Zimmer Holdings, Inc.
2009 Annual Report
Many strengths. Many opportunities. One mission.
proof 12b
rEvisEd @ printEr
datE
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CliEnt
Zimmer
projECt
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2009 Annual Report
09-ZMH-100
314 983 9600
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datE
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projECt
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proWolfE partnErs
2009 Annual Report
09-ZMH-100
314 983 9600
Many strengths. Many opportunities.
Zimmer’s leadership in the musculoskeletal
market comes from putting patients and customers
first and acting on that commitment through our
experience, comprehensive product portfolio,
well-developed infrastructure and global presence.
Advancing capabilities in reconstructive treatments
Our core Knee and Hip franchises are building
momentum as they address individual differences
among patients, expand applications for Trabecular
Metal TM Technology and extend the continuum of
care. Our world-class medical education program
trains surgeons to help patients. PAGE 9
Applying knowledge and skills across the
human musculoskeletal system Our experience
with large joints and expansive infrastructure
enable us to improve patient outcomes for other
conditions. Our comprehensive capabilities produce
a unique market position for Zimmer. PAGE 14
Enhancing excellence in key areas We continue to
strengthen our market leadership through strategic
investments that focus on our core competencies,
people and infrastructure. PAGE 20
Musculoskeletal mindset
We apply our broad knowledge
of bones and joints throughout
the musculoskeletal system,
leveraging knowledge for patients’
benefit and training surgeons to
achieve desired outcomes through
world-class medical education.
A brand that stands for leadership
Zimmer’s brand stands for quality
infused in a rich portfolio of products,
procedures and technologies
and a strong global network of
manufacturing and distribution that
resonates with providers who
are intent on delivering the
best available healthcare.
Emphasis on innovation
Our track record of extending
the continuum of care grows out
of a deep-seated commitment
to patients and a spirit
of innovation that energizes
everyday activities at Zimmer.
Operational excellence
A culture of constant improvement
and continuing investment
in human capital keeps Zimmer
operating at high levels of
quality and customer service.
Global market presence
Consistency in standards and
processes provides a solid base
from which Zimmer addresses the
diverse needs of markets in more
than 100 countries worldwide.
proof 12b
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datE
03/08/10
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Zimmer
projECt
job numbEr
proWolfE partnErs
2009 Annual Report
09-ZMH-100
314 983 9600
One mission.
Lead the industry in delivering
value to healthcare providers,
their patients and stockholders,
while embracing our social
responsibilities.
Long-time friends Madeleine
Campana-Erard, Susy Balsiger-
Peter and Susanne Rösli
head for the train station
in Bern, Switzerland. These
involved grandmothers are
role models for independent
living. Among them, they
have had seven surgeries
that used Zimmer products.
On the cover, Susy enjoys
long walks on the mountain
trails near Bern.
Note: Blue type below has been re-positioned 3/8/10. 1:15 pm,
edits to black text and 4/color image moved from page 6
To Our Stockholders:
Zimmer has been dedicated to addressing patients’ painful musculoskeletal
conditions for more than 80 years. Our intense focus and deep experience frame
a solid strategic platform from which we expand the continuum of care for
patients and support the healthcare providers who take care of their needs.
Acting on our patient-focused mission is the foundation for Zimmer’s leadership.
David C. Dvorak
learned from decades of experience with knees and hips to other areas of the human body. Our bias to
Zimmer has earned a unique position in the musculoskeletal market by applying what we have
act on behalf of patient care was again evident in 2009 as we continued to expand our product portfolio,
extended applications for our proprietary Trabecular MetalTM Technology and introduced additional
opportunities to tailor treatments through better-fitting implants and innovative surgical instruments.
These accomplishments continued in spite of the global recession, which caused a significant number of
patients to delay implant and oral surgeries as long as possible. We anticipate that they will eventually
proceed with treatments. Indeed, volume stabilized in the second half of 2009, particularly in the
Americas and Asia-Pacific regions.
Zimmer’s sales in 2009 totaled $4.1 billion. Fully diluted adjusted earnings per share of $3.94, while
slightly below 2008 results, were in line with our expectations coming into the year.
Our performance reflects the commitment of Zimmer’s people and our solid financial foundation,
strategic global infrastructure and well-anchored strategic plan. These strengths, combined with recent
momentum in reconstructive procedures and new-product regulatory clearances, give us confidence
in achieving sales growth and leveraged earnings in 2010.
Our Strategic Growth Platform Zimmer’s experience in large-joint reconstruction forms the nucleus
of our musculoskeletal market leadership. That body of knowledge supports an impressive long-term
success rate in knee and hip surgeries. Confidence in outcomes, in large part, reflects surgeons’ ability
to select implants that will address individual patient needs. Recognizing the value of these solutions,
we continue to expand our offerings. In the fourth quarter of 2009, patient-specific instruments were
cleared for use in certain Zimmer knee surgeries. We are one of only a few orthopaedic device providers
able to offer both pre-operative software and patient-specific pin guides.
We also received clearance for two new acetabular cups used in hip replacement. Additional operating
room flexibility provided by these cup systems along with our range of hip stems further expands
patient-specific capabilities. Empowering surgeons and preserving intraoperative flexibility are two
long-time Zimmer hallmarks. We continue to make those considerations a priority in product development.
Continuing the introduction of new products demonstrates that growth of our reconstructive franchise
remains a key strategic initiative. Those core capabilities also represent the catalyst for another
fundamental strategy—that of growing our smaller musculoskeletal business lines.
1
2009 Annual Report 5
To Our Stockholders (continued)
We not only have the advantage of understanding the musculoskeletal system but also the ability
to leverage our technologies, quality-driven manufacturing network and global distribution system.
Our presence in U.S. hospitals and markets in 100 countries worldwide, coupled with exceptional brand
recognition, means that Zimmer has attractive opportunities to expand our musculoskeletal reach and
accelerate growth in business lines beyond Knees and Hips.
Leveraging Capabilities Two prime examples of how we leverage capabilities are Trabecular Metal
Technology and our standard-setting medical education and bioskills training program.
Trabecular Metal Technology has been applied to implants for more than a decade, long enough
to accumulate a body of peer-reviewed journal articles with clinical data supporting positive results
Our Purpose
observed by surgeons and patients. Continuing research and development initiatives have led to
identifying Trabecular Metal Technology applications throughout our business units.
Our Mission
Our Values
Customers First
The medical education and bioskills training available through the Zimmer Institute exemplifies
world-class instruction. Its curriculum teaches safe and effective uses of our products and offers
healthcare providers learning opportunities that can lead to better patient outcomes. In 2009, the
Zimmer Institute trained more than 15,000 surgeons and clinicians on our products worldwide.
Our focus in 2010 and beyond continues to include innovative applications of our capabilities and
expertise. With a strong infrastructure in place, including significant investments in manufacturing and
Do the Right Thing
distribution in the past two years, our near-term emphasis is on effective execution, which includes
accelerating sales and earnings growth.
Innovate and Improve
Win Through Results
Dedication to People
One Zimmer
Applying Core Values in Day-to-Day Operations Zimmer employees share a deep commitment to improving
the quality of life for patients. It is especially rewarding when our day-to-day activities bring reminders of
the difference our products make in people’s lives.
My most recent experience along those lines occurred when I visited our facility in Winterthur, Switzerland.
Seated next to me on the flight from Zurich was Susy Balsiger-Peter, whose photo appears on the cover
of this report. Our conversation quickly found common ground because of her interest in orthopaedics
as a nurse and patient. She has had both knees and both hips replaced, with Zimmer products, it turns
out. Her first surgery was a hip replacement in 1988. “It’s an old one, but it still works,” she assured
me. Of her extensive implant experience, she says simply, “I’m so happy. I have no pain anymore.”
Hearing her and others’ testimonies reminds us not only why we do what we do but also why we work
to expand our musculoskeletal capabilities. We are grateful for the support of our customers, employees
and distributor networks in carrying out Zimmer’s patient-centric purpose and mission.
David C. Dvorak
President and
Chief Executive Officer
6 Zimmer Holdings, Inc.
Knees Multiple clinical registries rank Zimmer’s NexGen® System among
the best-performing knee implants in the world. Its design reflects cumulative
knowledge and ongoing emphasis on tailoring treatments to patient conditions,
exemplified in implants and surgical instruments that help surgeons determine
the best approach to making accurate and efficient bone resections.
Zimmer global market share:*
27% of a $6.4 billion market
Hips The portfolio of products for hip replacement includes new acetabular
cups to provide additional choices for surgeons to match implants to patients’
conditions. The cups work with stems such as the bone-conserving Fitmore®
Stem and the Zimmer ® M/L Taper Hip Prosthesis with Kinectiv ® Modular Neck
Technology. Modular design provides flexibility to better match each patient’s
anatomy to achieve the best fit.
21% of a $5.8 billion market
Extremities Extremities for Zimmer primarily relates to shoulders
and elbows. Technologies, as in the Zimmer ® Trabecular MetalTM Glenoid, and
the ability to convert the Inverse/Reverse System to a reverse shoulder are
advancing the Extremities portfolio.
13% of a $1.0 billion market
Dental Zimmer’s Dental business focuses on key areas of oral rehabilitation.
Regenerative products for bone and soft tissue are used to prepare for dental
reconstruction and support optimal aesthetic outcomes. Reconstructive implants
in conjunction with restorative products replace missing teeth and anchor
restorations that imitate natural teeth.
6% of a $3.3 billion market
Trauma Trauma products and related instrumentation are designed with
ease of use in mind to help surgeons address the wide variety of fractures
they treat. The comprehensive Zimmer ® Natural NailTM System offers advanced
technology for treating injured or broken bones.
5% of a $4.4 billion market
Spine Zimmer’s expanding spine product portfolio and geographic reach
offer a competitive differentiator in a highly fragmented global market. The portfolio
provides complete procedural solutions in the thoracolumbar, cervical fixation and
biologics markets as well as a complete range of minimally invasive solutions.
3% of an $8.7 billion market
Orthopaedic Surgical Products Zimmer’s Orthopaedic
Surgical Products business provides an array of products that contribute to
successful outcomes for implant patients, including tourniquet systems, wound
debridement products and bone cement.
*Zimmer’s share and market size for the full
year 2009 have been calculated based on
company and Wall Street analysts’ estimates.
Innovation throughout the human musculoskeletal system
Various Zimmer
Dental Products
Sequoia®
Pedicle Screw
System
Fitmore® Hip Stem
with ContinuumTM
Acetabular System
Gender SolutionsTM
NexGen® LPS-Flex Knee
Ant-Cer II® Dynamic Anterior
Cervical Plate with Puros®-S2
Cervical Interbody Allograft
Zimmer ® Trabecular MetalTM
Glenoid Fixation with Zimmer ®
Trabecular MetalTM Humeral Stem
Zimmer ®
Coonrad/Morrey
Total Elbow
Zimmer ®
Natural NailTM
System
Zimmer ® Periarticular
Locking Plate System
3
Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%
To Our Stockholders (continued)
We not only have the advantage of understanding the musculoskeletal system but also the ability
to leverage our technologies, quality-driven manufacturing network and global distribution system.
Our presence in U.S. hospitals and markets in 100 countries worldwide, coupled with exceptional brand
recognition, means that Zimmer has attractive opportunities to expand our musculoskeletal reach and
accelerate growth in business lines beyond Knees and Hips.
Leveraging Capabilities Two prime examples of how we leverage capabilities are Trabecular Metal
Technology and our standard-setting medical education and bioskills training program.
Trabecular Metal Technology has been applied to implants for more than a decade, long enough
to accumulate a body of peer-reviewed journal articles with clinical data supporting positive results
Our Purpose
observed by surgeons and patients. Continuing research and development initiatives have led to
identifying Trabecular Metal Technology applications throughout our business units.
Our Mission
Our Values
Customers First
The medical education and bioskills training available through the Zimmer Institute exemplifies
world-class instruction. Its curriculum teaches safe and effective uses of our products and offers
healthcare providers learning opportunities that can lead to better patient outcomes. In 2009, the
Zimmer Institute trained more than 15,000 surgeons and clinicians on our products worldwide.
Our focus in 2010 and beyond continues to include innovative applications of our capabilities and
expertise. With a strong infrastructure in place, including significant investments in manufacturing and
Do the Right Thing
distribution in the past two years, our near-term emphasis is on effective execution, which includes
accelerating sales and earnings growth.
Innovate and Improve
Win Through Results
Dedication to People
One Zimmer
Applying Core Values in Day-to-Day Operations Zimmer employees share a deep commitment to improving
the quality of life for patients. It is especially rewarding when our day-to-day activities bring reminders of
the difference our products make in people’s lives.
My most recent experience along those lines occurred when I visited our facility in Winterthur, Switzerland.
Seated next to me on the flight from Zurich was Susy Balsiger-Peter, whose photo appears on the cover
of this report. Our conversation quickly found common ground because of her interest in orthopaedics
as a nurse and patient. She has had both knees and both hips replaced, with Zimmer products, it turns
out. Her first surgery was a hip replacement in 1988. “It’s an old one, but it still works,” she assured
me. Of her extensive implant experience, she says simply, “I’m so happy. I have no pain anymore.”
Hearing her and others’ testimonies reminds us not only why we do what we do but also why we work
to expand our musculoskeletal capabilities. We are grateful for the support of our customers, employees
and distributor networks in carrying out Zimmer’s patient-centric purpose and mission.
David C. Dvorak
President and
Chief Executive Officer
6 Zimmer Holdings, Inc.
Knees Multiple clinical registries rank Zimmer’s NexGen® System among
the best-performing knee implants in the world. Its design reflects cumulative
knowledge and ongoing emphasis on tailoring treatments to patient conditions,
exemplified in implants and surgical instruments that help surgeons determine
the best approach to making accurate and efficient bone resections.
Zimmer global market share:*
27% of a $6.4 billion market
Hips The portfolio of products for hip replacement includes new acetabular
cups to provide additional choices for surgeons to match implants to patients’
conditions. The cups work with stems such as the bone-conserving Fitmore®
Stem and the Zimmer ® M/L Taper Hip Prosthesis with Kinectiv ® Modular Neck
Technology. Modular design provides flexibility to better match each patient’s
anatomy to achieve the best fit.
21% of a $5.8 billion market
Extremities Extremities for Zimmer primarily relates to shoulders
and elbows. Technologies, as in the Zimmer ® Trabecular MetalTM Glenoid, and
the ability to convert the Inverse/Reverse System to a reverse shoulder are
advancing the Extremities portfolio.
13% of a $1.0 billion market
Dental Zimmer’s Dental business focuses on key areas of oral rehabilitation.
Regenerative products for bone and soft tissue are used to prepare for dental
reconstruction and support optimal aesthetic outcomes. Reconstructive implants
in conjunction with restorative products replace missing teeth and anchor
restorations that imitate natural teeth.
6% of a $3.3 billion market
Trauma Trauma products and related instrumentation are designed with
ease of use in mind to help surgeons address the wide variety of fractures
they treat. The comprehensive Zimmer ® Natural NailTM System offers advanced
technology for treating injured or broken bones.
5% of a $4.4 billion market
Spine Zimmer’s expanding spine product portfolio and geographic reach
offer a competitive differentiator in a highly fragmented global market. The portfolio
provides complete procedural solutions in the thoracolumbar, cervical fixation and
biologics markets as well as a complete range of minimally invasive solutions.
3% of an $8.7 billion market
Orthopaedic Surgical Products Zimmer’s Orthopaedic
Surgical Products business provides an array of products that contribute to
successful outcomes for implant patients, including tourniquet systems, wound
debridement products and bone cement.
*Zimmer’s share and market size for the full
year 2009 have been calculated based on
company and Wall Street analysts’ estimates.
Innovation throughout the human musculoskeletal system
Various Zimmer
Dental Products
Sequoia®
Pedicle Screw
System
Fitmore® Hip Stem
with ContinuumTM
Acetabular System
Gender SolutionsTM
NexGen® LPS-Flex Knee
Ant-Cer II® Dynamic Anterior
Cervical Plate with Puros®-S2
Cervical Interbody Allograft
Zimmer ® Trabecular MetalTM
Glenoid Fixation with Zimmer ®
Trabecular MetalTM Humeral Stem
Zimmer ®
Coonrad/Morrey
Total Elbow
Zimmer ®
Natural NailTM
System
Zimmer ® Periarticular
Locking Plate System
3
Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%
One mission.
Lead the industry in delivering
value to healthcare providers,
their patients and stockholders,
while embracing our social
responsibilities.
Long-time friends Madeleine
Campana-Erard, Susy Balsiger-
Peter and Susanne Rösli
head for the train station
in Bern, Switzerland. These
involved grandmothers are
role models for independent
living. Among them, they
have had seven surgeries
that used Zimmer products.
On the cover, Susy enjoys
long walks on the mountain
trails near Bern.
Financial Highlights
(Dollars in millions except per share amounts)
% Change 2008-2009
Sales b y Geographic Segment
2005
2006
2007
2008
2009
Reported
58%
27%
15%
Americas
Europe
Asia Pacific
$1,942
$2,076
$2,277
$2,354
$2,372
875
469
931
488
1,081
1,179
1,119
540
588
604
Consolidated
$3,286
$3,495
$3,898
$4,121
$4,095
1%
-5%
3%
-1%
Constant
Currency(1)
1%
1%
—
1%
To Our Stockholders:
Zimmer has been dedicated to addressing patients’ painful musculoskeletal
conditions for more than 80 years. Our intense focus and deep experience frame
a solid strategic platform from which we expand the continuum of care for
patients and support the healthcare providers who take care of their needs.
Acting on our patient-focused mission is the foundation for Zimmer’s leadership.
% Change 2008-2009
Zimmer has earned a unique position in the musculoskeletal market by applying what we have
Sales b y Product Category
2005
2006
2007
2008
2009
Reported
30%
43%
3%
5%
6%
7% 6%
Reconstructive
$2,534
$2,665
$ 2,960
$3,164
$3,125
Knees
Hips
Extremities
Dental
Trauma
Spine
OSP* and Other
1,366
1,460
1,635
1,102
1,127
1,221
1,763
1,280
1,761
1,228
66
148
180
160
264
78
179
195
177
279
104
221
206
197
314
121
227
222
230
278
136
205
235
253
277
Consolidated
$3,286
$3,495
$ 3,898
$4,121
$4,095
-1%
—
-4%
12%
-10%
6%
10%
—
-1%
*Orthopaedic Surgical Products
Constant
Currency(1)
—
2%
-2%
14%
-8%
6%
12%
—
1%
Net Sales
Year-over-year sales increases in
2009 returned late in the year
as procedure volume stabilized.
Operating Profit
Top-line growth and ongoing
attention to controlling
production costs should
help restore positive trends
in operating profit.
Operating Cash Flow
Focus on strategic
management of inventory,
accounts receivable and
working capital contributed
to strong operating cash flow.
Diluted Earnings per Share
Earnings per share were
in line with expectations
in a year that included
anticipated economic and
market challenges.
-1% Reported
1
2
1
4
,
5
9
0
,
4
8
9
8
3
,
5
9
4
3
,
6
8
2
3
,
-4% Adjusted(2)
-7% Reported
1
7
1
1
,
5
6
1
1
,
7
1
1
1
,
5
5
0
1
,
3
2
3
1
,
8
2
1
1
,
5
3
2
1
,
0
9
0
1
,
3
8
1
,
1
9
1
0
,
1
8% Reported
-3% Adjusted(2)
-11% Reported
8
1
1
,
1
4
8
0
1
,
1
4
0
1
,
8
3
0
1
,
8
7
8
5
0
4
.
6
2
3
.
5
0
4
.
2
7
3
.
4
9
3
.
2
3
3
.
4
4
3
.
0
4
3
.
0
1
3
.
3
9
2
.
05
06
07
08
09
05
06
07
08
09
05
06
07
08
09
05
06
07
08
09
(1) “Constant Currency” refers to sales growth resulting from translating current and prior-period sales at the same predetermined foreign currency exchange rate. The translated results are then
used to determine year-over-year percentage increases or decreases that exclude the effect of changes in foreign currency exchange rates. See the reconciliation of this non-GAAP financial
measure to the most directly comparable GAAP measure on page 73.
(2) “Adjusted” refers to performance measures that exclude inventory step-up, acquisition, integration, realignment and other expenses, the provision for certain Durom® Acetabular Component
product claims in the U.S., goodwill impairment, net curtailment and settlement and a 2007 civil settlement with the U.S. government and related tax benefit. See the reconciliations of these
non-GAAP financial measures to the most directly comparable GAAP measures on page 73.
David C. Dvorak
learned from decades of experience with knees and hips to other areas of the human body. Our bias to
act on behalf of patient care was again evident in 2009 as we continued to expand our product portfolio,
extended applications for our proprietary Trabecular MetalTM Technology and introduced additional
opportunities to tailor treatments through better-fitting implants and innovative surgical instruments.
These accomplishments continued in spite of the global recession, which caused a significant number of
patients to delay implant and oral surgeries as long as possible. We anticipate that they will eventually
proceed with treatments. Indeed, volume stabilized in the second half of 2009, particularly in the
Americas and Asia-Pacific regions.
Zimmer’s sales in 2009 totaled $4.1 billion. Fully diluted adjusted earnings per share of $3.94, while
slightly below 2008 results, were in line with our expectations coming into the year.
Our performance reflects the commitment of Zimmer’s people and our solid financial foundation,
strategic global infrastructure and well-anchored strategic plan. These strengths, combined with recent
momentum in reconstructive procedures and new-product regulatory clearances, give us confidence
in achieving sales growth and leveraged earnings in 2010.
Our Strategic Growth Platform Zimmer’s experience in large-joint reconstruction forms the nucleus
of our musculoskeletal market leadership. That body of knowledge supports an impressive long-term
success rate in knee and hip surgeries. Confidence in outcomes, in large part, reflects surgeons’ ability
to select implants that will address individual patient needs. Recognizing the value of these solutions,
we continue to expand our offerings. In the fourth quarter of 2009, patient-specific instruments were
cleared for use in certain Zimmer knee surgeries. We are one of only a few orthopaedic device providers
able to offer both pre-operative software and patient-specific pin guides.
