“ I’ve danced with my
husband for the first time
in 10 years.”
Zimmer Holdings, Inc. 2008 Annual Report
Defining Zimmer
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Zimmer focuses on
restoring mobility,
alleviating pain and
improving the quality
of life for patients
around the world.
“I never thought
I’d hike again.”
On the cover:
For 13 years Peggy took a progressive
series of medications to manage the
pain in her arthritic joints. She was
among the first to get a Zimmer® Gender
Solutions™ Knee. Her new mobility has
allowed her to return to work, enjoy
her granddaughter’s soccer games and
plan some long-postponed vacations
with her husband.
Pictured above:
Born with dysplasia in both hips, Daniel
was experiencing debilitating pain and
reduced mobility that limited his activities.
Through research he found a skilled
surgeon who recommended a Zimmer
hip implant. The successful surgery and
rehab enabled Daniel to reclaim his outdoor
life — biking, mountain trekking, traveling
and photography.
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Our commitment to patients shapes strategies and
day-to-day decisions at Zimmer. Relentless customer
focus, innovative solutions, disciplined execution and
our dedicated people enable us to deliver products
and procedures to treat musculoskeletal conditions.
Through these core values, we are defining Zimmer.
Relentless
Customer Focus
Innovative
Solutions
Disciplined
Execution
Dedicated
People
Keeping patients in the
forefront of all our business
relationships exemplifies our
relentless customer focus.
Along with our customers,
we share a commitment to
achieving the best possible
patient outcomes. Zimmer
products and procedures
help achieve that goal.
Innovative solutions emerge
from the collaborative efforts
of experts in musculoskeletal
health who share an unshak-
able belief in the potential
for even better patient
outcomes. Zimmer expands
on this commitment, bringing
smart thinking to all of our
processes.
Zimmer’s strategies are
centered on a long-term,
global vision for medical
devices. Disciplined execu-
tion puts our strategies to
work and makes effective
use of our resources, sup-
porting our commitment to
achieve attractive returns
on investments.
Zimmer’s achievements are
the sum total of the contribu-
tions of more than 8,500
employees worldwide. Our
employee development
programs align day-to-day
activities with overarching
business strategies to lay
a solid foundation for
continued leadership.
Zimmer Holdings, Inc. 2008 Annual Report
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Financial Highlights
(Dollars in millions except per share amounts)
Sales b y Geographic Segment (Reported)
2004
2005
2006
2007
% Change
2008 2007-2008
58%
57%
29%
14%
Americas
Europe
Asia Pacific
$ 1,741
$ 1,942
$ 2,076
$ 2,277
$ 2,354
809
431
875
469
931
1,081
1,179
488
540
588
Consolidated
$ 2,981
$ 3,286
$ 3,495
$ 3,898
$ 4,121
3%
9%
9%
6%
Sales b y Product Category (Reported)
2004
2005
2006
2007
% Change
2008 2007-2008
42%
6%
5%
5%
31%
43%
3%
5%
7%
6%
5%
Reconstructive
$ 2,425
$ 2,682
$ 2,844
$ 3,181
$ 3,391
Knees
Hips
Extremities
Dental
Trauma
Spine
OSP* and Other
1,194
1,366
1,460
1,635
1,763
1,048
1,102
1,127
1,221
1,280
58
125
173
134
249
66
148
180
160
264
78
179
195
177
279
104
221
206
197
314
121
227
221
231
278
Consolidated
$2,981
$ 3,286
$ 3,495
$ 3,898
$ 4,121
*Orthopaedic Surgical Products
7%
8%
5%
16%
3%
8%
17%
-11%
6%
28%
14%
33%
3%
6%
Net Sales
Net sales totaled more than
$4 billion for the first time in
the company’s history.
Operating Profit
Zimmer pursued strategic
imperatives while addressing
the impact of demanding
market conditions.
Operating Cash Flow
Strong cash flow positions us
to return value to stockholders
through investments in our
business and share repurchases.
Diluted Earnings per Share
Zimmer held earnings performance
steady in a challenging year.
+6% Reported
(1)
-7% Adjusted
-3% Reported
1
2
1
4
,
8
9
8
3
,
5
9
4
3
,
6
8
2
3
,
1
8
9
2
,
1
7
1
1
,
5
6
1
1
,
3
2
3
1
,
8
2
1
1
,
7
1
1
1
,
5
5
0
1
,
4
0
9
3
6
7
-4% Reported
2
6
8
8
7
8
5
3
2
1
,
0
9
0
1
,
4
8
0
1
,
1
4
0
1
,
8
3
0
1
,
5
0
4
.
2
7
3
.
0% Adjusted (1)
14% Reported
4
4
3
.
0
4
3
.
5
0
4
.
6
2
3
.
0
1
3
.
3
9
2
.
1
4
2
.
9
1
2
.
04
05
06
07
08
04
05
06
07
08
04
05
06
07
08
04
05
06
07
08
(1) “Adjusted” refers to performance measures that exclude a one-time $169.5 million civil settlement and related tax benefit, a provision for certain Durom® Acetabular Component product
claims in the U.S., in-process research and development (IPR&D), inventory step-up, a tax benefit from decreased Swiss deferred tax, and acquisition, integration and other expenses.
See the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures on page 73.
2
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To Our Stockholders:
We are defining Zimmer by focusing on our fundamental purpose – restoring
mobility, alleviating pain and improving the quality of life for patients around
the world. While our 2008 financial performance did not meet our objectives,
from a broader perspective 2008 reaffirmed core Zimmer values and better
prepared us for continuing leadership in the markets we serve.
Throughout 2008, Zimmer introduced new and innovative products, expanded key facilities and capacities,
continued improvement efforts across our corporate-wide quality systems, strengthened our managerial talent and
supplemented our legacy Spine business with a meaningful acquisition. Moreover, we embraced the opportunity
as an industry leader to enhance our compliance program concerning consulting arrangements with healthcare
professionals. Through these efforts, we have preserved our ability to collaborate with the most talented
healthcare professionals in the world to do great things for today’s and tomorrow’s patients.
Full-year net sales topped $4 billion for the first time in our history at $4.12 billion. Our 2008 performance
was adversely affected by issues related to the global implementation of our enhanced compliance program
and the temporary suspensions of production and sales of certain products, among other matters. Despite
these challenges, we made substantial progress defining Zimmer for the future. Whether we are talking about
turbulence from these recent headwinds or about Zimmer’s future, the common element is our unwavering
commitment to act in the best interests of patients and to conduct our business in a manner that inspires
confidence and trust. That commitment in turn drives our strategies for maintaining Zimmer’s leadership in
medical devices and delivering solid returns on our investments.
A Stronger Foundation for Positive Long-Term Results
Our products, procedures and technologies have helped healthcare professionals throughout the world improve
the quality of life for millions of patients over many decades. Those outcomes reflect the commitment of Zimmer’s
people to innovation, a deep understanding of customer needs and our best-in-class distribution system. We are
moving decisively to leverage these strengths further across all of our businesses.
Our established heritage in research and development for reconstructive implants has resulted in a broad
portfolio of industry-leading solutions. Recently launched knee and hip products will be emphasized through
our expanded surgeon training programs in 2009, and we look forward to additional key product introductions
as this year progresses. Future areas of promise, particularly for a well-rounded company like Zimmer, include
the opportunity to expand the continuum of care through developments such as biologic solutions for early stage
joint disease, in addition to further personalizing implants and surgical instruments to fit specific patient needs.
With the knowledge gained in the reconstructive market, we are well prepared to advance treatments for other
parts of the musculoskeletal system, particularly through the use of Trabecular Metal™ Technology and the
application of anatomical-fit principles to improve implant designs. We also intend to take advantage of the
opportunities afforded to us with the expanded product portfolio resulting from our 2008 Abbott Spine acquisition.
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Zimmer Holdings, Inc. 2008 Annual Report
Zimmer Holdings, Inc. 2007 Annual Report
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3
To Our Stockholders continued
Zimmer’s far-reaching and service-oriented distribution system is a competitive strength, as well as a resource for
building stronger market presence. Our leadership in Knees and Hips means that we serve a substantial portion
of the hospital market. These hospital relationships translate into opportunities to supply a broader range of
products and add value as healthcare providers come under greater pressure to improve efficiency and more
effectively manage supplier relationships.
During 2008, we invested in infrastructure projects to accommodate anticipated growth in demand for musculo-
skeletal procedures. Accordingly, we are expanding manufacturing in Shannon, Ireland; Winterthur, Switzerland,
and Warsaw, Indiana, and we are consolidating certain of our European distribution facilities into a new highly
automated center in Eschbach, Germany.
Finally, we also added key management talent to our team in 2008, including two seasoned healthcare execu-
tives to lead our reconstructive and global businesses groups. Over the past two years, we have installed new
presidents in our Trauma, Spine, Dental and OSP divisions.
Forward Momentum
The groundwork has been laid for Zimmer to experience forward momentum in 2009. Indeed, we relish the
opportunity to focus our full attention and energy on realizing market opportunities, which are particularly
compelling given our comprehensive product portfolio and demographics that favor our business. Our top
priorities will be to stabilize and restore growth in our core Knee and Hip franchises and to accelerate growth
in our smaller business lines.
The changes we have made strengthen Zimmer. Although the process at times has been disruptive, we are
confident that, with optimal patient outcomes as our guiding principle, Zimmer is following the right course for
sustainable progress. We are grateful for the support that we have received from our customers, employees and
distributor networks in dealing with our recent challenges and we look forward with optimism to the year ahead.
David C. Dvorak
President and
Chief Executive Officer
4
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Letter from the Chairman
Zimmer’s solid grounding and broad strengths enabled the company to manage
a number of challenges in 2008 while carrying out initiatives that support
success over the long term. As we move into 2009, even amid macroeconomic
uncertainty, we remain confident that Zimmer is well positioned for success.
The Board is working closely with Zimmer’s leadership team to achieve the high levels of consistent
performance that we are confident this company can deliver. The company’s core strategic principles of
relentless customer focus, innovative solutions, disciplined execution and dedication to people provide
sound criteria for decision-making.
We are mindful that the industry is in one of its most dynamic periods ever, with global opportunities, global
competition, unprecedented economic pressures on healthcare providers and ever-higher expectations for the
outcomes of surgical procedures. Zimmer is uniquely positioned to meet these challenges. Its comprehensive
product portfolio, innovative surgical techniques and hands-on customer support point to sustainable market
leadership. Just as importantly, Zimmer has the wherewithal to leverage market presence, research capabilities
and operating infrastructure for continued strong performance.
The recent emphasis on consistent standards for operations worldwide has strengthened the company’s
prospects and its ability to act on market opportunities. Its compliance and medical education programs are
world-class, a step ahead of emerging global trends. Implementing the same operating principles worldwide
provides for the uninterrupted execution of Zimmer’s strategy and business unit plans. The company continues
to deepen management bench strength and implement programs to attract and retain first-rate employees.
The Board encourages these kinds of initiatives.
Your Board is fully engaged in applying the Directors’ broad experience to help Zimmer achieve its objectives
and deliver attractive returns to stockholders while embracing social responsibilities. In all of our discussions
there is an unshakable shared commitment to Zimmer’s core purpose and mission of improving patients’
lives and delivering value to healthcare providers. With these principles in place, and bolstered by a strong
commitment to quality, we are confident in Zimmer’s ability to align its considerable strengths to achieve
superior performance and to deliver growth and value to our stockholders.
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John L. McGoldrick
Chairman
Zimmer Holdings, Inc.
Zimmer Holdings, Inc. 2008 Annual Report
5
Surgeons continue to expand their skills throughout
their careers so that their patients have the best
treatment available. Zimmer’s world-class medical
education program offers training in a variety of
settings, from online to on site to accommodate
surgeons’ needs and put them in touch with
appropriate experts.
World-Class Medical Education
Zimmer programs are designed to
provide training on the safe and
effective use of our products. In
sessions like this one, attendees
listen to a presentation and then
break into small groups facilitated
by surgeons and Zimmer specialists
for further concentration on specific
topics and analyzing routine as well
as complex case studies.
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Defined by Relentless Customer Focus
Zimmer is grounded in awareness of patients’ needs, which fosters
a commitment to customer service across our business.
We reach patients through the surgeons
market a comprehensive product line
also helped expand thinking about how
who implant our products and use our
and confidence in being able to deliver
surgeons can deliver even better results.
techniques and procedures. We have
the products customers need. They are
The Gender Solutions Knee line lays
relationships with them and the hospitals
supported by Zimmer’s extensive market
the foundation for more customized
they serve as customers and separately
relationships, strategically positioned
solutions, taking into account variations
as collaborators to further improve
distribution facilities and worldwide
in knee anatomy.
patient outcomes.
manufacturing network.
Our comprehensive line of knee implants
Relentless customer focus fuels Zimmer’s
Rising medical costs and related
addresses a broad range of patient
leadership. It intersects with product quality,
productivity issues put more pressure
conditions. One example is the NexGen®
production efficiency, order reliability and
on healthcare providers. Our sales
the importance of understanding healthcare
representatives’ support of surgical teams
trends. It helps mold long-term strategy as
and understanding of hospitals’ efforts
well as day-to-day decisions.
to improve efficiency are particularly
important in this kind of environment.
Taking Customer Focus to Market
Their skills, dedication and commitment
8,000+
Surgeons
trained in MIS
techniques
LPS-Flex Mobile
Knee and its
emphasis on range
of motion, a match
for the needs of
younger patients
One demonstration of customer focus
is our sales representatives’ knowledge
and commitment to service. Their
approach to customer relationships
to patient care priorities add value to
customer relationships.
and more active lifestyles. Another is the
Zimmer Gender Solutions Patello-Femoral
Joint System, a solution that offers relief
Products That Match Needs
for patello-femoral pain without the
provides a distinctive competitive
By paying attention to how customers use
advantage for Zimmer.
our products and what their experience
Our sales representatives bring a thorough
understanding of product features and
clinical performance to their conversations
with customers. Their knowledge allows
them to communicate with healthcare
professionals and have the right implants
tells us about improving patient outcomes,
we have established a track record of
introducing innovative, value-added
products and procedures. Our industry
has a 95-percent-plus success rate for
knee and hip implants at 10 years.
and instruments available in operating
The Zimmer® Gender Solutions™ Knee line
rooms to help achieve intended patient
is a leading example of a product that not
outcomes. The representatives take to
only improved patient satisfaction but
necessity of a full knee replacement.
This is also an example of how we are
expanding the continuum of care.
In the Hip portfolio, prime examples of
flexibility for both surgeons and patients
— and competitive differentiators for
Zimmer — are our Zimmer® M/L Taper Hip
Prosthesis with Kinectiv® Modular Neck
Technology and VerSys® Epoch® FullCoat
Hip Prosthesis. The Zimmer M/L Taper
Hip Prosthesis modular neck pieces give
Collaborative Relationships
Zimmer sales representatives consult with
surgeons as they plan the best approaches
for upcoming surgeries. Our portfolio of
solutions includes the Zimmer® M/L Taper
Hip Prosthesis with Kinectiv® Modular Neck
Technology, shown at right. An array of
options allows surgeons to select a
personalized fit for their patients.
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Zimmer Holdings, Inc. 2008 Annual Report
7
Defined by Relentless Customer Focus continued
surgeons greater flexibility to make
of motion with knee and hip implants,
needing treatment and increased incidents
adjustments during an operation,
we are also advancing treatment options
of joint problems related to more wide-
increasing control over the procedure
for spine-related conditions. We made
spread obesity and an aging population.
and confidence in the outcome. The
a significant acquisition in our Spine
At the same time, hospitals are under
composite technology of the VerSys
business in 2008, further extending our
pressure to shorten stays and pursue
Epoch FullCoat Hip Prosthesis, a lower
reach and expanding our position as a
other efficiencies while maintaining high
stiffness implant, better matches the bone
single-source supplier for customers.
levels of patient care.
and maintains healthy bone around the
implant. In 2009, Zimmer’s Hip portfolio
will expand surgeons’ options with the
introduction of new acetabular cup products.
The trend toward tailoring implants for
individual patient needs also involves more
pre-surgery evaluations, including MRIs,
to enable improved pre-operative planning
Recent manufacturing infrastructure
Zimmer’s experience has resulted in an
investments in our Warsaw, Indiana,
in-depth understanding of healthcare
100+
Countries where
Zimmer products
are sold
and Winterthur,
economics. We see firsthand the differ-
Switzerland,
ence that successful surgery can make
operations are
for individuals. Changing healthcare
facilitating the
dynamics mean that we and our industry
worldwide rollout
overall are working to better understand
of a significantly
the implications of enhanced mobility,
and the preparation of patient-specific
expanded surgical nail portfolio for our
treatment to reduce pain and better quality
instrumentation. Our focus on customers
Trauma division. The Zimmer® Natural
of life with an eye toward measuring the
means that we not only have the implants
Nail™ System is a next-generation product
impact from the perspective of payors,
the surgeons need but also support them
line that provides highly anatomical
governments and society in general.
with the right training, tools and tech-
implants and, with ergonomic instrumen-
niques, including emerging technologies
tation, simplifies surgeon use. These
and biological solutions.
implants will be available in titanium
The better we understand patient differ-
ences, the more we recognize opportunities
to refine techniques and address unmet
needs. A company with our breadth of
experience has a superior vantage point
for identifying opportunities to leverage
experience and insight. As we continue to
apply what we know about improving range
and stainless steel for a wide variety
of indications and will be targeted to
high-volume trauma centers.
Changing Industry Dynamics
Patient outcomes remain the constant
focus in a time of dynamic change in our
markets. Along with our customers, we are
preparing for the impact of more patients
We have an important tool for under-
standing and preparing for the impact of
these trends in our Accelero Health Partners
unit. Besides the industry expertise it brings
to Zimmer, it provides consulting services
to the hospital industry. It helps clients
implement techniques to enhance economic
performance, balance emphasis on patient
care with economic realities and define
meaningful performance measures.
Defined by Innovative Solutions
The goal of improving patient outcomes focuses Zimmer on
innovation in products, procedures and business practices.
Zimmer’s track record of innovation has
continue to spark new avenues and
In 2008 we introduced enhancements to
led to game-changing products and
applications for improving patient
our corporate compliance program that set
procedures like the Gender Solutions
outcomes. The willingness to embrace
new standards in the industry by preserving
Knee, Trabecular Metal™ Technology,
new ideas is ingrained in Zimmer from
critically important, collaborative relation-
DeNovo® NT Natural Tissue Grafts and
product development to manufacturing,
ships with surgeons while bringing trans-
Zimmer® Minimally Invasive Solutions™
distribution processes and training
parency to those relationships. Under this
Procedures. Those breakthrough ideas
and education.
business model, sales, marketing and
8
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Collaborative relationships with surgeons are
essential in helping Zimmer design new products
and procedures to advance patient outcomes. The
product development teams include engineers whose
knowledge of design materials and manufacturing
processes helps turn ideas into products and
accompanying instrumentation.
New Uses for Trabecular Metal™
Technology – Design engineers
examine the new Zimmer® Trabecular
Metal™ Glenoid and the instruments
designed to implant it. The yellow
component shown above represents
porous Trabecular Metal Technology
surfaces which are uniquely
conducive to bone formation
and biologic in-growth.
Zimmer Holdings, Inc. 2008 Annual Report
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Custom-engineered processes deliver the volume of
products needed to support more than one million
surgeries annually. Designing automated manufacturing
tools and quality control systems is an integral part
of product development at Zimmer. This results in
increased precision as well as leaner, more efficient
manufacturing and distribution.
Quality Assurance
The robotic probe shown above
on a Coordinate Measuring Machine
(CMM) traces a neck component,
part of the Zimmer® M/L Taper Hip
Prosthesis with Kinectiv® Modular
Neck Technology. It is analyzed
against precise design specifica-
tions and manufacturing tolerances.
