dated September 27, 2007, between Zimmer, Inc. and the United States Attorney’s
Office for the District of New Jersey (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on
Form 10-Q filed November 9, 2007)
Zimmer, Inc. Monitor Agreement and Agreement Regarding Fees and Reimbursements, dated October 25, 2007
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 31, 2007)
Form of Indemnification Agreement with Non-Employee Directors (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed February 25, 2008)
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
* indicates management contracts or compensatory plans or arrangements
69
Z I M M E R H O L D I N G S , I N C .
Valuation and Qualifying Accounts
Description
Doubtful Accounts:
Year Ended December 31, 2005
Year Ended December 31, 2006
Year Ended December 31, 2007
Excess and Obsolete Inventory:
Year Ended December 31, 2005
Year Ended December 31, 2006
Year Ended December 31, 2007
Excess and Obsolete Instruments:
Year Ended December 31, 2005
Year Ended December 31, 2006
Year Ended December 31, 2007
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Schedule II
(In millions)
Additions
Charged
(Credited)
to Expense
Deductions
to Reserve
Effects of
Foreign
Currency
Balance at
End of
Period
$(2.2)
(3.2)
1.4
$ (1.5)
(1.0)
(1.2)
$(1.4) $ 23.3
20.4
21.7
1.3
1.1
$21.6
32.6
38.6
$10.0
8.3
3.1
$(18.5)
(26.0)
(26.9)
$(6.2) $121.0
129.5
143.7
1.9
2.5
$ (7.8)
(5.4)
(12.5)
$(0.9) $ 37.7
40.7
31.7
0.1
0.4
Balance at
Beginning
of Period
$ 28.4
23.3
20.4
$124.1
121.0
129.5
$ 36.4
37.7
40.7
70
Z I M M E R H O L D I N G S , I N C .
Certification
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
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, David C. Dvorak, 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 theperiod in which this report is
being prepared;
b. Designed such internal control 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: February 29, 2008
David C. Dvorak
President and
Chief Executive Officer
71
Z I M M E R H O L D I N G S , I N C .
Certification
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
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, James T. Crines, 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 control 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: February 29, 2008
James T. Crines
Executive Vice President, Finance and Chief
Financial Officer
72
Z I M M E R H O L D I N G S , I N C .
Certification
2 0 0 7 F O R M 1 0 - K A N N U A L R E P O R T
Exhibit 32
Certification Pursuant To U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
In connection with the Annual Report of Zimmer Holdings, Inc. (the “Company”) on Form 10-K for the period ending
December 31, 2007 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.
David C. Dvorak
President and Chief Executive Officer
February 29, 2008
James T. Crines
Executive Vice President, Finance and Chief Financial Officer
February 29, 2008
73
2003
$450.7
—
79.6
42.7
11.2
$584.2
2003
$ 1.64
—
0.38
0.20
0.05
(unaudited)
For the Years Ended December 31,
2005
$ 2.93
—
0.23
0.02
—
2004
$ 2.19
—
0.32
0.24
—
(0.08)
(0.20)
(0.21)
—
—
(0.14)
—
$ 2.41
—
(0.26)
$ 1.80
(in millions, unaudited)
For the Years Ended
December 31,
2007
$773.2
169.5
25.2
0.5
(6.8)
$961.6
2006
$834.5
—
6.1
—
2.5
$843.1
Z I M M E R H O L D I N G S , I N C .
Reconciliations
Reconciliation of Operating Profit to Adjusted Operating Profit for the Years Ended December 31, 2007, 2006, 2005, 2004 and 2003
Operating Profit
Settlement
Acquisition, integration and other
Inventory step-up
In-process research and development
Adjusted Operating Profit
(in millions, unaudited)
For the Years Ended December 31,
2007
$1,127.6
169.5
25.2
0.5
—
$1,322.8
2006
$1,165.2
—
6.1
—
—
$1,171.3
2005
$1,055.0
—
56.6
5.0
—
$1,116.6
2004
$763.2
—
81.1
59.4
—
$903.7
Reconciliation of Diluted EPS to Adjusted Diluted EPS for the Years Ended December 31, 2007, 2006, 2005, 2004 and 2003
Diluted EPS
Settlement
Acquisition, integration and other
Inventory step-up
In-process research and development
Taxes on settlement, acquisition, integration and other, inventory
step-up and in-processs research and development
Tax benefit from decreased deferred taxes of acquired Centerpulse
operations due to Swiss tax rate reduction
Cumulative effect of a change in accounting principle, net of tax
2007
$ 3.26
0.71
0.11
—
—
(0.03)
—
—
2006
$3.40
—
0.03
—
—
0.01
—
—
Adjusted Diluted EPS
$ 4.05
$3.44
$ 3.10
Reconciliation of Net Earnings and Adjusted Net Earnings For the Years Ended December 31, 2007 and 2006
Net Earnings
Settlement
Acquisition, integration and other
Inventory step-up
Taxes on settlement, acquisition, integration and other and inventory step-up
Adjusted Net Earnings
74
Corporate Information
Stock Performance Graph
Comparison of Cumulative Total Return for years ended December 31
Assumes $100 was invested on
December 31, 2002 in Zimmer
common stock and each index and
dividends are reinvested. No cash
dividends have been declared or
paid on Zimmer stock. Returns over
the indicated period should not be
considered indicative of future returns.