We also received clearance for two new acetabular cups used in hip replacement. Additional operating
room flexibility provided by these cup systems along with our range of hip stems further expands
patient-specific capabilities. Empowering surgeons and preserving intraoperative flexibility are two
long-time Zimmer hallmarks. We continue to make those considerations a priority in product development.
Continuing the introduction of new products demonstrates that growth of our reconstructive franchise
remains a key strategic initiative. Those core capabilities also represent the catalyst for another
fundamental strategy—that of growing our smaller musculoskeletal business lines.
1
4 Zimmer Holdings, Inc.
2009 Annual Report 5
One mission.
Lead the industry in delivering
value to healthcare providers,
their patients and stockholders,
while embracing our social
responsibilities.
Long-time friends Madeleine
Campana-Erard, Susy Balsiger-
Peter and Susanne Rösli
head for the train station
in Bern, Switzerland. These
involved grandmothers are
role models for independent
living. Among them, they
have had seven surgeries
that used Zimmer products.
On the cover, Susy enjoys
long walks on the mountain
trails near Bern.
Financial Highlights
(Dollars in millions except per share amounts)
% Change 2008-2009
Sales b y Geographic Segment
2005
2006
2007
2008
2009
Reported
58%
27%
15%
Americas
Europe
Asia Pacific
$1,942
$2,076
$2,277
$2,354
$2,372
875
469
931
488
1,081
1,179
1,119
540
588
604
Consolidated
$3,286
$3,495
$3,898
$4,121
$4,095
1%
-5%
3%
-1%
Constant
Currency(1)
1%
1%
—
1%
To Our Stockholders:
Zimmer has been dedicated to addressing patients’ painful musculoskeletal
conditions for more than 80 years. Our intense focus and deep experience frame
a solid strategic platform from which we expand the continuum of care for
patients and support the healthcare providers who take care of their needs.
Acting on our patient-focused mission is the foundation for Zimmer’s leadership.
% Change 2008-2009
Zimmer has earned a unique position in the musculoskeletal market by applying what we have
Sales b y Product Category
2005
2006
2007
2008
2009
Reported
30%
43%
3%
5%
6%
7% 6%
Reconstructive
$2,534
$2,665
$ 2,960
$3,164
$3,125
Knees
Hips
Extremities
Dental
Trauma
Spine
OSP* and Other
1,366
1,460
1,635
1,102
1,127
1,221
1,763
1,280
1,761
1,228
66
148
180
160
264
78
179
195
177
279
104
221
206
197
314
121
227
222
230
278
136
205
235
253
277
Consolidated
$3,286
$3,495
$ 3,898
$4,121
$4,095
-1%
—
-4%
12%
-10%
6%
10%
—
-1%
*Orthopaedic Surgical Products
Constant
Currency(1)
—
2%
-2%
14%
-8%
6%
12%
—
1%
Net Sales
Year-over-year sales increases in
2009 returned late in the year
as procedure volume stabilized.
Operating Profit
Top-line growth and ongoing
attention to controlling
production costs should
help restore positive trends
in operating profit.
Operating Cash Flow
Focus on strategic
management of inventory,
accounts receivable and
working capital contributed
to strong operating cash flow.
Diluted Earnings per Share
Earnings per share were
in line with expectations
in a year that included
anticipated economic and
market challenges.
-1% Reported
1
2
1
4
,
5
9
0
,
4
8
9
8
3
,
5
9
4
3
,
6
8
2
3
,
-4% Adjusted(2)
-7% Reported
1
7
1
1
,
5
6
1
1
,
7
1
1
1
,
5
5
0
1
,
3
2
3
1
,
8
2
1
1
,
5
3
2
1
,
0
9
0
1
,
3
8
1
,
1
9
1
0
,
1
8% Reported
-3% Adjusted(2)
-11% Reported
8
1
1
,
1
4
8
0
1
,
1
4
0
1
,
8
3
0
1
,
8
7
8
5
0
4
.
6
2
3
.
5
0
4
.
2
7
3
.
4
9
3
.
2
3
3
.
4
4
3
.
0
4
3
.
0
1
3
.
3
9
2
.
05
06
07
08
09
05
06
07
08
09
05
06
07
08
09
05
06
07
08
09
(1) “Constant Currency” refers to sales growth resulting from translating current and prior-period sales at the same predetermined foreign currency exchange rate. The translated results are then
used to determine year-over-year percentage increases or decreases that exclude the effect of changes in foreign currency exchange rates. See the reconciliation of this non-GAAP financial
measure to the most directly comparable GAAP measure on page 73.
(2) “Adjusted” refers to performance measures that exclude inventory step-up, acquisition, integration, realignment and other expenses, the provision for certain Durom® Acetabular Component
product claims in the U.S., goodwill impairment, net curtailment and settlement and a 2007 civil settlement with the U.S. government and related tax benefit. See the reconciliations of these
non-GAAP financial measures to the most directly comparable GAAP measures on page 73.
David C. Dvorak
learned from decades of experience with knees and hips to other areas of the human body. Our bias to
act on behalf of patient care was again evident in 2009 as we continued to expand our product portfolio,
extended applications for our proprietary Trabecular MetalTM Technology and introduced additional
opportunities to tailor treatments through better-fitting implants and innovative surgical instruments.
These accomplishments continued in spite of the global recession, which caused a significant number of
patients to delay implant and oral surgeries as long as possible. We anticipate that they will eventually
proceed with treatments. Indeed, volume stabilized in the second half of 2009, particularly in the
Americas and Asia-Pacific regions.
Zimmer’s sales in 2009 totaled $4.1 billion. Fully diluted adjusted earnings per share of $3.94, while
slightly below 2008 results, were in line with our expectations coming into the year.
Our performance reflects the commitment of Zimmer’s people and our solid financial foundation,
strategic global infrastructure and well-anchored strategic plan. These strengths, combined with recent
momentum in reconstructive procedures and new-product regulatory clearances, give us confidence
in achieving sales growth and leveraged earnings in 2010.
Our Strategic Growth Platform Zimmer’s experience in large-joint reconstruction forms the nucleus
of our musculoskeletal market leadership. That body of knowledge supports an impressive long-term
success rate in knee and hip surgeries. Confidence in outcomes, in large part, reflects surgeons’ ability
to select implants that will address individual patient needs. Recognizing the value of these solutions,
we continue to expand our offerings. In the fourth quarter of 2009, patient-specific instruments were
cleared for use in certain Zimmer knee surgeries. We are one of only a few orthopaedic device providers
able to offer both pre-operative software and patient-specific pin guides.
We also received clearance for two new acetabular cups used in hip replacement. Additional operating
room flexibility provided by these cup systems along with our range of hip stems further expands
patient-specific capabilities. Empowering surgeons and preserving intraoperative flexibility are two
long-time Zimmer hallmarks. We continue to make those considerations a priority in product development.
Continuing the introduction of new products demonstrates that growth of our reconstructive franchise
remains a key strategic initiative. Those core capabilities also represent the catalyst for another
fundamental strategy—that of growing our smaller musculoskeletal business lines.
1
4 Zimmer Holdings, Inc.
2009 Annual Report 5
To Our Stockholders (continued)
We not only have the advantage of understanding the musculoskeletal system but also the ability
to leverage our technologies, quality-driven manufacturing network and global distribution system.
Our presence in U.S. hospitals and markets in 100 countries worldwide, coupled with exceptional brand
recognition, means that Zimmer has attractive opportunities to expand our musculoskeletal reach and
accelerate growth in business lines beyond Knees and Hips.
Leveraging Capabilities Two prime examples of how we leverage capabilities are Trabecular Metal
Technology and our standard-setting medical education and bioskills training program.
Trabecular Metal Technology has been applied to implants for more than a decade, long enough
to accumulate a body of peer-reviewed journal articles with clinical data supporting positive results
Our Purpose
observed by surgeons and patients. Continuing research and development initiatives have led to
identifying Trabecular Metal Technology applications throughout our business units.
Our Mission
Our Values
Customers First
The medical education and bioskills training available through the Zimmer Institute exemplifies
world-class instruction. Its curriculum teaches safe and effective uses of our products and offers
healthcare providers learning opportunities that can lead to better patient outcomes. In 2009, the
Zimmer Institute trained more than 15,000 surgeons and clinicians on our products worldwide.
Our focus in 2010 and beyond continues to include innovative applications of our capabilities and
expertise. With a strong infrastructure in place, including significant investments in manufacturing and
Do the Right Thing
distribution in the past two years, our near-term emphasis is on effective execution, which includes
accelerating sales and earnings growth.
Innovate and Improve
Win Through Results
Dedication to People
One Zimmer
Applying Core Values in Day-to-Day Operations Zimmer employees share a deep commitment to improving
the quality of life for patients. It is especially rewarding when our day-to-day activities bring reminders of
the difference our products make in people’s lives.
My most recent experience along those lines occurred when I visited our facility in Winterthur, Switzerland.
Seated next to me on the flight from Zurich was Susy Balsiger-Peter, whose photo appears on the cover
of this report. Our conversation quickly found common ground because of her interest in orthopaedics
as a nurse and patient. She has had both knees and both hips replaced, with Zimmer products, it turns
out. Her first surgery was a hip replacement in 1988. “It’s an old one, but it still works,” she assured
me. Of her extensive implant experience, she says simply, “I’m so happy. I have no pain anymore.”
Hearing her and others’ testimonies reminds us not only why we do what we do but also why we work
to expand our musculoskeletal capabilities. We are grateful for the support of our customers, employees
and distributor networks in carrying out Zimmer’s patient-centric purpose and mission.
David C. Dvorak
President and
Chief Executive Officer
6 Zimmer Holdings, Inc.
Knees Multiple clinical registries rank Zimmer’s NexGen® System among
the best-performing knee implants in the world. Its design reflects cumulative
knowledge and ongoing emphasis on tailoring treatments to patient conditions,
exemplified in implants and surgical instruments that help surgeons determine
the best approach to making accurate and efficient bone resections.
Zimmer global market share:*
27% of a $6.4 billion market
Hips The portfolio of products for hip replacement includes new acetabular
cups to provide additional choices for surgeons to match implants to patients’
conditions. The cups work with stems such as the bone-conserving Fitmore®
Stem and the Zimmer ® M/L Taper Hip Prosthesis with Kinectiv ® Modular Neck
Technology. Modular design provides flexibility to better match each patient’s
anatomy to achieve the best fit.
21% of a $5.8 billion market
Extremities Extremities for Zimmer primarily relates to shoulders
and elbows. Technologies, as in the Zimmer ® Trabecular MetalTM Glenoid, and
the ability to convert the Inverse/Reverse System to a reverse shoulder are
advancing the Extremities portfolio.
13% of a $1.0 billion market
Dental Zimmer’s Dental business focuses on key areas of oral rehabilitation.
Regenerative products for bone and soft tissue are used to prepare for dental
reconstruction and support optimal aesthetic outcomes. Reconstructive implants
in conjunction with restorative products replace missing teeth and anchor
restorations that imitate natural teeth.
6% of a $3.3 billion market
Trauma Trauma products and related instrumentation are designed with
ease of use in mind to help surgeons address the wide variety of fractures
they treat. The comprehensive Zimmer ® Natural NailTM System offers advanced
technology for treating injured or broken bones.
5% of a $4.4 billion market
Spine Zimmer’s expanding spine product portfolio and geographic reach
offer a competitive differentiator in a highly fragmented global market. The portfolio
provides complete procedural solutions in the thoracolumbar, cervical fixation and
biologics markets as well as a complete range of minimally invasive solutions.
3% of an $8.7 billion market
Orthopaedic Surgical Products Zimmer’s Orthopaedic
Surgical Products business provides an array of products that contribute to
successful outcomes for implant patients, including tourniquet systems, wound
debridement products and bone cement.
*Zimmer’s share and market size for the full
year 2009 have been calculated based on
company and Wall Street analysts’ estimates.
Innovation throughout the human musculoskeletal system
Various Zimmer
Dental Products
Sequoia®
Pedicle Screw
System
Fitmore® Hip Stem
with ContinuumTM
Acetabular System
Gender SolutionsTM
NexGen® LPS-Flex Knee
Ant-Cer II® Dynamic Anterior
Cervical Plate with Puros®-S2
Cervical Interbody Allograft
Zimmer ® Trabecular MetalTM
Glenoid Fixation with Zimmer ®
Trabecular MetalTM Humeral Stem
Zimmer ®
Coonrad/Morrey
Total Elbow
Zimmer ®
Natural NailTM
System
Zimmer ® Periarticular
Locking Plate System
3
Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%Extremities Zimmer Market Share: 13%Dental Zimmer Market Share: 6%Spine Zimmer Market Share: 3%Trauma Zimmer Market Share: 5%Hips Zimmer Market Share: 21%Knees Zimmer Market Share:27%
Letter from the Chairman
Zimmer is strategically positioned to capitalize on opportunities in the
medical devices market through its comprehensive product portfolio, global
infrastructure, and strong commitment to supporting customers and
improving patients’ quality of life.
John L. McGoldrick
treatments that add quality to people’s lives. What sets Zimmer apart is its leadership both in providing
Aging and active populations around the world continue to present opportunities for orthopaedic
standard-setting large-joint implants and in applying its knowledge and creativity to benefit patients in
new ways. The company now applies its considerable experience across the range of the musculoskeletal
system and continues to extend the continuum of care, from early intervention to joint replacement. Your
Board encourages the company’s innovation and its strong relationships with healthcare professionals that
lead to advances in treatments and surgical techniques.
As directors, we are involved in setting Zimmer’s growth strategy. The company is following a compelling
plan that brings to bear its knowledge of medical devices and its global infrastructure to build value and
spur growth. The strategy puts into practice clear statements of corporate purpose and mission based on
core values of integrity and respect. The Board has worked closely with Zimmer’s management at each
stage of this strategic planning process. We believe the resulting action plan will produce solid results in
the near term as well as lay the groundwork for the business model to evolve to support continuing
market leadership.
We are confident Zimmer’s management will continue to excel in the reconstructive business and to
expand the company’s other businesses. The company’s improving performance in 2009 occurred
against the backdrop of a global recession, healthcare reform efforts and more demanding regulatory
requirements. As directors, our role is not only to help Zimmer meet such challenges but also to use our
collective experience to help develop new solutions. Zimmer will continue to lead in helping patients
with musculoskeletal conditions and in supporting the healthcare providers who treat them.
The women and men of Zimmer, and of your Board, take great pride in their contributions to improving
quality of life. Zimmer has the innovative spark and the solid experience to continue building a great
company around its patient-focused mission. We are confident in the company’s ability to execute
its strategic plan, and your Board remains committed to helping the management team deliver great
value to stockholders.
John L. McGoldrick
Chairman
Zimmer Holdings, Inc.
2009 Annual Report 7
Innovation to improve patient outcomes. An outstanding
example of Zimmer’s track record of innovation and strategic emphasis on
introducing new products is the NexGen® System, the world’s leading knee
replacement. Zimmer’s emphasis on innovation is responsible not only for
continuing to improve core products but also for finding ways to apply
proven capabilities across the musculoskeletal system.
8
Advancing capabilities in reconstructive treatments
Our unique market position is defined in part by our portfolio of businesses
that concentrate on the human musculoskeletal system. We consistently
focus on that area of expertise, on patients with musculoskeletal-related
disease or trauma, on healthcare providers who treat those conditions and
on the channels through which treatment is delivered.
In the $30 billion global musculoskeletal market, Zimmer clearly has earned leadership in large-joint
replacement, which covers knees and hips. Our business units have a strong presence in four other
musculoskeletal specialties—extremities, dental, trauma and spine. Our ability to leverage bone and joint
knowledge and our strong product and instrument portfolio match the needs of growing numbers of
patients with joint problems and an expanding market of healthcare providers, who increasingly
emphasize quality, service and knowledge in choosing business partners.
Our experience and innovation have led to breakthroughs in knee and hip replacements, advances
in minimally invasive surgery, progress in cartilage repair and improvements like Trabecular MetalTM
Technology. Because we understand the human musculoskeletal system and participate in the environment
in which patients receive related treatments, we are well-positioned to continue to innovate and grow.
Opportunities come from demographic and lifestyle trends worldwide as well as our demonstrated
capabilities to address unmet patient needs, expand the continuum of care, enhance operational
excellence and function seamlessly in a global market.
Emphasis on Our Core Business Our decades of experience in knee and hip implants have produced
a comprehensive product portfolio for our core franchises. The accompanying depth of knowledge
spurs innovation.
A best-in-class product—and now the pace-setter in knee implants—is Zimmer’s NexGen® System.
Its development builds on implants designed to improve flexion, extending patients’ knee-bending
capability and thereby broadening their comfort level with physical activities. The system also
incorporates minimally invasive surgical techniques and mobile-bearing implant options. Taking that
body of knowledge another step led to the Gender SolutionsTM Natural-Knee® Flex System, further
accommodating patient differences. Zimmer’s NexGen System is an example of the progress being made
in increasing surgeons’ ability to create solutions to match individual patient needs.
Independent clinical studies have documented the NexGen System’s patient benefits. Data in the
2009 annual report on the Swedish Knee Arthroplasty Register show a cumulative risk of revision of
approximately 2 percent for recipients of NexGen System implants after 10 years. The registry reflects
clinical data collected on a variety of knee replacements from multiple surgeons and how the implants
performed for the first 10 years after the patients’ surgeries.
Implant performance is a fundamental patient concern, particularly as active lifestyles and longer life
expectancies play bigger roles in decisions about implant surgery. While the NexGen System represented
a major step in advancing patient care, innovation continues. The ability to tailor surgeries to patient
conditions is taking another step forward with the introduction of patient-specific instruments. The
application involves three-dimensional imaging to assist the surgeon in choosing the most appropriate
implants, instruments and techniques to work with individual patient anatomies.
2009 Annual Report 9
Best in Class
Patients who receive Zimmer’s
NexGen® Gender SolutionsTM
High-Flex Knee replacement
comfortably engage in activities
that involve deep bending
of their knees because of
the 155 degrees of flexion
designed into the innovative
implant. The NexGen Brand is
Zimmer’s best-selling product.
Moreover, it is used in
approximately one in four
primary knee-replacement
surgeries worldwide.
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Trabecular Metal TM
Technology is
incorporated
in products
across our
musculoskeletal
portfolio.
Portfolio-Wide Applications
An independent study reported
in The Journal of Arthroplasty
in 2009 found significant
reductions in bone loss next
to acetabular hip implants
manufactured with Zimmer’s
Trabecular Metal TM Technology
compared with other products
on the market. The study
followed hip replacement
patients for six to nine years
after surgery.
10 Zimmer Holdings, Inc.
Ongoing efforts to personalize implant fit have similarly driven progress in our Hip business. We
introduced a significant advancement in hip products in 2007 with the Zimmer ® M/L Taper Hip Prosthesis
with Kinectiv® Modular Neck Technology. Its design and materials differentiate it from other products, plus
it expands opportunities to improve patient outcomes by allowing surgeons to better fit the implant to the
patient’s anatomy during the operation. Our hip products portfolio continues to add options in bone-
conserving stems and in acetabular cups, notably the versatile ContinuumTM Acetabular Cup. The new
products, plus the flexibility the portfolio offers, allow surgeons to better address individual patient needs.
Giving Bone a Solid Hold Trabecular Metal Technology entered the market over a decade ago. Since
then, it has been applied to implants across Zimmer’s businesses. This highly porous biomaterial is
designed to act as a scaffold for bone to grow more naturally around and into an implant. Using a
method exclusive to Zimmer, we make Trabecular Metal Technology implants using elemental
tantalum and a patented chemical vapor deposition process.
More than 10 years’ experience with Trabecular Metal Technology has allowed rigorous clinical use to support
its exceptional role in patient treatment. A Mayo Clinic study reported in The Journal of Arthroplasty in 2009
was the first to quantify bone conditions around hip implants six to nine years after surgery. The results
showed significant reductions in acetabular bone loss adjacent to Trabecular Metal Technology compared
with a titanium component.
Trabecular Metal Technology also provides an example of Zimmer’s broader musculoskeletal perspective.
We have continued to apply its benefits as a platform technology across our business lines over the past
decade. A Trabecular Metal Technology implant is available or in development across Zimmer’s product
franchises. Research remains ongoing to find more applications for this market differentiator.
World-Class Medical Education Execution of a comprehensive medical education and bioskills
training program is keeping pace with product advances. The program is offered worldwide through
the Zimmer Institute.
The program reflects the broad spectrum of medical knowledge applied to treating human musculoskeletal
conditions as well as healthcare providers’ commitment to achieving the best possible outcomes for
their patients. Their focus on patients connects with another core component of our medical education
program, which is to help medical specialists use our products and instruments in safe and effective
ways to treat patients’ musculoskeletal conditions. Accordingly, the Zimmer Institute offers a robust
training program in multiple sites worldwide for the convenience of participating surgeons and
clinicians. We also offer a variety of instructional settings, from hands-on lab-based experience to
case study discussions among highly experienced surgeons to Internet-based courses. More than
15,000 medical specialists participated in Zimmer Institute training in 2009.
Zimmer also is focused on enhancing the design of surgical instruments. Product designers and engineers
collaborate with developer surgeons to incorporate feedback on instrument design, almost in real time.
The product development experts monitor lab sessions to gather additional insight into how instruments
New Solutions in
Orthobiologics
DeNovo® NT Natural Tissue
Graft, shown in its package,
is used to repair defects in
cartilage due to trauma or
normal wear.
function in the hands of surgeons, engineers modify specifications and a Zimmer team creates a new
prototype overnight, in time for the next day’s design session. The process is further affirmation of the
patient-centric focus Zimmer applies across our business.