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Defined by Innovative Solutions continued
research and development roles are
Medical education incorporates online
higher returns on research and develop-
well-defined, and policies governing
learning modules, interactive small group
ment resources.
interactions with customers and business
discussions, intensive case study reviews
partners are clearly differentiated.
and surgeon-to-surgeon training programs,
We also put in place third-party mecha-
nisms to oversee certain educational and
charitable contributions. Our partnership
with AmeriCares, one of the world’s leading
non-governmental organizations providing
in-kind medical donations, supports
emergency response and ongoing medical
assistance. We are the founding supporter
including difficult-case consultation. The
model focuses on knowledge and skill
transfer in educationally relevant settings,
backed by sound instructional design and
adult learning principles. Participants have
direct access to faculty in small group inter-
active sessions, a change from the typical
large, lecture-based programs of the past.
of OMeGA Medical Grants Association LLC,
Surgical skills training is available at The
an entity created by the American Ortho-
Zimmer Institute Education Facility at our
paedic Association to provide funding for
headquarters in Warsaw, Indiana, and at
post-graduate orthopaedic fellowships and
other qualified facilities around the world.
residency programs.
Our long-standing worldwide support
of local community development and
healthcare projects continues, guided
by a process in which an internal
committee of non-sales and marketing
staff will assess and act upon requests
for financial support and grants, including
such things as medical education, unre-
stricted research and charitable activities.
21%
Of sales are
from products
introduced in
the last 3 years
In the hands-on
training sessions
using anatomical
materials, surgeons
learn new proce-
dures and become
more familiar with
the products and instruments they will
use in implant procedures.
Research Emphasis
This approach means giving more attention
to expanding the continuum of care for
both younger and older patients, who are
living longer, lead more active lives and
may need revisions. We see opportunities
to complement Zimmer’s already strong
product portfolio while developing
additional attractive market opportunities.
Biologics play an important role at multiple
points along the spectrum of care. Zimmer
has a comprehensive program investigating
uses of biologic technologies for bone,
cartilage, meniscus, tendon and spine
repair. A bone graft substitute launched
in 2008 represents an example of our
reconstructive businesses, as well as
Trauma, Spine and Dental, integrating
the same product into their portfolios.
Other promising advances in treatment
include techniques that conserve bone
when patients undergo knee or hip
surgeries and motion preservation
technology in the spine market. Bone
conservation takes on increased impor-
World-Class Medical Education
Zimmer has developed a new, highly
interactive medical education model that
we believe sets new standards for the
industry. It lays the foundation for both
medical education and surgical skills
training to be offered through The Zimmer
Institute® Education Program.
Addressing unmet clinical needs continues
tance as longer life expectancy leads
to represent the core of Zimmer’s research
to more wear and tear on joints as well
and development process. It emphasizes
as greater likelihood of multiple joint
an energetic and sustainable climate of
replacements over the course of a
innovation that benefits both patients and
lifetime. In treating spine patients, even
surgeons. By aligning R&D with overall
a few degrees of motion represents
business strategy, we also are encourag-
improvement. Research in our Spine
ing more use of market research and other
business focuses on improved clinical
data to drive research choices and deliver
outcomes and increased range of motion.
In Touch With Customers
Advertising to healthcare professionals is
one of the communication tools Zimmer
uses to highlight product features and
benefits. This recent ad focuses on
Trabecular Metal™ Technology and its
ability to mimic bone structure, function
and physiology. Zimmer is differentiated by
our ability to leverage such technologies
across a wide range of knee, hip, shoulder,
spine and trauma products.
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
Zimmer Holdings, Inc. 2008 Annual Report
11
Defined by Innovative Solutions continued
Catalysts for Innovation
new applications. We draw on R&D,
surgery and other technological capabili-
Trends affecting the markets we serve
present an environment rich in oppor-
tunities for innovative solutions.
Even a trend such as the aging population
continues to generate opportunities.
Societies are facing the challenges of
decreased mobility, more back pain and
greater susceptibility to broken bones that
go along with the aging process. Adding
to the sense of urgency, the need for
improving treatment emerges at a time of
unprecedented mandates to improve the
economics and availability of healthcare.
technologies and materials across our
ties also position us well for the growing
businesses to provide solutions for other
trend among surgeons and hospitals to
musculoskeletal applications.
tailor surgical plans for individual patients.
One of the most important trends is the
Our deep orthopaedic knowledge and
desire among patients and healthcare
broad product line, backed by clinical data,
providers for less invasive procedures
position us well to continue to extend
11
Years of available
clinical data for
Trabecular Metal
Technology
that reduce patient
the continuum of care, which already is a
discomfort and
strategic priority for our research initiatives.
promote quicker
Another priority is development of products
recovery. Zimmer’s
and procedures that leave open the
pioneering work in
possibility for revision as people live
minimally invasive
longer and pursue more active lifestyles.
Zimmer Minimally Invasive Solutions
surgery has made
Our far-reaching orthopaedics expertise
Procedures a routine consideration in
not only focuses on specific products and
further development of products and
procedures but also recognizes potential
procedures. Our computer-assisted
Defined by Disciplined Execution
Patients receive Zimmer implants in more than one million
surgeries each year, the result of a disciplined process of
research, development, manufacturing and product delivery.
Disciplined execution recognizes our
needs, takes a long-term view and sets
Our broad portfolio of products and
strong commitment to patient care,
goals whose accomplishment requires
technologies offers additional opportuni-
customer service and return on invest-
strong and integrated performance across
ties to apply competencies across various
ment. The defining qualities for Zimmer’s
the organization.
Recent strategic hires have deepened
management bench strength, adding
capabilities in managing processes and
bringing fresh approaches to business
operations. Zimmer has tremendous
expertise in orthopaedics and a solid
financial foundation to support growth.
Our size and range of competencies
are key strategic strengths.
disciplines. Overlap in customer groups
enables us to leverage sales processes
and distribution capabilities. Our range
of products, distribution channels and
markets presents a unique strategic
advantage in our industry.
Enhanced Quality Discipline
Our quality infrastructure is designed
to facilitate standardization across the
Zimmer network and enhance the flow
approach to operations are quality, value
and quick, efficient production processes.
With our long-term and global view of
addressing musculoskeletal conditions,
we are building an infrastructure in which
all the components adhere to these high
standards, while the network as a whole
provides flexibility in manufacturing and
distribution to meet market needs.
No part of our business was left
unexamined as we evaluated our business
model and assessed the potential of our
infrastructure to continue to support our
industry leadership. Our framework for
strategic planning starts with patient
12
A priority for the leadership team is to
of information to ensure consistent
assess how best to align the company’s
interpretation of regulations as well
considerable resources to deliver
as to help recognize potential problems
consistently high performance and take
at early stages. Internal quality assurance
advantage of growth opportunities.
teams along with regular quality audits
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
Zimmer’s manufacturing processes combine automation
with hands-on quality inspection for additional assur-
ance that our products meet demanding standards for
patient implants. Consistent operating procedures and
quality control standards are deployed across our
global network.
High Performance, High Quality
Technicians add visual inspection
to the automated quality checks
applied throughout the production
process. Here an employee examines
a nail, part of the Zimmer® Natural
Nail™ System, before the product
is further processed to match the
curvature of the human femur.
Zimmer Holdings, Inc. 2008 Annual Report
13
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
Lean manufacturing allows Zimmer to reduce
production time and cost while increasing efficiency.
We can maintain leaner inventories while still getting
our products in the hands of surgeons when and
where they are needed around the world.
Benefiting From Scale
Our extensive product line and
related production capabilities
offer opportunities to leverage
infrastructure. A robotic arm, shown
above, removes ceramic molds after
one of many applications of silica.
In the next stage of production,
3,000-degree molten cobalt chrome
alloy will be poured into these
molds to make implants.
14
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
Defined by Disciplined Execution continued
by experienced third parties deliver
economic environment worldwide
dimensional program adds manufacturing
improved consistency and strengthen
and increasing attention to healthcare
capacity in key geographies and enhances
operational excellence. By encouraging
expenditures underscore the need to
product distribution.
a robust global view of quality, we
drive costs out of the system.
Manufacturing expansion and efficiencies
Our manufacturing facilities are industry
are being realized with our new plant in
leaders in terms of automation and
Shannon, Ireland, as well as operational
productivity. As part of our drive to
changes at our plant in Winterthur, Switzer-
continue improving efficiency, our
land, and our foundry in Warsaw, Indiana.
The philosophy underlying quality
focused on continuous operational
considerations at Zimmer puts patient
improvement and optimization.
operations follow a cellular concept in
production and practice a philosophy
As a greenfield site, the Shannon plant
incorporates the most cost-effective
practices from across the Zimmer network.
We expect to achieve significant produc-
Adding to efficiency, at certain of our
tion efficiencies at a lower overall total
facilities many employees are cross-
delivered cost. The building and site can
trained to perform a broad array of
accommodate capacity expansion as
operations. For both efficiency and quality
demand increases.
are better prepared to meet regulatory
requirements regardless of differences
among markets. Zimmer actively seeks
to prevent quality issues through the
use of lean manufacturing, Six Sigma
and other similar programs.
safety ahead of everything. Employees
are expected to stop production if they
identify a problem. Both growth and
global operations point to the need to
further institutionalize quality consider-
ations and ingrain a quality culture
beyond manufacturing. Zimmer has long
had quality systems implemented at all
of our manufacturing facilities. We continue
to improve those systems as we maintain
both ISO certification and FDA registration
for those facilities whose products can
be sold in the United States.
control, we continually evaluate the
potential to in-source core products
such as castings and forgings. Ongoing
initiatives to improve production involve
the use 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
Our expansion in Winterthur, Switzerland,
added 85,000 square feet of production
capacity to accommodate planned new-
product launches and position us over
the long term to help meet expected
increases in demand for knee and hip
99.99%
Accuracy
in product
shipments
implants. The
planning for the
Winterthur facility
also incorporated
continuity capabili-
ties to maintain
production under various business
interruption scenarios. The plant’s location
and improved manufacturing efficiencies
give us additional tools to optimize
network performance.
Zimmer’s quality emphasis requires high
process controls; state-of-the-art equip-
quality standards, demands patient safety
ment purchases and upgrades, and
first and foremost and drives consistency
high-speed machining.
and compliance into design and manufac-
turing, while at the same time preserving
Disciplined Infrastructure Build-Out
production flexibility.
Discipline for Greater Efficiency
Zimmer is nearing completion of a
significant capital investment program
designed to assure a world-class infra-
Efficiency improvement is a continuing
structure to accommodate growth and
process at Zimmer facilities. The challenging
changing market dynamics. The multi-
Accurate, Quick Order Fulfillment
Highly efficient distribution centers track
and ship millions of products annually
with 99.99 percent order fulfillment
accuracy. Zimmer products are bar coded
and increasingly are tracked with Radio
Frequency Identification (RFID) tags —
another tool to facilitate shipping and
inventory management.
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
Zimmer Holdings, Inc. 2008 Annual Report
Zimmer Holdings, Inc. 2008 Annual Report
15
15
Defined by Disciplined Execution continued
The major distribution initiative in
which products not only are easily
To surgeons and patients, those almost
our infrastructure build-out focused
retrieved when it is time for them to be
imperceptible differences in implants or
on Eschbach, Germany, where a new
shipped, but also are managed during
instruments can make an unmistakable
facility consolidates certain European
storage to assure that instruments and
difference in the surgical outcome.
distribution in one location. More
implants remain shipment-ready.
important in terms of immediate impact
on customer service is the facility’s
central location and efficient, highly
automated material handling system.
As a result, it can accommodate later
cut-off times and still meet delivery
schedules. The automated system supports
a dynamic distribution environment in
We design infrastructure projects to
strike the best balance among demanding
quality standards, cost savings, production
flexibility and performance criteria. Even
with world-class manufacturing processes,
the nature of our products requires human
intervention to meet exacting specifications.
Defined by Dedicated People
Throughout Zimmer, employees are focused on initiatives
that restore mobility, alleviate pain and improve the quality
of life for patients around the world.
This patient-centered purpose is the basis
and then each business unit’s functional
One Zimmer
for the corporate values on which our
groups. The effect is to have the
business model is constructed. Among
company’s goals cascade across the
other qualities, our corporate values
organization, defining appropriate
emphasize integrity, accountability,
expectations for delivering results
respect and innovation. Together they
at every level of the company.
form the platform for strategic initiatives
to maintain Zimmer’s market leadership
position, embrace social responsibility
and deliver value to patients, healthcare
providers and our stockholders.
Goal-Oriented Practices
To make sure that the principles
are applied consistently in the “One
Zimmer” culture that our business model
supports, all Zimmer employees now
participate in a goal-oriented performance
management system.
The performance alignment process
translates the company’s strategic goals
into annual business goals for executive
management, which in turn define
operating goals for each business unit
16
The evolution of Zimmer’s business
means hiring employees with a broad
8,500
Dedicated
employees
worldwide
range of skills to
accommodate new
opportunities and
deepen management
bench strength.
In particular, we
have recruited employees with skills to
fill key marketing positions, expand our
quality assurance teams and support our
enhanced medical education program.
Our human resources specialists are
making extensive use of technology in
training and recruiting and, as an example,
Zimmer has launched a worldwide
multi-lingual training system.
In a highly competitive industry, with
innovative solutions, relentless customer
focus and disciplined execution driving
our corporate strategy, we seek out top
talent. Zimmer offers opportunities for
employees to continue to develop their
skills and knowledge. Our strength comes
from the diversity in background and ideas
that our employees bring to their work.
Our business model emphasizes One
Zimmer, with the same high standards
for quality, compliance, performance and
value-added service across our business
lines and geographic boundaries. The
commitment of Zimmer’s 8,500 employees
is the engine behind our forward-looking
business model, one which turns diversity
of products, markets and people into one
of our greatest strengths.
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
Zimmer’s people come to work knowing that the
products they make may well be used to improve the
quality of life of their own family members and friends.
This awareness drives a culture of innovation, quality
and customer service across all disciplines and locations
worldwide. Employees’ pride in their company fuels
Zimmer’s achievements.
The Personal Connection
“Zimmer in Me,” an internal
communications campaign, features
Zimmer implant patients — a
reminder to employees of their
important roles in improving the
quality of life for patients around
the world. In Warsaw, banners
overlook the Innovation Café — a
popular meeting place for employee
collaboration and inspiration.
Zimmer Holdings, Inc. 2008 Annual Report
17
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
“The implant makes
my active, family-oriented
lifestyle possible.”
Pictured above:
John was unable to do anything strenuous
or enjoy even moderate exercise without
pain shooting through his legs. Now
with his Zimmer spine implant, he has a
renewed commitment to lifetime fitness.
In the last two years he has participated
in two triathlons with his wife, and best
of all, he can be an energetic, active
father to his four children.
18
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
Spanning the Continuum of Care
Zimmer’s unwavering focus on enhancing patient lives has
produced a comprehensive portfolio of medical device products,
procedures and technologies.
We are successfully applying the body of knowledge gained through our pioneering
work in knee and hip surgeries to advance treatment and deliver superior patient
outcomes in other musculoskeletal applications. Not only do we offer products to repair
and replace knees, hips, shoulders, elbows, ankles, teeth and
the spine, but we also develop procedures and techniques
that ease surgery and hasten patient recovery. The result is
an industry-leading offering of innovative and differentiated
capabilities that help surgeons restore patients’ participation
in the activities of everyday life.
Safe, Effective Use of Products in Surgery
We pioneered minimally invasive surgical techniques to minimize muscle cuts and
incision size. We introduced Trabecular Metal Technology to encourage strong bone
growth. Our computer-assisted surgical techniques add precision to operations.
Integrating products, techniques and skills is the mission of our standard-setting,
content-driven medical education program, which offers a variety of teaching methods
and settings to address how and what surgeons want to learn.
Delivering Solutions
Zimmer is committed to expanding the continuum of care. That
means applying knowledge from our core capabilities to accelerate
learning trajectories for other parts of the musculoskeletal system.
The desire to expand the continuum of care also encourages
research in areas like orthobiologics. Biological solutions help the
healing process when implants are used and create new options
for treating joint damage and degeneration.
Zimmer’s comprehensive portfolio of products and procedures — and the
knowledge base they represent — is the springboard for further developments
in musculoskeletal applications.
Results-Focused Innovation
Zimmer’s track record of innovation is
accompanied by an equally distinctive
medical education program to keep
healthcare providers abreast of advances
in procedures and treatments. Here,
surgeons at The Zimmer Institute® Lab
in Warsaw, Indiana, put into practice
surgical techniques, using Zimmer®
Minimally Invasive Solutions™
Procedures and Technologies.
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600
Zimmer Holdings, Inc. 2008 Annual Report
19
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A Global Presence, A Global Commitment
Zimmer’s statement of corporate purpose drives the commitment of a global company.
GÖTEBORG, SWEDEN
KIEL, GERMANY
BRUSSELS, BELGIUM
PARIS, FRANCE
SWINDON, UK
SHANNON, IRELAND
FREIBURG, GERMANY
ETUPES, FRANCE
BORDEAUX, FRANCE
LISBON, PORTUGAL
BARCELONA, SPAIN
CATANIA, ITALY
MONTREAL, CANADA
MISSISSAUGA, CANADA
PLAINVILLE, MA
PARSIPPANY, NJ
CEDAR KNOLLS, NJ
DOVER, OH
CANONSBURG, PA
WASHINGTON, DC
STATESVILLE, NC
MIAMI, FL
MERCEDITA, PUERTO RICO
UTRECHT, NETHERLANDS
MOSCOW, RUSSIA
MÜNSINGEN, SWITZERLAND
ESCHBACH, GERMANY
WINTERTHUR, SWITZERLAND
BAAR, SWITZERLAND
VIENNA, AUSTRIA
TREVISO, ITALY
MILAN, ITALY
RAMAT GAN, ISRAEL
BEIJING, CHINA
SHANGHAI, CHINA
CHENGDU, CHINA
GUANGZHOU, CHINA
GURGAON, INDIA
JOHANNESBURG,
SOUTH AFRICA
CAPE TOWN,
SOUTH AFRICA
SEOUL, SOUTH KOREA
TOKYO, JAPAN
GOTEMBA, JAPAN
FUKUOKA, JAPAN
TAIPEI, TAIWAN
HONG KONG
SINGAPORE
SYDNEY, AUSTRALIA
AUCKLAND, NEW ZEALAND
Restore mobility, alleviate pain and improve the quality of life for
patients around the world.
Lead the industry in delivering value to healthcare providers, their
patients and stockholders, while embracing our social responsibilities.
Customers First – We are committed to being responsive to our
customers’ needs and earning their trust every day.
Do the Right Thing – We hold ourselves to the highest standards
of quality and integrity in everything we do.
Innovate and Improve – We are driven to develop innovative products
that make a difference and to continuously improve our performance.
Win Through Results – We are accountable for delivering on our
commitments and recognize that success requires a winning attitude,
discipline and a sense of urgency.
Dedication to People – We are dedicated to attracting and retaining the
best talent and enabling individuals to achieve their highest potential.
One Zimmer – We perform as a global company and value diversity
of background, talent and style.
WARSAW, IN
OAKBROOK TERRACE, IL
MINNEAPOLIS, MN
MEMPHIS, TN
AUSTIN, TX
CARLSBAD, CA
ZIMMER CORPORATE
HEADQUARTERS
OTHER OPERATING
LOCATIONS
Our Purpose
Our Mission
Our Values
24
24
Form 10-K
Zimmer Holdings, Inc. 2008 Annual Report
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, 2008
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. n
Indicate by check mark 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
(Do not check if a smaller reporting company)
Smaller reporting company n
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 $15,309,609,246 (based on the closing price of these shares on the
New York Stock Exchange on June 30, 2008, and assuming solely for the purpose of this calculation that all directors and executive
officers of the registrant are “affiliates”). As of February 13, 2009, 222,839,490 shares of the registrant’s $.01 par value common stock
were outstanding.
Document
Portions of the Proxy Statement with respect to the 2009 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 8 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
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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 orthopaedic and dental
reconstructive implants, spinal implants, trauma products and
related 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 2008 that had a
significant impact on our business.
We continued to meet our obligations under the Deferred
Prosecution Agreement (“DPA”) and the Corporate Integrity
Agreement (“CIA”) we signed in September 2007. During
2008, we devoted substantial resources to meet our
obligations under those agreements and implemented
enhancements to our corporate compliance program
applicable in most respects to all of our businesses on a global
basis.