$ 250
$ 200
$ 150
$ 100
$ 50
$ 0
Zimmer Holdings, Inc. S&P 500 Stock Index S&P 500 Health Care Equipment Index
2002
$100
100
100
2003
$ 170
126
131
2004
$193
138
147
2005
$ 162
142
146
2006
$ 189
161
151
2007
$159
167
158
Stuart M. Essig
President and Chief Executive
Officer, Integra LifeSciences
Holdings Corporation
Larry C. Glasscock
Chairman, WellPoint, Inc.
Arthur J. Higgins
Chairman of the Board
of Management,
Bayer HealthCare AG
Augustus A. White, III, M.D., Ph.D.
Ellen and Melvin Gordon
Professor of Medical Education,
Professor of Orthopaedic Surgery,
Former Master, Oliver Wendell
Holmes Society,
Harvard Medical School
Corporate Governance
ISS Corporate Governance
Quotient* (CGQ®)
Index Ranking: 95.9
Industry Ranking: 99.6
Zimmer Holdings, Inc. outperformed
95.9 percent of the companies in
the S&P 500 Index and 99.6 percent
of the companies in the health
care equipment and services group
as of February 7, 2008.
James T. Crines
Executive Vice President,
Finance and Chief Financial Officer
Bruno A. Melzi
Chairman,
Europe, Middle East and Africa
Chad F. Phipps
Senior Vice President,
General Counsel and Secretary
Derek Davis
Vice President, Finance
and Corporate Controller
and Chief Accounting Officer
Laura C. O’Donnell
Chief Compliance Officer
Stephen H. L. Ooi
President,
Asia Pacific
Renee P. Rogers, Ph.D.
Vice President,
Global Human Resources
Richard C. Stair
Senior Vice President,
Global Operations
and Logistics
Board of Directors
John L. McGoldrick
Chairman of the Board,
Zimmer Holdings, Inc.
Senior Vice President,
External Strategy Development,
International AIDS
Vaccine Initiative
David C. Dvorak
President and
Chief Executive Officer,
Zimmer Holdings, Inc.
Officers and Key Management
David C. Dvorak
President and
Chief Executive Officer
Cheryl R. Blanchard, Ph.D.
Senior Vice President,
Research and Development
and Chief Scientific Officer
Sheryl L. Conley
Group President,
Americas and Global Marketing
and Chief Marketing Officer
Jon E. Kramer
President,
U.S. Sales
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:
BNY Mellon Shareholder Services
P.O. Box 358015
Pittsburgh, PA 15252-8015
+1-888-552-8493 (Domestic)
+1-201-680-6685 (International)
http://www.bnymellon.com/
shareowner
Investor Relations
Zimmer invites stockholders,
security analysts, portfolio
managers and other interested
parties to contact:
Paul G. Blair
Vice President, Investor Relations
+1-574-371-8042
paul.blair@zimmer.com
James T. Crines
Executive Vice President,
Finance and Chief Financial Officer
+1-574-372-4264
james.crines@zimmer.com
To obtain a free copy of Zimmer’s
annual report on 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 http://investor.zimmer.com
or call +1-66-6-656.
Independent Auditors
PricewaterhouseCoopers LLP
Chicago, IL, USA
* Trademark of Institutional Shareholder Services, Inc. Originally introduced in 2002, the ISS
Corporate Governance Quotient (CGQ®) is a dynamic corporate governance rating tool that
is designed to help investors manage investment risk and drive value while also helping
corporations perform peer analysis and benchmark their corporate governance practices.
The cover and narrative section of this
annual report are printed on FSC certified
stock. The financial section contains 10%
post-consumer waste and is not FSC certified.
A Global Presence
Patients worldwide benefit from Zimmer’s innovative products. We have a market presence in more than 100 countries, and 45 percent
of our nearly $4 billion in annual sales comes from markets outside the United States. Our core hip and knee replacement business
ranks No. 1 in the global market.