Compelling Market Opportunities The recognized driver of market opportunities in our core Knee and
Hip franchises traditionally has come from aging populations. The market remains attractive given aging
populations in many countries worldwide, the success of implant procedures, and the lack of alternative
medical solutions for severe joint pain and reduced mobility.
Various studies point to growing demand for knee and hip replacements. Data gathered by the Archives
of Internal Medicine show that one in eight Americans over 60 years of age suffers from symptomatic
knee osteoarthritis. According to the National Institutes of Health, 9 percent to 13 percent of people
needing total knee replacement and less than 25 percent of people needing hip replacement undergo
the procedures. Those proportions have remained low despite clinical evidence of the durability of total
joint replacements over the long term. In one review of data, The Journal of Arthroplasty reported
post-operative success rates of 92 percent to 98 percent 10 to 20 years after surgery.
Moreover, there are compelling market opportunities beyond the fact that the oldest Baby Boomers are
within a few years of turning 67 years old, the average age for total knee or hip replacement. Two other
significant trends in the musculoskeletal market come from the expanding continuum of care and
lifestyle-related considerations.
Orthobiologics for cartilage repair and partial and bone-conserving implants are making significant
contributions to broadening the continuum of care. They serve as interim steps to provide a degree of
relief until a patient is ready to make the decision to undergo total joint replacement surgery. Zimmer’s
DeNovo® NT Natural Tissue Graft is gaining a solid foothold in the market for cartilage repair. DeNovo® ET
Engineered Tissue Graft is being evaluated in clinical trials. Orthobiologics also plays an important role for
Zimmer in the area of bone repair and generation as these products are commonly used in fracture repair,
spinal fusion, dental implant restoration and knee and hip revision procedures.
Expanding the continuum of care is a particularly timely undertaking, given more wear and tear on
joints from physically demanding lifestyles and obesity trends. According to the Centers for Disease
Control, bone and joint disorders are the leading cause of disability in the United States, and there are
correlations between osteoarthritis and other chronic diseases such as diabetes, high blood pressure
and heart disease. A 2009 report in the Archives of Internal Medicine predicted a dramatic increase in
the need for knee and hip replacements in the next two decades, largely because of obesity and longer
life expectancies. Putting numbers to that outlook, The Journal of Bone and Joint Surgery estimated a
674 percent increase in demand for knees and 174 percent increase in demand for hips through 2030.
Population Projections
2005-2030
Compound annual growth
rates vary, but the population
of 60- to 84-year-olds is
generally growing worldwide.
That and the fact that surgery
is the best, lasting solution for
osteoarthritic pain indicate
continuing strong demand
for implants.
Source: U.S. Census Bureau,
International Data Base
+2.5%
United States
+3.7%
Mexico
+3.7%
Brazil
+1.0%
Germany
+1.6%
United Kingdom
+1.0%
Russia
+0.5%
Japan
+2.4%
Australia
+3.6%
China
2009 Annual Report 11
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Taking Training to Surgeons
As part of the Zimmer Institute
training program, Dr. H. Nötzli,
who envisioned and then
played a central role in
developing Zimmer’s bone-
conserving Fitmore® Hip Stem,
leads a class for surgeons
in Heidelberg, Germany.
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Learn. Do. Excel.TM The Zimmer Institute offers a comprehensive medical
education and bioskills training curriculum. Its variety of instructional settings
and learning opportunities supports surgeons and other clinicians in using
our products safely and effectively to achieve desired patient outcomes. The
program is both world-class and worldwide to accommodate healthcare
practitioners’ universally high standards and busy schedules.
Bringing Surgeons to the Lab
Surgeons come together for
hands-on training in labs
where they can use anatomical
materials to improve their
surgical skills and learn
new techniques.
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Applying knowledge and skills across
the human musculoskeletal system
The track record in our core franchise is powerful, but what increasingly
defines Zimmer’s leadership is our strategic global musculoskeletal
market presence.
Even as we grow Knees and Hips, we see additional attractive opportunities in orthobiologics and in our
musculoskeletal specialties—Extremities, Dental, Trauma and Spine. The institutional knowledge within
Zimmer enables us to recognize growth trajectories similar to the proven developmental path of Knees and
Hips, but at an accelerated pace given experience accumulated through treatment of those larger joints.
Leveraging Zimmer Capabilities Zimmer’s skill set—in products, procedures and technologies as well
as global manufacturing and distribution—positions us for progress. The Zimmer brand, known world-
wide for putting patients first and elevating industry standards for quality and customer service, is a
shared strength across our musculoskeletal markets.
Zimmer’s ability to meet the needs of various specialties through the 130,000 SKUs we manufacture and
distribute is becoming a more important competitive differentiator. We also have a presence in most
hospitals in the United States and a market presence in more than 100 countries worldwide. These
characteristics take on greater significance in the healthcare environment as hospitals look to partner with
approved providers. We bring to the relationships not only devices, instruments and technologies used in
patient procedures but also solutions that grow out of understanding healthcare industry trends. Our
scope lines up well with the trend of procurement officers and healthcare system managers playing a
bigger role in their institutions’ product purchasing decisions.
Top-of-mind name awareness is an attribute which can be particularly advantageous for our smaller
business units. Their competitors may number in the hundreds and include many small, device-driven
providers. The pressures on healthcare providers’ time and financial resources encourage them to give
weight to Zimmer’s reliability, staying power and the availability of clinical data supporting the efficacy
of our products.
Leveraging Global Presence Zimmer’s global musculoskeletal leadership derives not only from our
brand and market presence but also our strategic adoption of a global perspective.
Our manufacturing plants adhere to standardized quality requirements such that products made in one
location can be shipped elsewhere to meet demand, with full confidence that they will meet nations’
individual requirements. Our sales representatives study the same clinical data and detail the same product
features, adding to the consistent recognition of how Zimmer products, procedures and technologies fit into
patient care considerations. Our research initiatives increasingly take a global perspective, keeping a finger
on the pulse of international markets and unmet patient needs in order to advance Zimmer innovation and
focus on products that are most likely to achieve market success.
Embracing the diversity of the many cultures in which we operate through a foundation of shared core
values and a single mission is a strategic imperative for Zimmer. It gives us a clear line of sight to patient
and customer needs, which in turn enables us to act quickly on market opportunities.
Leveraging the
Zimmer Brand
Zimmer’s depth of knowledge
about reconstructing the
human body’s large joints lays
the foundation to support
healthcare providers in
restoring mobility and
alleviating pain for patients
with other musculoskeletal
conditions and injuries.
Around the world the Zimmer
brand represents ongoing and
successful efforts to improve
patient care.
14 Zimmer Holdings, Inc.
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Quality assurance. Throughout the production process, Zimmer
applies and assures demanding measures of quality and consistency.
Zimmer’s production process matches skilled workers with finely tuned
equipment to assure that products meet high standards.
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Probing Product Quality
An employee operates a highly
sensitive measurement device
used in the final stages of
making a polyethylene liner for
acetabular cups.
15
Applications across the musculo-
skeletal system. The understanding of
human joints and motion that has evolved from
Zimmer’s long history of innovations in knee and
hip applications enables us to develop successful
treatments offered through our Extremities, Dental,
Trauma and Spine businesses.
1616
Quality Process
Pedicle screws will be polished
and etched before undergoing
their final inspection and
sterilization.
Broadening Applications
The continuing introduction
of intramedullary nails that
make up the comprehensive
Zimmer ® Natural Nail TM System
significantly expands our
Trauma product portfolio.
Building Musculoskeletal Capabilities Our business line focus on particular musculoskeletal categories
provides the framework for executing our growth strategies. The continuing launch of new products plays
a key role in the business lines’ operating plans.
Zimmer’s Extremities business emphasizes products used to treat shoulders and elbows. Trabecular
Metal Technology has been incorporated into products that expand patients’ range of motion. It has
made the Zimmer ® Trabecular Metal Reverse Shoulder System the fastest-growing product in the
Extremities portfolio.
Implants and regenerative products are the primary focus of our Dental business and offer better clinical
outcomes over traditional repair. They are designed to support versatile and aesthetic tooth replacement
procedures. Those features provide ease of use for surgeons and less time in the dental chair for patients.
Along with advances in the implants themselves, Dental has continued to introduce innovative instruments
that are easier for dentists to use and minimize risk of procedure-related complications.
Our Trauma business is completing introduction of the comprehensive Zimmer ® Natural Nail TM System.
This nail system complements our extensive line of periarticular plates and screws, giving surgeons a
single nail offering that accommodates various procedures and patient needs. Our Trauma products are
distributed to customers through our robust distribution system for reconstructive products, representing
an opportunity to leverage the strong Zimmer network.
Adding this new comprehensive nail system to our product line provides Zimmer the opportunity to compete
in Level 1 and Level 2 trauma centers and strengthens our position in Trauma. In the overall market, nails
account for about one-fourth of total product sales and represent a nearly billion dollar sales opportunity.
The top priority for Zimmer Spine during 2009 was the global integration of Abbott Spine, acquired
in October 2008. The expanded product portfolio, cross-trained sales force and strengthened global
distribution channel enhance Zimmer’s presence in the highly fragmented spine market.
Among differentiators for Zimmer Spine are the PathFinder ® Minimally Invasive Pedicle Screw System
and an elegantly simple Universal Clamp® System used in the treatment of scoliosis. The products are
attractive to surgeons not only because of their reliability but also because their flexibility allows them to
be combined with other products the surgeons may use in treating particular cases.
Accelerating Progress
We are accelerating the
development trajectory for
Extremities, Dental and Spine
by building on the expertise
and technologies that we
developed in conjunction with
advancing treatments for
large-joint conditions.
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Production breadth. Preparation of Zimmer’s more than 130,000
SKUs involves a worldwide network of manufacturing locations and
a wide spectrum of capabilities. The production facilities all share a
commitment to quality, safety, efficiency, and customer service and
operate in an environment of continuous improvement.
Quality Control
As part of the quality control
process, an employee
inspects hip stems by
exposing them to black light
to reveal any imperfections.
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Paying Attention to Work Flow
Our new plant in Shannon,
Ireland, was designed to
maximize efficiency and speed
work flow. A board tracking
multiple metrics is posted
at the entry to each pod so
that workers can monitor
manufacturing performance.
19
Enhancing excellence in key areas
Zimmer’s comprehensive musculoskeletal product portfolio becomes an
even stronger market differentiator through the contributions of a well-
informed sales force, state-of-the-art distribution and a continuous loop
of improvement in manufacturing efficiency and quality.
Sales Force Effectiveness Across Zimmer, attention is paid to sales training and rigorous management
of the sales process. New instructional modules delve more deeply into preparing salespeople to better
understand the broader healthcare-management issues surgeons and other decision-makers increasingly
bring to the conversations with sales representatives. In order to achieve consistency across our
network, we also make the training modules available to staff members of our independent distributors.
An important component of the sales process is customers’ use of peer-reviewed published clinical data
to help make product decisions. This subject is one that Zimmer is particularly well-prepared to address,
given independent findings related to the success of materials and products like Trabecular Metal
Technology and the NexGen System in knees.
State-of-the-Art Distribution Zimmer’s long-standing emphasis on customer service relies not only
on an effective sales force but also the ability to meet product demand accurately and in a timely fashion.
In a patient-treatment situation, in which the final implant selection often depends on the circumstances
Order-Filling Accuracy
In Zimmer’s state-of-the-art
distribution facility in
Eschbach, Germany, highly
automated systems transport
blue totes containing specific
SKUs through the warehouse
and under counters where
order pickers are stationed.
Employee skill combines with
advanced technology to fill
orders accurately and quickly.
20 Zimmer Holdings, Inc.
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Stacked With Efficiency
At the state-of-the-art
Eschbach, Germany,
distribution facility, robotic
shuttles transfer totes to
conveyors, which circulate
around the warehouse to
order-picking stations.
Replacement stock enters
storage through a separate
but similar track on another
side of the building.
Inside the Eschbach, Germany,
Distribution Center
• Racks 215 feet long
• High-rack area 29 levels tall
• 28 robotic shuttles retrieving
and replacing totes
• 90,000 totes transporting
products to order pickers
• 4 active order-picking stations
the surgeon encounters while the patient is in the operating room, distribution is a uniquely complex
process. The continuing expansion of our product portfolio adds yet another dimension.
Our new distribution center in Eschbach, Germany, illustrates our focus on customer service as well
as our emphasis on operating efficiency and strategic preparation for growth. This technologically
advanced center is designed to fill dual roles as the central warehouse for our operations in Europe and
assembly center for instrument kits used by surgeons in major European markets. Detailed planning and
state-of-the-art capabilities make the warehouse the most efficient in the Zimmer system and a
standard-setter within the industry.
The site’s paperless picking system is an example of how technology can be used not only to reshape
procedures but also the configuration of the facility itself. The system uses bar codes and readers to
deliver storage bins to the pickers, who then fill individual order bins at their work stations. The
technology at Eschbach also allows more of the warehouse to be applied to storage, including higher,
densely packed shelves generally out of reach for human hands but readily accessible to the robotic
equipment that delivers selected objects to the pickers.
Continuous Improvement in Operations A similar emphasis on efficiency and continuous improvement
permeates operations across Zimmer. Manufacturing facilities in Europe, the United States and Puerto
Rico have long adhered to the principles of lean manufacturing and Six Sigma. Those disciplines
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Starting Off on the Right Foot
From their first day on the
job, employees begin an
orientation process to become
familiar with Zimmer’s
Purpose, Mission and Values,
the foundation on which our
business is built and the
principles we apply day to day.
Orientation continues with
hands-on exposure to
procedures in the work area.
22 Zimmer Holdings, Inc.
increasingly are finding their way into staff functions, with the effect of smoother design, development
and production processes and continuous evaluation of how and where to make Zimmer products to
achieve the highest levels of quality, efficiency and customer service.
Talent Development Investments in human capital parallel investments in infrastructure at Zimmer,
including the creation of a multi-dimensional leadership model to drive clear expectations of desired
leadership behaviors. Employees set goals aligned with the company’s overall strategic plan. Our
compensation structure ties to achievement of goals on both an individual and company basis.
In addition, we provide a multi-faceted talent development program so that employees have additional
tools to help attain their goals, which roll up into Zimmer’s meeting the high expectations we set for
ourselves. Putting our core values into practice is an inherent part of the goal-setting and performance
measurement process, helping keep individual accomplishments as well as the company on course.
The most recent addition to the training and development curriculum is a leadership development
program for senior managers. It is aimed at expanding their recognition of leadership styles and ways to
maximize strengths, identify areas for improvement and effectively match skills with business situations.
Zimmer values our diversity, energy and readiness to innovate. Our investments in human capital
express our confidence in our people and their ability to maintain the company’s vibrancy. At the base
of that confidence is our global buy-in to one mission—to lead the industry in delivering value to
healthcare providers, their patients and stockholders, while embracing our social responsibilities.
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Around-the-clock service. Zimmer’s
emphasis on customer service and our dedication
to achieving the best possible outcomes for
patients mean that we make sure products reach
healthcare providers on a timely basis.
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23
Order Fulfillment
Delivery vans leave a Zimmer
distribution center at the last
shipment cut-off of the day,
timed to assure overnight
delivery of products, support
distributors and accommodate
healthcare providers’ surgery
schedules.
Zimmer employees worldwide embrace our purpose of alleviating
patients’ pain and restoring their mobility. Their commitment plays out every
day in their approach to their jobs. They make our products, get them to
market, focus on continuous improvement and search for new solutions to
unmet needs as if their family members’ health depends on their contributions.
Often it does, as these family members’ implant stories confirm.
Virginia, with her daughter-in-law, Denise Good, coordinator for global
event management. Non-stop throbbing knee pain made Virginia’s living
room chair a constant companion. Her favorite activities like walks in the
neighborhood, all-afternoon baking sessions and volunteering at church
were not possible. She celebrates the day she got two new Zimmer
knees —and got back on course with her active lifestyle.
Shi Yuan, with his daughter, Veronica Peng, sales representative in China.
Shi Yuan’s aversion to having an operation outweighed knee pain for more
than a decade, including four years of strong encouragement for surgery
from Veronica. His quick recovery after total knee arthroplasty surprised
even her. Now he plays soccer, practices Taijiquan and keeps up with his
young granddaughter.
Michael, with his brother, Jim Crines, chief financial officer. College tennis
and soccer, golfing and an all-around active lifestyle led to an intense ache
in Michael’s right hip by the time he was in his mid-30s. Medication was
ineffective, but a hip replacement relieved his pain. The surgery gave him
back full range of motion and energy to keep up with his on-the-go family.
Ingeborg, with her son-in-law, Harald Meyer, general manager, Germany.
Twenty-five years of professional tennis and extensive travel describe
Ingeborg’s lifestyle before osteoarthritis caused debilitating pain.
Determined not to depend on medication and nearly unable to walk, she
opted for total hip arthroplasty. Now she is back to taking part in sports,
travel and family activities —pain-free.
Tony, with his stepson, Mark Tenner, process engineer. Over the years Tony
found ways to compensate for not being able to raise his left arm all the
way—sticking with dog-paddling in swimming, re-engineering his 5-wood
for golf and the like. But pain associated with pulling, twisting or pushing
intensified and kept him awake at night. A shoulder implant gave him
range of motion and sound sleep.
“ My Zimmer knees have
been such a blessing.
I am now able to bake in
my kitchen all afternoon.”
“ The Zimmer implant is
now a part of me and my
life, and I’d like to thank
everyone who contributed
to producing it.”
“ My hip replacement has
allowed me to live a fuller,
more dynamic life. I can
now play tennis with my
daughters.”
“ My new hip has brought
me back to life. Once
again, I am able to live
without pain.”
“ I am so proud of Mark
and the work he does
at Zimmer. Thank you
is all I can say to the
many wonderful
Zimmer employees.”
24 Zimmer Holdings, Inc.
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Form 10-K
Zimmer Holdings, Inc. 2009 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, 2009
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
No n
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¥
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ¥
Indicate by 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
Smaller reporting company n
Non-accelerated filer n
(Do not check if a smaller reporting company)
Indicate by check mark 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 $9,120,369,894 (based on the closing price of these shares on the New
York Stock Exchange on June 30, 2009 and assuming solely for the purpose of this calculation that all directors and executive officers of
the registrant are “affiliates”). As of February 12, 2010, 202,790,978 shares of the registrant’s $.01 par value common stock were
outstanding.
Document
Portions of the Proxy Statement with respect to the 2010 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 9 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 reconstructive
implants, dental 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.
Zimmer Holdings was incorporated in Delaware in 2001.
Our history dates to 1927, when Zimmer Manufacturing
Company, a predecessor, was founded in Warsaw, Indiana. On
August 6, 2001, Zimmer Holdings was spun off from its former
parent and became an independent public company.
CUSTOMERS, SALES AND MARKETING
Our primary customers include orthopaedic 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 Australia 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 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 2009. 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 2009.
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
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
quantities required to maintain service levels. We also carry
trade accounts receivable balances based on credit terms that
are generally consistent with local market practices.
We utilize a network of sales associates, sales managers
and support personnel, most of whom are employed or
contracted by independent distributors and sales agencies. We
invest a significant amount of time and expense in training
sales associates in how to use specific products and how to
best inform surgeons of product features and uses. Sales force
representatives must have strong technical selling skills and
medical education to provide technical support for surgeons.
In response to the different healthcare systems
throughout the world, our sales and marketing strategies and
organizational structures differ by region. We utilize a global
approach to sales force training, marketing and medical
education to provide consistent, high quality service.
Additionally, we keep current with key surgical developments
and other issues related to orthopaedic surgeons,
neurosurgeons, dentists and oral surgeons and the medical
procedures they perform.
Americas. The Americas is our largest geographic
segment, accounting for $2,372.4 million, or 58 percent, of
2009 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 2009, individual
hospital orders purchased through contractual arrangements
with our two largest group purchasing organizations
accounted for approximately 34 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.
3
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
Europe. The European geographic segment accounted
PRODUCTS
for $1,119.2 million, or 27 percent, of 2009 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 $603.8 million, or 15 percent, of 2009 net sales,
with Japan being the largest market within this segment,
accounting for approximately 58 percent of the region’s sales.
This segment also includes key markets such as Australia,
New Zealand, Korea, China, Taiwan, India, Thailand,
Singapore, Hong Kong and Malaysia. In Japan and most
countries in the Asia Pacific region, we maintain a network of
dealers, who act as order agents on behalf of hospitals in the
region, and sales associates, who build and maintain
relationships with orthopaedic 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; and Austin, Texas and
internationally, in Australia, Austria, Belgium, Canada, the
Czech Republic, China, Finland, France, Germany, Hong Kong,
India, Italy, Japan, Korea, Malaysia, the Netherlands, New
Zealand, Portugal, Russia, Singapore, South Africa, Spain,
Sweden, Switzerland, Taiwan, Thailand and the United
Kingdom. In 2009, we completed construction of our highly
automated, state-of-the-art distribution facility in Eschbach,
Germany. This new facility supports direct to customer,
country and dealer shipments for the European region and
global shipments for products sourced from certain European-
based supply chain sites.
We generally ship our orders via expedited courier. We do
not consider our backlog of firm orders to be material to an
understanding of our business.
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Our products include orthopaedic reconstructive
implants, dental implants, spinal implants, trauma products
and related surgical products.
We utilize our exclusive Trabecular MetalTM Technology
across various product categories. Trabecular Metal material
is a structural biomaterial with a cellular architecture that
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.
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 Procedure utilizes
specialized MIS Instruments which feature smaller, ergonomic
and highly precise instruments which accommodate and
facilitate 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 number
one selling knee brand in the world, the NexGen Knee
product line is a comprehensive system for knee replacement
surgery which has significant application across the
continuum of care in all things related to primary and revision
knee arthroplasty, including CR, PS and revision procedures.
The NexGen Knee System offers joint stability, sizing and
performance options 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 spanning multiple surgeon and treatment
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philosophies, including soft tissue balancing and measured
resection MIS Mini-Incision Instruments, and multiple
traditional instrument systems. The breadth and versatility of
the NexGen Knee System allows surgeons to transition from
one type of implant to another during surgery, according to
the respective needs of the patient, and to support current
surgical philosophies.