In the first half of 2008, we initiated voluntary product
recalls of certain Orthopaedic Surgical Products (“OSP”)
manufactured at our Dover, Ohio facility that we determined
did not meet internal quality standards. Additionally, we
voluntarily and temporarily suspended production and sales of
certain OSP products manufactured at the Dover facility. We
expect to have a significant portion of these products back
into production by the end of the first quarter of 2009, with
most other products coming back into production in the
second quarter of 2009.
In July 2008, we suspended marketing and distribution of
the Durom» Acetabular Component (Durom Cup) in the
U.S. to permit us to update product labeling and implement a
surgical training program in the U.S. We resumed marketing
and distribution of the Durom Cup in the U.S. in August
2008. We received claims from a number of Durom Cup
patients seeking reimbursement for costs and payments for
alleged pain and suffering and we recorded a provision for
certain claims of $69.0 million in 2008, which represents
management’s estimate of liability to patients undergoing
revision surgeries related to the Durom Cup. In addition, we
expect that our entry into the U.S. hip resurfacing market
may be hindered or delayed as the Durom Cup has been
integral to our plans for entry into that market.
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
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, stocking
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 2008. 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 2008.
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
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.
In October 2008, we acquired Abbott Spine, previously a
We utilize a network of sales associates, sales managers
subsidiary of Abbott Laboratories, for approximately
$360 million. This investment adds a number of innovative
products and helps build toward critical mass in the Spine
product category. The acquisition also enhances our research
and development capabilities in the Spine product category
and strengthens our sales coverage.
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
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
3
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
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,
neurosurgeons, dentists and oral surgeons and the medical
procedures they perform.
Americas. The Americas is our largest geographic
segment, accounting for $2,353.9 million, or 57 percent, of
2008 net sales, with the United States accounting for
94 percent of net sales in this region. The United States sales
force primarily consists 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. 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 2008, individual
hospital orders purchased through contractual arrangements
with our two largest group purchasing organizations
accounted for approximately 35 percent of our net sales in
the United States. Contractual sales were highest through
Novation, LLC and Premier Purchasing Partners, L.P. 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 including the
achievement of certain sales targets and maintenance of
efficient levels of working capital.
Europe. The European geographic segment accounted
for $1,179.1 million, or 29 percent, of 2008 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 direct sales associates, commissioned
agents, independent distributors 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 $588.1 million, or 14 percent, of 2008 net sales,
with Japan being the largest market within this segment,
accounting for approximately 55 percent of the region’s sales.
This segment also includes key markets such as Australia,
4
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, neurosurgeons
and dental 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; Austin, Texas and
internationally, in Australia, Austria, Belgium, Canada, China,
Finland, France, Germany, Hong Kong, India, Italy, Japan,
Korea, the Netherlands, Portugal, Russia, Singapore, Spain,
Sweden, Switzerland, Taiwan, Thailand and the United
Kingdom. We generally ship our orders via expedited courier.
Our operations support local language labeling requirements
for the European Union member countries, as well as specific
Asia Pacific countries. Our backlog of firm orders is not
considered material to an understanding of our business.
PRODUCTS
Our products include orthopaedic and dental
reconstructive implants, spinal implants, trauma products, and
related surgical products. Orthopaedic reconstructive implants
restore joint function lost due to disease or trauma in joints
such as knees, hips, shoulders and elbows. Dental
reconstructive implants restore function and aesthetics in
patients who have lost teeth due to trauma or disease.
Orthopaedic surgeons and neurosurgeons use spinal implants
in the treatment of degenerative diseases, deformities and
trauma. Trauma products are used primarily to reattach or
stabilize damaged bone and tissue to support the body’s
natural healing process. Our related surgical products include
supplies and instruments designed to aid in orthopaedic
surgical procedures and post-operation rehabilitation.
We utilize our exclusive Trabecular MetalTM Technology
across various product categories. Trabecular Metal material
is a structural biomaterial whose cellular architecture
resembles bone and approximates its physical and mechanical
properties more closely than other prosthetic materials. The
highly porous trabecular configuration is conducive to more
normal bone formation and bone in-growth. Trabecular Metal
implants are fabricated using elemental tantalum metal and a
patented vapor deposition technique that creates a metallic
strut configuration resembling cancellous bone with nano-
textured surface features.
Z I M M E R H O L D I N G S , I N C .
Orthopaedic Reconstructive Implants
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 Minimally Invasive SolutionsTM
Procedures (“MIS”) 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. In late 2007, the Premarket Approval (PMA)
application for the NexGen LPS-Flex Mobile Knee was
approved by the FDA. With the staged rollout of this product
in the U.S., we are now one of only two companies that can
offer a mobile-bearing total knee treatment option in the U.S.
The NexGen CR product line is designed to be used
in conjunction with a functioning posterior cruciate ligament.
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
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 Metal Technology material. These augments are
designed to address significant bone loss in revision surgery.
NexGen Knee Gender SolutionsTM 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
designs compatible with both NexGen CR-Flex and LPS-Flex
femoral components.
The Natural-Knee» II System. The Natural-Knee
II System consists of a range of interchangeable, anatomically
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 fully
released in 2008 and adds our 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
MIS procedures and accommodates high flexion capacity up
to 155 degrees. The system features the proven clinical
success of our asymmetric tibial plate, CSTi porous coating,
Prolong Highly Crosslinked Polyethylene 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. Gender Solutions design features were added to this
comprehensive knee system in late 2008. The Innex Knee
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System is distributed in Europe and Asia Pacific, and is not
available for commercial distribution in the United States.
rotation. The CLS Spotorno Stem has excellent clinical
results, confirmed by the 2006 Swedish Hip Registry.
Unicompartmental Knee Systems. The Zimmer»
Fitmore» Hip Stem. The Fitmore Hip Stem was
Unicompartmental Knee System offers a high flexion design
for 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. The Gender Solutions
Patello-Femoral Joint System was fully commercialized in
2008 and incorporates key gender specific design features and
a proprietary guided milling surgical technique for use in
patello-femoral joint replacement.
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 Anterior Supine Technique, the MIS Posterior
Procedure, the Zimmer MIS Anterolateral Technique and
MIS 2-IncisionTM Hip Replacement Procedure. The MIS
Techniques are designed to be less invasive to soft tissues and
to shorten recovery time.
Our key hip replacement products include:
Zimmer M/L Taper Hip Prosthesis with Kinectiv»
Technology. The Zimmer M/L Taper Hip Prosthesis offers a
proximally porous-coated wedge-shaped design based on long
term clinically proven concepts. The M/L Taper has become
widely used in MIS Procedures due to several key design
features. The Zimmer M/L Taper Hip Prosthesis with
Kinectiv Technology is a system of modular stem and neck
components designed to help the surgeon restore the natural
hip joint center intraoperatively by addressing the key
variables of leg length, offset and version independently. 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 one of the
most used, primary, cementless hip systems 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 provide
the capability for restoration of the physiological center of
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released in 2008 and offers the surgeon a short, bone
preserving stem. Maintaining bone stock is particularly
important for patients who may undergo a later revision
procedure. Its unique shape facilitates MIS procedures,
especially the MIS Anterior Supine approach which is gaining
in popularity.
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. A
unique offering within the VerSys Hip System, the VerSys
Epoch» Fullcoat Hip System is the first reduced-stiffness
stem specifically designed to address varying patient femoral
anatomies and minimize implant-related complications such as
thigh pain, bone resorption and leg lengthening. In 2008, we
introduced a line extension to this family to enhance the stem
fit in osteoporotic patients.
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.
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 offer the Trabecular Metal Modular Primary
Acetabular System, which 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 Acetabular Revision System that
provides the surgeon with a variety of off-the-shelf options to
address a wide range of bone deficiencies encountered during
acetabular revisions and achieve a stable construct – without
the need for custom implants or bone graft, which carries
with it the potential for resorption and disease transmission.
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
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minimize wear over time, with the goal of increasing the
longevity of the implant.
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 biological
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 Anatomical Shoulder Fracture System. 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
Our dental products division 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.
1 Registered Trademark of RTI Biologics, Inc.
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-Lock» 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»1
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 RTI
Biologics, Inc.
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During 2008, within our Dental division, we released
our new Zimmer Instrument Kit System, which is designed to
better enable clinicians to use the Tapered Screw-Vent and
Zimmer One-Piece implants. We extended our regenerative
product portfolio by releasing the CopiOs» Pericardium
Membrane in the United States. Sourced from bovine
pericardial tissue, CopiOs Pericardium Membrane provides
the characteristics of natural tissue.
Spine Implants
Our spine products division 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.
In October 2008, we acquired Abbott Spine. This
investment adds a number of innovative products and builds
critical mass in our Spine products segment. In addition to
bringing existing products and a promising pipeline, the
Abbott Spine acquisition added to our research and
development capabilities in the spinal category and
strengthened our sales coverage.
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 in the U.S.
PathFinder» System. The Pathfinder System is a
minimally invasive posterior stabilization system used in
lumbar surgery. Its design accommodates single or multilevel
constructs and offers advanced reduction, compression and
distraction capabilities.
Universal Clamp» Device. The Universal Clamp
Device is designed to correct scoliotic deformity and provides
intra-operative flexibility with immediate post-operative
stability.
Sequoia» Pedicle Screw System. The Sequoia
Pedicle Screw Platform was designed to treat a variety of
conditions of the thoracolumbar spine. The system offers
reproducible fixation required for spinal arthrodesis while
minimizing screw bulk and footprint. This allows greater
decortication and fusion bed preparation, space for
distraction/compression and in situ bending. In addition to a
reduced footprint, the Sequoia platform offers a variety of
advanced and proprietary features that improve strength,
reduce cross-threading and minimize head splay.
2 Manufactured by Kensey Nash Corporation
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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 NorthStar»
Cannulated Screw Delivery System allows for percutaneous
placement of the screws.
Ant-Cer»II Plate. The Ant-Cer II Plate is a dynamic
cervical plate providing the capacity for one way translational
settling to maintain natural graft loading.
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 number of instruments 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
utilized for vertebral body replacement procedures as well as
bone void fillers.
Puros» Allograft Products. We continue to sell
traditional and specialty Puros Allograft Bone Products
through our exclusive U.S. and Canadian distribution
agreements with RTI Biologics, Inc.
CopiOs Bone Void Filler2. CopiOs Bone Void Filler
is a collagen-based synthetic bone graft material provided in
the form of sponges or pastes 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 integrating orthobiologics and other next-
generation technologies into our portfolio of trauma solutions.
Zimmer Trauma offers a comprehensive line of products,
including:
NCB» Plating System. The titanium NCB Locking
Plates provide surgeons with the ability to place screws with
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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 compression devices.
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.
Zimmer Intertrochanteric/Subtrochanteric
(I.T.S.T.TM) Nailing System. The I.T.S.T. system offers a
proven method to treat hip fractures that are common in
elderly patients. The system allows for treatment of a variety
of hip fractures with a simple, well accepted surgical
technique. Instrumentation designed specifically for the
system allows surgeons to use a minimally invasive approach.
Orthopaedic Surgical Products
We develop, manufacture and market surgical products
that support our reconstructive, trauma, spine and dental
product systems in the operating room environment, with a
focus on Bone Cements, Surgical Wound Site Management and
Blood Management. Orthopaedic Surgical Products include:
PALACOS»3 Bone Cement. We have exclusive
United States distribution rights for the PALACOS line of
bone cement products manufactured by Heraeus Kulzer
GmbH. 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, and are
used by orthopaedic surgeons to reduce the risk of
postoperative infection. The products handling characteristics
make them well-suited for minimally invasive procedures.
Hi-FatigueTM4 Bone Cement. We have exclusive
European and Asian distribution rights for the Hi-Fatigue line
of bone cement products manufactured by aap Biomaterials
GmbH. Included in these brands are Hi-Fatigue and Hi-
Fatigue G Bone Cements. The Hi-Fatigue G bone cement
utilizes the antibiotic gentamiacin pre-mixed in the
3 Registered Trademark of Heraeus Kulzer GmbH
4 Trademark of aap Biomaterials GmbH & Co. KG
formulation, and is used by orthopaedic surgeons to reduce
the risk of postoperative infection.
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 proprietary technology to
determine a patient’s proper “Limb Occlusion Pressure”
(LOP) based on the patient’s specific physiology. A decrease
in LOP may reduce tissue or nerve damage. The range of cuffs
which complement the machines provides 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.
HEALTHCARE CONSULTING
Our healthcare consulting services subsidiary, Accelero
Health Partners, LLC (Accelero), is based in Canonsburg,
Pennsylvania. Accelero 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 Accelero represents less than 1 percent of
our total net sales.
ORTHOBIOLOGICS
Our research and development efforts include an
Orthobiologics group based in Austin, Texas, with its own full-
time staff and dedicated projects centralizing on the
development of biologic technologies for musculoskeletal
applications, including the repair and replacement of damaged
tendon, ligament, meniscus, articular cartilage, bone and
spinal nucleus tissues. This group works on biological
solutions to repair and regenerate damaged or degenerated
musculoskeletal tissues using biomaterials/cell therapies which
offer the possibility of treating damaged joints by biological
repair rather than replacing them. 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 (Neocartilage) and osteochondral grafts
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for cartilage repair. ISTO creates cell-based therapies for
cartilage regeneration using cells from juvenile donor
cartilage. Neocartilage is a living tissue-engineered cartilage
graft under clinical investigation for the restoration of
cartilage defects, reestablishment of joint function and relief
of pain in the knee. The Phase I/II clinical trial (IND) for
Neocartilage has completed patient enrollment with all
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 our first cartilage repair
product (DeNovo NT Natural Tissue Graft) in 2007 and
expanded use of the product in 2008. This product provides
particulated juvenile cartilage tissue for repair of articular
cartilage defects and has been implanted in nearly
200 patients during this limited release phase.
Many musculoskeletal surgical procedures use bone grafts
to help regenerate lost or damaged bone. In 2008, our Spine,
Dental and Trauma divisions introduced a technologically
advanced all-human demineralized bone matrix, Puros DBM
Putty and Putty with bone chips. This bone-derived allograft
material is used to fill bone voids or defects. It is placed into
the bone void where it is then 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.
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, 2008, 2007 and 2006, we spent $194.0 million,
$209.6 million, and $188.3 million, respectively, on research
and development. The decreased spending on research and
development in 2008 reflects delays connected with our
operational compliance with the DPA and CIA and
implementation of our enhanced compliance and ethics
initiatives. We intend to increase spending on product
development in 2009. Our primary research and
development facility is located in Warsaw, Indiana. 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, 2008, we
employed more than 800 research and development
employees worldwide.
We expect to continue to identify innovative technologies
and consider acquiring complementary products or
businesses, or establishing technology licensing arrangements
or strategic alliances.
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GOVERNMENT REGULATION AND COMPLIANCE
We are subject to government regulation in the countries
in which we conduct business. In the U.S., numerous laws and
regulations govern all the processes by which medical devices
are brought to market. These include, among 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
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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. 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. As part of
meeting our obligations under the 2007 DPA, we developed
and have substantially implemented enhanced compliance
initiatives and are applying these enhancements in most
respects to all of our businesses on a global basis.
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 clean-up
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 related
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,
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, in addition to the global competitors,
compete with us. Today most hip implants sold in Europe are
products developed specifically for the European market,
although global products are gaining acceptance. 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.
MANUFACTURING AND RAW MATERIALS
We manufacture substantially all of our products at eight
sites 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 and are scheduled
to open the facility in the second half of 2009.
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 and optimization. In
addition, at certain of our manufacturing facilities, many of
the employees are cross-trained to perform a broad array of
operations.
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.
We have improved our manufacturing processes to
protect our profitability and offset the impact of inflationary
costs. We have, for example, employed computer-assisted
robots and multi-axis grinders to precision polish medical
devices; automated certain manufacturing and inspection
processes, including on-machine inspection and process
controls; purchased state-of-the-art equipment; in-sourced
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core products, such as castings and forgings; 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
EXECUTIVE OFFICERS
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 8,500 employees worldwide,
including more than 800 employees dedicated to research and
development. Over 5,200 employees are located within the
United States and approximately 3,300 employees are located
outside of the United States, primarily throughout Europe and
in Japan. We have over 3,600 employees dedicated to
manufacturing our products worldwide. The Warsaw, Indiana
production facility employs more than 1,600 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.
The following table sets forth certain information with respect to our executive officers as of January 31, 2009.
Name
David C. Dvorak
Cheryl R. Blanchard, Ph.D.
James T. Crines
Derek M. Davis
Jeffery A. McCaulley
Bruno A. Melzi
Stephen H.L. Ooi
Chad F. Phipps
Mark C. Throdahl
Age
Position
45
44
49
39
43
61
55
37
57
President and Chief Executive Officer
Senior Vice President, Research and Development and Chief Scientific Officer
Executive Vice President, Finance and Chief Financial Officer
Vice President, Finance and Corporate Controller and Chief Accounting Officer
President, Zimmer Reconstructive
Chairman, Europe, Middle East and Africa
President, Asia Pacific
Senior Vice President, General Counsel and Secretary
Group President, Global Businesses
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 and Development, Quality and Regulatory, Medical
Education, and Medical Affairs. From October 2003 to
December 2005, Dr. Blanchard served as Vice President,
12
Corporate Research and Clinical Affairs and from August 2002
to October 2003, she served as Vice President, Research and
Biologics.
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
Z I M M E R H O L D I N G S , I N C .
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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.
Mr. McCaulley was appointed President, Zimmer Reconstructive
in December 2008. He has responsibility for our activities in
the reconstructive devices market, including Global Marketing
and Americas Sales. Prior to joining us, Mr. McCaulley served
as President and Chief Executive Officer of the Health Division
of Wolters Kluwer, a leading provider of scientific information
and workflow solutions for healthcare professionals, providers,
payors and the pharmaceutical industry, from November 2004
to November 2008. Prior to joining Wolters Kluwer,
Mr. McCaulley served as Vice President and General Manager
of the Diabetes Division of Medtronic, Inc., a global leader in
medical technology, from 2002 to 2004.
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. Mr. Phipps also oversees
our Government Affairs, Corporate Communication and Public
Relations activities. 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.
Mr. Throdahl was appointed Group President, Global Businesses
of Zimmer Holdings in May 2008. He is responsible for Zimmer
Spine, Zimmer Dental, Zimmer Trauma, Zimmer Orthopaedic
Surgical Products, Zimmer Computer Assisted Solutions and
Accelero Health Partners. Prior to joining us, Mr. Throdahl
served as Chief Executive Officer of Consort Medical plc
(formerly Bespak plc), a leader in medical devices for inhaled
drug delivery and anesthesia based in Milton Keynes, United
Kingdom, from June 2001 to December 2007.
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 will 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, in September 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 “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.
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If we do not comply with the terms of these agreements,
Our temporary suspension of the U.S. marketing
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.
We could be subject to further governmental
investigations or actions by other third parties based on
allegations of wrongdoing similar to those made by the
U.S. Attorney.
Our settlement with the U.S. government does not
preclude other governmental agencies or state authorities from
conducting investigations or instituting proceedings based on
allegations of wrongdoing similar to those made by the
U.S. Attorney. As previously disclosed, we are cooperating
with the U.S. Securities and Exchange Commission and the
U.S. Department of Justice with regard to an informal
investigation into 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 are also cooperating with investigative demands made by
two state attorneys general. While we believe that the pending
state investigations are 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, the settlement with the government
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 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.
If we are not able to fulfill or otherwise resolve our
existing royalty and other payment obligations to
healthcare professional consultants and institutions,
our ability to maintain our existing intellectual
property rights and obtain future rights may be
impaired.
We have reviewed our existing royalty agreements with
healthcare professional consultants and institutions in light of
the requirements of the DPA. Following our review, we
resumed paying royalties with respect to some of the
agreements. With respect to others, we made lump-sum
payments to resolve our accrued and future royalty obligations
and secure rights to the intellectual property. With respect to
the remaining agreements, if we do not fulfill our obligations
or reach some other resolution acceptable to the affected
healthcare professional consultants 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 healthcare professional consultants or
institutions for the future acquisition of intellectual property
rights may be adversely affected.
14
and distribution of one of our hip products has
adversely affected sales, resulted in claims and may
adversely affect our ability to compete in the growing
hip resurfacing market in the U.S.