WARSAW, IN
MINNEAPOLIS, MN
MEMPHIS, TN
AUSTIN, TX
CARLSBAD, CA
WARSAW, IN
MINNEAPOLIS, MN
MEMPHIS, TN
AUSTIN, TX
CARLSBAD, CA
(cid:62)(cid:45)(cid:49)(cid:49)(cid:41)(cid:54)(cid:4)(cid:39)(cid:51)(cid:54)(cid:52)(cid:51)(cid:54)(cid:37)(cid:56)(cid:41)
(cid:44)(cid:41)(cid:37)(cid:40)(cid:53)(cid:57)(cid:37)(cid:54)(cid:56)(cid:41)(cid:54)(cid:55)
(cid:51)(cid:56)(cid:44)(cid:41)(cid:54)(cid:4)(cid:51)(cid:52)(cid:41)(cid:54)(cid:37)(cid:56)(cid:45)(cid:50)(cid:43)(cid:4)
(cid:55)(cid:57)(cid:38)(cid:55)(cid:45)(cid:40)(cid:45)(cid:37)(cid:54)(cid:45)(cid:41)(cid:55)
(cid:62)(cid:45)(cid:49)(cid:49)(cid:41)(cid:54)(cid:4)(cid:39)(cid:51)(cid:54)(cid:52)(cid:51)(cid:54)(cid:37)(cid:56)(cid:41)
(cid:44)(cid:41)(cid:37)(cid:40)(cid:53)(cid:57)(cid:37)(cid:54)(cid:56)(cid:41)(cid:54)(cid:55)
(cid:51)(cid:56)(cid:44)(cid:41)(cid:54)(cid:4)(cid:51)(cid:52)(cid:41)(cid:54)(cid:37)(cid:56)(cid:45)(cid:50)(cid:43)(cid:4)
(cid:55)(cid:57)(cid:38)(cid:55)(cid:45)(cid:40)(cid:45)(cid:37)(cid:54)(cid:45)(cid:41)(cid:55)
GÖTEBORG, SWEDEN
KIEL, GERMANY
BRUSSELS, BELGIUM
PARIS, FRANCE
SWINDON, UK
SHANNON, IRELAND
FREIBURG, GERMANY
ETUPES, FRANCE
GÖTEBORG, SWEDEN
BARCELONA, SPAIN
KIEL, GERMANY
LISBON, PORTUGAL
BRUSSELS, BELGIUM
CATANIA, ITALY
PARIS, FRANCE
SWINDON, UK
SHANNON, IRELAND
FREIBURG, GERMANY
ETUPES, FRANCE
BARCELONA, SPAIN
LISBON, PORTUGAL
CATANIA, ITALY
MISSISSAUGA, CANADA
PARSIPPANY, NJ
CEDAR KNOLLS, NJ
DOVER, OH
CANONSBURG, PA
WASHINGTON, DC
STATESVILLE, NC
MIAMI, FL
MISSISSAUGA, CANADA
MERCEDITA, PUERTO RICO
PARSIPPANY, NJ
CEDAR KNOLLS, NJ
DOVER, OH
CANONSBURG, PA
WASHINGTON, DC
STATESVILLE, NC
MIAMI, FL
MERCEDITA, PUERTO RICO
VIENNA, AUSTRIA
TREVISO, ITALY
MILAN, ITALY
VIENNA, AUSTRIA
TREVISO, ITALY
MILAN, ITALY
UTRECHT, NETHERLANDS
MOSCOW, RUSSIA
MÜNSINGEN, SWITZERLAND
WINTERTHUR, SWITZERLAND
BAAR, SWITZERLAND
UTRECHT, NETHERLANDS
MOSCOW, RUSSIA
RAMAT GAN, ISRAEL
MÜNSINGEN, SWITZERLAND
WINTERTHUR, SWITZERLAND
BAAR, SWITZERLAND
BEIJING, CHINA
SHANGHAI, CHINA
CHENGDU, CHINA
GUANGZHOU, CHINA
GURGAON, INDIA
RAMAT GAN, ISRAEL
BEIJING, CHINA
SHANGHAI, CHINA
CHENGDU, CHINA
GUANGZHOU, CHINA
GURGAON, INDIA
JOHANNESBURG,
SOUTH AFRICA
JOHANNESBURG,
SOUTH AFRICA
SEOUL, SOUTH KOREA
TOKYO, JAPAN
GOTEMBA, JAPAN
FUKUOKA, JAPAN
TAIPEI, TAIWAN
HONG KONG
BANGKOK, THAILAND
SINGAPORE
SEOUL, SOUTH KOREA
TOKYO, JAPAN
GOTEMBA, JAPAN
FUKUOKA, JAPAN
TAIPEI, TAIWAN
HONG KONG
BANGKOK, THAILAND
SINGAPORE
SYDNEY, AUSTRALIA
AUCKLAND, NEW ZEALAND
SYDNEY, AUSTRALIA
AUCKLAND, NEW ZEALAND
Zimmer Holdings, Inc.
345 East Main Street, P.O. Box 708, Warsaw, IN 46580, U.S.A.
www.zimmer.com