The NexGen CR product line is designed to be used
in conjunction with a functioning posterior cruciate ligament.
Similar to the posterior stabilized design, the NexGen
CR-Flex Fixed Bearing Knee is designed to provide a greater
range of motion for patients who require deep bending in
their activities of daily living. The NexGen CR-Flex Femoral
Components offer a tissue balancing (flexion balancing)
solution which allows the surgeon to adjust component sizing
and balance and stabilize the implant without removing
additional bone or wasting critical procedure time.
The NexGen Complete Knee Solution Legacy»
Knee-Posterior Stabilized product line provides stability in the
absence of the posterior cruciate ligament. The PS capabilities
can be augmented via the use of a NexGen Legacy Posterior
Stabilized Flex Knee (LPS-Flex Knee), a high-flexion implant
that has the potential to accommodate knee flexion up to
155-degrees range of motion for patients whose lifestyle and
body type demand and can accommodate this performance
standard. With the 2008 rollout of the NexGen LPS-Flex
Mobile Knee 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. market for surgeons and patients
that may be best suited for this high performance implant
design.
NexGen Knee Gender SolutionsTM femorals
represent the first knee implants specifically shaped to offer
fit and function optimized for the unique anatomical
considerations 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. The concept of
advancing implant design through customization based on
anatomy or other patient characteristics has manifested in
rapidly expanding gender technologies across the continuum
of our products and into other important brands in our
growing portfolio.
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
multiple constraint levels for ligament and soft tissue
inefficiencies and a bone augmentation implant system made
from our Trabecular Metal Technology material. These
augments are designed to address significant bone loss in
revision surgery while allowing natural bone to reconstruct
within the implant construct.
We offer improved polyethylene performance in the
NexGen Knee System with our conventional polyethylene and
Prolong» Highly Crosslinked Polyethylene, which offers
reduced wear and 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.
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.
Gender Solutions Natural-Knee Flex System. The
Gender Solutions Natural-Knee Flex System adds our 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.
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, the Innex Revision Knee and Innex
Gender Solutions components make this offering a
comprehensive mobile and fixed bearing knee system. The
Innex Knee System is distributed in Europe and Asia Pacific
and is not currently available for commercial distribution in
the United States.
Zimmer» Unicompartmental Knee Systems. The
Zimmer Unicompartmental Knee System offers a high flexion
design for unicompartmental knee surgery. This high flex
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. A Gender Solutions
Patello-Femoral Joint System is also available which
incorporates key gender specific design features and a
proprietary guided milling surgical technique for use in
patello-femoral joint replacement.
Zimmer Patient Specific Instruments.
In late 2009,
a 510(k) Application for the Zimmer Patient Specific
Instruments was approved by the U.S. Food and Drug
Administration (FDA). The Zimmer Patient Specific
Instruments simplify a total knee procedure and help enhance
appropriate placement of the final implant based on a
surgeon’s preoperative surgical plan. Based on a patient’s MRI
scan, a computer generated, custom guide is produced to
conform to a patient’s unique knee anatomy. This guide is
then utilized intraoperatively to aid in the surgical correction
of the patient’s knee.
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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.
ContinuumTM Acetabular System, Trilogy» IT
Acetabular System and Allofit» IT Alloclassic» Acetabular
System. These systems were released in 2009 and each
acetabular system offers the surgeon a choice of advanced
bearing options to meet the clinical and lifestyle needs of each
patient. Bearing options include Longevity» Highly
Crosslinked Polyethylene, Metasul» Metal-on-Metal
Technology and a BIOLOX»1 delta ceramic-on-ceramic (where
Zimmer has regulatory clearances). The acetabular systems
also provide surgeons a choice of fixation method that
accommodates their surgical philosophy.
Zimmer MMCTM Cup. The Zimmer MMC Cup is an
acetabular implant featuring Metasul Metal-on-Metal
Technology and a hemispherical design that offers familiar
handling for surgeons. This system was released in 2009. It is
used with Metasul Large Diameter Heads, which are designed
to provide increased range of motion and reduced probability
of dislocation, making this implant an option for active
patients.
Trilogy» Acetabular System. The Trilogy
Acetabular System, with its titanium alloy shell, fiber metal
mesh ingrowth surface and Longevity Highly Crosslinked
Polyethylene Liners, is our most widely sold acetabular cup
system.
We offer the Trabecular Metal Modular 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 to achieve a stable construct.
Zimmer Segmental System. Adding to our broad
portfolio of revision options, the Zimmer Segmental System is
a comprehensive system designed to address patients with
severe bone loss associated with disease, trauma or revision.
This important addition realizes our strategic goal of
expanding our product solutions across the continuum of care
and, with the incorporation of Trabecular Metal Technology,
expands the possibilities for treatment, short and long term
fixation and stability.
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.
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
rotation. The CLS Spotorno Stem has excellent clinical
results, confirmed by the 2006 Swedish Hip Registry.
Fitmore» Hip Stem. The Fitmore Hip Stem was
released in 2008 and offers the surgeon a short, bone
1 Registered trademark of CeramTec AG
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Extremity Implants
Our extremity portfolio, primarily shoulder and elbow
products, is 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 Glenoid. The Trabecular Metal
Glenoid offers surgeons a glenoid component designed to
improve fixation. Trabecular Metal’s material properties allow
for more normal bone formation and maintenance.
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 Implants
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
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Tapered Screw-Vent System, with its two-stage design, was
developed to minimize valuable chair time for restorations.
Featuring a proprietary 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. 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 a solution for 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.
During 2009, we released our new Hex-Lock Short
Abutment and Restorative System, an all-inclusive system that
promotes posterior restorations, as well as the Zimmer
Contour Angled Zirconia Abutment engineered for use with
the Tapered Screw-Vent implants to provide clinicians with a
restorative solution for patients’ esthetic needs.
Dental Regenerative Products
We market the following product lines for use in
regenerative techniques in oral surgery:
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
Puros» Allograft Products. The Puros Material is
an allograft material which in the case of mineralized bone
and dermal tissues utilizes the Tutoplast»2 Tissue Processing
Technique that provides exceptional bone and soft tissue
grafting material for use in oral surgery. Zimmer Dental
2 Registered trademark of RTI Biologics, Inc.
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offers seven 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, Puros
Dermis Membranes and, in 2009, we extended our Puros
portfolio by adding Puros Demineralized Bone Matrix (DBM)
and Puros DBM Putty with Chips. We market the Puros
Allograft Products through an agreement with RTI Biologics,
Inc.
Through this same agreement with RTI Biologics,
Inc., we provide CopiOs» Pericardium Membrane in the
United States. Sourced from bovine pericardial tissue, CopiOs
Pericardium Membrane provides the characteristics of natural
tissue and can be used as a direct substitute for Puros
Pericardium Membranes.
In addition, we extended our regenerative portfolio
further in wound management by adding the HemCon»3
Dental Dressing, an advanced wound dressing material that
utilizes a propriety chitosan-based technology to effectively
seal the wound and minimize pain in various surgical
procedures. The HemCon Dental Dressing is exclusively
distributed by Zimmer Dental. In 2009, we also introduced our
Zimmer Sinus Lift Balloon, created to simplify the delicate
sinus lift procedure under an agreement with Osseous
Technologies of America (OTA).
Spine Implants
Our Spine products division designs, manufactures and
distributes medical devices and surgical instruments to deliver
comprehensive solutions for those with back or neck pain
caused by degenerative conditions, deformities or traumatic
injury of the spine. We provide surgeons a broad range of
technologies for posterior and anterior procedures in the
cervical, thoracic and lumbar regions of the spine.
Zimmer Spine’s portfolio of spinal solutions includes:
Dynesys» Dynamic Stabilization System. The
Dynesys family of implants was designed to facilitate a more
physiologic approach to low back spinal stabilization. The
system threads flexible components, instead of traditional
rigid titanium rods, through pedicle screws in order to
stabilize affected spinal segments in a more natural anatomic
position and to alleviate pain. The Dynesys Dynamic
Stabilization System is currently indicated for use as an
adjunct to fusion in the U.S.
PathFinder» Minimally Invasive Pedicle Screw
System. A pioneering technology in MIS, the PathFinder
System is a posterior stabilization system used in fusion
procedures of the lumbar and thoracic spine. The system
easily facilitates single or multi-level procedures while
featuring reduction, compression and distraction capabilities.
3 Registered trademark of HemCon Medical Technologies, Inc.
4 Registered trademark of Victrex PLC Corporation, United Kingdom
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Universal Clamp» Spinal Fixation System. The
innovative design of the Universal Clamp implant allows it to
be used alongside traditional hooks, screws and wires to treat
scoliotic deformities and correct complex spinal pathologies.
Sequoia» Pedicle Screw System. The Sequoia
System was developed to simplify surgical flow, reduce
implantation time and improve ergonomic tool design. This
advanced pedicle screw system combines ergonomic
instrumentation with an effective design that reduces implant
metal volume.
Ardis» Interbody System. The Ardis implant
features a self-distracting nose, convex geometry and wide
range of sizes. This versatile PEEK-OPTIMA»4 device
incorporates a large space for graft placement, plus an
advanced tooth design to effectively resist migration and
expulsion during procedures. Ardis instrumentation was also
designed to streamline the surgical procedure and improve
surgeon comfort.
Trinica» Select Anterior Cervical Plating System.
The Trinica Select System is designed to simplify the surgical
procedure with the Secure-Twist» anti-migration system,
which provides visual confirmation of screw capture, as well
as a wide variety of screw options to customize the construct
depending on patient need.
Biological Products. Zimmer Spine offers a full
line of bone void filler products to accommodate most surgical
procedures. Puros» Demineralized Bone Matrix is available in
Putty and Putty with Chips formulations, and the CopiOs»
Bone Void Filler family of products includes synthetic bone
graft material in the form of sponges or pastes that are used
to fill bone voids during spine surgery.
Wallis» Posterior Dynamic Stabilization System
(available outside the U.S. only). The Wallis system is an
innovative spinal implant that was designed to stabilize the
lumbar spine while preserving the anatomy and minimizing
the need for bony resection. The Wallis system combines a
PEEK-OPTIMA spacer linked to the vertebrae via a polyester
band that permits an even distribution of stresses on bone.
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. Orthobiologics are
used in conjunction with traditional trauma devices to
encourage healing and replace bone lost during an injury. We
are focused on providing exceptional options to treat a broad
range of traumatic injuries, addressing unmet clinical needs
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and implementing next-generation technologies into our
portfolio of trauma solutions.
Zimmer Trauma offers a comprehensive line of products,
including:
Zimmer Natural NailTM System. The Zimmer
Natural Nail System includes a series of intramedullary nails
designed to address a broad range of long bone fractures. The
nails are anatomically shaped and incorporate an innovative
feature that allows the screws to be linked to the nails,
creating a robust construct even in poor quality bone.
Instrumentation for nail placement is designed to make it easy
for surgeons to utilize the implants as well as to address
growing concerns with obesity and osteoporosis.
NCB» Polyaxial Locking Plate System. NCB
Polyaxial Locking Plates provide surgeons with the ability to
place screws with polyaxial freedom and utilize both
conventional and locking technology in the treatment of
complex fractures of the distal femur, proximal humerus and
proximal tibia. We continue to invest in additional applications
of this exciting technology.
Zimmer Periarticular Locking Plate System. The
Zimmer Periarticular Locking Plate System combines advanced,
anatomic designs 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 plates, screws and instruments for
fracture fixation. The Universal Locking System plates
resemble standard plates, but have figure-8 shaped holes
which allow the plates to be used as compression plates,
locked internal fixators or as an internal fixation system
combining both techniques.
Zimmer Cable-Ready» System. The Zimmer
Cable-Ready System includes a series of instruments, cables
and other implants that help a surgeon treat several different
fracture types, including those that occur around a previously
implanted device (periprosthetic). The cables are wrapped
around the bone and then secured, either to themselves or to
plates, to provide fixation for fractured limbs.
Orthopaedic Surgical Products
We develop, manufacture and market products that
support our reconstructive, trauma, spine and dental implant
procedures in the peri-operative environment, with a focus on
Bone Cements, Surgical Wound Site Management and Blood
Management. Orthopaedic Surgical Products include:
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; both are
used by orthopaedic surgeons to reduce the risk of
postoperative infection in second stage revisions. These
products have handling characteristics that make them well-
suited for minimally invasive procedures.
Hi-FatigueTM6 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
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 portfolio includes the A.T.S. 3000
Tourniquet System, 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 System. 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.
Zimmer Blood Reinfusion System (ZBRS) and
Hemovac» Blood Management Systems. These two blood
management systems are part of a larger family that supports
the clinician in managing patient blood loss after the surgical
procedure. The ZBRS product is a closed-loop postoperative
system that effectively salvages and filters the patient’s own
blood, which can help reduce the dependency on banked
blood and/or preoperative autologous donation.
HEALTHCARE CONSULTING
PALACOS»5 Bone Cement. We have exclusive
United States distribution rights for the PALACOS line of
Our healthcare consulting services subsidiary, Accelero
Health Partners, LLC (Accelero), is based in Canonsburg,
5 Registered trademark of Heraeus Kulzer GmbH
6 Registered trademark of aap Biomaterials GmbH & Co. KG
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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 a variety of biologic technologies for
musculoskeletal applications. 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 and osteochondral grafts for cartilage
repair. ISTO creates cell-based therapies for cartilage
regeneration using cells from juvenile donor cartilage. DeNovo
ET Engineered Tissue Graft 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 for
DeNovo ET has been completed and the data has been
supplied to the FDA with a request to allow Zimmer/ISTO to
proceed with enrollment with the pivotal Phase III clinical
trial. In addition, we completed the full launch of our first
cartilage repair product, DeNovo NT Natural Tissue Graft, in
2009. This product provides particulated juvenile cartilage
tissue for repair of articular cartilage defects of the knee,
ankle, shoulder, hip, elbow and toe joints. More than
700 patients have undergone this innovative cartilage repair
procedure.
Many musculoskeletal surgical procedures use bone grafts
to help regenerate lost or damaged bone. Our Spine, Dental
and Trauma divisions have 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.
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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, 2009, 2008 and 2007, we spent $205.4 million,
$192.3 million and $182.6 million, respectively, on research
and development. 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, 2009, 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.
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 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. The FDA has the authority to: halt the distribution
of certain medical devices; detain or seize adulterated or
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misbranded medical devices; or order the repair, replacement
or refund of the costs of such devices. There are also certain
requirements of state, local and foreign governments that we
must comply with in the manufacture and marketing of our
products.
In many of the foreign countries in which we market our
products, we are subject to local regulations affecting, among
other things, design and product standards, packaging
requirements and labeling requirements. Many of the
regulations applicable to our devices and products in these
countries are similar to those of the FDA. The member
countries of the European Union have adopted the European
Medical Device Directive, which creates a single set of
medical device regulations for products marketed in all
member countries. Compliance with the Medical Device
Directive and certification to a quality system enable the
manufacturer to place a CE mark on its products. To obtain
authorization to affix the CE mark to a product, a recognized
European Notified Body must assess a manufacturer’s quality
systems and the product’s conformity to the requirements of
the Medical Device Directive. We are subject to inspection by
the Notified Bodies for compliance with these requirements.
Further, we are subject to various federal and state laws
concerning healthcare fraud and abuse, including false claims
laws and anti-kickback laws. These laws are administered by,
among others, the U.S. Department of Justice, the Office of
Inspector General of the Department of Health and Human
Services and state attorneys general. Many of these agencies
have increased their enforcement activities with respect to
medical device manufacturers in recent years. Violations of
these laws are punishable by criminal and/or civil sanctions,
including, in some instances, fines, imprisonment and, within
the United States, exclusion from participation in government
healthcare programs, including Medicare, Medicaid and
Veterans Administration (VA) health programs.
Our operations in foreign countries are subject to the
extraterritorial application of the U.S. Foreign Corrupt
Practices Act (FCPA). As part of our global compliance
program, we seek to address FCPA risks proactively.
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., Smith & Nephew plc,
Wright Medical Group, Inc., Synthes, 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
and complex regulatory environments, 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 Aesculap AG (a subsidiary of B. Braun),
Waldemar LINK GmbH & Co., KG and Mathys AG 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 the spinal and biologic business of Medtronic,
Inc., DePuy Spine (a subsidiary of Johnson & Johnson),
Synthes, Inc., Stryker Corporation, Biomet Trauma and
Biomet Spine (subsidiaries of Biomet, Inc.) and NuVasive, Inc.
In the dental implant category, we compete primarily with
Nobel Biocare Holding AG, Straumann Holding AG, Astra Tech
Dental and Biomet 3i (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 nine
sites including Warsaw, Indiana; Winterthur, Switzerland;
Ponce, Puerto Rico; Dover, Ohio; Statesville, North Carolina;
Carlsbad, California; Parsippany, New Jersey; Shannon,
Ireland; and Etupes, France.
We believe that our manufacturing facilities are among
the best in our industry 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. Our continuous improvement efforts are driven
by Lean and Six Sigma methodologies. In addition, at certain
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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
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
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 8,200 employees worldwide,
including more than 800 employees dedicated to research and
development. Approximately 4,900 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 3,500 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.
We have 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.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our executive officers as of February 15, 2010.
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
Jeffrey B. Paulsen
Chad F. Phipps
Age
Position
46
45
50
40
44
62
56
48
38
President and Chief Executive Officer
Senior Vice President 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
Group President, Global Businesses
Senior Vice President, General Counsel and Secretary
Mr. Dvorak was appointed President, Chief Executive Officer
and a member of the Board of Directors of Zimmer Holdings
on May 1, 2007. From December 2005 to April 2007,
Mr. Dvorak served as Group President, Global Businesses and
Chief Legal Officer. From October 2003 to December 2005,
Mr. Dvorak served as Executive Vice President, Corporate
Services, Chief Counsel and Secretary, as well as Chief
Compliance Officer. Mr. Dvorak was appointed Corporate
Secretary in February 2003. He joined Zimmer Holdings in
December 2001 as Senior Vice President, Corporate Affairs
and General Counsel.
Dr. Blanchard was appointed Senior Vice President and Chief
Scientific Officer of Zimmer Holdings in December 2005. She
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is responsible for Corporate Research, Global Quality and
Regulatory Affairs, Global Medical Affairs, Biologics Research
and Development and Biologics Marketing. From October 2003
to December 2005, Dr. Blanchard served as Vice President,
Corporate Research and Clinical Affairs and from August 2002
to October 2003, she served as Vice President, Research and
Biologics.
Prior to that, he served as Group President of TriMas
Corporation, a specialty manufacturing company, from January
2007 to June 2008. Before joining TriMas Corporation,
Mr. Paulsen held a number of increasingly responsible
executive roles at Stryker Corporation from 1996 to December
2006, including President, Orthopaedic Reconstructive
Division.
Mr. Crines was appointed Executive Vice President, Finance
and Chief Financial Officer of Zimmer Holdings on May 1,
2007. From December 2005 to April 2007, Mr. Crines served as
Senior Vice President, Finance, Operations and Corporate
Controller and Chief Accounting Officer. From October 2003 to
December 2005, Mr. Crines served as Senior Vice President,
Finance/Controller and Information Technology and from July
2001 to October 2003, he served as Vice President, Finance/
Controller.
Mr. Davis was appointed Vice President, Finance and Corporate
Controller and Chief Accounting Officer of Zimmer Holdings in
May 2007. He has responsibility for internal and external
reporting, planning and analysis, and corporate and business
unit accounting. From March 2006 to May 2007, Mr. Davis
served as Director, Financial Planning and Accounting. From
December 2003 to March 2006, Mr. Davis served as Director,
Finance, Operations and Logistics and from April 2003 to
December 2003, he served as Associate Director, Finance.
Mr. McCaulley was appointed President, Zimmer Reconstructive
in November 2008. He has overall responsibility for the Global
Reconstructive Business, including direct responsibility for
Global Brand Management, Product Development and Medical
Training and Education, as well as Americas Marketing and
Sales. Prior to joining Zimmer, he served as President and
Chief Executive Officer of the Health Division of Wolters
Kluwer from 2005 and Vice President and General Manager of
the Diabetes Division of Medtronic, Inc. from 2002.
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. Paulsen was appointed Group President, Global Businesses
of Zimmer Holdings in December 2009. He has responsibility
for Zimmer Spine, Zimmer Dental, Zimmer Trauma and
Zimmer Orthopaedic Surgical Products. Prior to joining us,
Mr. Paulsen served as Chief Operating Officer of MPS Group,
Inc., a privately held environmental services and facility
management firm, from September 2008 to December 2009.
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 Communications 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.
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:
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
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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 Corporate
Integrity Agreement we entered into in September 2007,
we may be subject to 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 (U.S. Attorney) into financial
relationships between major orthopaedic manufacturers and
consulting orthopaedic surgeons. As part of that settlement,
we entered into a Corporate Integrity Agreement (CIA) with
the Office of Inspector General of the Department of Health
and Human Services (OIG-HHS). A copy of the CIA is filed as
an exhibit to this report. If we do not comply with the terms
of the CIA, we could 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 ongoing
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. 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.
may be asserted. In addition, our entry into the U.S. hip
resurfacing market has been delayed as the Durom Cup had
been integral to our plans for entry into that market.
If we fail to retain the independent agents and
distributors upon whom we rely heavily to market our
products, customers may not buy our products and our
revenue and profitability may decline.
Our marketing success in the United States and abroad
depends significantly upon our agents’ and distributors’ sales
and service expertise in the marketplace. Many of these agents
have developed professional relationships with existing and
potential customers because of the agents’ detailed knowledge
of products and instruments. A loss of a significant number of
these agents could have a material adverse effect on our
business and results of operations.