In July 2008, we temporarily suspended the marketing
and distribution of our Durom Acetabular Component
(Durom Cup) in the U.S. We believe this action adversely
affected our hip product sales in the U.S. in the last half of
2008. Although we resumed U.S. marketing and distribution in
August 2008, we expect the effects of this action will continue
to have a negative impact through 2009.
Following our action, product liability lawsuits and other
claims were asserted against us and we expect additional
similar claims will be asserted. In addition, we expect that our
entry into the growing U.S. hip resurfacing market has been
delayed as the Durom Cup had been integral to our plans for
entry into that market.
The implementation of our enhanced global
compliance program is requiring us to devote
substantial resources, is disruptive to normal business
activities and may place us at a competitive
disadvantage.
Since entering into the DPA and CIA, we have devoted
substantial resources to meet our obligations under those
agreements and implemented enhancements to our global
compliance program applicable in most respects to all of our
businesses on a global basis. These efforts have not only
involved significant expense, but also required 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. 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.
We believe we have lost market share as a result of
recent events. If we are not able to recover or grow our
market share, our operating results could be materially
adversely affected.
We believe that the disruptive effects of the product
suspensions and recalls in 2008 and the implementation of our
enhanced global compliance initiatives contributed to
customer losses during the last half of 2008. We may not be
able to recapture market share lost due to these events and
we may continue to lose customers due to these factors in the
future.
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.
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If we do not introduce new products in a timely
manner, our products may become obsolete over time,
customers may not buy our products and our revenue
and profitability may decline.
Demand for our products may change, in certain cases, in
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.
We sell our products in more than 100 countries and
derive more than 40% of our net sales from outside 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 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 of foreign laws or regulations 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, cause our profitability to decline and expose us
to counterparty risks.
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. Although we address
currency risk management through regular operating and
financing activities, and, on a limited basis, through the use of
derivative financial instruments, those actions may not prove
to be fully effective. The current global economic crisis has
generally increased the risk of entering into derivative financial
instruments, even if major international financial institutions
act as counterparties.
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 applications may not result in issued patents, and
issued patents are subject to claims concerning priority, scope
and other issues.
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The United States Patent and Trademark Office and the
(cid:129) the priorities of our strategic partners may prove
courts have not consistently treated the breadth of claims
allowed or interpreted in orthopaedic reconstructive implant
and biotechnology patents. Future 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 of limited effect in some foreign countries. If we do not
obtain sufficient international protection for our intellectual
property, our competitiveness in international markets could
be impaired, which could limit our growth and revenue.
We also attempt to protect our trade secrets, proprietary
know-how and continuing technological innovation with
security measures, including the use of confidentiality
agreements with our employees, consultants, and
collaborators. These measures may prove to be ineffective and
any remedies available to us may be insufficient to compensate
our damages.
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.
If we were to lose such litigation involving material intellectual
property rights, we may be unable to manufacture, sell or use
some of our products.
We may make additional acquisitions or enter into
strategic alliances that 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 and other companies with whom we could form
strategic alliances or enter into other arrangements to develop
or exploit intellectual property rights. These activities involve
risks, 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 integrating acquired businesses 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 recognize expected cost savings from
acquisitions or the anticipated benefits of strategic alliances;
(cid:129) our acquisition candidates or strategic partners may have
unexpected liabilities or prove unable to meet their
obligations to us or the joint venture; and
16
incompatible with ours.
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.
We are subject to putative stockholder class action
lawsuits that could be costly to defend and distracting
to management.
We and a number of our related parties are defending
putative stockholder class action lawsuits alleging violations of
the securities laws, breaches of fiduciary duties or violations of
the federal Employee Retirement Income Security Act of 1974
arising out of trading or ownership of our common stock. We
believe these lawsuits are without merit, and we intend to
defend them vigorously. We may incur significant expenses
associated with the defense of these lawsuits, however, and
the necessary participation of our executive officers could
detract from their ability to devote their full time and
attention to our business operations.
RISKS RELATED TO OUR INDUSTRY
The ongoing informal investigation by the
U.S. 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 U.S. Securities and
Exchange Commission and the U.S. Department of Justice
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. Although we have adopted
policies and procedures designed to prevent improper
payments and we train our employees, distributors and others
concerning these issues, we cannot assure that violations of
these requirements will not occur. 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.
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
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laws, the federal Anti-Kickback Statute, similar state laws and
physician self-referral laws. Violations of these laws are
punishable by criminal and/or civil sanctions, including, in
some instances, fines, imprisonment and, within the United
States, exclusion from participation in government healthcare
programs, including Medicare, Medicaid and Veterans
Administration (VA) health programs. The interpretation and
enforcement of these laws and regulations are uncertain and
subject to rapid change.
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. 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.
We have also experienced downward pressure on product
pricing and other effects of healthcare reform in our
international markets. If key participants in government
healthcare systems reduce the reimbursement levels for our
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.
Continuing weakness in the global economy is likely
to adversely affect our business until an economic
recovery is underway.
A significant portion of our products are used in
procedures covered by private insurance, many of which,
including procedures using our dental products, may be
considered elective procedures. We expect the current global
economic crisis is likely to reduce the availability or
affordability of private insurance or may impact patient
decisions to have an elective procedure performed. If current
economic conditions continue or worsen, we expect that
increasing levels of unemployment and pressures to contain
healthcare costs could adversely affect the global growth rate
of hip and knee procedure volume, which 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. Competition is primarily on the basis of:
(cid:129) technology;
(cid:129) innovation;
(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.
17
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
We and our customers are subject to various
(cid:129) criminal prosecution.
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 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.
In addition, if we fail to comply with applicable material
regulatory requirements, including, for example, the Quality
System Regulation, recordkeeping regulations, labeling
requirements and adverse event reporting regulations, we
may be subject to a range of sanctions including:
(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
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.
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.
Although we maintain third-party product liability
insurance coverage, it is possible that 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 typically
have substantial retentions or deductibles that we are
responsible for. Product liability claims 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.
18
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 8 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
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
Shannon, Ireland
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
Leased
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . .
Leased
Offices & Research & Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Leased
Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research & Development, Manufacturing & Warehousing. . . . . . . . . . . . . .
Leased
Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . . Owned
Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices, Research & Development & Distribution . . . . . . . . . . . . . . . . . . . . . . .
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, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices, Service Center & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
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
51,000
23,000
115,000
156,000
140,000
61,000
30,000
97,000
36,000
15,000
15,000
52,000
18,000
90,000
51,000
21,000
125,000
47,000
87,000
24,000
22,000
16,000
213,000
10,000
16,000
40,000
358,000
76,000
70,000
We began construction of our new 125,000 square feet Shannon, Ireland facility in 2008 and expect to begin manufacturing
operations at this facility in the second half of 2009. In an effort to expand our global distribution network, we have begun
construction on a 130,000 square feet warehouse facility in Eschbach, Germany. We expect to begin utilizing this facility in the
second half of 2009. 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 16 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.
19
Z I M M E R H O L D I N G S , I N C .
Part II
2 0 0 8 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 2008
and 2007 are set forth as follows:
Quarterly High-Low Share Prices
Year Ended December 31, 2008:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2007:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$79.78
$80.92
$74.55
$66.42
$88.18
$94.38
$91.00
$85.91
$63.80
$66.12
$60.41
$34.10
$76.90
$83.67
$75.14
$63.00
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, 2009 was approximately 470,800. On February 13,
2009, the closing price of the common stock, as reported on the New York Stock Exchange, was $41.06 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, 2008:
October 2008
November 2008
December 2008
Total
Total Number of
Shares Purchased
Average Price
Paid per Share
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
1,189,100
$40.47
30,066,500
$1,134,346,296
–
–
–
–
–
–
–
–
1,189,100
$40.47
30,066,500
$1,134,346,296
(1) Includes repurchases made under expired programs as well as the program announced in April 2008 authorizing $1.25 billion of repurchases through
December 31, 2009.
20
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 8 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 per common share
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
2008
2007
2006
2005
2004
$4,121.1
848.6
$3,897.5
773.2
$3,495.4
834.5
$3,286.1
732.5
$2,980.9
541.8
$
3.73
3.72
$
3.28
3.26
$
3.43
3.40
$
2.96
2.93
$
2.22
2.19
227.3
228.3
235.5
237.5
243.0
245.4
247.1
249.8
244.4
247.8
$7,239.0
–
460.1
353.9
5,650.3
$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
21
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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 orthopaedic and dental
reconstructive implants, spinal implants, trauma products and
related surgical products (sometimes referred to in this report
as “OSP”). We also provide other healthcare related services.
Orthopaedic reconstructive implants restore joint function lost
due to disease or trauma in joints such as knees, hips,
shoulders and elbows. Dental reconstructive implants restore
function and aesthetics in patients who 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
2007 and 2006 consolidated financial statements have been
reclassified to conform to the 2008 presentation.
Beginning in 2008, our Hips product category sales no
longer include bone cement and accessory sales, which have
been reclassified to our OSP and Other product category.
Amounts in the years ended December 31, 2007 and 2006
related to sales of bone cement and accessory products have
been reclassified to conform to the 2008 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,
2008.
Demand (Volume and Mix) Trends
Increased volume and changes in the mix of product sales
contributed 3 percentage points of 2008 sales growth, which
is 6 percentage points below the rate of growth from 2007
compared to 2006. We estimate that the orthopaedic
procedure volume market growth rate on a global basis will be
in the mid single digits in the coming years 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
22
growth. Our 2008 increase of 3 percentage points decreased
from 2007 and was lower than market growth due to the
factors discussed below.
Pricing Trends
Selling prices were flat during 2008, which is similar to
2007 when compared to 2006. Asia Pacific selling prices
decreased 3 percentage points for the year ended
December 31, 2008, compared to a 1 percent decrease in
2007 when compared to 2006. Japan and Australia reported
4 percent and 3 percent decreases, respectively, in average
selling prices as a result of scheduled reductions in
reimbursement prices. Japan and Australia combined
represent approximately 10 percent of our sales. Selling prices
in the Americas were flat during 2008, compared to a
1 percent increase in 2007. In Europe, selling prices for 2008
were flat, compared to a 1 percent decrease in 2007. With the
effect of governmental healthcare cost containment efforts
and pressure from group purchasing organizations, we expect
global selling prices to remain flat in 2009.
Foreign Currency Exchange Rates
For 2008, 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 a stronger dollar versus foreign currency
exchange rates will have a negative effect in 2009 of
approximately 4 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 and
options 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
and options, which are recorded in cost of products sold, the
effect on net earnings in the near term is expected to be
minimal.
Abbott Spine Acquisition
In October 2008, we acquired Abbott Spine, previously a
subsidiary of Abbott Laboratories, for approximately
$360 million. The purchase price was funded by a combination
of cash on hand and borrowings under existing credit
facilities. This investment adds a number of innovative
products and helps build toward critical mass in the Spine
product category. The acquisition also enhances our research
and development capabilities in the Spine product category
and strengthens our sales coverage. We recorded $48.7 million
of acquisition and integration costs in 2008 as a result of this
transaction, including $38.5 million of in-process research and
development expense. For more information regarding the
acquisition of Abbott Spine, see Note 4 to the consolidated
financial statements included elsewhere in this Form 10-K.
Z I M M E R H O L D I N G S , I N C .
Compliance-Related Matters
In September 2007, we and other major U.S. orthopaedic
manufacturers reached a settlement with the U.S. government
to resolve claims related to an investigation into financial
relationships between the industry and consulting orthopaedic
surgeons. We paid the government $169.5 million and entered
into a Deferred Prosecution Agreement (DPA) under which
we will remain subject to oversight by a federally-appointed
monitor through March 27, 2009.
We also entered into a Corporate Integrity Agreement
(CIA) 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 16 to the consolidated financial
statements included elsewhere in this Form 10-K.
We did not record any tax benefit related to the
$169.5 million payment in 2007. During 2008, we reached an
agreement with the U.S. Internal Revenue Service confirming
the deductibility of a portion of the payment and recorded a
current tax benefit of $31.7 million, resulting in a decrease to
the current period effective tax rate. For more information
regarding the tax treatment of the settlement expense, see
Note 12 to the consolidated financial statements included
elsewhere in this Form 10-K.
We have developed and substantially implemented
enhanced global compliance initiatives which address areas
such as product development, marketing, surgeon training and
educational and charitable funding. The principles of this
program meet or exceed the requirements of the DPA and
CIA, as those principles are being applied in most respects to
all product segments and reach all worldwide operations.
Costs related to the DPA, CIA and the enhanced compliance
initiatives in 2008 were approximately $60 million, including
the fees incurred for the federally-appointed monitor.
Durom Acetabular Component
In July 2008, we temporarily suspended marketing and
distribution of the Durom Acetabular Component (Durom
Cup) in the U.S. to permit us to update product labeling to
provide more detailed surgical technique instructions and
implement an enhanced surgical training program in the
U.S. We resumed marketing and distribution of the Durom
Cup in the U.S. in August 2008.
During 2008, we received claims from a number of
Durom Cup patients seeking reimbursement for costs and
payments for alleged pain and suffering and we expect to
receive additional similar claims. We recorded a provision for
certain claims of $69.0 million in 2008, which represents
management’s estimate of liability to patients undergoing
revision surgeries related to the Durom Cup. The estimate is
limited to revisions associated with surgeries occurring before
July 2008 and within two years of the original surgery date.
Any claims received outside of these defined parameters will
be managed in the normal course and reflected in our
standard product liability accruals.
We believe we lost hip product sales during 2008, in large
part as a consequence of the events involving the Durom
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
Cup. In addition, we expect that our entry into the U.S. hip
resurfacing market has been hindered or delayed as the
Durom Cup had previously been integral to our plans for
entry into that market.
Orthopaedic Surgical Products (OSP) Actions
In the first half of 2008, we initiated voluntary product
recalls of certain OSP patient care products manufactured at
our Dover, Ohio facility that we determined did not meet
internal quality standards and we temporarily suspended
production and sales of certain OSP products manufactured at
the Dover facility. We estimate that these actions adversely
impacted 2008 OSP revenues by approximately $70 million
and 2008 diluted earnings per share by $0.18 including related
inventory charges, idle plant costs and other non-recurring
charges. We expect to have a significant portion of these
products back in production in the first quarter of 2009, with
most other products coming back into production in the
second quarter of 2009.
Impact of Disruptive Events on Market Share
As a result of the disruptive factors discussed above,
including our temporary suspension of U.S. marketing and
distribution of the Durom Cup, our voluntary recall and
suspension of production of certain OSP patient care
products, and the implementation of our enhanced global
compliance initiatives, we have suffered customer losses
during 2008. We estimate that these customer losses reduced
our knee and hip market share by 1.5 to 2.0 percent as
measured from fourth quarter results. We expect our sales
growth to be at a rate slower than the market in the near
term due to these disruptive factors.
2009 Outlook
We expect conditions in the broader economy will result
in a temporary slowdown in elective hospital procedures.
Although many of our products are used in elective
procedures, we believe our core knee and hip franchises
remain more insulated than most from swings in the broader
economy because the need for these procedures does not
diminish, even if the timing is affected.
We expect to experience further customer losses in 2009
affecting our knee and hip market share as a result of the
ongoing effects of the disruptive factors discussed above. Our
assumption is that share loss should stabilize by year-end
2009, as we anniversary out of the majority of the 2008
customer and product-related losses, and as we launch new
products in sufficient quantities to recover some of the
product-related losses.
Among our other product categories, we expect
extremities and trauma sales growth to be in line with market
growth rates. We expect dental revenues to reflect the weak
economic environment and to underperform relative to
market growth rates given company-specific operational
challenges. Finally, we expect spine revenues to increase as a
result of the Abbott Spine acquisition and reflect sales dis-
synergies associated with the ongoing integration of the two
businesses.
23
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
In 2009, our operating expenses will be impacted by a
number of factors, which in the aggregate are expected to
result in a modest net decrease in total expense compared to
2008. We expect to realize significant savings from third-party
fees related to compliance with the DPA and the
implementation of our enhanced compliance initiatives,
Durom-related certain claims and acquisition, integration and
other expenses. For 2009, however, we intend to partially
offset those savings with increased spending in areas that
suffered disruption in 2008, including product development
and medical education. We also continue to step-up our level
of spending on quality systems to achieve our continuous
improvement objectives in the areas of design and process
control as well as ongoing product surveillance.
RESULTS OF OPERATIONS
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
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,
2008
2007
% Inc
$2,353.9
1,179.1
588.1
$4,121.1
$2,277.0
1,081.0
539.5
$3,897.5
3%
9
9
6
Volume/
Mix
3%
4
5
3
Price
–%
–
(3)
–
Foreign
Exchange
–%
5
7
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
The NexGen Complete Knee Solution product line,
including Gender Solutions Knee Femoral Implants, the
NexGen LPS-Flex Knee, the NexGen CR-Flex Knee and the
NexGen LCCK Revision Knee, led knee sales. In addition, the
Zimmer Unicompartmental High-Flex Knee and the Gender
Solutions Natural-Knee Flex System exhibited strong
growth.
The continued conversion to porous stems, including the
Zimmer M/L Taper Stem, the Zimmer M/L Taper Stem with
Kinectiv Technology, the CLS Spotorno Stem from the CLS
Hip System, and the Alloclassic Zweymu¨ ller Hip Stem, led
hip stem sales, but was partially offset by weaker sales of
cemented stems. Trabecular Metal Acetabular Cups and
Longevity and Durasul Highly Crosslinked Polyethylene
Liners also had strong growth. The temporary suspension of
marketing and distribution of the Durom Cup in the
U.S. negatively impacted hip sales growth. Additionally, with
24
Year Ended December 31,
2008
2007
% Inc (Dec)
Volume/
Mix
Foreign
Exchange
Price
$1,763.0
1,279.5
121.0
227.5
$1,634.6
1,221.4
104.0
221.0
3,391.0
3,181.0
221.4
230.6
278.1
205.8
197.0
313.7
$4,121.1
$3,897.5
8%
5
16
3
7
8
17
(11)
6
7%
2
14
–
5
4
14
(14)
3
(1)%
(1)
1
1
(1)
1
2
–
–
2%
4
1
2
3
3
1
3
3
the lack of a hip resurfacing product within our U.S. hip
portfolio, we expect to face a continuing challenge in hip sales
growth with the adoption of hip resurfacing in the
U.S. market.
As a result of the disruptive factors discussed above, we
suffered customer losses during 2008. We estimate that these
customer losses reduced our knee and hip market share by
1.5 to 2.0 percent as measured from fourth quarter results.
We expect to experience further customer losses in 2009 as a
result of the ongoing effects of these disruptive factors.
The Bigliani/Flatow Complete Shoulder Solution and the
Zimmer Trabecular Metal Reverse Shoulder System 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 the I.T.S.T. Intertrochanteric/Subtrochanteric Fixation
System led trauma sales. The Dynesys Dynamic Stabilization
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
System and the Trinica Select Anterior Cervical Plate System
led spine sales, which also reflect an increase as a result of
the Abbott Spine acquisition. OSP sales were negatively
affected by the patient care product recalls and related
voluntary suspension of production of certain products, but
these negative factors were partially offset by strong growth
in PALACOS Bone Cement.
The following table presents estimated* 2008 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***
$ 6.4
5.7
0.8
3.2
$16.1
$ 4.1
$ 6.8
8% 27%
6
13
7
22
14
7
7
10
10
21
5
3
1
1
3
4
1
5
5
* Estimates based on competitor annual filings, Wall Street equity
research and Company estimates
** 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,
2008
2007
% Inc (Dec)
$1,089.8
576.1
88.1
114.9
$1,029.8
568.3
73.9
118.9
1,868.9
1,790.9
125.8
181.3
177.9
122.9
160.3
202.9
$2,353.9
$2,277.0
6%
1
19
(3)
4
2
13
(12)
3
The NexGen Complete Knee Solution product line,
including the Gender Solutions Knee Femoral Implants,
NexGen LPS-Flex Knee, the NexGen LCCK Revision Knee
and the NexGen CR-Flex Knee, led knee sales. The Gender
Solutions Natural-Knee Flex System also made a strong
contribution.
Growth in porous stems, including growth of the Zimmer
M/L Taper Stem and the Zimmer M/L Taper Stem with
Kinectiv Technology, led hip stem sales, but was partially
offset by weaker sales of cemented stems. Trabecular Metal
Acetabular Cups and Longevity Highly Crosslinked
Polyethylene Liners also made a strong contribution. As noted
above, the temporary suspension of marketing and
distribution of the Durom Cup in the U.S. will continue to
negatively impact hip sales and we also expect that the
adoption of hip resurfacing in the U.S. market will continue to
adversely affect our hip sales growth.
As a result of the disruptive factors discussed above, we
suffered customer losses during 2008. These customer losses
negatively impacted sales growth, primarily in the knee and
hip product segments. We expect to experience further
customer losses in 2009 as a result of the ongoing effects of
these disruptive factors.
The Bigliani/Flatow Shoulder Solution and the Zimmer
Trabecular Metal Reverse Shoulder System led extremities
sales. Negative sales growth for our dental business reflects
disruptions caused by the implementation of our enhanced
compliance initiatives and overall weakness in the
U.S. economy. Zimmer Periarticular Plates and the I.T.S.T.
Intertrochanteric/Subtrochanteric Fixation System led trauma
sales. The Dynesys Dynamic Stabilization System and the
Trinica Select Anterior Cervical Plate System led spine sales,
which also reflect an increase as a result of the Abbott Spine
acquisition. OSP sales were negatively affected by the patient
care product recalls and related voluntary suspension of
production of certain products, but these negative factors
were partially offset by strong growth in PALACOS Bone
Cement.
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,
2008
2007
% Inc (Dec)
$ 452.6
493.9
25.8
82.2
1,054.5
47.4
40.1
37.1
$ 407.8
459.9
23.2
71.3
962.2
41.1
31.2
46.5
$1,179.1
$1,081.0
11%
7
11
15
10
16
29
(20)
9
Changes in foreign exchange rates positively affected
both knee and hip sales by 5 percent. The NexGen Complete
Knee Solution product line, including the NexGen LPS-Flex
Knee, the NexGen LCCK Revision Knee and the NexGen
CR-Flex Knee, led knee sales in our Europe region.
Growth in porous stems, including the CLS Spotorno
Stem, led hip stem sales. Longevity and Durasul Highly
Crosslinked Polyethylene Liners, Trabecular Metal Acetabular
Cups and the Allofit» Hip Acetabular System also contributed
to hip sales.
As a result of the disruptive factors discussed above, we
suffered customer losses during 2008. These customer losses
negatively impacted sales growth, primarily in the knee and
hip product segments. We expect to experience further
customer losses in 2009 as a result of the ongoing effects of
these disruptive factors.
The Anatomical Shoulder System and the Coonrad/
Morrey Total Elbow led extremities sales. The Tapered
Screw-Vent Implant System led dental sales. The Cable-
Ready» Cable Grip System and the NCB Plating System led
25
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
trauma sales, which were offset by weaker sales of our
intramedullary fixation systems. The Dynesys Dynamic
Stabilization System and the OptimaTM5 ZS Spinal Fixation
System led spine sales. OSP sales were negatively affected by
the patient care product recalls and related voluntary
suspension of production of certain products.
Asia Pacific Net Sales
The following table presents Asia Pacific net sales
(dollars in millions):
Year Ended December 31,
Gross Profit
Gross profit as a percentage of net sales was 75.8 percent
in 2008, compared to 77.5 percent in 2007. The following
table reconciles the gross margin for 2007 to 2008:
Year ended December 31, 2007 gross margin
Foreign exchange impact, net
Excess and obsolete inventory
Inventory step-up
Other
77.5%
(0.8)
(0.6)
(0.2)
(0.1)
75.8%
2008
2007
% Inc (Dec)
Year ended December 31, 2008 gross margin
Reconstructive
Knees
Hips
Extremities
Dental
Total
Trauma
Spine
OSP and other
Total
$220.6
209.5
7.1
30.4
467.6
48.2
9.2
63.1
$197.0
193.2
6.9
30.8
427.9
41.8
5.5
64.3
$588.1
$539.5
12%
8
3
(1)
9
15
65
(2)
9
Gross margin decreased in 2008 primarily due to the
unfavorable effect of year-over-year changes in foreign
currency hedge gains and losses as well as an increase in
excess inventory and obsolescence charges due to write-offs
related to the OSP patient care product recalls and increased
inventory levels as a result of lower than forecasted sales.
Inventory step-up related to the completion of the Abbott
Spine acquisition during 2008 also had an unfavorable impact
on gross margin.
Changes in foreign exchange rates positively affected
knee sales by 6 percent and hip sales by 8 percent. Reported
decreases in average selling prices negatively affected both
knee and hip sales by 4 percent. The NexGen Complete Knee
Solution product line, the NexGen CR-Flex Knee and the
NexGen LPS-Flex Knee led knee sales. The Gender
Solutions Knee Femoral Implant also made strong
contributions to knee sales for the period.
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 and Durasul
Highly Crosslinked Polyethylene Liners, the Trilogy
Acetabular System and Trabecular Metal Acetabular Cups
also increased.
As a result of the disruptive factors discussed above, we
suffered customer losses during 2008. These customer losses
negatively impacted sales growth, primarily in the knee and
hip product segments. We expect to experience further
customer losses in 2009 as a result of the ongoing effects of
these disruptive factors.
The Bigliani/Flatow Shoulder Solution and the Coonrad/
Morrey Total Elbow led extremities sales. The Tapered
Screw-Vent Implant System led dental sales. Trauma sales
were led by the I.T.S.T. Intertrochanteric/Subtrochanteric
Fixation System. The Dynesys Dynamic Stabilization System
led spine sales. OSP sales were negatively affected by the
patient care product recalls and related voluntary suspension
of production of certain products.
5 Trademark of U & i Corporation
26
Operating Expenses
Research and Development, or R&D, as a percentage of
net sales was 4.7 percent for 2008, compared to 5.4 percent in
2007. R&D decreased to $194.0 million for 2008 from
$209.6 million in 2007, reflecting decreased spending on
certain development, clinical and external research activities
due to delays connected with our operational compliance with
the DPA and CIA and implementation of our enhanced
compliance and ethics initiatives. We do not expect delays
with our development programs in 2009 and therefore our
R&D expense as a percentage of revenue is expected to
return to historical levels of 5 to 6 percent.
Selling, general and administrative, or SG&A, as a
percentage of net sales was 41.3 percent for 2008, compared
to 38.2 percent in 2007. SG&A expense increased to
$1,702.3 million for 2008, from $1,489.7 million in 2007.
Increased SG&A costs include monitor fees as well as
consulting and legal fees associated with the global
implementation of our enhanced compliance initiatives.
Expenses related to other operating initiatives also caused an
increase in SG&A as a percentage of net sales. Such operating
initiatives include the planned implementation of a global IT
system and improving quality systems at our Dover facility.
Additionally, selling costs increased as a result of the
ORTHOsoft acquisition, an increase in the headcount of our
sales force in certain locations, increased commission
incentives to sell certain key products and a change in the
mix of commissions earned as a result of lower OSP sales.
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.
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
Certain claims expense of $69.0 million is a provision for
estimated claims from Durom Cup patients undergoing
revision surgeries within specified periods. Acquisition,
integration and other expenses increased to $68.5 million for
2008, compared to $25.2 million in 2007. The acquisition,
integration and other expenses recorded during 2008 include
$38.5 million for in-process research and development related
to the Abbott Spine acquisition, costs related to the
integration of Abbott Spine, facility consolidation costs, legal
fees, and retention and termination payments, partially offset
by favorable adjustments to certain liabilities of acquired
companies. 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.
Operating Profit, Income Taxes and Net Earnings
Operating profit for 2008 decreased 3 percent to
$1,090.0 million, from $1,127.6 million in 2007. Operating
profit for 2007 includes the effect of the non-recurring
settlement expense of $169.5 million. Excluding the impact of
the settlement expense in 2007, operating profit for 2008
would still have been unfavorable compared to 2007 as a
result of lower gross margins, significant but temporary
increases in SG&A costs attributable to the implementation of
our enhanced compliance initiatives and certain claims
expense of $69.0 million.
Interest and other income for 2008 increased to
$31.8 million, from $4.0 million in 2007. Interest and other
income for 2008 includes a realized gain of $38.8 million
related to the sale of certain marketable securities, partially
offset by increased interest expense as a result of an increase
in outstanding long-term debt.
The effective tax rate on earnings before income taxes
and minority interest decreased to 24.3 percent for 2008,
down from 31.6 percent in 2007. The effective tax rate for the
2007 period reflects the effect of the $169.5 million
settlement expense, for which no tax benefit had previously
been recognized. During 2008, we recorded a current tax
benefit of $31.7 million related to the settlement expense,
resulting in a decrease of approximately 3 percent to the
current period effective tax rate. The effective tax rate for
2008 was further reduced as a result of increased profits in
lower tax jurisdictions. These decreases in the effective tax
rate were partially offset by Abbott Spine acquisition-related
in-process research and development charges recorded during
2008 for which no tax benefit was recorded.
Net earnings increased 10 percent to $848.6 million for
2008, compared to $773.2 million in 2007, as the decrease in
operating profit was more than offset by favorable items in
interest and other income and a lower effective tax rate. Basic
and diluted earnings per share increased 14 percent to $3.73
and $3.72, respectively, from $3.28 and $3.26 in 2007. The
higher growth rate in earnings per share as compared to net
earnings is attributed to the effect of 2008 and 2007 share
repurchases.
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
27
Z I M M E R H O L D I N G S , I N C .
Net Sales by Product Category
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
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
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 was partially offset by weaker sales of
cemented and revision stems. 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.
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 Cervical Plate System and
Trabecular Metal Implants led spine sales. Extremity surgical
products and PALACOS Bone Cement led OSP sales.
28
Year Ended December 31,
2007
2006
% Inc
Volume/
Mix
Foreign
Exchange
Price
$1,634.6
1,221.4
104.0
221.0
$1,460.5
1,126.9
77.6
179.0
3,181.0
2,844.0
205.8
197.0
313.7
194.7
177.4
279.3
$3,897.5
$3,495.4
12%
8
34
23
12
6
11
12
12
9%
6
30
16
–%
(1)
1
4
9
2
9
9
9
–
1
1
1
–
3%
3
3
3
3
3
1
2
3
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
$1,029.8
568.3
73.9
118.9
$ 940.8
533.8
54.2
105.4
1,790.9
1,634.2
122.9
160.3
202.9
117.1
146.9
178.3
$2,277.0
$2,076.5
10%
6
36
13
10
5
9
14
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 was partially offset by
weaker sales of cemented stems. Trabecular Metal
Acetabular Cups and Durom Acetabular Cups with Metasul
LDH Large Diameter Heads also exhibited strong growth.
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. PALACOS Bone Cement led OSP
sales.
Z I M M E R H O L D I N G S , I N C .
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
$ 407.8
459.9
23.2
71.3
$352.2
408.3
17.9
47.2
962.2
825.6
41.1
31.2
46.5
38.2
24.8
42.5
$1,081.0
$931.1
16%
13
30
51
17
8
26
9
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.
Asia Pacific Net Sales
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
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 and Bone Cement and
accessories 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.
The following table presents Asia Pacific net sales
Operating Expenses
(dollars in millions):
Reconstructive
Knees
Hips
Extremities
Dental
Total
Trauma
Spine
OSP and other
Total
Year Ended December 31,
2007
2006
% Inc (Dec)
$197.0
193.2
6.9
30.8
427.9
41.8
5.5
64.3
$167.5
184.8
5.5
26.4
384.2
39.4
5.7
58.5
$539.5
$487.8
18%
5
27
17
11
6
(4)
10
11
Changes in foreign exchange rates positively affected
knee sales by 5 percent and positively affected hip sales by
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.
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.
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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 was
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were
$1,038.1 million in 2008 compared to $1,084.4 million in 2007.
The principal source of cash was net earnings of
$848.6 million. Non-cash charges included in net earnings
accounted for another $353.7 million of operating cash.
Income tax-related balances decreased by $77.3 million in
2008, primarily reflecting the impact of accelerated tax
payments resulting from changes in Federal and State tax
rules. All other items of operating cash flows accounted for a
use of $86.9 million of cash pertaining to pension funding and
to investments in working capital in support of sales services.
Operating cash flows continued to be positively affected by
delayed payments related to various contractual arrangements
with healthcare professionals or institutions. For 2008, we
30
estimate this delay had a positive effect on operating cash
flows of approximately $26 million.
At December 31, 2008, we had 59 days of sales
outstanding in trade accounts receivable, an increase of
7 days when compared to December 31, 2007, reflecting a
change in geographic mix of outstanding accounts receivable
balances and a general weakening in the broader economy. At
December 31, 2008, we had 344 days of inventory on hand,
above December 31, 2007 by 86 days, reflecting a planned
increase in field-based inventory deployments in the U.S., a
build-out of our inventory pipeline for certain new products
we are preparing to launch in 2009, lower than expected sales
in the fourth quarter of 2008 and the year-over-year change in
foreign currency hedge gains/losses impacting cost of goods
sold.
Cash flows used in investing activities were $924.2 million
in 2008, compared to $491.5 million in 2007. The most
significant contributors to the increase in cash flows used in
investing activities were the acquisition of Abbott Spine and
the acquisition of intellectual property rights. Cash payments
related to the acquisition of Abbott Spine were $363.0 million
compared to total acquisition-related payments of
$160.3 million in 2007, which related primarily to the
acquisitions of Endius and ORTHOsoft. Acquired intellectual
property rights of $109.4 million relate to lump-sum payments
made to certain healthcare professionals and institutions in
place of future royalty payments that otherwise would have
been due under the terms of an existing contractual
arrangement. These lump-sum payments were based upon a
third party fair market valuation of the current net present
value of the contractual arrangement. In 2009, we anticipate
making additional lump-sum payments to acquire intellectual
property rights. Additions to instruments during 2008 were
$237.9 million compared to $138.5 million in 2007. Additions
to instruments increased in 2008 compared to 2007 due to an
increase in 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. In 2009, we expect to spend approximately
$160 — $170 million on instruments to support new products
and sales. Additions to other property, plant and equipment
during 2008 were $250.0 million compared to $192.7 million in
2007. This increase reflects spending on planned
infrastructure improvements such as opening a new
manufacturing facility in Ireland, improving our quality system
infrastructure and investing in a central distribution center for
our Europe segment. During 2009, we expect to purchase
approximately $230 — $240 million in other property, plant
and equipment, reflecting the cash necessary to complete
capital expansions initiated in 2008 as well as new product-
related investments and normal replacement of older
machinery and equipment. Also included in investing activities
for 2008 is $54.9 million in proceeds from the sale of certain
equity securities.
Cash flows used in financing activities were
$343.5 million for 2008, compared to $399.5 million in 2007.
We repurchased $737.0 million of our common stock in 2008
as compared with $576.3 million in 2007 under our stock
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
repurchase programs. We utilized cash generated from
operating activities, $57.0 million in cash proceeds received
from employee stock compensation plans and borrowings
under credit facilities to fund the repurchases. During 2008,
we borrowed $330.0 million from our existing credit facilities
to fund stock repurchases and partially fund the acquisition of
Abbott Spine.
We may use excess cash or further borrow from our
credit facilities to repurchase additional common stock under
the $1.25 billion program which expires December 31, 2009.
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
$460.1 million outstanding under the Senior Credit Facility at
December 31, 2008, and an availability of $889.9 million. 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
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, 2008.
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.
Notwithstanding recent interruptions in global credit markets,
as of the date of this report, we believe our access to our
Senior Credit Facility has not been impaired.
In October 2008, we funded a portion of the acquisition
of Abbott Spine with approximately $110 million of new
borrowings under the Senior Credit Facility. Each of the
lenders under the Senior Credit Facility funded its portion of
the new borrowings in accordance with its commitment
percentage.
We also have available uncommitted credit facilities
totaling $71.4 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
2009
2010
and
2011
2012
and
2013
2014
and
Thereafter
Long-term debt
$ 460.1
$
–
$
–
$460.1
$
–
Operating leases
Purchase obligations
149.3
56.8
38.2
47.7
51.0
7.6
30.2
1.5
29.9
–
Long-term income taxes
payable
Other long-term
liabilities
Total contractual
obligations
116.9
237.0
–
–
69.6
24.9
22.4
30.7
15.1
191.2
$1,020.1
$85.9
$158.9
$531.8
$243.5
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
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 – 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
31
Z I M M E R H O L D I N G S , I N C .
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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 the
assistance of 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.
During 2008, in addition to our general product liability
estimates, we recorded a provision for certain claims of
$69.0 million representing management’s estimate of liability
to Durom Cup patients undergoing revisions associated with
surgeries occurring before July 2008 and within two years of
the original surgery date. These parameters are consistent
with our data which indicates that cup loosenings associated
with surgical technique are most likely to occur within that
time period. Any claims received outside of these defined
parameters will be managed in the normal course and
reflected in our standard product liability accruals. The
amounts established for our general product liability
estimates, excluding certain claims for the Durom Cup,
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
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.
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Z I M M E R H O L D I N G S , I N C .
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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 and options with major financial
institutions. These forward contracts and options 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 and options 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, 2008, 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 2009 through June
2011. The notional amounts of outstanding forward contracts
entered into with third parties to purchase U.S. Dollars at
December 31, 2008 and 2007 were $1,343.0 million and
$1,244.6 million, respectively. The notional amounts of
outstanding forward contracts entered into with third parties
to purchase Swiss Francs at December 31, 2008 and 2007
were $207.5 million and $138.4 million, respectively. The
weighted average contract rates outstanding are
Euro:USD 1.41, USD:Swiss Franc 1.10, USD:Japanese Yen 101,
British Pound:USD 1.86, USD:Canadian Dollar 1.09, Australian
Dollar:USD 0.82 and USD:Korean Won 1,000.
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
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,
2008 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
2011, depending on the direction of the change, by an average
approximate amount of $72.3 million, $21.1 million,
$32.4 million, $10.4 million, $7.1 million, $7.2 million and
$1.9 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
$2,003 million at December 31, 2008, primarily in Swiss
Francs, Japanese Yen and Euros. Approximately
$1,234 million of the net asset exposure at December 31,
2008 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 remeasurement 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.
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.
33
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 we may do so in
the future. Based upon our overall interest rate exposure as of
December 31, 2008, 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 8 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.
34
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Management’s Report on Internal Control Over Financial Reporting
The management of Zimmer Holdings, Inc. is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) promulgated under the
Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and
principal financial officers and effected by the company’s Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
(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, 2008. 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, 2008, 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, 2008, as stated in its report which appears in Item 8 of this Annual Report on
Form 10-K.
35
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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, 2008, 2007 and 2006
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
Page
37
38
39
40
41
42
43
36
Z I M M E R H O L D I N G S , I N C .
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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, 2008 and 2007, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 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, 2008, 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, 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 Report of Management on Internal Control over Financial Reporting. Our responsibility is to express opinions
on these financial statements 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 12 to the consolidated financial statements, the Company changed the manner in which it accounts for
uncertain tax positions in 2007. As discussed in Note 2 to the consolidated financial statements, the Company changed the
manner in which it accounts for 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 23, 2009
37
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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 16)
Certain claims (Note 16)
Acquisition, integration and other
Operating expenses
Operating Profit
Interest and other, net
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)
2008
2007
2006
$4,121.1
997.3
$3,897.5
875.9
$3,495.4
780.1
3,123.8
3,021.6
2,715.3
194.0
1,702.3
–
69.0
68.5
209.6
1,489.7
169.5
–
25.2
188.3
1,355.7
–
–
6.1
2,033.8
1,894.0
1,550.1
1,090.0
31.8
1,121.8
272.3
(0.9)
1,127.6
4.0
1,131.6
357.9
(0.5)
1,165.2
3.8
1,169.0
334.0
(0.5)
$ 848.6
$ 773.2
$ 834.5
$
$
3.73
3.72
$
$
3.28
3.26
$
$
3.43
3.40
227.3
228.3
235.5
237.5
243.0
245.4
38
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 16)
Minority Interest
Stockholders’ Equity:
Common stock, $0.01 par value, one billion shares authorized,
253.7 million (252.2 million in 2007) issued
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, 30.1 million shares (19.3 million shares in 2007)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements.