If 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
Our temporary suspension of the U.S. marketing
(cid:129) provide adequate medical education relating to new
and distribution of one of our hip products has
adversely affected sales growth, resulted in claims and
may adversely affect our ability to compete in the hip
resurfacing market in the U.S.
As previously reported, we temporarily suspended the
marketing and distribution of our Durom Acetabular
Component (Durom Cup) in the U.S. in July 2008. Although
we resumed U.S. marketing and distribution in August 2008,
we believe the effects of this action had a negative impact on
our hip product sales growth through 2009 and may continue
to have a negative impact in 2010.
Following our action, product liability lawsuits and other
claims were asserted against us and additional similar claims
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
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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 percent 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.
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.
The United States Patent and Trademark Office and the
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;
15
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
(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;
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.
The impact of healthcare reform in the U.S. on us is
(cid:129) we may not recognize expected cost savings or the
uncertain.
anticipated benefits of acquisitions or 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
(cid:129) the priorities of our strategic partners may prove
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 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 investigation by the U.S. Securities and
Exchange Commission and the U.S. Department of
Justice 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 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
16
There is increasing emphasis within the federal
government to reform healthcare in the U.S., though it is
uncertain whether new legislation will be enacted. To the
extent that the number of uninsured or underinsured patients
is reduced, demand for our products could marginally
increase. However, efforts to pay for healthcare reform
through a proposed new tax on medical device companies and
efforts to contain healthcare costs, directly through pricing or
reimbursement controls or indirectly by government-sponsored
healthcare insurance, could have a material adverse effect on
our sales and results of operations. Accordingly, the impact of
healthcare reform on the medical device industry in general or
us in particular remains uncertain.
We are subject to healthcare fraud and abuse
regulations on an ongoing basis that could require us to
change our business practices and restrict our
operations in the future.
Our industry is subject to various federal and state laws
pertaining to healthcare fraud and abuse, including false claims
laws, the federal Anti-Kickback Statute, similar state laws and
physician self-referral laws. 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
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
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.
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
biological 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.
We and our customers are subject to various
governmental regulations relating to the manufacturing,
labeling and marketing of our products, and we may
incur significant expenses to comply with these
regulations and develop products compatible with these
regulations.
The medical devices we design, develop, manufacture and
market are subject to rigorous regulation by the FDA and
numerous other federal, state and foreign governmental
authorities. The process of obtaining regulatory approvals to
market a medical device 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
(cid:129) criminal prosecution.
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
17
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
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 9 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
Statesville, North Carolina
Dover, Ohio
Dover, Ohio
Parsippany, New Jersey
Memphis, Tennessee
Austin, Texas
Sydney, Australia
Mo¨ dling, Austria
Wemmel, Belgium
Mississauga, Canada
Shanghai, China
Etupes, France
Eschbach, Germany
Freiburg, Germany
Kiel, Germany
Shannon, Ireland
Milan, Italy
Gotemba, Japan
Tokyo, Japan
Seoul, Korea
Utrecht, Netherlands
Ponce, Puerto Rico
Singapore
Barcelona, Spain
Winterthur, Switzerland
Mu¨ nsingen, Switzerland
Swindon, United Kingdom
Use
Owned/Leased
Square Feet
Research & Development, Manufacturing, Warehousing, Marketing &
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Corporate Headquarters and The Zimmer Institute . . . . . . . . . . . . . . . . . . . . . Owned
Leased
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Research & Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . . Owned
Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Office, Research & Development, Manufacturing, . . . . . . . . . . . . . . . . . . . . . . .
Leased
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Administration, Research & Development . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Distribution Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Service Center & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . .
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Leased
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,400,000
117,000
90,000
118,000
51,000
156,000
140,000
61,000
115,000
30,000
97,000
36,000
14,000
15,000
52,000
18,000
90,000
94,000
51,000
21,000
125,000
47,000
87,000
24,000
22,000
16,000
213,000
19,000
16,000
374,000
76,000
70,000
During 2009 we commenced manufacturing operations in our new 125,000 square feet Shannon, Ireland facility and began
utilizing our new 94,000 square feet warehouse facility in Eschbach, Germany in an effort to expand our global distribution
network. We believe the current facilities, including manufacturing, warehousing, research and development and office space
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 17 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 9 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 SIX 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 2009
and 2008 are set forth as follows:
Quarterly High-Low Share Prices
Year Ended December 31, 2009:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2008:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$44.36
$47.41
$55.25
$60.64
$79.78
$80.92
$74.55
$66.42
$30.67
$35.36
$38.55
$49.14
$63.80
$66.12
$60.41
$34.10
We have not declared or paid dividends on our common stock since becoming a public company in 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 holders of our common stock on February 12, 2010 was approximately 350,200. On February 12, 2010, the
closing price of the common stock, as reported on the New York Stock Exchange, was $57.24 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, 2009:
October 2009
November 2009
December 2009
Total
Total Number of
Shares Purchased
Average Price
Paid per Share
–
3,892,800
5,059,981
8,952,781
$
–
56.88
58.82
$57.98
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
40,940,867
44,833,667
49,893,648
49,893,648
$730,190,146
508,750,284
211,110,839
$211,110,839
(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, 2010.
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 9 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 of Zimmer Holdings, Inc.
Earnings per common share
Basic
Diluted
Average common shares outstanding
Basic
Diluted
Balance Sheet Data
Total assets
Long-term debt
Other long-term obligations
Stockholders’ equity
2009
2008
2007
2006
2005
$4,095.4
717.4
$4,121.1
848.6
$3,897.5
773.2
$3,495.4
834.5
$3,286.1
732.5
$
3.34
3.32
$
3.73
3.72
$
3.28
3.26
$
3.43
3.40
$
2.96
2.93
215.0
215.8
227.3
228.3
235.5
237.5
243.0
245.4
247.1
249.8
$7,785.5
1,127.6
328.5
5,638.7
$7,239.0
460.1
353.9
5,653.9
$6,633.7
104.3
328.4
5,452.4
$5,974.4
99.6
323.4
4,923.2
$5,721.9
81.6
348.3
4,685.1
21
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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 reconstructive
implants, dental implants, spinal implants, trauma products
and related surgical products (sometimes referred to in this
report as OSP). We also provide other healthcare related
services. 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
2008 and 2007 consolidated financial statements have been
reclassified to conform to the 2009 presentation.
Beginning in 2009, we no longer include our Dental
product category sales within our Reconstructive products
category. Amounts in the years ended December 31, 2008 and
2007 related to sales of Dental products have been reclassified
to conform to the 2009 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,
2009.
Demand (Volume and Mix) Trends
Increased volume and changes in the mix of product sales
contributed 2 percentage points of 2009 sales growth, which
is 1 percentage point below the rate of growth from 2008
compared to 2007.
We believe the market for orthopaedic procedure volume
temporarily decelerated from mid single digit growth rates to
low single digit growth rates on a global basis due to the
weakened global economy. We believe long-term market
growth rates will be driven by an aging global population,
obesity, proven clinical benefits, new material technologies,
advances in surgical techniques and more active lifestyles,
among other factors. In addition, the ongoing shift in demand
to premium products, such as Longevity and Prolong Highly
Crosslinked Polyethylenes, Trabecular Metal Technology
products, hip stems with Kinectiv Technology, high-flex
knees, knee revision products, porous hip stems and the
introduction of patient specific devices continues to positively
affect sales growth. Our 2 percentage points of sales growth in
2009 from volume and changes in mix decreased from 2008
and was lower than market growth due to the impact of the
disruptive events discussed below.
22
Pricing Trends
Global selling prices decreased 1 percent during 2009
compared to flat pricing in 2008. Selling prices in the
Americas decreased 1 percent during the year ended
December 31, 2009, compared to flat pricing in the same 2008
period. Europe selling prices were flat for the year ended
December 31, 2009, which is similar to the 2008 period. Asia
Pacific selling prices decreased 1 percent for the year ended
December 31, 2009, compared to a 3 percent decrease in the
same 2008 period, as we anniversaried out of scheduled
reductions in reimbursement prices in Japan. With the effect
of governmental healthcare cost containment efforts and
continuing pressure from local hospitals and health systems,
we expect selling prices to decrease approximately 1 to
2 percent on a global basis for 2010.
Foreign Currency Exchange Rates
For 2009, foreign currency exchange rates resulted in a
2 percent decline in sales. If foreign currency exchange rates
remain consistent with 2009 year end rates, we estimate that
a weaker dollar versus foreign currency exchange rates will
have a positive effect in 2010 of approximately 1 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.
Disruptive Events
We suffered customer losses as a result of disruptive
factors experienced during 2008, including the
implementation of our enhanced global compliance initiatives,
our temporary suspension of U.S. marketing and distribution
of the Durom Cup and our voluntary recall and suspension of
production of certain OSP patient care products. We estimate
that these customer losses reduced our global knee market
share by approximately 1.5 percent and hip market share by
approximately 2 percent on a cumulative basis through the
end of 2008. These share losses affected sales growth in 2009,
especially in the first six to nine months of the year, but
stabilized as we concluded the year.
Global Economic Conditions
We believe adverse conditions in the broader economy
have resulted in a slowdown in elective hospital procedures.
We saw evidence of recovery in 2009, although the large
developed countries in Europe appear to be lagging the
U.S. and Japan. Although many of our products are used in
elective procedures, we believe our core knee and hip
franchises remain more insulated than many medical product
categories from swings in the broader economy because the
need for these procedures does not diminish, even if the
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
timing is affected. In particular, our dental revenues have
experienced pressure due to the weak economic environment
as many of those procedures are not reimbursed by third-
party payors.
2010 Outlook
In the second half of 2009, we saw encouraging signs that
orthopaedic procedure volumes in certain markets were
recovering. Our market assumptions are that in 2010 knee and
hip procedures will grow in mid single digits within the
Americas and Asia Pacific markets, and remain flat to slightly
positive in the large developed markets in Europe. Given the
expected pacing of our new product launches, such as the
Zimmer MMC Cup, Continuum Acetabular System and
Zimmer Patient Specific Instruments, we anticipate our sales
growth in 2010 to be greater in the second half of the year.
We expect to continue making investments in R&D in the
range of 5 to 6 percent of sales. Assuming currency rates
remain at year end 2009 levels, we expect our gross margin to
be approximately 75 percent of sales in 2010. This takes into
account the higher cost inventory we carry into 2010 as well
as projected foreign currency hedge losses partially offset by
lower anticipated excess and obsolete inventory charges in
2010. We expect the gross margin ratio to be slightly lower in
the first half of 2010 as compared to the second half of the
year. SG&A as a percent of sales is expected to decrease for
the full year as we restore leverage from revenue growth
offset, in part, by sales and marketing investments in support
of new product launches. We have completed the
infrastructure investment projects in Eschbach, Germany, our
automated, centralized distribution facility for the Europe,
Middle East and Africa region, and in Shannon, Ireland, our
new implant manufacturing facility. Both facilities are now
operational and should provide economic benefits for the full
year 2010.
We expect interest expense will be unfavorable
year-over-year due to the $1 billion senior notes offering we
completed in the fourth quarter of 2009. The impact of this
expense on our diluted earnings per share should be more
than offset by the additional shares we repurchased with a
portion of the proceeds from the notes offering.
RESULTS OF OPERATIONS
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net Sales by Reportable Segment
The following table presents net sales by reportable segment and the components of the percentage changes (dollars in
millions):
Americas
Europe
Asia Pacific
Total
Year Ended December 31,
2009
2008
% Inc/(Dec)
Volume/
Mix
Foreign
Exchange
Price
$2,372.4
1,119.2
603.8
$4,095.4
$2,353.9
1,179.1
588.1
$4,121.1
1%
(5)
3
(1)
2%
1
1
2
(1)%
–
(1)
(1)
–%
(6)
3
(2)
“Foreign Exchange” as used in the tables in this report represents the effect of changes in foreign currency 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
Total
Dental
Trauma
Spine
OSP and other
Total
Year Ended December 31,
2009
2008
% Inc (Dec)
Volume/
Mix
Foreign
Exchange
Price
$1,760.6
1,228.5
135.6
$1,763.1
1,279.4
121.0
3,124.7
3,163.5
204.7
234.8
253.6
277.6
227.5
222.3
229.7
278.1
$4,095.4
$4,121.1
–%
(4)
12
(1)
(10)
6
10
–
(1)
3%
(1)
14
1
(9)
5
12
(1)
2
(1)%
(1)
–
(1)
1
1
–
1
(1)
(2)%
(2)
(2)
(1)
(2)
–
(2)
–
(2)
23
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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 by region (dollars in millions):
Year Ended December 31,
2009
2008
% Inc (Dec)
Reconstructive
Knees
Americas
Europe
Asia Pacific
Hips
Americas
Europe
Asia Pacific
Extremities
Americas
Europe
Asia Pacific
Total
Dental
Americas
Europe
Asia Pacific
Trauma
Americas
Europe
Asia Pacific
Spine
Americas
Europe
Asia Pacific
OSP and other
Americas
Europe
Asia Pacific
Total
Knees
$1,101.9
429.2
229.5
$1,089.8
452.6
220.7
565.9
448.6
214.0
103.7
23.9
8.0
576.1
493.9
209.4
88.1
25.8
7.1
3,124.7
3,163.5
102.8
78.2
23.7
125.9
52.7
56.2
192.6
46.9
14.1
179.6
39.7
58.3
114.9
82.2
30.4
126.7
47.4
48.2
180.4
40.1
9.2
177.9
37.1
63.1
$4,095.4
$4,121.1
1
(5)
4
(2)
(9)
2
18
(7)
15
(1)
(11)
(5)
(22)
(1)
11
17
7
17
54
1
7
(8)
(1)
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
Gender Solutions Natural-Knee Flex System made a strong
contribution. In Europe, changes in foreign currency exchange
rates negatively affected knee sales by 6 percent.
Hips
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 those sales were partially offset by weaker
sales of cemented stems. Trabecular Metal Acetabular Cups
and Longevity Highly Crosslinked Polyethylene Liners also
made strong contributions. In the U.S. hip market, we had
some product gaps related to our acetabular cups which have
affected sales growth. This was most noticeable in the area of
metal-on-metal articulation. In November 2009, the
Continuum Acetabular System and the Zimmer MMC Cup
were cleared for sale in the U.S. These systems give surgeons
a comprehensive array of acetabular cup solutions that, in
concert with our comprehensive stem portfolio, provide
additional patient matching options. These cups have also
24
received approval in various countries outside the U.S. and
will help complete our product portfolios in those countries as
well. In Europe, changes in foreign currency exchange rates
negatively affected hip sales by 6 percent. In Asia Pacific,
changes in foreign currency exchange rates positively affected
hip sales by 4 percent.
Extremities
The Bigliani/Flatow Complete Shoulder Solution and the
Zimmer Trabecular Metal Reverse Shoulder System led
extremities sales. Trabecular Metal Technology is playing a
critical role in addressing previously unmet clinical needs in
the expanding extremities market.
Dental
The Tapered Screw-Vent Implant System led dental
sales. Negative sales growth for our dental business reflects
overall weakness in the global economy. We continue to
believe the dental market will rebound as the global economy
recovers and look forward to new opportunities as our
product line is expanded through internal and external
development efforts.
Trauma
Zimmer Periarticular Locking Plates and the ITST
Intertrochanteric/Subtrochanteric Fixation System led trauma
sales but were partially offset by declining sales of
compression hip screws. Femoral and tibial nails within the
new Zimmer Natural Nail system also made a contribution
during the year.
Spine
In the fourth quarter of 2008, we acquired Abbott Spine.
As a result of the acquisition, spine sales have increased but
the increase is offset in part by sales losses associated with
the integration of the business. Solid sales of acquired fusion
devices as well as legacy interbody devices and bone graft
substitutes partly offset a significant decline in sales of the
Dynesys Dynamic Stabilization System during the year. We
expect our spinal business will continue to experience
reimbursement challenges related to the Dynesys system.
Following the November 2009 non-approvable
recommendation by the FDA advisory panel of our request for
additional approved uses for the Dynesys system, we are
exploring our options, which are presently uncertain. We
believe that we generally have a solid portfolio of spine
products as well as broad global distribution capabilities that
should lead to improved performance over time.
OSP and other
OSP sales were led by PALACOS Bone Cement. OSP
product sales growth improved in the second half of 2009 due
to the effect of anniversarying out of the voluntary suspension
and recall of certain products during 2008 and by the
reintroduction of wound debridement products in 2009.
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
The following table presents estimated* 2009 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
Total
Dental
Trauma
Spine***
$ 6.4
5.8
1.0
$13.2
$ 3.3
$ 4.4
$ 8.7
5% 27%
4
15
21
13
5
(5)
6
10
24
6
5
3
1
2
3
1
5
5
6
* Estimates are not precise and are based on competitor annual filings,
Wall Street equity research and Company estimates
** Excludes the effect of changes in foreign currency exchange rates on
sales growth
*** Spine includes related orthobiologics
Expenses as a Percent of Net Sales
Year Ended
December 31,
2009
2008
Inc (Dec)
24.2%
5.0
42.2
0.9
1.8
1.8
(0.8)
50.9
24.9
(0.5)
24.2%
4.7
41.3
1.7
–
1.6
–
49.3
26.5
0.8
–
0.3
0.9
(0.8)
1.8
0.2
(0.8)
1.6
(1.6)
1.3
Cost of products sold
Research and development
Selling, general and administrative
Certain claims
Goodwill impairment
Acquisition, integration, realignment and
other
Net curtailment and settlement
Operating expenses
Operating profit
Interest and other income (expense), net
Cost of Products Sold
Gross margin in 2009 was unchanged compared to 2008.
Manufacturing costs per unit increased in 2009 due to lower
production levels. Excess inventory and obsolescence charges
increased in 2009 as a result of certain product-specific
matters and new product launches. These costs were offset by
foreign currency hedge gains recognized in the 2009 period
compared to hedge losses recognized in 2008.
Under our hedging program, 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 earnings.
The following table reconciles the gross margin for 2008
to 2009:
Year ended December 31, 2008 gross margin
Increased unit manufacturing costs
Excess and obsolete inventory
Foreign currency exchange impact, net
Other
Year ended December 31, 2009 gross margin
75.8%
(1.7)
(0.4)
2.0
0.1
75.8%
Operating Expenses
Research and development expense, or R&D, increased
to $205.4 million in 2009 from $192.3 million in 2008. This
increase reflects additional spending on certain development,
clinical and external research activities throughout 2009 in
contrast to the delay in activities experienced in 2008 as we
implemented our enhanced compliance program.
Selling, general and administrative expense, or SG&A,
increased to $1,729.2 million in 2009, from $1,704.0 million in
2008. This is an increase of approximately 90 basis points
compared to the prior year. SG&A expense in the 2008 period
included approximately $60 million of incremental costs, such
as monitor fees and consulting and legal fees associated with
the global roll-out of our enhanced compliance program. The
savings from these costs in 2009 have been offset by
increased spending to fund enhanced medical education
programs, Abbott Spine costs and increased product liability
claims. In this challenging economic environment, we are
carefully managing our SG&A spend, reducing expenses in
certain areas in order to fund growth and productivity
initiatives. Areas of investment include marketing and
promotion and medical education and training. The
acquisition of Abbott Spine increased SG&A costs for items
such as selling expenses, increased instrument depreciation
and amortization of the acquired intangible assets.
Additionally, SG&A as a percentage of net sales is negatively
impacted by the decrease in revenues caused by changes in
foreign currency rates. A majority of our SG&A spend is
incurred in the U.S., primarily from our corporate
headquarters and similar functions at our various businesses
such as Dental, Trauma, Spine and OSP. Therefore, SG&A
expense does not respond to changes in foreign currency
rates proportionally to our revenue, which has caused SG&A
as a percentage of net sales to increase.
Certain claims expense is a provision for estimated
Durom Cup patients undergoing revision surgeries within
specified times. A provision of $69.0 million was originally
recorded during 2008 with an additional $35.0 million
recorded during 2009, bringing the total provision to
$104.0 million for these claims. For more information
regarding these claims, see Note 17 to the consolidated
financial statements.
In connection with our annual goodwill impairment test
performed in the fourth quarter of 2009, we noted that the
carrying value of the assets of our U.S. Spine reporting unit
was in excess of its estimated fair value. As a result, we
recorded a related goodwill impairment charge of
$73.0 million during the year ended December 31, 2009. For
more information regarding goodwill impairment and the
factors that led to the impairment, see Note 8 to the
consolidated financial statements. We have five other
reporting units with goodwill assigned to them. We estimate
the fair value of those reporting units using the income
approach by discounting to present value the estimated future
cash flows of the reporting unit. For each of those five
reporting units, the estimated fair value substantially exceeds
its carrying value.
25
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
Acquisition, integration, realignment and other expenses
for 2009 were $75.3 million compared to $68.5 million in
2008. During 2009, we initiated a workforce realignment,
which included the elimination of positions in some areas and
increases in others to support long-term growth. As a result of
this realignment and headcount reductions from acquisitions,
we incurred approximately $19.0 million of severance and
termination-related expenses. Other items in acquisition,
integration, realignment and other expenses in 2009 included
approximately $9.4 million of expenses related to contract
termination costs, $23.4 million of certain litigation matters
that were recognized during the period and various costs
incurred to integrate the Abbott Spine business acquired in
the fourth quarter of 2008. Included in acquisition,
integration, realignment and other expenses in 2008 was
$38.5 million of in-process research and development related
to the Abbott Spine acquisition and other costs related to the
integration of Abbott Spine. See Note 2 to the consolidated
financial statements for a more complete description of these
charges.
We recognized a net curtailment and settlement gain of
$32.1 million during 2009 related to amending our U.S. and
Puerto Rico postretirement benefit plans. For more
information regarding the net curtailment and settlement gain,
see Note 12 to the consolidated financial statements.
Operating Profit, Income Taxes and Net Earnings
Operating profit for 2009 decreased 7 percent to
$1,018.8 million from $1,090.0 million in 2008. The decrease
in operating profit is due to higher operating expenses, most
notably the goodwill impairment charge.