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
(in millions)
2008
2007
$ 212.6
2.7
732.8
928.3
103.9
198.3
2,178.6
1,264.1
2,774.8
872.1
149.4
$
463.9
2.5
674.3
727.8
59.4
154.8
2,082.7
971.9
2,621.4
743.8
213.9
$7,239.0
$ 6,633.7
$186.4
6.6
578.1
771.1
353.9
460.1
$
174.1
85.1
489.4
748.6
328.4
104.3
1,585.1
1,181.3
3.6
2.8
2.5
3,138.5
4,385.5
240.0
(2,116.2)
2.5
2,999.1
3,536.9
290.3
(1,379.2)
5,650.3
5,449.6
$7,239.0
$ 6,633.7
39
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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, 2006
Net earnings
Other comprehensive income
Impact of adoption of SFAS 158
Stock compensation plans, including tax
benefits
Share repurchases
Balance December 31, 2006
Net earnings
Other comprehensive income
Impact of adoption of FIN 48
Stock compensation plans, including tax
benefits
Share repurchases
Balance December 31, 2007
Net earnings
Other comprehensive loss
Stock compensation plans, including tax
benefits
Share repurchases
Common Shares
Number
Amount
247.8
–
–
–
1.1
–
248.9
–
–
–
3.3
–
252.2
–
–
1.5
–
$2.5
–
–
–
–
–
2.5
–
–
–
–
–
2.5
–
–
–
–
Paid-in
Capital
$2,601.1
–
–
–
Retained
Earnings
$1,934.0
834.5
–
–
–
–
2,768.5
773.2
–
(4.8)
–
–
3,536.9
848.6
–
142.1
–
2,743.2
–
–
–
255.9
–
2,999.1
–
–
139.4
–
Accumulated
Other
Comprehensive
Income
Treasury Shares
Number
Amount
(in millions)
Total
Stockholders’
Equity
$149.3
–
95.3
(35.4)
–
–
209.2
–
81.1
–
–
–
290.3
–
(50.3)
(0.1)
–
–
–
–
(12.0)
(12.1)
–
–
–
–
(7.2)
(19.3)
–
–
$
(4.1)
–
–
–
$4,682.8
834.5
95.3
(35.4)
–
(798.8)
(802.9)
–
–
–
–
(576.3)
(1,379.2)
–
–
142.1
(798.8)
4,920.5
773.2
81.1
(4.8)
255.9
(576.3)
5,449.6
848.6
(50.3)
–
–
–
–
–
(10.8)
–
(737.0)
139.4
(737.0)
Balance December 31, 2008
253.7
$2.5
$3,138.5
$4,385.5
$240.0
(30.1)
$(2,116.2)
$5,650.3
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 8 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
Gain on sale of investments
In-process research and development
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)
2008
2007
2006
$ 848.6
$ 773.2
$ 834.5
275.1
(38.8)
38.5
69.9
7.0
2.0
12.5
(6.5)
(77.3)
(44.4)
(148.1)
119.3
(19.7)
230.0
–
6.5
70.1
0.5
63.9
40.8
(27.0)
6.1
(12.5)
(58.0)
61.9
(71.1)
197.4
–
2.9
76.0
–
43.8
11.6
(8.0)
24.9
(76.9)
(39.2)
(29.9)
3.6
Net cash provided by operating activities
1,038.1
1,084.4
1,040.7
Cash flows provided by (used in) investing activities:
Additions to instruments
Additions to other property, plant and equipment
Acquisition of intellectual property rights
Proceeds from sale of investments
Proceeds from sale of property, plant and equipment
Abbott Spine acquisition, net of acquired cash
Other acquisitions, net of acquired cash
Net cash used in investing activities
Cash flows provided by (used in) financing activities:
Net borrowings under credit facilities
Proceeds from employee stock compensation plans
Excess income tax benefit from stock option exercises
Repurchase of common stock
Net cash used in financing activities
Effect of exchange rates on cash and equivalents
Increase (decrease) in cash and equivalents
Cash and equivalents, beginning of year
Cash and equivalents, end of year
The accompanying notes are an integral part of these consolidated financial statements.
(237.9)
(250.0)
(109.4)
54.9
–
(363.0)
(18.8)
(138.5)
(192.7)
–
–
–
–
(160.3)
(126.2)
(142.1)
–
–
16.2
–
(34.9)
(924.2)
(491.5)
(287.0)
330.0
57.0
6.5
(737.0)
–
149.8
27.0
(576.3)
18.8
41.3
8.0
(798.8)
(343.5)
(399.5)
(730.7)
(21.7)
(251.3)
463.9
4.8
198.2
265.7
9.5
32.5
233.2
$ 212.6
$ 463.9
$ 265.7
41
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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
$0.7 in 2008, $11.5 in 2007 and $7.6 in 2006
Reclassification adjustments on foreign currency hedges, net of tax effects of
$(10.9) in 2008, $(1.3) in 2007 and $(1.8) in 2006
Unrealized gains/(losses) on securities, net of tax effects of $(15.2) in 2008,
$0.9 in 2007 and $0.9 in 2006
Reclassification adjustments on securities, net of tax effects of $15.0 in 2008
Prior service cost and unrecognized gain/(loss) in actuarial assumptions,
net of tax effects of $14.1 in 2008 and $(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)
2008
2007
2006
$848.6
$773.2
$834.5
(49.4)
101.1
143.8
35.0
(49.8)
(56.7)
43.4
27.0
8.7
24.4
(23.8)
(79.9)
–
(50.3)
(1.4)
–
(1.4)
–
4.2
–
–
0.9
81.1
95.3
$798.3
$854.3
$929.8
42
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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 orthopaedic
and dental reconstructive implants, spinal implants, trauma
products, and related surgical products. We also provide other
healthcare related services. Orthopaedic 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 who 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 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 2007 and 2006
consolidated financial statements have been reclassified to
conform to the 2008 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
transaction gains and losses included in net earnings for the
years ended December 31, 2008, 2007 and 2006 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. Sales to stocking distributors, healthcare
dealers, dental practices and dental laboratories account for
approximately 20 percent of our net sales. With these types of
sales, revenue is recognized when title to product passes,
either upon shipment of the product or in some cases upon
implantation of the product. Product is generally sold at
contractually fixed prices for specified periods. Payment
terms vary by customer, but are typically less than 90 days. In
some cases sales incentives may be earned by a customer for
purchasing a specified amount of our product. We estimate
whether such incentives will be achieved and, if so, recognize
these incentives as a reduction in revenue in the same period
the underlying revenue transaction is recognized. Occasionally
products are returned and, accordingly, we maintain an
estimated sales return reserve that is recorded as a reduction
in revenue. Product returns were not significant for the years
ended December 31, 2008, 2007 and 2006.
The reserves for doubtful accounts were $20.0 million
and $21.7 million as of December 31, 2008 and 2007,
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 $117.3 million,
$104.1 million and $95.5 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
Acquisition, Integration and Other – We recognize
incremental expenses resulting directly from our business
combinations and significant nonrecurring and unusual items
as “Acquisition, integration and other” expenses. Acquisition,
integration and other expenses for the years ended
43
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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, 2008, 2007 and 2006, included (in millions):
2008
2007
2006
Gain on disposition, adjustment or impairment
of acquired assets and obligations
$(9.0)
$(1.2)
$(19.2)
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
10.1
1.9
0.9
38.5
–
7.5
7.3
8.1
3.2
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
Acquisition, Integration and Other
$68.5
$25.2
$ 6.1
Included in the gain on disposition, adjustment or
impairment of acquired assets and obligations for 2008 is a
favorable adjustment to certain liabilities of acquired
companies due to changes in circumstances surrounding those
liabilities subsequent to the related measurement period.
Included in the gain on disposition, adjustment 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. In-process research and
development charges for 2008 are related to the acquisition of
Abbott Spine. In-process research and development charges
for 2007 are related to the acquisitions of Endius and
ORTHOsoft. Consulting and professional fees relate to third-
party integration consulting performed in a variety of areas
such as tax, compliance, logistics and human resources and
legal fees related to matters involving acquired businesses.
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. 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
44
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.
Software Costs – We capitalize certain computer software
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 the software is ready
for its intended use 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. We
perform annual impairment tests by comparing each reporting
unit’s fair value to its carrying amount to determine if there is
potential impairment. The fair value of the reporting unit and
the implied fair value of goodwill are determined based upon a
discounted cash flow analysis. Significant assumptions are
incorporated into to these discounted cash flow analyses such
as estimated growth rates and risk-adjusted discount rates.
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.
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
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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)
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. Indefinite life intangible assets are assessed
annually to determine whether events and circumstances
continue to support an indefinite life. Intangible assets with a
finite life, including core and developed technology, certain
trademarks and trade names, customer-related intangibles,
intellectual property rights and patents and licenses are
amortized on a straight-line basis over their estimated useful
life, ranging from less than one year to 40 years. Intangible
assets with a finite life are tested for impairment whenever
events or circumstances indicate that the carrying amount
may not be recoverable. 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. The fair values of indefinite lived
intangible assets are determined based upon a discounted
cash flow analysis using the relief from royalty method. The
relief from royalty method estimates the cost savings
associated with owning, rather than licensing, assets.
Significant assumptions are incorporated into to these
discounted cash flow analyses such as estimated growth rates,
royalty rates and risk-adjusted discount rates.
The useful lives of intangible assets range from less than
one year 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. Intellectual
property rights are assigned useful lives that approximate the
contractual life of any related patent or the period for which
we maintain exclusivity over the intellectual property.
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 service fees paid to collaborative partners.
Income Taxes – We account for income taxes in
accordance with SFAS No. 109, “Accounting for Income
Taxes” and related interpretations, 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
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 and options 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
45
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Notes to Consolidated Financial Statements (Continued)
the years ended December 31, 2008, 2007 and 2006, due to
ineffectiveness and amounts excluded from the assessment of
hedge effectiveness, was not significant.
For contracts outstanding at December 31, 2008, 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 2009
through June 2011. The notional amounts of outstanding
forward contracts entered into with third parties to purchase
U.S. Dollars at December 31, 2008 were $1,343.0 million. The
notional amounts of outstanding forward contracts entered
into with third parties to purchase Swiss Francs at
December 31, 2008 were $207.5 million. The fair value of
outstanding derivative instruments recorded on the balance
sheet at December 31, 2008, together with settled derivatives
where the hedged item has not yet affected earnings, was a
net unrealized gain of $32.7 million, or $33.0 million net of
taxes, which is deferred in other comprehensive income, of
which $16.4 million, or $17.9 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 remeasurement 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. In 2006 we adopted SFAS 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
required recognition of the funded status of our benefit plans
in the statement of financial position and recognition of
certain deferred gains or losses in other comprehensive
income. We recorded an unrealized loss of $35.4 million in
other comprehensive income during 2006 related to the
adoption of SFAS 158.
The components of accumulated other comprehensive income are as follows (in millions):
Foreign currency translation
Foreign currency hedges
Unrealized gain/(loss) on securities
Unrecognized prior service cost and unrecognized gain/(loss) in actuarial assumptions
Accumulated other comprehensive income
Balance at
December 31,
2007
Other
Comprehensive
Income (Loss)
Balance at
December 31,
2008
$368.8
$(49.4)
$ 319.4
(45.4)
(1.9)
(31.2)
78.4
0.6
33.0
(1.3)
(79.9)
(111.1)
$290.3
$(50.3)
$ 240.0
During 2008, we reclassified an investment previously
accounted for under the equity method to an available-for-sale
investment as we no longer exercised significant influence
over the third-party investee. The investment was marked-to-
market in accordance with SFAS 115, “Accounting for Certain
Investments in Debt and Equity Securities,” resulting in a net
unrealized gain of $23.8 million recorded in other
comprehensive income for 2008. This unrealized gain was
reclassified to the income statement when we sold this
investment in 2008 for total proceeds of $54.9 million and a
gross realized gain of $38.8 million included in interest and
other income. The basis of these securities was determined
based on the consideration paid at the time of acquisition.
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 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 full adoption of
SFAS No. 157 is not expected to have a material impact on
our consolidated financial statements or results of operations.
46
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Notes to Consolidated Financial Statements (Continued)
In December 2007, the FASB issued SFAS No. 141(R),
“Business Combinations,” which is a revision of SFAS No. 141
“Business Combinations.” SFAS No. 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.
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities, an amendment of SFAS No. 133.” SFAS No. 161 will
require increased disclosure of our derivative and hedging
activities, including how derivative and hedging activities
affect our consolidated statement of earnings, balance sheet
and cash flows. SFAS No. 161 is effective for fiscal years
beginning on or after December 15, 2008 and interim periods
within those fiscal years. The adoption of SFAS No. 161 will
increase the required disclosure of our derivative and hedging
activities, but will not have any impact on our financial
position 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. For
the year ended December 31, 2008, share-based payment
expense was $69.9 million or $49.5 million net of the related
tax benefits. 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.
Stock Options
We had three equity compensation plans in effect at
December 31, 2008: 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
as of December 31, 2008. 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, 2008, an
aggregate of 11.2 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 and generally have a maximum
contractual life of 10 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.
47
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Notes to Consolidated Financial Statements (Continued)
A summary of stock option activity for the year ended
December 31, 2008 is as follows (options in thousands):
Outstanding at December 31, 2007
Options granted
Options exercised
Options cancelled
Options expired
Outstanding at December 31, 2008
Stock Options
Weighted Average
Exercise Price
14,107
3,975
(1,190)
(698)
(294)
15,900
$67.94
76.45
43.68
77.87
76.85
$71.25
The following table summarizes information about stock options outstanding at December 31, 2008 (options in thousands):
Range of Exercise Prices
$22.00 – $27.50
$27.51 – $37.50
$39.50 – $51.00
$55.00 – $70.50
$71.00 – $91.00
Outstanding
Weighted
Average
Remaining
Contractual Life
1.85
2.46
4.19
6.01
7.79
6.91
Weighted
Average
Exercise Price
$24.76
30.64
44.02
68.64
77.88
Options
187
915
734
2,403
3,900
Exercisable
Weighted
Average
Exercise Price
$24.76
30.64
44.02
69.30
77.93
$71.25
8,139
$65.79
Options
187
915
734
2,970
11,094
15,900
We use a Black-Scholes option-pricing model to
determine the fair value of our stock options. 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. The expected term of the
stock options has 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, 2008, 2007 and 2006 were
determined using the following assumptions:
2008
2007
2006
respectively, or $46.3 million, $50.4 million and $47.7 million
net of the related tax benefits, respectively.
Summarized information about outstanding stock options
as of December 31, 2008 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
15,096
8,139
6.9 years
5.6 years
$70.94
$12.2
$65.79
$12.2
Dividend Yield
Volatility
–%
–%
–%
* Includes effects of estimated forfeitures
27.4% 23.8% 25.7%
As of December 31, 2008, there was $117.5 million of
Risk-free interest rate
2.9% 4.4% 4.5%
5.1
5.4
Expected life (years)
5.1
The weighted average fair value for options granted
during 2008, 2007 and 2006 was $23.32, $22.60 and $22.32,
respectively. The total intrinsic value of stock options
exercised during the years ended December 31, 2008, 2007
and 2006 was $31.9 million, $124.5 million and $40.5 million,
respectively. For the years ended December 31, 2008, 2007
and 2006, share-based payment expense related to stock
options was $65.4 million, $73.4 million and $66.3 million,
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 2.7 years.
Performance Shares and RSUs
We granted performance shares and performance-based
RSUs in 2006 and 2007, respectively, the vesting of which
depended on the achievement of objective performance
targets over periods ended December 31, 2008. The
48
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Notes to Consolidated Financial Statements (Continued)
performance targets related to these awards were not met and
the related performance shares and RSUs were forfeited. We
also granted RSUs in December 2007. These RSUs are not
tied to our performance and vest ratably on the first and
second anniversaries of the date of grant, provided that the
recipient is still our employee. Each of these awards are
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, 2008 is as follows
(Performance Shares and RSUs in thousands):
Outstanding at January 1, 2008
Granted
Vested
Forfeited
Outstanding at December 31, 2008
Performance
Shares and RSUs
Weighted Average
Grant Date
Fair Value
1,147
40
(123)
(895)
169
$69.35
53.29
68.29
69.64
$64.93
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, 2008, we
estimate that all 169,000 outstanding 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 RSUs that we expect to vest, the
unrecognized share-based payment expense as of
December 31, 2008 was $10.0 million, and is expected to be
recognized over a period of 1.4 years. For the years ended
December 31, 2008, 2007 and 2006, pre-tax expense (income)
related to these awards was $4.5 million, $(3.3) million and
$9.7 million, respectively, or $3.2 million, $(2.3) million and
$6.8 million net of the related tax benefits, respectively.
4.
ACQUISITIONS
We made acquisitions during the years 2008, 2007 and
2006, the more significant of which are described below.
These acquisitions were accounted for under the purchase
method of accounting pursuant to 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.
Abbott Spine
In October 2008, we acquired Abbott Spine, a former
subsidiary of Abbott Laboratories, for an aggregate value of
approximately $363.0 million, including a $358.0 million cash
purchase price after certain working capital adjustments and
$5.0 million of direct acquisition costs. The acquisition was
funded by approximately $253 million of cash on-hand and
$110 million from new borrowings under our Senior Credit
Facility. This investment adds a number of innovative
products and builds critical mass in the Spine product
category. The acquisition also enhances our research and
development capabilities in the Spine product category and
strengthens our sales coverage.
We completed the preliminary purchase price allocation
in accordance with U.S. generally accepted accounting
principles. The process included interviews with both Abbott
Spine and our management, review of the economic and
competitive environment and examination of assets including
historical performance and future prospects. The preliminary
purchase price allocation was based on information currently
available to us, and expectations and assumptions deemed
reasonable by us. No assurance can be given, however, that
the underlying assumptions used to estimate expected
technology-based product revenues, development costs or
profitability, or the events associated with such technology
will occur as projected. The final purchase price allocation
may vary from the preliminary purchase price allocation. The
final valuation and associated purchase price allocation is
expected to be completed during the first half of 2009. To the
extent that the estimates need to be adjusted, we will do so.
The following table summarizes the preliminary estimate
of fair values of the assets acquired and liabilities assumed at
the date of the Abbott Spine acquisition (in millions):
Current assets
Property, plant and equipment
Instruments
Intangible assets subject to amortization:
Customer relationships (10 year useful life)
Developed technology (10 year useful life)
In-process research and development
Other assets
Goodwill
Total assets acquired
Current liabilities
Deferred taxes
Total liabilities assumed
Net assets acquired
As of
October 16, 2008
$ 63.6
6.5
17.5
8.6
64.3
38.5
10.0
197.4
406.4
14.0
29.4
43.4
$363.0
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2 0 0 8 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 of $129.3 million, $65.7 million and $2.4 million
was assigned to the Americas, Europe and Asia Pacific
reporting segments, respectively. None of the goodwill is
deductible for tax purposes.
acquisition of Endius has expanded our spine product
portfolio to include innovative minimally invasive instruments
and implants.
In-process research and development charges relate to
5.
FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES
acquired technologies for which no alternative future use has
been identified at the acquisition date. The values assigned to
in-process research and development (IPR&D), are based on
valuations that estimate the future cash flows of the related
technologies and discounting the net cash flows back to their
present values utilizing an appropriate risk-adjusted rate of
return (discount rate). These valuations also include
consideration of the risk of the project not achieving
commercial feasibility and include a factor that takes into
account the uncertainty surrounding the successful
development of the IPR&D.
At the time of acquisition, we expect all acquired IPR&D
will reach technological feasibility, but there can be no
assurance that the commercial viability of these products will
actually be achieved. The nature of the efforts to develop the
acquired technologies into commercially viable products
consists principally of planning, designing, and conducting
clinical trials necessary to obtain regulatory approvals. The
risks associated with achieving commercialization include, but
are not limited to, delay or failure to obtain regulatory
approvals to conduct clinical trials, delay or failure to obtain
required market clearances, and patent issuance, validity and
litigation, if any.
The $38.5 million of IPR&D primarily relates to projects
in the following spine product categories: 1) Thoracolumbar,
2) Minimally Invasive Surgery, and 3) Cervical. The related
products have projected launch dates beginning in 2009
through 2014, with estimated total costs to complete of
approximately $8.5 million.
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 $31.3 million in
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.
On January 1, 2008, we adopted the provisions of
SFAS No. 157 “Fair Value Measurements” as it relates to
financial assets and liabilities recorded at fair value on a
recurring basis. FSP No. SFAS 157-2 has delayed the effective
date of SFAS No. 157 for nonfinancial assets and liabilities,
except for items that are recognized or disclosed at fair value
in the financial statements on a recurring basis. We do not
expect that the full adoption of SFAS No. 157 will have a
material impact on our consolidated financial statements or
results of operations.
The following financial assets and liabilities are recorded
at fair value on a recurring basis as of December 31, 2008 (in
millions):
Fair Value Measurements at Reporting Date Using:
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Recorded
Balance
$ 1.1
65.4
$66.5
Assets
Available-for-sale
securities
Derivatives, current
and non-current
Total assets recorded
at fair value
Liabilities
Derivatives, current
and non-current
Total liabilities
recorded at fair
value
$1.1
–
$1.1
$
–
65.4
$65.4
$28.9
$ –
$28.9
$28.9
$ –
$28.9
$–
–
$–
$–
$–
Available-for-sale securities are valued using a market
approach, based on quoted prices for the specific security
from transactions in active exchange markets. Derivatives
relate to foreign exchange forward contracts and foreign
currency options entered into with various third parties. We
value these instruments using a market approach based on
foreign currency exchange rates obtained from active markets.
6.
INVENTORIES
Inventories at December 31, 2008 and 2007 consist of the
Endius Incorporated
following (in millions):
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 $38.5 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
50
Finished goods
Work in progress
Raw materials
Inventories, net
2008
2007
$731.2
52.6
144.5
$564.2
50.3
113.3
$928.3
$727.8
Reserves for excess and obsolete inventory were
$199.6 million and $143.7 million at December 31, 2008 and
2007, respectively. Included in finished goods inventory at
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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, 2008 is approximately $14.0 million of
inventory step-up resulting primarily from the Abbott Spine
acquisition. Inventory step-up values are based upon
estimated sales prices less distribution costs and a profit
allowance.
7.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2008 and
2007 was as follows (in millions):
Land
Building and equipment
Capitalized software costs
Instruments
Construction in progress
Accumulated depreciation
$
2008
21.7
992.7
136.7
1,161.7
149.0
$
2007
19.4
855.3
98.7
903.8
98.7
2,461.8
(1,197.7)
1,975.9
(1,004.0)
Property, plant and equipment, net
$ 1,264.1
$
971.9
Depreciation expense was $215.8 million, $182.6 million
and $155.0 million for the years ended December 31, 2008,
2007 and 2006, respectively.
8.
GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the changes in the
carrying amount of goodwill for the years ended December 31,
2008 and 2007 (in millions):
Americas
Europe
Asia Pacific
Total
Balance at January 1, 2007
$1,414.1 $ 993.9
$107.6 $2,515.6
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
Balance at December 31,
2007
Change in fair value
estimates of
Centerpulse related to:
Integration liability
Income taxes
Change in fair value
estimates of Endius
related to:
Integration liability
Income taxes
Change in fair value
estimates of
ORTHOsoft related to:
Developed technology
Income taxes
Other
Purchase of Abbott Spine
Other
Currency translation
(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
1,443.5
1,066.3
111.6
2,621.4
–
(22.7)
(0.1)
(0.9)
0.2
(4.0)
–
–
–
–
–
–
0.8
(1.0)
0.1
129.3
–
(5.9)
–
–
–
65.7
(0.5)
(20.4)
–
–
–
2.4
–
10.4
(0.1)
(23.6)
0.2
(4.0)
0.8
(1.0)
0.1
197.4
(0.5)
(15.9)
Balance at December 31,
2008
$1,540.3 $1,110.1
$124.4 $2,774.8
Goodwill increased by $197.4 million during 2008 related
to the acquisition of Abbott Spine. 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.
51
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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
Intellectual
Property Rights
Trademarks and
Trade Names
Customer
Relationships
Other
Total
As of December 31, 2008:
Intangible assets subject to amortization:
Gross carrying amount
Accumulated amortization
Intangible assets not subject to amortization:
Gross carrying amount
$144.1
(36.0)
$ 498.8
(147.5)
$109.4
(6.7)
–
–
–
Total identifiable intangible assets
$108.1
$ 351.3
$102.7
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
$144.8
(27.9)
$ 433.3
(116.4)
–
–
$116.9
$ 316.9
$
$
–
–
–
–
$ 35.6
(16.6)
197.0
$216.0
$ 35.6
(13.1)
199.9
$222.4
$52.9
(8.7)
–
$44.2
$44.5
(6.2)
–
$38.3
$ 83.6
(33.8)
$ 924.4
(249.3)
–
197.0
$ 49.8
$ 872.1
$ 75.7
(26.4)
$ 733.9
(190.0)
–
199.9
$ 49.3
$ 743.8
During 2008 we made lump-sum payments of
$109.4 million to certain healthcare professionals and
institutions in place of future royalty payments that otherwise
would have been due under the terms of existing contractual
arrangements. Such payments were based upon a third party
fair market valuation of the current net present value of the
contractual arrangement. Under the terms of these
resolutions, we acquired the exclusive rights to any
intellectual property, patented and unpatented, provided by
the healthcare professional or institution during the course of
the original contractual arrangement. The weighted average
useful life for these assets is 5.6 years, which represents the
life of any related patent or the period for which we maintain
exclusivity to the intellectual property. Amortization expense
for these assets is reported as part of cost of goods sold.
As a result of the acquisition of Abbott Spine, we
acquired developed technology-related intangible assets of
approximately $64.3 million and customer relationship related
intangible assets of approximately $8.6 million, based on the
preliminary purchase price allocation as of December 31,
2008. These assets each have a 10 year useful life.
Total amortization expense for finite-lived intangible
assets was $59.3 million, $47.4 million and $42.4 million for
the years ended December 31, 2008, 2007 and 2006,
respectively. For 2008, $6.7 million of amortization expense
was recorded as part of cost of goods sold, with the remaining
$52.6 million recorded as part of selling, general and
administrative expenses. For 2007 and 2006, all amortization
expense was recorded as part of selling, general and
administrative expenses. Estimated annual amortization
expense for the years ending December 31, 2009 through
2013 is $82.2 million, $79.9 million, $74.3 million,
$72.2 million and $67.1 million, respectively.
52
9.
OTHER CURRENT AND LONG-TERM LIABILITIES
Other current and long-term liabilities at December 31,
2008 and 2007 consist of the following (in millions):
Other current liabilities:
License and service agreements
Certain claims accrual (Note 16)
Fair value of derivatives
Salaries, wages and benefits
Accrued liabilities
Total other current liabilities
Other long-term liabilities:
Long-term income tax payable
Accrued retirement and postretirement benefit
plans
Other long-term liabilities
Total other long-term liabilities
2008
2007
$169.6
62.8
17.7
91.5
236.5
$149.9
–
50.0
59.3
230.2
$578.1
$489.4
$116.9
$137.0
129.9
107.1
66.3
125.1
$353.9
$328.4
10. DEBT
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, 2008 were
$889.9 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.
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,
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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)
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, 2008.
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, 2008 was
$460.1 million and $104.3 million as of December 31, 2007.
We had no current debt as of December 31, 2008 or 2007.
We also have available uncommitted credit facilities
totaling $71.4 million.
The weighted average interest rate for borrowings under
the Senior Credit Facility was 3.2 percent at December 31,
2008. Borrowings under the Senior Credit Facility were
U.S. Dollar and Japanese Yen-based borrowings at
December 31, 2008 and Japanese Yen-based borrowings at
December 31, 2007. We paid $14.0 million, $8.5 million and
$5.8 million in interest during 2008, 2007 and 2006,
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, 2008,
unamortized debt issuance costs were $3.5 million.
11. RETIREMENT BENEFIT PLANS
We have defined benefit pension plans covering certain
U.S. and Puerto Rico employees. The employees who are not
participating in the defined benefit plans 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.
We use a December 31 measurement date for our benefit
plans.
Defined Benefit Plans
The components of net pension expense for the years
ended December 31, 2008, 2007 and 2006 for our defined
benefit retirement plans are as follows (in millions):
Service cost
Interest cost
Expected return on plan assets
Settlement
Amortization of prior service cost
Amortization of unrecognized actuarial loss
U.S. and Puerto Rico
2008
2007
$ 11.7
$ 13.0
9.7
(13.5)
3.4
0.1
2.2
8.8
(10.9)
–
–
2.9
2006
$13.1
7.4
(8.2)
–
–
3.7
2008
$12.1
7.3
(9.3)
0.1
(0.1)
0.1
Non-U.S.
2007
$10.8
5.7
(8.0)
–
–
0.2
2006
$10.2
4.8
(6.6)
–
0.1
0.2
Net periodic benefit cost
$ 13.6
$ 13.8
$16.0
$10.2
$ 8.7
$ 8.7
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
2008
2007
2006
2008
6.16%
3.84%
8.00%
6.14%
3.84%
8.00%
5.84%
3.84%
8.25%
3.60%
3.06%
4.64%
Non-U.S.
2007
3.64%
3.12%
4.73%
2006
3.20%
2.27%
4.70%
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.
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.
53
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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)
Changes in projected benefit obligations and plan assets, for the years ended December 31, 2008 and 2007 for our defined
benefit retirement plans, were (in millions):
U.S. and Puerto Rico
Non-U.S.
Projected benefit obligation – beginning of year
2008
$166.0
2007
$144.2
Plan amendments
Service cost
Interest cost
Employee contributions
Benefits paid
Actuarial (gain) loss
Settlement
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
Translation gain
–
11.7
9.7
–
(9.7)
11.8
(1.1)
–
$188.4
$147.2
(39.3)
40.3
–
(9.7)
–
0.9
13.0
8.8
–
(2.8)
1.9
–
–
$166.0
$115.3
6.7
28.0
–
(2.8)
–
2008
$181.6
–
12.1
7.3
14.5
(22.5)
(8.5)
–
7.6
$192.1
$180.4
(31.4)
15.2
14.5
(22.5)
7.5
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
Plan assets at fair market value – end of year
$138.5
$147.2
$163.7
$180.4
Funded status
$(49.9)
$(18.8)
$(28.4)
$ (1.2)
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
$
–
(0.5)
(49.4)
$
–
(5.6)
(13.2)
$
2.5
–
(30.9)
$
7.1
–
(8.3)
$(49.9)
$(18.8)
$(28.4)
$ (1.2)
$
0.9
101.0
$101.9
$
1.0
43.2
$ 44.2
$ (1.3)
31.2
$ 29.9
$ (1.1)
6.0
$
4.9
We estimate the following amounts recorded as part of accumulated other comprehensive income will be recognized as part
of our net pension expense during 2009:
Unrecognized prior service cost
Unrecognized actuarial loss
54
U.S. and
Puerto Rico
$0.1
4.6
$4.7
Non-U.S.
$(0.1)
1.3
$ 1.2
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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
2008
2007
2006
2008
5.79%
3.84%
6.16%
3.84%
6.14%
3.84%
3.34%
3.03%
Non-U.S.
2007
3.71%
3.15%
2006
3.23%
2.28%
Plans with projected benefit obligations in excess of plan assets as of December 31, 2008 and 2007 were as follows (in
millions):
Projected benefit obligation
Plan assets at fair market value
U.S. and Puerto Rico
Non-U.S.
2008
$188.4
138.5
2007
$166.0
147.2
2008
$178.3
147.8
2007
$163.0
155.5
Plans with accumulated benefit obligations in excess of plan assets as of December 31, 2008 and 2007 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 $140.6 million and
$116.8 million as of December 31, 2008 and 2007, respectively.
The accumulated benefit obligation for non-U.S. defined benefit
retirement plans was $178.7 million and $150.9 million as of
December 31, 2008 and 2007, 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,
2009
2010
2011
2012
2013
2014-2018
U.S. and
Puerto Rico
Non-U.S.
$ 3.4
$17.6
3.8
5.1
6.4
7.3
57.6
16.9
15.8
14.0
14.4
72.5
Our weighted-average asset allocations at December 31,
2008 and 2007, 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.
2008
2007
2008
2007
59%
31
–
10
–
65%
35
–
–
–
28%
43
18
3
8
37%
38
15
4
6
100%
100%
100%
100%
The U.S. and Puerto Rico defined benefit retirement
plans’ overall investment strategy is to maximize total returns
by emphasizing long-term growth of capital while avoiding
risk. We have established target ranges of assets held by the
U.S. and
Puerto Rico
Non-U.S.
2008
$15.5
7.4
2007
$20.5
8.8
2008
$140.4
120.1
2007
$5.5
4.5
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, 2008 and 2007, 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 2009 for the qualified U.S. and Puerto
Rico defined benefit retirement plans, however, subsequent
Congressional action may impact the minimum funding
requirement for 2009. We expect to voluntarily contribute
between $40 million to $50 million to these plans during 2009.
Contributions to non-U.S. defined benefit plans are estimated
to be approximately $11 million in 2009. We do not expect the
plan assets in any of our plans to be returned to us in the
next year.
55
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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)
Defined Contribution Plans
We also sponsor defined contribution plans for
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 $14.9 million, $12.8 million and
$12.6 million related to these plans for the years ended
December 31, 2008, 2007 and 2006, respectively.
12.
INCOME TAXES
Our operations in Puerto Rico, Switzerland and the State
of Indiana benefit from various tax incentive grants. Unless
these grants are extended, they will expire between fiscal
years 2016 and 2019.
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.
The components of earnings before taxes consist of the
The components of deferred taxes consisted of the
following (in millions):
following (in millions):
For the Years Ending December 31,
2008
2007
2006
United States operations
$ 618.8
$ 597.0
$ 727.3
Foreign operations
503.0
534.6
441.7
Total
$1,121.8
$1,131.6
$1,169.0
The provision for income taxes consists of (in millions):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
$ 136.0
$ 173.0
$ 178.5
27.3
107.0
270.3
31.6
(2.0)
(27.6)
2.0
25.0
96.0
22.2
89.5
294.0
290.2
39.0
19.0
5.9
63.9
31.7
5.0
7.1
43.8
Provision for income taxes
$ 272.3
$ 357.9
$ 334.0
Income taxes paid during 2008, 2007 and 2006 were
$332.9 million, $255.9 million and $257.6 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,
2008
2007
2006
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%
1.6
35.0%
2.7
35.0%
1.3
(7.3)
(7.0)
(4.3)
(2.5)
(3.1)
(2.0)
(1.3)
(0.1)
0.1
(2.8)
1.2
0.4
(1.2)
(0.4)
0.2
5.2
0.2
–
(1.2)
(0.1)
0.1
–
–
(0.2)
28.6%
Effective income tax rate
24.3%
31.6%
56
Deferred tax assets:
Inventory
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
2008
2007
$ 165.9
64.8
23.7
–
105.4
49.4
95.5
38.4
$ 118.6
101.4
20.7
1.7
97.3
35.7
94.0
24.4
543.1
(37.1)
506.0
493.8
(55.7)
438.1
$ (79.1)
(188.1)
(0.4)
(4.4)
$ (36.3)
(174.8)
(1.4)
(3.0)
(272.0)
(215.5)
$ 234.0
$ 222.6
The net operating loss carryovers are available to reduce
future federal, state and foreign taxable earnings. At
December 31, 2008, these net operating loss carryovers
generally expire within a period of 1 to 20 years. Valuation
allowances for net operating loss carryovers have been
established in the amount of $18.9 million and $16.3 million at
December 31, 2008 and 2007, respectively. The tax credit
carryovers are available to offset future federal, state and
foreign tax liabilities. At December 31, 2008, 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 $12.9 million and
$20.2 million at December 31, 2008 and 2007, respectively.
The remaining valuation allowances of $5.3 million and
$17.5 million at December 31, 2008 and 2007, respectively,
relate primarily to potential capital losses. We have
established valuation allowances related to certain business
combination transactions through goodwill. These allowances
were approximately $19.3 million and $33.9 million at
December 31, 2008 and 2007, respectively.
At December 31, 2008, we had an aggregate of
approximately $871 million of unremitted earnings of foreign
subsidiaries that have been, or are intended to be, indefinitely
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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 June 2006, the Financial Accounting Standards Board
Decreases related to lapse of statue of limitations
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.
In September 2007, we reached a settlement with the
United States Department of Justice to resolve an
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. At the time, no tax benefit was
recorded related to the settlement expense due to the
uncertainty as to the tax treatment. During the third quarter
of 2008, we reached an agreement with the U.S. Internal
Revenue Service (IRS) confirming the deductibility of a
portion of the settlement payment. As a result, during 2008
we recorded a current tax benefit of $31.7 million.
(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.
As of December 31, 2008, the amount of unrecognized
tax benefits is $129.5 million. Of this amount, $45.5 million
would impact our effective tax rate if recognized.
$38.2 million of the $129.5 million liability for unrecognized
tax benefits relate to tax positions of acquired entities taken
prior to their acquisition by us. Under FAS 141(R), if these
liabilities are settled for different amounts, they will affect the
income tax expense in the period of reversal or settlement.
The following is a tabular reconciliation of the total
amounts of unrecognized tax benefits (in millions):
Balance at January 1
Increases related to prior periods
Decreases related to prior periods
Increases related to current period
Decreases related to settlements with taxing
authorities
Balance at December 31
2008
2007
$135.2
12.1
(32.0)
15.8
$ 95.7
27.4
(5.5)
21.9
(1.3)
(0.3)
(1.3)
(3.0)
$129.5
$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
December 31, 2007, we recorded a liability of $19.6 million for
accrued interest and penalties, of which $14.7 million would
impact our effective tax rate, if recognized. The amount of
this liability is $22.9 million as of December 31, 2008. Of this
amount, $17.1 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. The U.S. federal returns for years
2003 and 2004 are currently under examination by the IRS.
On July 15, 2008, the IRS issued its examination report. We
filed a formal protest on August 15, 2008 and requested a
conference with the Appeals Office regarding disputed issues.
Although the appeals process could take several years, we do
not anticipate resolution of the audit will result in any
significant impact on our results of operations, financial
position or cash flows. In addition, for the 1999 tax year of
Centerpulse, which we acquired in October 2003, one issue
remains in dispute.
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
57
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2 0 0 8 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)
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 (2002 onward), France (2006
onward), Germany (2005 onward), Italy (2005 onward), Japan
(2002 onward), Puerto Rico (2005 onward), Singapore (2003
onward), Switzerland (2006 onward) and the United Kingdom
(2006 onward).
Our tax returns are currently under examination in
various foreign jurisdictions. The most significant foreign tax
jurisdiction under examination is the United Kingdom. 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.
13. CAPITAL STOCK AND EARNINGS PER SHARE
We are authorized to issue 250 million shares of preferred
stock, none of which were issued or outstanding as of
December 31, 2008.
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):
2008
2007
2006
Weighted average shares outstanding for
basic net earnings per share
227.3
235.5
243.0
Effect of dilutive stock options and
other equity awards
Weighted average shares outstanding for
1.0
2.0
2.4
diluted net earnings per share
228.3
237.5
245.4
For the year ended December 31, 2008, an average of
11.2 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, 2007 and 2006, an average of 3.1 million
and 7.6 million options, respectively, were not included.
During 2008, we repurchased approximately 10.8 million
shares of our common stock at an average price of $68.72 per
share for a total cash outlay of $737.0 million, including
commissions. In April 2008, we announced that our Board of
Directors authorized a $1.25 billion share repurchase program
which expires December 31, 2009. Approximately $1.13 billion
remains authorized under this plan.
14. SEGMENT DATA
We design, develop, manufacture and market orthopaedic
and dental reconstructive implants, spinal implants, trauma
products and related 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, certain claims, 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.