Interest and other expense for 2009 increased to
$20.6 million compared to income of $31.8 million in 2008.
Interest and other income in 2008 included a realized gain of
$38.8 million related to the sale of certain marketable
securities. Interest expense increased in the 2009 period as
the result of increased long-term debt used to partially fund
the Abbott Spine acquisition and the $1.0 billion senior notes
offering during 2009.
The effective tax rate on earnings before income taxes
increased to 28.1 percent for 2009, up from 24.3 percent in
2008. The effective tax rate for 2009 is negatively impacted by
the goodwill impairment charge of $73.0 million recorded
during 2009 for which no tax benefit was recorded. The
effective tax rate for 2008 includes the impact of a current tax
benefit of $31.7 million related to the 2007 settlement
expense, resulting in a decrease of approximately 3 percent in
the 2008 effective tax rate. This impact on the 2008 effective
tax rate was partially offset by Abbott Spine acquisition-
related in-process research and development charges
recorded during 2008 for which no tax benefit was recorded.
These discrete items account for the majority of the change in
our effective tax rate year-over-year.
Net earnings decreased 15 percent to $717.4 million for
2009, compared to $848.6 million in 2008, as a result of
decreased operating profit, increased interest expense and an
increased effective tax rate. Basic earnings per share in 2009
decreased 10 percent to $3.34 from $3.73 in 2008. Diluted
earnings per share decreased 11 percent to $3.32 from $3.72
in 2008. The disproportional change in earnings per share as
compared to net earnings is attributed to the effect of 2009
and 2008 share repurchases.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net Sales by Reportable Segment
The following table presents net sales by reportable segment and the components of the percentage changes (dollars in
Year Ended December 31,
2008
2007
% Inc
Volume/
Mix
Foreign
Exchange
Price
$2,353.9
1,179.1
588.1
$2,277.0
1,081.0
539.5
$4,121.1
$3,897.5
3%
9
9
6
3%
4
5
3
–%
–
(3)
–
–%
5
7
3
millions):
Americas
Europe
Asia Pacific
Total
26
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 9 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
Total
Dental
Trauma
Spine
OSP and other
Total
Year Ended December 31,
2008
2007
% Inc (Dec)
Volume/
Mix
Foreign
Exchange
Price
$1,763.1
1,279.4
121.0
3,163.5
227.5
222.3
229.7
278.1
$1,634.6
1,221.4
104.0
2,960.0
221.0
205.8
197.0
313.7
$4,121.1
$3,897.5
8%
5
16
7
3
8
17
(11)
6
7%
2
14
5
–
4
14
(14)
3
(1)%
(1)
1
(1)
1
1
2
–
–
2%
4
1
3
2
3
1
3
3
The following table presents net sales by product
category by region (dollars in millions):
affected knee sales by 5 percent in Europe and by 6 percent
in Asia Pacific.
Year Ended December 31,
2008
2007
% Inc (Dec)
Hips
Reconstructive
Knees
Americas
Europe
Asia Pacific
Hips
Americas
Europe
Asia Pacific
Extremities
Americas
Europe
Asia Pacific
Total
Dental
Americas
Europe
Asia Pacific
Trauma
Americas
Europe
Asia Pacific
Spine
Americas
Europe
Asia Pacific
OSP and other
Americas
Europe
Asia Pacific
Total
Knees
$1,089.8
452.6
220.7
$1,029.8
407.8
197.0
576.1
493.9
209.4
88.1
25.8
7.1
568.3
459.9
193.2
73.9
23.2
6.9
3,163.5
2,960.0
114.9
82.2
30.4
126.7
47.4
48.2
180.4
40.1
9.2
177.9
37.1
63.1
118.9
71.3
30.8
122.9
41.1
41.8
160.3
31.2
5.5
202.9
46.5
64.3
$4,121.1
$3,897.5
6%
11
12
1
7
8
19
11
3
7
(3)
15
(1)
2
16
15
13
29
65
(12)
(20)
(2)
6
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. Changes in foreign currency exchange rates positively
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 those sales were partially offset by weaker
sales of cemented stems. Trabecular Metal Acetabular Cups
and Longevity 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. Changes in foreign currency
exchange rates positively affected hip sales by 5 percent in
Europe and by 8 percent in Asia Pacific.
Extremities
The Bigliani/Flatow Complete Shoulder Solution and the
Zimmer Trabecular Metal Reverse Shoulder System led
extremities sales.
Dental
Orthobiologicals and prosthetic implants, including strong
growth of the Tapered Screw-Vent Implant System, led dental
sales.
Trauma
Zimmer Periarticular Locking Plates and the ITST
Intertrochanteric/Subtrochanteric Fixation System led trauma
sales.
Spine
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 and other
OSP sales were negatively affected by the patient care
product recalls and related voluntary suspension of
production of certain products, but these negative factors
27
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
were partially offset by strong growth in PALACOS Bone
Cement.
Expenses as a Percent of Net Sales
Year Ended
December 31,
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 payment we made as part of the 2007 civil settlement.
2008
2007
Inc (Dec)
Certain claims expense of $69.0 million is a provision for
Cost of products sold
Research and development
Selling, general and administrative
Settlement
Certain claims
Acquisition, integration, realignment and
other
Operating expenses
Operating profit
Interest and other income, net
Cost of Products Sold
24.2%
4.7
41.3
–
1.7
1.6
49.3
26.5
0.8
22.5%
4.7
38.9
4.4
–
0.6
48.6
28.9
0.1
1.7
–
2.4
(4.4)
1.7
1.0
0.7
(2.4)
0.7
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.
The following table reconciles the gross margin for 2007
to 2008:
Year ended December 31, 2007 gross margin
Foreign currency exchange impact, net
Excess and obsolete inventory
Inventory step-up
Other
Year ended December 31, 2008 gross margin
77.5%
(0.8)
(0.6)
(0.2)
(0.1)
75.8%
Operating Expenses
R&D increased to $192.3 million for 2008 from
$182.6 million in 2007 but remained unchanged as a percent
of total sales. The year-over-year increase represents our
continued investment in R&D to grow at or above sales
growth.
SG&A expense increased to $1,704.0 million for 2008
from $1,516.7 million in 2007. Increased SG&A costs include
monitor fees paid as part of our 2007 civil settlement with the
U.S. government regarding financial relationships with
consulting orthopaedic surgeons, 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
28
estimated claims from Durom Cup patients undergoing
revision surgeries within specified periods. For more
information regarding these claims, see Note 17 to the
consolidated financial statements.
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. See Note 2 to the
consolidated financial statements for a more complete
description of these charges.
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 included 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, 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
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
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were
$1,117.5 million in 2009 compared to $1,038.1 million in 2008.
The principal source of cash from operating activities in 2009
was net earnings. Non-cash charges included in net earnings
accounted for another $446.4 million of operating cash. All
other items of operating cash flows in 2009 reflect a use of
$46.3 million of cash. The resolution of outstanding payments
to healthcare professionals and institutions resulted in
increased cash outflows during the 2009 period compared to
the delay in similar payments during the 2008 period as we
implemented our enhanced global compliance program. The
resolution of these outstanding payments, along with a change
in the timing of employee bonus payments compared to the
2008 period and product liability payments, contributed to
increased outflows from accrued expenses in 2009. These
outflows were partially offset by improved accounts receivable
collections and better inventory management.
At December 31, 2009, we had 56 days of sales
outstanding in trade accounts receivable, a decrease of 3 days
when compared to December 31, 2008, reflecting improved
collections across all geographic segments. At December 31,
2009, we had 302 days of inventory on hand, a decrease of
42 days compared to December 31, 2008. Over the past two
years we have made significant investments in inventory,
including investments in response to growing demand for
systems that provide more versatility and better fit for
patients. In 2009 we made progress rationalizing these
investments through reductions in field-based consignments
and through the use of new inventory management tools to
speed returns and redeployments. The continued build out of
pipeline inventory for planned product launches should
partially offset these reductions in field consignments in 2010.
Cash flows used in investing activities were $381.2 million
in 2009 compared to $924.2 million in 2008. Additions to
instruments decreased in 2009 compared to the 2008 period,
as year-over-year spending on instruments declined compared
to the significant investments made in 2008. In 2010, we
expect to spend approximately $170 – $180 million on
instruments to support new products and sales growth.
Spending on other property, plant and equipment decreased
to $105.1 million during 2009 compared to $250.0 million in
the same 2008 period. Spending on property, plant and
equipment decreased compared to 2008 levels, as certain
planned infrastructure initiatives from 2008 were completed
and as we adjusted spending to lower production volumes.
During 2010, we expect to purchase approximately $150 –
$160 million in other property, plant and equipment, reflecting
the cash outlays necessary to complete new product-related
investments and normal replacement of older machinery and
equipment. Acquired intellectual property rights were
$35.8 million in 2009 compared to $109.4 million in 2008.
These items 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 existing contractual arrangements. These lump-
sum payments were based upon a third party fair market
valuation of the current net present value of the contractual
arrangements. During 2009 we invested excess cash of
approximately $66.4 million in certificates of deposit that have
original maturities greater than 90 days. Investments in other
assets in both 2009 and 2008 primarily relate to payments to
acquire certain foreign-based distributors. Investments in
other assets in 2007 primarily related to payments to acquire
Endius and ORTHOsoft. Included in investing cash flows in
2008 were $363.0 million paid to acquire Abbott Spine and
$54.9 million of proceeds we received from the sale of certain
equity securities.
Cash flows used in financing activities were
$262.1 million for 2009 compared to $343.5 million in 2008. In
November 2009, we sold $1.0 billion aggregate principal
amount of senior unsecured notes (Senior Notes) in a public
offering. We received net proceeds of approximately
$998.8 million, net of an offering discount of $1.2 million. We
also paid an additional $8.5 million of debt issuance costs
related to the sale of the Senior Notes. The proceeds of the
offering were used to repay amounts outstanding under our
senior credit facility, to finance our stock repurchase program
and for general corporate purposes. We repurchased
$923.7 million of our common stock in 2009 as compared with
$737.0 million in 2008 under our stock repurchase programs.
The Senior Notes include two tranches: $500 million
aggregate principal amount of 4.625% Senior Notes due
November 30, 2019, and $500 million aggregate principal
amount of 5.75% Senior Notes due November 30, 2039.
Interest on the Senior Notes is payable on May 30 and
November 30 of each year beginning on May 30, 2010 until
maturity. The Senior Notes are rated A- by Standard & Poor’s
Ratings Services and are rated Baa1 by Moody’s Investors’
Service, Inc.
We may redeem the Senior Notes at our election in whole
or in part at any time prior to maturity at a redemption price
equal to the greater of 1) 100 percent of the principal amount
of the notes being redeemed; or 2) the sum of the present
values of the remaining scheduled payments of principal and
interest (not including any portion of such payments of
interest accrued as of the date of redemption), discounted to
the date of redemption on a semi-annual basis at the Treasury
Rate (as defined in the debt agreement), plus 20 basis points,
in the case of the 2019 notes, and 25 basis points, in the case
of the 2039 notes. We will also pay the accrued and unpaid
interest on the Senior Notes to the redemption date.
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We have a five year $1,350 million revolving, multi-
currency, senior unsecured credit facility maturing
November 30, 2012 (Senior Credit Facility). We had
$128.8 million outstanding under the Senior Credit Facility at
December 31, 2009, and an availability of $1,221.2 million.
The Senior Credit Facility contains provisions by which we
can increase the line to $1,750 million.
We also have available uncommitted credit facilities
totaling $84.1 million.
We may use excess cash or further borrow against our
Senior Credit Facility, subject to limits set by our Board of
Directors, to repurchase additional common stock under the
$1.25 billion program which expires December 31, 2010.
Approximately $211.1 million remains authorized for future
repurchases under this plan.
Management believes that cash flows from operations and
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
2010
2011
and
2012
2013
and
2014
2015
and
Thereafter
Long-term debt
$1,127.6
$
–
$128.8
$
–
$ 998.8
Interest payments
1,095.6
Operating leases
Purchase obligations
Long-term income
taxes payable
Other long-term
liabilities
Total contractual
obligations
53.7
37.3
27.8
103.8
103.8
47.6
5.1
26.6
0.1
834.3
23.1
–
–
–
56.5
15.3
22.5
81.7
26.2
126.3
134.6
33.0
94.3
234.2
$2,719.3
$118.8
$423.5
$172.0
$2,005.0
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
30
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 – Our income tax expense, deferred
tax assets and liabilities and reserves for unrecognized tax
benefits reflect management’s best assessment of estimated
future taxes to be paid. We are subject to income taxes in
both the U.S. and numerous foreign jurisdictions. Significant
judgments and estimates are required in determining the
consolidated income tax expense.
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.
The calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax laws and
regulations in a multitude of jurisdictions across our global
operations. We are subject to regulatory review or audit in
virtually all of those jurisdictions and those reviews and audits
may require extended periods of time to resolve. We record
our income tax provisions based on our knowledge of all
relevant facts and circumstances, including existing tax laws,
our experience with previous settlement agreements, the
status of current examinations and our understanding of how
the tax authorities view certain relevant industry and
commercial matters.
We recognize tax liabilities in accordance with the
Financial Accounting Standards Board’s (FASB) guidance on
income taxes and we adjust these liabilities when our
judgment changes as a result of the evaluation of new
information not previously available. Due to the complexity of
some of these uncertainties, the ultimate resolution may
result in a payment that is materially different from our
current estimate of the tax liabilities. These differences will be
reflected as increases or decreases to income tax expense in
the period in which they are determined.
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 legal 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
Z I M M E R H O L D I N G S , I N C .
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over time are statistically analyzed to arrive at factors which
are then applied to loss estimates in the actuarial model.
During 2009, in addition to our general product liability
estimates and the $69.0 million provision recorded in 2008
related to the Durom Cup, we recorded an additional
provision for certain claims of $35.0 million representing
management’s updated 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. We expect to pay the majority of these claims within
the next three years. Any claims received outside of these
defined parameters will be managed in the normal course and
reflected in our standard product liability accruals.
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. Changes to these assumptions could
require us to record impairment charges on these assets.
In the fourth quarter of 2009, we determined our
U.S. Spine reporting unit’s carrying value was in excess of its
estimated fair value. Fair value was determined using an equal
weighting of income and market approaches. Fair value under
the income approach was determined by discounting to
present value the estimated future cash flows of the reporting
unit. Fair value under the market approach utilized the
comparable transaction methodology, which uses valuation
indicators determined from sales of other businesses that are
similar to our U.S. Spine reporting unit. Factors that
contributed to the estimated fair value of the reporting unit
being below its carrying value included a decrease in
projected revenues related to the Dynesys Dynamic
Stabilization System. This product line experienced increased
competition and insurance reimbursement issues in 2009. We
have been seeking approval from the FDA to market this
product differently in the U.S., which would enhance its
position in the market. However, in November 2009 an FDA
advisory panel issued a non-approvable recommendation,
increasing the uncertainty of the estimated future cash flows.
In addition to the Dynesys product, revenues from other
products have been affected as we work through the
integration of the sales channel following the Abbott Spine
acquisition.
As a result, we recorded a related goodwill impairment
charge of $73.0 million during the year ended December 31,
2009.
We have five other reporting units with goodwill assigned
to them. We estimate the fair value of those reporting units
using the income approach by discounting to present value
the estimated future cash flows of the reporting unit. For each
of those five reporting units, the estimated fair value
substantially exceeds its carrying value.
Share-based Payment – We measure share-based
payment expense at the grant date based on the fair value of
the award and recognize expense 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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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, Korean
Won and Swedish Krona. 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 currency exchange rate
movements on transactions denominated in foreign
currencies, we enter into derivative financial instruments in
the form of foreign currency 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, 2009, we had
obligations to purchase U.S. Dollars and sell Euros, Japanese
Yen, British Pounds, Canadian Dollars, Australian Dollars,
Korean Won and Swedish Krona and purchase Swiss Francs
and sell U.S. Dollars at set maturity dates ranging from
January 2010 through June 2012. The notional amounts of
outstanding forward contracts entered into with third parties
to purchase U.S. Dollars at December 31, 2009 and 2008 were
$1.1 billion and $1.3 billion, respectively. The notional
amounts of outstanding forward contracts entered into with
third parties to purchase Swiss Francs at December 31, 2009
and 2008 were $202.4 million and $207.5 million, respectively.
The weighted average contract rates outstanding are
Euro:USD 1.40, USD:Swiss Franc 1.10, USD:Japanese Yen 94,
British Pound:USD 1.66, USD:Canadian Dollar 1.11, Australian
Dollar:USD 0.75, USD:Korean Won 1,208 and USD:Swedish
Krona 7.52.
We maintain written policies and procedures governing
our risk management activities. Our policy requires that
32
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
currency exchange forward contracts outstanding at
December 31, 2009 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, Korean Won and Swedish Krona, with no
change in the interest differentials, the fair value of those
contracts would increase or decrease earnings before income
taxes in periods through 2012, depending on the direction of
the change, by an average approximate amount of
$54.9 million, $20.5 million, $25.0 million, $10.2 million,
$4.7 million, $9.9 million, $2.9 million and $1.8 million for the
Euro, Swiss Franc, Japanese Yen, British Pound, Canadian
Dollar, Australian Dollar, Korean Won and Swedish Krona
contracts, respectively. Any change in the fair value of foreign
currency 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 currency 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
$2,346 million at December 31, 2009, primarily in Swiss
Francs, Japanese Yen and Euros. Approximately
$1,309 million of the net asset exposure at December 31,
2009 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
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
Z I M M E R H O L D I N G S , I N C .
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material effect on our consolidated financial position, results
of operations or cash flows.
equivalents, counterparty transactions and accounts
receivable.
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 cash 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. Our
Senior Notes have fixed interest rates and are not exposed to
any risk from movement in interest rates. 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 under the
Senior Credit Facility 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, 2009, 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
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 cash
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.
33
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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, 2009. 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, 2009, 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, 2009, as stated in its report which appears in Item 8 of this Annual Report on
Form 10-K.
34
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ITEM 8. Financial Statements and Supplementary Data
Zimmer Holdings, Inc.
Index to Consolidated Financial Statements
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings for the Years Ended December 31, 2009, 2008 and 2007
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
Page
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38
39
40
41
42
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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, 2009 and 2008, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 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 accompanying 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, 2009, 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 2 to the consolidated financial statements, the Company changed the manner in which it accounts for
uncertain tax positions in 2007.
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 24, 2010
36
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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 17)
Certain claims (Note 17)
Goodwill impairment (Note 8)
Acquisition, integration, realignment and other (Note 2)
Net curtailment and settlement (Note 12)
Operating expenses
Operating Profit
Interest and other income (expense), net
Earnings before income taxes
Provision for income taxes
Net earnings
Less: Net earnings attributable to noncontrolling interest
Net Earnings of Zimmer Holdings, Inc.
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)
2009
2008
2007
$4,095.4
990.8
$4,121.1
997.3
$3,897.5
875.9
3,104.6
3,123.8
3,021.6
205.4
1,729.2
–
35.0
73.0
75.3
(32.1)
192.3
1,704.0
–
69.0
–
68.5
–
182.6
1,516.7
169.5
–
–
25.2
–
2,085.8
2,033.8
1,894.0
1,018.8
(20.6)
998.2
280.8
717.4
–
1,090.0
31.8
1,121.8
272.3
1,127.6
4.0
1,131.6
357.9
849.5
(0.9)
773.7
(0.5)
$ 717.4
$ 848.6
$ 773.2
$
$
3.34
3.32
$
$
3.73
3.72
$
$
3.28
3.26
215.0
215.8
227.3
228.3
235.5
237.5
37
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
(in millions)
2009
2008
$691.7
0.1
66.4
751.4
913.2
105.3
209.9
2,738.0
1,221.7
2,783.5
858.0
184.3
$
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
$7,785.5
$ 7,239.0
$134.6
57.5
498.6
690.7
328.5
1,127.6
2,146.8
$
186.4
26.6
558.1
771.1
353.9
460.1
1,585.1
2.5
3,214.6
5,102.5
358.6
(3,039.5)
5,638.7
–
5,638.7
2.5
3,138.5
4,385.5
240.0
(2,116.2)
5,650.3
3.6
5,653.9
$7,785.5
$ 7,239.0
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 cash equivalents
Restricted cash
Certificates of deposit
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
Other current liabilities
Total Current Liabilities
Other long-term liabilities
Long-term debt
Total Liabilities
Commitments and Contingencies (Note 17)
Stockholders’ Equity:
Zimmer Holdings, Inc. Stockholders’ Equity:
Common stock, $0.01 par value, one billion shares authorized,
254.1 million (253.7 million in 2008) issued
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, 49.9 million shares (30.1 million shares in 2008)
Total Zimmer Holdings, Inc. stockholders’ equity
Noncontrolling interest
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements.