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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
2008
2007
2006
2008
2007
2006
2008
2007
$2,353.9
1,179.1
588.1
$2,277.0
1,081.0
539.5
$2,076.5
931.1
487.8
$1,209.4
470.2
257.1
$1,184.2
429.6
259.5
$1,093.7
385.9
231.5
$2,845.6
2,200.0
395.1
$2,552.6
1,999.2
348.3
$4,121.1
$3,897.5
$3,495.4
Americas
Europe
Asia Pacific
Net sales
Share-based payment expense
Inventory step-up
Settlement
Certain claims
Acquisition, integration and other
Global operations and corporate
functions
Operating profit
Total assets
U.S. sales were $2,212.3 million, $2,142.2 million and
$1,962.5 million for the years ended December 31, 2008, 2007
and 2006, 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.
Beginning in 2008, our Hips product category sales no
longer include bone cement and accessory sales, which have
been reclassified to our Orthopaedic Surgical Products and
Other (“OSP and other”) product category. Amounts in 2007
and 2006 related to sales of bone cement and accessory
products have been reclassified to conform to 2008
presentation.
Net sales by product category are as follows (in millions):
Reconstructive
Knees
Hips
Extremities
Dental
Total
Trauma
Spine
OSP and other
Total
2008
2007
2006
$1,763.0
1,279.5
121.0
227.5
3,391.0
221.4
230.6
278.1
$1,634.6
1,221.4
104.0
221.0
3,181.0
205.8
197.0
313.7
$1,460.5
1,126.9
77.6
179.0
2,844.0
194.7
177.4
279.3
$4,121.1
$3,897.5
$3,495.4
Long-lived tangible assets as of December 31, 2008 and
2007 are as follows (in millions):
Americas
Europe
Asia Pacific
Total
2008
2007
$ 918.3
272.5
73.3
$707.3
211.8
52.8
$1,264.1
$971.9
The Americas long-lived tangible assets are located
primarily in the U.S. Approximately $232.7 million of Europe
long-lived tangible assets as of December 31, 2008 are located
in Switzerland.
(69.9)
(7.0)
–
(69.0)
(68.5)
(70.1)
(0.5)
(169.5)
–
(25.2)
(74.8)
–
–
–
(6.1)
(632.3)
(480.4)
(465.0)
1,798.3
1,733.6
$1,090.0
$1,127.6
$1,165.2
$7,239.0
$6,633.7
Capital expenditures by operating segment for the years
ended December 31, 2008, 2007 and 2006 were as follows (in
millions):
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
2008
2007
2006
$
1.5
$
0.7
$
0.7
25.3
25.4
20.0
59.6
24.6
25.9
2.2
9.4
1.2
2.4
1.7
2.5
210.4
111.9
104.5
equipment
179.5
165.0
113.0
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.
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Notes to Consolidated Financial Statements (Continued)
Depreciation and amortization included in operating
segment profit for the years ended December 31, 2008, 2007
and 2006 was as follows (in millions):
Americas
Europe
Asia Pacific
Global operations and corporate
functions
Total
15. LEASES
2008
2007
2006
$ 78.5
57.0
25.6
$ 66.9
60.7
22.7
$ 56.7
46.5
18.7
114.0
79.7
75.5
$275.1
$230.0
$197.4
Future minimum rental commitments under non-
cancelable operating leases in effect as of December 31, 2008
were $38.2 million for 2009, $30.1 million for 2010,
$20.9 million for 2011, $15.9 million for 2012, $14.3 million for
2013 and $29.9 million thereafter. Total rent expense for the
years ended December 31, 2008, 2007 and 2006 aggregated
$41.4 million, $37.1 million and $31.1 million, respectively.
16. COMMITMENTS AND CONTINGENCIES
Intellectual Property and Product Liability-Related Litigation
In July 2008, we temporarily suspended marketing and
distribution of the Durom» Acetabular Component (Durom
Cup) in the U.S. to allow us to update product labeling to
provide more detailed surgical technique instructions to
surgeons and implement a surgical training program in the
U.S. Following our announcement, product liability lawsuits
and other claims have been asserted against us, some of
which we have settled. There are a number of claims still
pending and we expect additional claims will be submitted.
We recorded a provision of $47.5 million in the third quarter
of 2008, representing management’s estimate of these Durom
Cup-related claims. We increased that provision by
$21.5 million in the fourth quarter of 2008. The provision is
limited to revisions within two years of an original surgery
that occurred prior to July 2008. These parameters are
consistent with our data which indicates that cup loosenings
associated with surgical technique are most likely to occur
within that time period. Any claims received outside of these
defined parameters will be managed in the normal course and
reflected in our standard product liability accruals.
On February 15, 2005, Howmedica Osteonics Corp. 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. On August 19, 2008, the Court
granted our motion for summary judgment of non-
infringement of certain claims of U.S. Patent No. 6,818,020,
60
reducing the number of claims at issue in the suit to five. We
continue to believe that our defenses against infringement of
the remaining claims are valid and meritorious, and we intend
to defend this lawsuit vigorously.
In addition to certain claims related to the Durom Cup
discussed above, 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 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, liabilities from
these cases in excess of those recorded, if any, will not have a
material adverse effect on our consolidated financial position,
results of operations or cash flows.
Government Investigations
In March 2005, the U.S. Department of Justice through
the U.S. 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 U.S. through
the U.S. Department of Justice and 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 U.S. 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 all civil and administrative claims related to
the federal investigation by making a settlement payment to
the U.S. government of $169.5 million.
Under the terms of the DPA, the U.S. Attorney filed a
criminal complaint in the U.S. 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
Z I M M E R H O L D I N G S , I N C .
2 0 0 8 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)
requirements, in accordance with the terms set forth in the
CIA. 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.
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 received a
similar inquiry from the Oregon Attorney General’s office in
October 2008. We are cooperating fully with the investigators
with regard to these matters.
In September 2007, the Staff of the U.S. Securities and
Exchange Commission (“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 and the
U.S. Department of Justice with regard to this informal
investigation.
Derivative Actions and Class Actions
On April 24, 2008, a complaint was filed in the
U.S. District Court for the Southern District of New York,
Thorpe v. Zimmer, Inc., et al., naming us and two of our
subsidiaries as defendants. The complaint relates to a putative
class action on behalf of certain residents of New York who
had hip or knee implant surgery involving Zimmer products
during an unspecified period. The complaint alleges that our
relationships with orthopaedic surgeons and others violated
the New York deceptive practices statute and unjustly
enriched us. The plaintiff requests actual damages or $50.00,
whichever is greater, on behalf of each class member, a
permanent injunction from our engaging in allegedly improper
practices in the future and restitution in an unspecified
amount. We believe this lawsuit is without merit, and we
intend to defend it vigorously.
On August 5, 2008, a complaint was filed in the
U.S. District Court for the Southern District of Indiana,
Plumbers and Pipefitters Local Union 719 Pension Fund v.
Zimmer Holdings, Inc., et al., naming us and two of our
executive officers as defendants. The complaint relates to a
putative class action on behalf of persons who purchased our
common stock between January 29, 2008 and July 22, 2008.
The complaint alleges that we and two of our executive
officers engaged in violations of federal securities laws by
allegedly failing to disclose developments relating to our OSP
manufacturing operations in Dover, Ohio and problems
relating to the Durom Cup. The plaintiff seeks unspecified
damages and interest, attorneys’ fees, costs and other relief.
On December 24, 2008, the lead plaintiff filed a consolidated
complaint that alleges the same claims and relates to the
same time period. The defendants filed a motion to dismiss
the consolidated complaint on February 23, 2009. The motion
to dismiss is pending with the court. We believe this lawsuit is
without merit, and we and the individual defendants intend to
defend it vigorously.
On August 15, 2008, a shareholder derivative action,
Hays v. Dvorak et al., was filed in the U.S. District Court for
the Southern District of Indiana. The plaintiff seeks to
maintain the action purportedly on our behalf against certain
of our current and former directors and two non-director
executive officers. The plaintiff alleges, among other things,
breaches of fiduciary duties, abuse of control, unjust
enrichment and gross mismanagement by the named
defendants based on substantially the same factual allegations
as the putative federal securities class action referenced
above brought by the Plumbers and Pipefitters Local Union
719 Pension Fund. The plaintiff does not seek damages from
us, but instead requests damages of an unspecified amount on
our behalf. The plaintiff also seeks equitable relief to remedy
the individual defendants’ alleged misconduct, attorneys’ fees,
costs and other relief. The court has entered a scheduling
order that permits the plaintiff to file an amended complaint
on or before March 11, 2009. Under that same court order,
the defendants are not required to respond to any complaint
until May 11, 2009.
On November 20, 2008, a complaint was filed in the
U.S. District Court for the Northern District of Indiana,
Dewald v. Zimmer Holdings, Inc., et al., naming us and certain
of our current and former directors and employees as
defendants. The complaint relates to a putative class action
on behalf of all persons who were participants in or
beneficiaries of our U.S. or Puerto Rico Savings and
Investment Programs (“plans”) between October 5, 2007 and
the date of filing and whose accounts included investments in
our common stock. The complaint alleges, among other
things, that the defendants breached their fiduciary duties in
violation of the Employee Retirement Income Security Act of
1974, as amended, by continuing to offer Zimmer stock as an
investment option in the plans when the stock purportedly
was no longer a prudent investment and that defendants
failed to provide plan participants with complete and accurate
information sufficient to advise them of the risks of investing
their retirement savings in Zimmer stock. The plaintiff seeks
an unspecified monetary payment to the plans, injunctive and
equitable relief, attorneys’ fees, costs and other relief. On
January 23, 2009, the plaintiff filed an amended complaint
that alleges the same claims and clarifies that the class period
is October 5, 2007 through September 2, 2008. The
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Notes to Consolidated Financial Statements (Continued)
defendants are not required to respond to the amended
complaint until March 23, 2009. We believe this lawsuit is
without merit, and we and the individual defendants intend to
defend it vigorously.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in millions, except per share data)
Net sales
Gross profit
Net earnings
Net earnings per common share
Basic
Diluted
2008 Quarter Ended
2007 Quarter Ended
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
$1,059.2
804.5
239.3
$1,079.5
817.2
227.1
$952.2
715.0
214.7
$1,030.2
787.1
167.5
$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
1.03
1.02
0.99
0.99
0.96
0.95
0.75
0.75
0.99
0.98
0.98
0.97
0.19
0.19
1.13
1.12
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2 0 0 8 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, 2008 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 2008, 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 2008
required by the New York Stock Exchange to the exchange on
June 3, 2008.
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PART III
2 0 0 8 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 2009 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 2009 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 2009 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 and director independence is
incorporated herein by reference from our definitive Proxy Statement for our 2009 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 2009 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.
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PART IV
ITEM 15. Exhibits, Financial Statement Schedules
(a) 1. Financial Statements
2 0 0 8 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, 2008, 2007 and 2006
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II. Valuation and Qualifying Accounts
Other financial statement schedules are omitted because they are not applicable or the required information is shown in
the financial statements or the notes thereto.
3. Exhibits
A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately
precedes such exhibits and is incorporated herein by reference.
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Signatures
2 0 0 8 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 27, 2009
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
/s/
JAMES T. CRINES
James T. Crines
/s/ DEREK M. DAVIS
Derek M. Davis
/s/ BETSY J. BERNARD
Betsy J. Bernard
Marc N. Casper
/s/ LARRY C. GLASSCOCK
Larry C. Glasscock
/s/ ROBERT A. HAGEMANN
Robert A. Hagemann
/s/ ARTHUR J. HIGGINS
Arthur J. Higgins
/s/
JOHN L. MCGOLDRICK
John L. McGoldrick
/s/ CECIL B. PICKETT, PH.D.
Cecil B. Pickett, Ph.D.
President, Chief Executive Officer and Director
(Principal Executive Officer)
February 27, 2009
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
Vice President, Finance, and Corporate Controller
and Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
/s/ AUGUSTUS A. WHITE, III, M.D., PH.D.
Director
February 27, 2009
Augustus A. White, III, M.D., Ph.D.
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 8 F O R M 1 0 - K A N N U A L R E P O R T
2.1
3.1
3.2
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*
10.20*
10.21*
10.22*
10.23*
Stock Purchase Agreement dated as of September 4, 2008 (incorporated by reference to Exhibit 2.1 to the Registrant’s
Current Report on Form 8-K filed September 4, 2008)
Restated Certificate of Incorporation of Zimmer Holdings, Inc. dated May 13, 2008 (incorporated by reference to
Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 5, 2008)
Restated By-Laws of Zimmer Holdings, Inc. effective May 6, 2008 (incorporated by reference to Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K filed May 9, 2008)
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, as amended (incorporated by reference to Appendix B
to the Registrant’s definitive Proxy Statement on Schedule 14A filed March 20, 2008)
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)
First Amendment to the Restated Zimmer Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors
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)
Change in Control Severance Agreement with David C. Dvorak
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)
Form of Change in Control Severance Agreement with James T. Crines and Cheryl R. Blanchard
Form of Change in Control Severance Agreement with Jeffery A. McCaulley, Mark C. Throdahl and Chad F. Phipps
Change in Control Severance Agreement with Derek M. Davis
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)
Restated Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating
in the Zimmer Holdings, Inc. Savings and Investment Program
Restated 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
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)
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 8 F O R M 1 0 - K A N N U A L R E P O R T
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
10.31*
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)
10.32*
Summary Compensation Sheet
10.33
10.34
10.35
10.36
10.37
10.38
21
23
31.1
31.2
32
$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)
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 and Officers (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 31, 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
68
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, 2006
Year Ended December 31, 2007
Year Ended December 31, 2008
Excess and Obsolete Inventory:
Year Ended December 31, 2006
Year Ended December 31, 2007
Year Ended December 31, 2008
Excess and Obsolete Instruments:
Year Ended December 31, 2006
Year Ended December 31, 2007
Year Ended December 31, 2008
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
Schedule II
(In millions)
Balance at
Beginning
of Period
$ 23.3
20.4
21.7
$121.0
129.5
143.7
$ 37.7
40.7
31.7
Additions
Charged
(Credited)
to Expense
Deductions
to Reserve
Effects of
Foreign
Currency
Acquired
Abbott Spine
Allowances
Balance at
End of
Period
$(3.2)
1.4
(0.5)
$ (1.0)
(1.2)
(1.9)
$ 1.3
1.1
(1.2)
$
–
–
1.9
$ 20.4
21.7
20.0
$32.6
38.6
66.5
$ 8.3
3.1
5.6
$(26.0)
(26.9)
(23.1)
$ 1.9
2.5
(2.6)
$
–
–
15.1
$129.5
143.7
199.6
$ (5.4)
(12.5)
(2.9)
$ 0.1
0.4
0.3
$
–
–
2.4
$ 40.7
31.7
37.1
69
Z I M M E R H O L D I N G S , I N C .
Certification
2 0 0 8 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 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: Date: February 27, 2009
David C. Dvorak
President and
Chief Executive Officer
70
Z I M M E R H O L D I N G S , I N C .
Certification
2 0 0 8 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 27, 2009
James T. Crines
Executive Vice President, Finance and Chief
Financial Officer
71
Z I M M E R H O L D I N G S , I N C .
Certification
2 0 0 8 F O R M 1 0 - K A N N U A L R E P O R T
Exhibit 32
Certification Pursuant to 18 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, 2008 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 27, 2009
James T. Crines
Executive Vice President, Finance and Chief Financial Officer
February 27, 2009
72
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, 2008, 2007, 2006, 2005 and 2004
2008
Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,090.0
7.0
Inventory step-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69.0
Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68.5
Acquisition, integration and other . . . . . . . . . . . . . . . . . . . .
Adjusted Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . $1,234.5
(in millions, unaudited)
For the Years Ended December 31,
2007
$1,127.6
0.5
169.5
—
25.2
$1,322.8
2006
$1,165.2
—
—
—
6.1
$1,171.3
2005
$1,055.0
5.0
—
—
56.6
$1,116.6
Reconciliation of Diluted EPS to Adjusted Diluted EPS for the Years Ended December 31, 2008, 2007, 2006, 2005 and 2004
(unaudited)
For the Years Ended December 31,
2008
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.72
0.03
Inventory step-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.30
Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.30
Acquisition, integration and other . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes on inventory step-up, settlement, certain claims and acquisition,
integration and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from decreased deferred taxes of acquired Centerpulse
(0.16)
(0.14)
operations due to Swiss tax rate reduction . . . . . . . . . . . . . . . . . .
—
Adjusted Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.05
2007
$ 3.26
—
0.71
—
0.11
(0.03)
—
—
$ 4.05
2006
$ 3.40
—
—
—
0.03
0.01
—
—
$ 3.44
2005
$ 2.93
0.02
—
—
0.23
(0.08)
—
—
$ 3.10
2004
$763.2
59.4
—
—
81.1
$903.7
2004
$ 2.19
0.24
—
—
0.32
(0.20)
—
(0.14)
$ 2.41
73
Corporate Information
Board of Directors
John L. McGoldrick
Chairman of the Board,
Zimmer Holdings, Inc.
Senior Vice President,
External Strategy Development,
International AIDS
Vaccine Initiative
Betsy J. Bernard
Former President, AT&T Corp.
Marc N. Casper
Executive Vice President
and Chief Operating Officer,
Thermo Fisher Scientific Inc.
David C. Dvorak
President and
Chief Executive Officer,
Zimmer Holdings, Inc.
Larry C. Glasscock
Chairman, WellPoint, Inc.
Robert A. Hagemann
Senior Vice President
and Chief Financial Officer,
Quest Diagnostics Incorporated
Arthur J. Higgins
Chairman of the Board
of Management,
Bayer HealthCare AG
Cecil B. Pickett, Ph.D.
President, Research and
Development, Biogen Idec Inc.
Augustus A. White, III, M.D., Ph.D.
Ellen and Melvin Gordon
Professor of Medical Education,
Professor of Orthopaedic Surgery
and former Master of the Oliver
Wendell Holmes Society,
Harvard Medical School
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
Derek M. Davis
Vice President, Finance
and Corporate Controller
and Chief Accounting Officer
Jon E. Kramer
President,
U.S. Sales
James T. Crines
Executive Vice President,
Finance and Chief Financial Officer
Jeffery A. McCaulley
President,
Zimmer Reconstructive
Bruno A. Melzi
Chairman,
Europe, Middle East and Africa
Renee P. Rogers, Ph.D.
Vice President,
Global Human Resources
Laura C. O’Donnell
Chief Compliance Officer
Stephen H. L. Ooi
President,
Asia Pacific
Richard C. Stair
Senior Vice President,
Global Operations and Logistics
Mark C. Throdahl
Group President, Global Businesses
Chad F. Phipps
Senior Vice President,
General Counsel and Secretary
David J. Weidenbenner
Senior Vice President,
Global Marketing
Stockholder Information
Headquarters
Zimmer Holdings, Inc.
345 East Main Street
Warsaw, IN 46580, U.S.A.
+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 +1-866-688-7656.
Independent Auditors
PricewaterhouseCoopers LLP
Chicago, IL, U.S.A.
Corporate Governance
Stock Performance Graph
Comparison of Cumulative Total Return for years ended December 31
ISS Corporate Governance
Quotient* (CGQ®)
Index Ranking: 92.5
Industry Ranking: 99.5
Zimmer Holdings, Inc. outperformed
92.5 percent of the companies in
the S&P 500 Index and 99.5 percent
of the companies in the healthcare
equipment and services group as
of February 17, 2009.
Assumes $100 was invested on
December 31, 2003 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.
$150
$100
$50
$0
Zimmer Holdings, Inc.
S&P 500 Stock Index
2003
$100
100
S&P 500 Health Care Equipment Index
100
2004
$114
109
112
2005
$ 96
112
112
2006
$111
128
115
2007
$ 94
132
120
2008
$ 57
81
86
* 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.
This annual report is printed on papers that
contain 10% post-consumer waste.
“ I am deeply grateful
to the people of Zimmer,
who gave me back my life.”
Zimmer Holdings, Inc.
345 East Main Street, P.O. Box 708
Warsaw, IN 46580, U.S.A.
www.zimmer.com
Pictured above:
Medications that Stephanie took for
long-standing medical conditions hastened
bone deterioration. That led to debilitating
pain. Her physician knew a Zimmer hip
implant was her ticket to improved quality
of life. Now she spends fun-filled days
with her grandchildren and volunteers
at her church.
proof 13
Date
03/09/09
Client
Zimmer
projeCt
job number
proWolfe partners
2008 Annual Report
08-ZMH-100
314 983 9600