38
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
Consolidated Statements of Stockholders’ Equity
Zimmer Holdings, Inc. Stockholders
Accumulated
Other
Comprehensive
Income
Treasury Shares
Number
Amount
Noncontrolling
Interest
$209.2
–
81.1
(12.1)
–
–
$ (802.9)
–
–
$ 2.7
0.5
–
(in millions)
Total
Stockholders’
Equity
$4,923.2
773.7
81.1
Common Shares
Number
Amount
Balance January 1, 2007
Net earnings
Other comprehensive income
Adoption of FASB’s uncertain
tax position guidance
Stock compensation plans,
including tax benefits
Share repurchases
Currency translation
Balance December 31, 2007
Net earnings
Other comprehensive loss
Stock compensation plans,
including tax benefits
Share repurchases
Currency translation
Balance December 31, 2008
Net earnings
Other comprehensive income
Purchase of noncontrolling
interest
Stock compensation plans,
including tax benefits
Share repurchases
248.9
–
–
–
3.3
–
–
252.2
–
–
1.5
–
–
253.7
–
–
–
0.4
–
$2.5
–
–
–
–
–
–
2.5
–
–
–
–
–
2.5
–
–
–
–
–
Paid-in
Capital
$2,743.2
–
–
Retained
Earnings
$2,768.5
773.2
–
–
(4.8)
255.9
–
–
2,999.1
–
–
139.4
–
–
3,138.5
–
–
–
–
–
3,536.9
848.6
–
–
–
–
4,385.5
717.4
–
(5.0)
–
81.1
–
(0.4)
–
–
–
–
–
290.3
–
(50.3)
–
–
–
240.0
–
118.6
–
–
–
–
–
–
(4.8)
–
(7.2)
–
(19.3)
–
–
–
(10.8)
–
(30.1)
–
–
–
(576.3)
–
(1,379.2)
–
–
–
(737.0)
–
(2,116.2)
–
–
–
–
(0.4)
2.8
0.9
–
–
–
(0.1)
3.6
–
–
255.9
(576.3)
(0.4)
5,452.4
849.5
(50.3)
139.4
(737.0)
(0.1)
5,653.9
717.4
118.6
–
–
(3.6)
(8.6)
–
(19.8)
0.4
(923.7)
Balance December 31, 2009
254.1
$2.5
$3,214.6
$5,102.5
$358.6
(49.9)
$(3,039.5)
$
The accompanying notes are an integral part of these consolidated financial statements.
–
–
–
81.1
(923.7)
$5,638.7
39
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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 of Zimmer Holdings, Inc.
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization
Goodwill impairment
Gain on sale of investments
In-process research and development
Net curtailment and settlement
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
Net cash provided by operating activities
Cash flows provided by (used in) investing activities:
Additions to instruments
Additions to other property, plant and equipment
Acquisition of intellectual property rights
Purchases of certificates of deposit
Proceeds from sale of investments
Abbott Spine acquisition, net of acquired cash
Investments in other assets
Net cash used in investing activities
Cash flows provided by (used in) financing activities:
Net proceeds (payments) under revolving credit facility
Debt issuance costs
Proceeds from employee stock compensation plans
Excess income tax benefit from stock option exercises
Repurchase of common stock
Proceeds from issuance of notes
Acquisition of noncontrolling interest
Net cash used in financing activities
Effect of exchange rates on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
The accompanying notes are an integral part of these consolidated financial statements.
40
(in millions)
2009
2008
2007
$ 717.4
$ 848.6
$ 773.2
337.4
73.0
–
–
(32.1)
75.3
12.5
(19.7)
3.5
(0.4)
275.1
–
(38.8)
38.5
–
69.9
7.0
2.0
12.5
(6.5)
7.0
(4.6)
36.2
(132.6)
44.6
(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)
1,117.5
1,038.1
1,084.4
(123.7)
(105.1)
(35.8)
(66.4)
–
–
(50.2)
(237.9)
(250.0)
(109.4)
–
54.9
(363.0)
(18.8)
(138.5)
(192.7)
–
–
–
–
(160.3)
(381.2)
(924.2)
(491.5)
(330.0)
(8.5)
9.5
0.4
(923.7)
998.8
(8.6)
330.0
–
57.0
6.5
(737.0)
–
–
–
–
149.8
27.0
(576.3)
–
–
(262.1)
(343.5)
(399.5)
4.9
479.1
212.6
(21.7)
(251.3)
463.9
4.8
198.2
265.7
$ 691.7
$ 212.6
$ 463.9
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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
$8.9 in 2009, $0.7 in 2008 and $11.5 in 2007
Reclassification adjustments on foreign currency hedges, net of tax effects of
$(0.1) in 2009, $(9.2) in 2008 and $(1.3) in 2007
Unrealized gains/(losses) on securities, net of tax effects of $0.1 in 2009,
$(15.2) in 2008 and $0.9 in 2007
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 $(1.4) in 2009, $14.1 in 2008 and $(0.4) in 2007
Total Other Comprehensive Income (Loss)
Comprehensive (Loss) Attributable to Noncontrolling Interest
Comprehensive Income Attributable to Zimmer Holdings, Inc.
The accompanying notes are an integral part of these consolidated financial statements.
(in millions)
2009
2008
2007
$717.4
$849.5
$773.7
114.0
(49.4)
101.1
(28.9)
35.0
(49.8)
(18.1)
43.4
27.0
(0.3)
–
24.4
(23.8)
51.9
118.6
–
(79.9)
(50.3)
(0.9)
(1.4)
–
4.2
81.1
(0.5)
$836.0
$798.3
$854.3
41
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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
reconstructive implants, dental 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 2008 and 2007
consolidated financial statements have been reclassified to
conform to the 2009 presentation.
Use of Estimates – The consolidated financial statements
are prepared in conformity with accounting principles
generally accepted in the United States which require us to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during
the reporting period. 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
42
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, 2009, 2008 and 2007 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, 2009, 2008 and 2007.
The reserves for doubtful accounts were $18.8 million
and $20.0 million as of December 31, 2009 and 2008,
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 $121.8 million,
$117.3 million and $104.1 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Acquisition, Integration, Realignment and Other – We
recognize expenses resulting directly from our business
combinations and other items as “Acquisition, integration,
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
realignment and other” expenses. Acquisition, integration,
realignment and other expenses for the years ended
December 31, 2009, 2008 and 2007, included (in millions):
2009
2008
2007
Adjustment or impairment of acquired assets
and obligations, net
$(1.5)
$(10.4)
$(1.2)
Consulting and professional fees
11.7
13.2
Employee severance and retention, including
share-based compensation acceleration
Information technology integration
In-process research & development
Vacated facilities
Facility and employee relocation
Distributor acquisitions
Certain litigation matters
Contract terminations
Other
19.0
1.1
–
1.4
5.4
1.1
23.4
9.4
4.3
0.2
0.7
38.5
–
7.5
6.9
–
5.7
6.2
1.0
1.6
2.6
6.5
–
–
4.1
–
5.4
5.2
Acquisition, integration, realignment and other
$75.3
$ 68.5
$25.2
Adjustment or impairment of acquired assets and
obligations relates to impairment on assets that were acquired
in business combinations or adjustments to certain liabilities
of acquired companies due to changes in circumstances
surrounding those liabilities subsequent to the related
measurement period.
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 include
third-party fees related to severance and termination benefits
matters. These fees also include legal fees related to litigation
matters involving acquired businesses that existed prior to our
acquisition or resulted from our acquisition.
During 2009, we commenced a global realignment
initiative to focus on business opportunities that best support
our strategic priorities. As part of this realignment, we
initiated changes in our work force, eliminating positions in
some areas and increasing others. Approximately
300 employees from across the globe were affected by these
actions. As a result of these changes in our work force and
headcount reductions from acquisitions, we recorded expense
of $19.0 million related to severance and other employee
termination-related costs. These termination benefits were
provided in accordance with our existing or local government
policies and are considered ongoing benefits. These costs
were accrued when they became probable and estimable and
were recorded as part of other current liabilities. The majority
of these costs were paid during 2009.
Information technology integration relates to the non-
capitalizable costs associated with integrating the information
systems of acquired businesses.
In-process research and development charges for 2008
relate to the acquisition of Abbott Spine. In-process research
and development charges for 2007 relate to the acquisitions of
Endius and ORTHOsoft.
In 2009, we ceased using certain leased facilities and,
accordingly, recorded expense for the remaining lease
payments, less estimated sublease recoveries, and wrote-off
any assets being used in those facilities.
Facility and employee relocation relates to costs
associated with relocating certain facilities. Most notably, we
consolidated our legacy European distribution centers into a
new distribution center in Eschbach, Germany.
Over the past three years we have acquired a number of
U.S. and foreign-based distributors. We have incurred various
costs related to the acquisition and integration of those
businesses.
Certain litigation matters relate to costs recognized
during the year for the estimated or actual settlement of
various legal matters, including patent litigation matters,
commercial litigation matters and matters arising from our
acquisitions of certain competitive distributorships in prior
years. We recognize expense for the potential settlement of a
legal matter when we believe it is probable that a loss has
been incurred and we can reasonably estimate the loss. In
2009, we made a concerted effort to settle many of these
matters to avoid further litigation costs.
Contract termination costs relate to terminated
agreements in connection with the integration of acquired
companies. The terminated contracts primarily relate to sales
agents and distribution agreements.
Cash and Cash 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 cash equivalents are valued
at cost, which approximates their fair value.
Certificates of Deposit – We invest in cash deposits with
original maturities greater than three months and classify
these investments as certificates of deposit on our
consolidated balance sheet. The carrying amounts reported in
the balance sheet for certificates of deposit are valued at cost,
which approximates their fair value.
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 and three to eight years for
machinery and equipment. Maintenance and repairs are
expensed as incurred. 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.
43
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
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 ten years.
Instruments – Instruments are hand-held devices used by
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
whenever events or changes in circumstances indicate that
the carrying value of an instrument may not be recoverable.
Depreciation of instruments is recognized as selling, general
and administrative expense.
Goodwill – 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 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 or whenever events or changes in
circumstances indicate that the carrying value of the reporting
unit’s assets may not be recoverable. 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. During the year ended December 31,
2009, we recorded a goodwill impairment charge of
$73.0 million related to our U.S. Spine reporting unit. See
Note 8 for more information regarding goodwill and goodwill
impairment.
Intangible Assets – Intangible assets are initially
measured at their fair value. We have determined the fair
value of our intangible assets either by the fair value of the
consideration exchanged for the intangible asset or the
estimated after-tax discounted cash flows expected to be
44
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 these
discounted cash flow analyses such as estimated growth rates,
royalty rates and risk-adjusted discount rates.
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 under the
asset and liability method, which requires the recognition of
deferred tax assets and liabilities for the expected future tax
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
consequences of events that have been included in the
financial statements. Under this method, deferred tax assets
and liabilities are determined based on the differences
between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The effect of a
change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the
enactment date.
We record net deferred tax assets to the extent we
believe these assets will more likely than not be realized. In
making such determination, we consider all available positive
and negative evidence, including future reversals of existing
taxable temporary differences, projected future taxable
income, tax planning strategies and recent financial
operations. In the event we were to determine that we would
be able to realize our deferred income tax assets in the future
in excess of their net recorded amount, we would make an
adjustment to the valuation allowance which would reduce the
provision for income taxes. 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 measure all
derivative instruments at fair value and report them on our
consolidated balance sheet as assets or liabilities. 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. See Note 11 for more information regarding our
derivative and hedging activities.
Other Comprehensive Income – Other comprehensive
income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are included
in comprehensive income but are excluded from net earnings
as these amounts are recorded directly as an adjustment to
stockholders’ equity. Other comprehensive income is
comprised of foreign currency translation adjustments,
unrealized foreign currency hedge gains and losses, unrealized
gains and losses on available-for-sale securities and
amortization of prior service costs and unrecognized gains and
losses in actuarial assumptions.
The components of accumulated other comprehensive income are as follows (in millions):
Foreign currency translation
Foreign currency hedges
Unrealized gain/(loss) on securities
Unrecognized prior service cost and unrecognized gain/(loss) in actuarial assumptions
Accumulated other comprehensive income
Balance at
December 31,
2008
Other
Comprehensive
Income (Loss)
Balance at
December 31,
2009
$ 319.4
$114.0
$433.4
33.0
(1.3)
(111.1)
(47.0)
(0.3)
51.9
(14.0)
(1.6)
(59.2)
$ 240.0
$118.6
$358.6
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 the FASB’s guidance on
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 reissue common stock
held in treasury only for limited purposes.
Noncontrolling Interest – On January 1, 2009, we
adopted the FASB’s newly issued guidance related to
noncontrolling interests. This new guidance changes the
accounting and reporting for minority interests, which are
now recharacterized as noncontrolling interests and classified
as a component of equity. This new guidance requires
retroactive adoption of the presentation and disclosure
requirements for existing noncontrolling interests. This
adoption did not have a material impact on our consolidated
financial statements or results of operations. During the year
ended December 31, 2009, we acquired 100 percent
ownership of our only outstanding noncontrolling interest for
approximately $8.6 million. This purchase was recorded as an
equity transaction and is reflected as a financing activity in
our consolidated statement of cash flows. As a result, the
carrying balance of the noncontrolling interests of $3.6 million
was eliminated, and the remaining $5.0 million, representing
the difference between the purchase price and carrying
balance, was recorded as a reduction in paid-in capital.
Transactions with noncontrolling interests had the following
45
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
effect on equity attributable to Zimmer Holdings, Inc. (in
millions):
Net earnings of Zimmer Holdings, Inc.
Transfers to noncontrolling interests:
Decrease in equity related to the purchase of
noncontrolling interests
2009
2008
$717.4
$848.6
(5.0)
–
Change from net earnings of Zimmer Holdings, Inc.
and transfers to noncontrolling interests
$712.4
$848.6
Accounting Pronouncements – In September 2006, the
FASB issued guidance related to 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 guidance did not require any new fair
value measurements, but provided guidance on how to
measure fair value by providing a fair value hierarchy used to
classify the source of the information. In February 2008, the
FASB delayed the effective date of certain provisions of this
fair value guidance relating to non-financial assets and
liabilities measured at fair value on a non-recurring basis until
fiscal years beginning after November 15, 2008. In January
2009, we adopted these additional provisions of the FASB’s
fair value guidance. This adoption did not have a material
impact on our consolidated financial statements or results of
operations. See Note 7 for more information on fair value
measurements of assets and liabilities.
On January 1, 2009, we adopted the FASB’s newly issued
guidance related to business combinations. This guidance
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. Additionally, it changes the
accounting for deferred tax assets and income tax reserves
recorded as part of a business combination. If a
remeasurement of these assets or liabilities is warranted after
January 1, 2009, it will affect income tax expense as opposed
to the previous accounting guidance which would have
required goodwill to be adjusted. We have applied this
guidance to business combinations with acquisition dates
occurring in 2009. This adoption did not have a material
impact on our consolidated financial statements or results of
operations.
On January 1, 2009, we adopted the FASB’s newly issued
guidance related to disclosures about derivative instruments
and hedging activities. This guidance requires 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, but does
not impact our financial position or results of operations. See
Note 11 for more information on our derivative instruments
and hedging activities.
46
In May 2009, the FASB issued new guidance related to
the accounting for and disclosure of subsequent events, which
is effective for interim and annual periods ending after
June 15, 2009. This new guidance establishes general
standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial
statements are issued or are available to be issued. This
guidance introduces new terminology but is based on the
same principles that previously existed in the auditing
standards. Under this new guidance we are required to
provide disclosure of the date through which we have
evaluated subsequent events and whether that date
represents the date the financial statements were issued or
the date the financial statements were available to be issued.
For the financial statements related to the years ended
December 31, 2009, 2008 and 2007 contained herein, we have
evaluated subsequent events through February 25, 2010
representing the date these financial statements were issued.
In July 2006, the FASB issued guidance which clarifies
the accounting for uncertainty in income taxes recognized in
the financial statements. This guidance provides that a tax
benefit from an uncertain tax position may be recognized
when it is more likely than not that the position will be
sustained upon examination, including resolutions of any
related appeals or litigation processes, based on the technical
merits. Income tax positions must meet a more likely than not
recognition threshold at the effective date and in subsequent
periods to be recognized. The FASB also provided guidance
on measurement, derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. We adopted the FASB guidance effective January 1,
2007.
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, 2009, share-based payment
expense was $75.3 million or $54.4 million net of the related
tax benefits. 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.
Stock Options
We had two equity compensation plans in effect at
December 31, 2009: the 2009 Stock Incentive Plan (2009
Plan) and the Stock Plan for Non-Employee Directors. The
2009 Plan succeeds the 2006 Stock Incentive Plan (the “2006
Plan”) and the TeamShare Stock Option Plan (TeamShare
Plan). Following stockholder approval of the 2009 Plan in May
2009, no further awards were granted under the 2006 Plan or
under the TeamShare Plan, and shares remaining available for
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
grant under those plans are expected to be merged into the
2009 Plan. Vested and unvested stock options and unvested
restricted stock and RSUs previously granted under the 2006
Plan, the TeamShare Plan and another prior plan, the 2001
Stock Incentive Plan, remained outstanding as of
December 31, 2009. We have reserved the maximum number
of shares of common stock available for award under the
terms of each of these plans. We have registered 52.9 million
shares of common stock and expect to register an additional
5 million shares under the Securities Act of 1933, as amended.
The 2009 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, RSUs 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 2009 Plan to our executive officers is expected to
occur in the first quarter of each year following the earnings
announcements for the previous quarter and full year. The
Stock Plan for Non-Employee Directors provides for awards of
stock options, restricted stock and RSUs 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, 2009,
an aggregate of 14.2 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. As established under our equity
compensation plans, vesting may accelerate upon retirement
after the first anniversary date of the award if certain criteria
are met. We recognize expense related to stock options on a
straight-line basis over the requisite service period, less
awards expected to be forfeited using estimated forfeiture
rates. Due to the accelerated retirement provisions, the
requisite service period of our stock options range from one
to four years. Stock options are granted with an exercise price
equal to the market price of our common stock on the date of
grant, except in limited circumstances where local law may
dictate otherwise. In the past, certain options have had price
thresholds, which affect exercisability. All such price
thresholds have been satisfied. The total number of awards
which may be granted in a given year and/or over the life of
the plan under each of our stock option plans is limited to
control dilution.
A summary of stock option activity for the year ended
December 31, 2009 is as follows (options in thousands):
Stock Options
Weighted Average
Exercise Price
Outstanding at December 31, 2008
Options granted
Options exercised
Options cancelled
Options expired
15,900
2,567
(176)
(799)
(580)
Outstanding at December 31, 2009
16,912
$71.25
40.12
30.32
63.61
75.56
67.17
The following table summarizes information about stock options outstanding at December 31, 2009 (options in thousands):
Range of Exercise Prices
$22.00 – $27.50
$27.51 – $37.50
$37.51 – $51.00
$51.01 – $70.50
$70.51 – $91.00
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
Outstanding
Weighted
Average
Remaining
Contractual Life
1.11
2.10
7.69
4.98
6.92
6.44
Exercisable
Weighted
Average
Exercise Price
$25.73
30.84
41.08
68.67
77.88
Options
137
814
715
2,522
5,993
67.17
10,181
Weighted
Average
Exercise Price
$25.73
30.55
44.01
68.97
77.95
68.85
Options
137
858
2,928
2,813
10,176
16,912
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 and we do not expect to pay a
dividend in the foreseeable future.
47
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
The weighted average fair value of the options granted in
the years ended December 31, 2009, 2008 and 2007 were
determined using the following assumptions:
targets over multiple year periods. For these performance-
based awards, it was determined in 2008 that the performance
targets would not be achieved. Accordingly, as of
December 31, 2009 and 2008, no performance-based awards
were outstanding.
2009
2008
2007
–%
–%
–%
41.6% 27.4% 23.8%
A summary of nonvested RSU activity for the year ended
1.7% 2.9% 4.4%
December 31, 2009 is as follows (in thousands):
Dividend Yield
Volatility
Risk-free interest rate
Expected life (years)
5.1
The weighted average fair value for stock options granted
5.4
5.4
during 2009, 2008 and 2007 was $16.02, $23.32 and $22.60,
respectively. The total intrinsic value of stock options
exercised during the years ended December 31, 2009, 2008
and 2007 was $3.3 million, $31.9 million and $124.5 million,
respectively. For the years ended December 31, 2009, 2008
and 2007, share-based payment expense related to stock
options was $61.9 million, $65.4 million and $73.4 million,
respectively, or $44.7 million, $46.3 million and $50.4 million
net of the related tax benefits, respectively.
Summarized information about outstanding stock options
as of December 31, 2009 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
16,008
10,181
6.3 years
5.3 years
$67.37
$75.3
$68.85
$38.6
* Includes effects of estimated forfeitures
As of December 31, 2009, there was $85.1 million of
unrecognized share-based payment expense related to
nonvested stock options granted under our plans. That
expense is expected to be recognized over a weighted average
period of 2.3 years.
Performance Shares and RSUs
We have utilized both performance shares and RSUs as
share-based payments to our employees. Some of these
awards have had service conditions while others have had
performance conditions. The terms of the service condition
awards have been either two or four years with vesting
occurring ratably on the anniversary date of the award.
However, based upon meeting certain criteria, as established
under our equity compensation plans, these awards may
accelerate upon retirement after the first anniversary date of
the award. Accordingly, the requisite service period used for
share-based payment expense ranges from one to four years.
The vesting of the awards with performance conditions
was based upon the achievement of objective performance
48
Outstanding at January 1, 2009
Granted
Vested
Forfeited
Outstanding at December 31, 2009
Weighted Average
Grant Date Fair
Value
$64.93
40.33
68.27
41.28
42.09
RSUs
169
573
(118)
(189)
435
The fair value of the awards was determined based upon
the fair market value of our common stock on the date of
grant. We are required to estimate the number of RSUs that
will vest and recognize share-based payment expense on a
straight-line basis over the requisite service period. As of
December 31, 2009, we estimate that approximately 404,000
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, 2009 was $13.2 million
and is expected to be recognized over a weighted-average
period of 3.1 years. For the years ended December 31, 2009,
2008 and 2007, pre-tax expense (income) related to these
awards was $13.4 million, $4.5 million and $(3.3) million,
respectively, or $9.7 million, $3.2 million and $(2.3) million
net of the related tax benefits, respectively.
4.
INVENTORIES
Inventories at December 31, 2009 and 2008 consist of the
following (in millions):
Finished goods
Work in progress
Raw materials
Inventories, net
2009
2008
$718.6
48.0
146.6
$731.2
52.6
144.5
$913.2
$928.3
Reserves for excess and obsolete inventory were
$255.1 million and $199.6 million at December 31, 2009 and
2008, respectively. Included in finished goods inventory at
December 31, 2009 is approximately $1.3 million of inventory
step-up resulting from the Abbott Spine acquisition. Inventory
step-up values are based upon estimated sales prices less
distribution costs and a profit allowance. Included in finished
goods inventory at December 31, 2009 and 2008 is
approximately $9.4 million and $11.3 of capitalized share-
based payment expense, respectively.
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
5.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2009 and
2008 was as follows (in millions):
The following table summarizes the estimates of fair
value of the assets acquired and liabilities assumed at the date
of the Abbott Spine acquisition (in millions):
Land
Building and equipment
Capitalized software costs
Instruments
Construction in progress
Accumulated depreciation
2009
2008
$
21.8
1,147.7
158.8
1,210.2
62.0
$
21.7
992.7
136.7
1,161.7
149.0
2,600.5
(1,378.8)
2,461.8
(1,197.7)
Current assets
Property, plant and equipment
Instruments
Intangible assets subject to amortization:
Customer relationships (10 year useful life)
Property, plant and equipment, net
$ 1,221.7
$ 1,264.1
Developed technology (10 year useful life)
Depreciation expense was $244.2 million, $215.8 million
and $182.6 million for the years ended December 31, 2009,
2008 and 2007, respectively.
6.
ACQUISITIONS
We made acquisitions during the years 2009, 2008 and
2007, the most significant of which was our acquisition of
Abbott Spine in 2008, which is described below. 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 the FASB’s guidance on
business combinations 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.
In 2009 we completed the final purchase price allocation,
which reflects additional contract termination liabilities,
changes to the preliminary fair values assigned to acquired
inventory and changes to deferred taxes.
As of October 16,
2008
$ 61.4
6.5
17.5
8.6
64.3
38.5
10.0
203.2
410.0
19.5
27.5
47.0
$363.0
In-process research and development
Other assets
Goodwill
Total assets acquired
Current liabilities
Deferred taxes
Total liabilities assumed
Net assets acquired
Goodwill of $130.6 million, $69.9 million and $2.7 million
was assigned to the Americas, Europe and Asia Pacific
reporting segments, respectively. None of the goodwill is
deductible for tax purposes.
7.
FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES
The following financial assets and liabilities are recorded
at fair value on a recurring basis as of December 31, 2009 (in
millions):
Description
Assets
Available-for-sale securities
Derivatives, current and
non-current
Liabilities
Derivatives, current and
non-current
Recorded
Balance
$ 0.9
12.4
$13.3
$32.7
$32.7
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)
$0.9
–
$0.9
$ –
$ –
$
–
12.4
$12.4
$32.7
$32.7
$–
–
$
$–
$–
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 currency 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 and perform an assessment of counterparty
credit risk.
49
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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 following nonfinancial assets were measured at fair
8.
GOODWILL AND OTHER INTANGIBLE ASSETS
value on a nonrecurring basis during the year ended
December 31, 2009 (in millions):
Fair Value Measurements Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
$–
$–
Year Ended
December 31,
2009
$342.9
$342.9
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Losses
$–
$–
$342.9
$73.0
$342.9
$73.0
Description
Goodwill
In 2009, goodwill relating to our U.S. Spine reporting unit
with a carrying amount of $415.9 million was written down to
its implied fair value of $342.9 million, resulting in an
impairment charge of $73.0 million. The implied fair value of
goodwill equals the estimated fair value of a reporting unit
minus the fair value of the reporting unit’s net assets.
Accordingly, in determining the implied fair value of the
U.S. Spine reporting unit goodwill, we used unobservable
inputs to estimate the fair value of the reporting unit and its
assets and liabilities. Fair value was determined using an
equal weighting of income and market approaches. Fair value
under the income approach was determined by discounting to
present value the estimated future cash flows of the reporting
unit. Fair value under the market approach utilized the
comparable transaction methodology, which uses valuation
indicators determined from sales of other businesses that are
similar to our U.S. Spine reporting unit. In estimating the
future cash flows of the reporting unit, we utilized a
combination of market and company specific inputs that a
market participant would use in assessing the fair value of the
reporting unit. The primary market input was revenue growth
rates. These rates were based upon historical trends and
estimated future growth drivers such as an aging global
population, obesity and more active lifestyles. Significant
company specific inputs included assumptions regarding how
the reporting unit could leverage operating expenses as
revenue grows and the impact any new products will have on
revenues. Under the comparable transaction methodology, we
took into consideration when the comparable transaction
occurred and the differences that may exist due to changes in
the economic environment. We also took into consideration
differences between the comparable companies and our
U.S. Spine reporting unit that could affect fair value, such as
cash and debt levels.
The fair value of the reporting unit’s assets and liabilities
were determined by using the same methods that are used in
business combination purchase accounting. See Note 8 for
further information regarding this goodwill impairment.
There were no other significant nonfinancial assets that
were measured at fair value in the year ending December 31,
2009.
50
The following table summarizes the changes in the
carrying amount of goodwill for the years ended December 31,
2009 and 2008 (in millions):
Americas
Europe Asia Pacific
Total
Balance at January 1, 2008
Goodwill
Accumulated impairment
losses
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
Balance at December 31, 2008
Goodwill
Accumulated impairment
losses
Change in fair value estimates
of Abbott Spine related to:
Integration liability
Inventory
Income taxes
U.S. Spine reporting unit
impairment
Other acquisitions
Currency translation
Balance at December 31, 2009
Goodwill
Accumulated impairment
losses
$1,443.5 $1,066.3
$111.6 $2,621.4
–
–
–
–
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)
1,540.3 1,110.1
124.4 2,774.8
–
–
–
–
1,540.3 1,110.1
124.4 2,774.8
1.0
2.2
(1.9)
(73.0)
–
6.3
4.2
–
–
–
5.0
53.8
0.3
–
–
–
–
10.8
5.5
2.2
(1.9)
(73.0)
5.0
70.9
1,547.9 1,173.1
135.5 2,856.5
(73.0)
–
–
(73.0)
$1,474.9 $1,173.1
$135.5 $2,783.5
We conduct our annual impairment test in the fourth
quarter of every year or whenever events occur or
circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying amount. In
the fourth quarter of 2009, we determined our U.S. Spine
reporting unit’s carrying value was in excess of its estimated
fair value. Fair value was determined using an equal weighting
of income and market approaches. Factors that contributed to
the estimated fair value of the reporting unit to be below its
carrying value included a decrease in projected revenues
related to the Dynesys Dynamic Stabilization System. This
product line experienced increased competition and insurance
reimbursement issues in 2009. We have been seeking approval
from the FDA to market this product differently in the U.S.,
which would enhance its position in the market. However, in
November 2009 an FDA advisory panel issued a non-
approvable recommendation, increasing the uncertainty of the
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
estimated future cash flows. In addition to the Dynesys
product, revenues from other products have been affected as
we work through the integration of the sales channel following
the Abbott Spine acquisition.
As a result, we recorded a related goodwill impairment
charge of approximately $73.0 million during the year ended
December 31, 2009. Before the impairment charge, goodwill
assigned to this reporting unit was approximately
$416 million, of which approximately two-thirds arose from
the Centerpulse acquisition in 2003 and the remaining from
the Abbott Spine acquisition in 2008.
We have five other reporting units with goodwill assigned
to them. We estimate the fair value of those reporting units
using the income approach by discounting to present value
the estimated future cash flows of the reporting unit. For each
of those five reporting units, the estimated fair value
substantially exceeds its carrying value.
We will continue to monitor the fair value of our
U.S. Spine reporting until as well as our other five reporting
units in our interim and annual reporting periods. If our
estimated cash flows for these reporting units decrease, we
may have to record further impairment charges in the future.
Factors that could result in our cash flows being lower than
our current estimates include: 1) decreased revenues caused
by changes in the healthcare market, or our inability to
generate new product revenue from our research and
development activities, and 2) if we are not able to achieve
the estimated operating margins in our forecasts due to
unforeseen factors. Additionally, changes in the broader
economic environment could cause changes to our estimated
discount rates which will impact our estimated fair values.
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, 2009:
Intangible assets subject to amortization:
Gross carrying amount
Accumulated amortization
Intangible assets not subject to amortization:
Gross carrying amount
$144.1
(44.0)
$ 499.1
(183.5)
$145.2
(40.3)
–
–
–
Total identifiable intangible assets
$100.1
$ 315.6
$104.9
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
$ 34.7
(20.0)
196.5
$211.2
$ 35.6
(16.6)
197.0
$216.0
$129.2
(23.4)
$ 51.5
(31.1)
$1,003.8
(342.3)
–
–
196.5
$105.8
$ 20.4
$ 858.0
$ 93.6
(15.6)
$ 42.9
(26.9)
$ 924.4
(249.3)
–
–
197.0
$ 78.0
$ 16.0
$ 872.1
administrative expenses. 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, all
amortization expense was recorded as part of selling, general
and administrative expenses. Estimated annual amortization
expense for the years ending December 31, 2010 through
2014 is $89.7 million, $80.9 million, $73.4 million,
$66.8 million and $62.6 million, respectively.
During 2009, we made lump-sum payments of
$35.8 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 arrangements. 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 arrangements. 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.
Total amortization expense for finite-lived intangible
assets was $93.2 million, $59.3 million and $47.4 million for
the years ended December 31, 2009, 2008 and 2007,
respectively. For 2009, $33.6 million of amortization expense
was recorded as part of cost of goods sold, with the remaining
$59.6 million recorded as part of selling, general and
51
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
9.
OTHER CURRENT AND LONG-TERM LIABILITIES
Other current and long-term liabilities at December 31,
2009 and 2008 consist of the following (in millions):
Other current liabilities:
License and service agreements
Certain claims accrual (Note 17)
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
Certain claims accrual (Note 17)
Other long-term liabilities
Total other long-term liabilities
2009
2008
$108.0
42.5
95.7
252.4
$169.6
62.8
91.5
234.2
$498.6
$558.1
$ 94.3
$116.9
32.9
29.4
171.9
129.9
–
107.1
$328.5
$353.9
10. DEBT
In November 2009, we sold $500 million aggregate
principal amount of our 4.625% Senior Notes due
November 30, 2019 and $500 million aggregate principal
amount of our 5.75% Senior Notes due November 30, 2039
(Senior Notes) in a public offering. Interest is payable on May
30 and November 30 of each year beginning on May 30, 2010
until maturity. We received net proceeds of approximately
$998.8 million, net of an offering discount of $1.2 million. The
Senior Notes carry an effective interest rate of 4.634% and
5.762%, respectively. We used the proceeds to repay amounts
outstanding under our senior credit facility, to finance our
stock repurchase program and for general corporate purposes.
We may redeem the Senior Notes at our election in whole
or in part at any time prior to maturity at a redemption price
equal to the greater of 1) 100 percent of the principal amount
of the notes being redeemed; or 2) the sum of the present
values of the remaining scheduled payments of principal and
interest (not including any portion of such payments of
interest accrued as of the date of redemption), discounted to
the date of redemption on a semi-annual basis at the Treasury
Rate (as defined in the debt agreement), plus 20 basis points,
in the case of the 2019 notes, and 25 basis points, in the case
of the 2039 notes. We will also pay the accrued and unpaid
interest on the Senior Notes to the redemption date.
We have a five year $1,350 million senior credit
agreement (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, 2009 were
$1,221.2 million. The Senior Credit Facility contains provisions
whereby borrowings may be increased to $1,750 million.
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
52
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, 2009.
Commitments under the Senior Credit Facility are subject to
certain fees, including a facility and a utilization fee.
Borrowings under the Senior Credit Facility were Japanese
Yen-based borrowings at December 31, 2009 and U.S. Dollar
and Japanese Yen-based borrowings at December 31, 2008.
Outstanding long-term debt as of December 31, 2009 was
$1,127.6 million, comprised of $998.8 million from our Senior
Notes and $128.8 from our Senior Credit Facility. As of
December 31, 2008, $460.1 million was outstanding from our
Senior Credit Facility. We had no short-term debt as of
December 31, 2009 or 2008. The estimated fair value of our
Senior Notes as of December 31, 2009 was $992.1 million. The
carrying value of the Senior Credit Facility approximates fair
value, as the underlying instruments have variable interest
rates at market value.
We also have available uncommitted credit facilities
totaling $84.1 million.
The weighted average interest rate for all borrowings was
4.7 percent at December 31, 2009. We paid $17.0 million,
$14.0 million and $8.5 million in interest during 2009, 2008
and 2007, respectively.
Debt issuance costs of $22.8 million were incurred to
obtain the Senior Credit Facility and debt issuance costs of
$8.5 million were incurred during the sale of our Senior Notes.
These costs were capitalized and are amortized to interest
expense over the lives of the related facility and the Senior
Notes. At December 31, 2009, total unamortized debt issuance
costs were $11.7 million.
11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to certain market risks relating to our
ongoing business operations, including foreign currency risk,
commodity price risk, interest rate risk and credit risk. We
manage our exposure to these and other market risks through
regular operating and financing activities. Currently, the only
risk that we manage through the use of derivative instruments
is foreign currency risk.
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
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. To reduce the potential effects of
foreign currency exchange rate movements on net earnings,
we enter into derivative financial instruments in the form of
foreign currency exchange forward contracts and options with
major financial institutions. 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, Korean Won and Swedish Krona. We do
not use derivative financial instruments for trading or
speculative purposes.
We report all derivative instruments as assets or liabilities
on the balance sheet at fair value.
Derivatives Designated as Hedging Instruments
Our revenues are generated in various currencies
throughout the world. However, a significant amount of our
inventory is produced in U.S. Dollars. Therefore, movements
in foreign currency exchange rates may have different
proportional effects on our revenues compared to our cost of
products sold. To minimize the effects of foreign currency
exchange rate movements on cash flows, we hedge
intercompany sales of inventory expected to occur within the
next 30 months with foreign currency exchange forward
contracts and options. We designate these derivative
instruments as cash flow hedges. We have not entered into
any derivative instruments designated as fair value or net
investment in foreign operation hedges.
We perform quarterly assessments of hedge effectiveness
by verifying and documenting the critical terms of the hedge
instrument and that forecasted transactions have not changed
significantly. 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 2009 and 2008 due to ineffectiveness and
amounts excluded from the assessment of hedge effectiveness
was not significant.
For forward contracts and options outstanding at
December 31, 2009, we have obligations to purchase
U.S. Dollars and sell Euros, Japanese Yen, British Pounds,
Canadian Dollars, Australian Dollars, Korean Won and Swedish
Krona and purchase Swiss Francs and sell U.S. Dollars at set
maturity dates ranging from January 2010 through June 2012.
The notional amounts of outstanding forward contracts and
options entered into with third parties to purchase
U.S. Dollars at December 31, 2009 were $1.1 billion. The
notional amounts of outstanding forward contracts entered
into with third parties to purchase Swiss Francs at
December 31, 2009 were $202 million.
As of December 31, 2009 and 2008, all derivative instruments designated as cash flow hedges are recorded at fair value on
the balance sheet. On our consolidated balance sheet, we recognize individual forward contracts and options with the same
counterparty on a net asset/liability basis if we have a master netting agreement with the counterparty. The fair value of
derivative instruments on a gross basis as of December 31, 2009 and 2008 is as follows (in millions):
2009
Balance Sheet
Location
Fair
Value
2008
Balance Sheet
Location
Fair
Value
Asset Derivatives
Foreign exchange forward contracts
Other current assets
$23.3
Other current assets
$53.7
Foreign exchange options
Foreign exchange forward contracts
Total asset derivatives
Liability Derivatives
Other current assets
Other assets
–
6.3
$29.6
Other current assets
Other assets
4.6
30.3
$88.6
Foreign exchange forward contracts
Other current liabilities
$35.4
Other current liabilities
$34.4
Foreign exchange forward contracts
Other long-term liabilities
14.5
Other long-term liabilities
17.7
Total liability derivatives
$49.9
$52.1
The fair value of outstanding derivative instruments
recorded on the balance sheet at December 31, 2009, together
with settled derivatives where the hedged item has not yet
affected earnings, was a net unrealized loss of $24.9 million,
or $14.1 million net of taxes, which is deferred in other
comprehensive income, of which $11.0 million, or $5.3 million
net of taxes, is expected to be reclassified to earnings over
the next twelve months.
Derivative instruments had the following effects on other
comprehensive income on our consolidated balance sheet and
53
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
Derivative Instrument
2009
2008
2009
2008
Foreign exchange forward contracts
Derivative Instrument
Total
our consolidated statement of earnings on a gross basis for
the years ended December 31, 2009 and 2008 (in millions):
Amount of
Gain/(Loss)
Recognized
in OCI
Amount of
Gain/(Loss)
Reclassified From OCI
to Cost of Products Sold
Foreign exchange forward
contracts
Foreign exchange options
Total
$(35.8)
(2.0)
$(37.8)
$33.1
1.2
$34.3
$16.8
1.2
$18.0
$(52.6)
–
$(52.6)
Derivatives Not Designated as Hedging Instruments
We enter into foreign currency forward exchange
contracts with terms of one month to manage currency
exposures for monetary 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 are generally offset with gains/losses
on the foreign currency forward exchange contracts in the
same reporting period. These offsetting gains/losses are
recorded in cost of products sold as the underlying assets and
liabilities exposed to remeasurement include inventory-related
transactions. These contracts are settled on the last day of
each reporting period. Therefore, there is no outstanding
balance related to these contracts recorded on the balance
sheet as of the end of the reporting period. The notional
amounts of these contracts are typically in a range of
$1.2 billion to $1.4 billion per quarter.
Defined Benefit Plans
The following gains/(losses) from these derivative
instruments were recognized in cost of products sold on our
consolidated statement of earnings (in millions):
Year Ended
December 31,
2009
2008
$(10.3)
$(2.2)
$(10.3)
$(2.2)
This impact does not include any offsetting gains/losses
recognized in earnings as a result of foreign currency
remeasurement of monetary assets and liabilities denominated
in a currency other than an entity’s functional currency.
12. 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.
The components of net pension expense for the years ended December 31, 2009, 2008 and 2007 for our defined benefit
retirement plans are as follows (in millions):
Service cost
Interest cost
Expected return on plan assets
Curtailment
Settlement
Amortization of prior service cost
Amortization of unrecognized actuarial loss
U.S. and Puerto Rico
2009
2008
2007
$ 12.3
$ 11.7
$ 13.0
10.6
(16.4)
9.7
(13.5)
8.8
(10.9)
0.4
–
0.1
4.1
–
3.4
0.1
2.2
–
–
–
2.9
2009
$13.7
6.8
(8.2)
–
–
(0.7)
1.9
Non-U.S.
2008
$12.1
7.3
(9.3)
–
0.1
(0.1)
0.1
2007
$10.8
5.7
(8.0)
–
–
–
0.2
Net periodic benefit cost
$ 11.1
$ 13.6
$ 13.8
$13.5
$10.2
$ 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 rate of return on plan assets
54
U.S. and Puerto Rico
2009
2008
2007
2009
5.79%
3.84%
7.75%
6.16%
3.84%
8.00%
6.14%
3.84%
8.00%
3.40%
2.39%
4.16%
Non-U.S.
2008
3.60%
3.06%
4.64%
2007
3.64%
3.12%
4.73%
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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 expected long-term rate of return on plan assets is based on the historical and estimated future 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.
Changes in projected benefit obligations and plan assets, for the years ended December 31, 2009 and 2008 for our defined
benefit retirement plans, were (in millions):
U.S. and Puerto Rico
Non-U.S.
Projected benefit obligation – beginning of year
Service cost
Interest cost
Employee contributions
Benefits paid
Actuarial (gain) loss
Prior service cost
Curtailment
Settlement
Translation loss
Projected benefit obligation – end of year
Plan assets at fair market value – beginning of year
Actual return on plan assets
Employer contributions
Employee contributions
Benefits paid
Translation gain
Plan assets at fair market value – end of year
Funded status
Amounts recognized in consolidated balance sheet:
Prepaid pension
Short-term accrued benefit liability
Long-term accrued benefit liability
2009
$188.4
12.3
10.6
–
(2.6)
(21.0)
–
(0.1)
–
–
$187.6
$138.5
25.8
40.4
–
(2.6)
–
$202.1
$ 14.5
$ 21.4
(0.3)
(6.6)
2008
$166.0
11.7
9.7
–
(9.7)
11.8
–
–
(1.1)
–
$188.4
$147.2
(39.3)
40.3
–
(9.7)
–
2009
$192.1
13.7
6.8
12.0
(27.0)
(3.0)
(5.0)
–
–
7.7
$197.3
$163.7
11.0
12.2
12.0
(27.0)
7.1
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
$138.5
$179.0
$163.7
$(49.9)
$(18.3)
$(28.4)
$
–
(0.5)
(49.4)
$
1.8
–
(20.1)
$
2.5
–
(30.9)
Net amount recognized
$ 14.5
$(49.9)
$(18.3)
$(28.4)
Amounts recognized in accumulated other comprehensive income:
Unrecognized prior service cost
Unrecognized actuarial loss
Total amount recognized
$
0.5
66.2
$ 66.7
$
0.9
101.0
$101.9
$ (5.8)
30.8
$ 25.0
$ (1.3)
31.2
$ 29.9
55
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
We estimate the following amounts recorded as part of accumulated other comprehensive income will be recognized as part
of our net pension expense during 2010 (in millions):
Unrecognized prior service cost
Unrecognized actuarial loss
U.S. and
Puerto Rico
$0.1
2.6
$2.7
Non-U.S.
$(0.6)
1.0
$ 0.4
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
2009
2008
2007
2009
6.26%
3.80%
5.79%
3.84%
6.16%
3.84%
3.25%
2.46%
Non-U.S.
2008
3.34%
3.03%
2007
3.71%
3.15%
Plans with projected benefit obligations in excess of plan assets as of December 31, 2009 and 2008 were as follows (in
millions):
Projected benefit obligation
Plan assets at fair market value
U.S. and Puerto Rico
Non-U.S.
2009
$6.9
–
2008
$188.4
138.5
2009
$157.5
137.7
2008
$178.3
147.8
Plans with accumulated benefit obligations in excess of plan assets as of December 31, 2009 and 2008 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
$148.3 million and $140.6 million as of December 31, 2009
and 2008, respectively. The accumulated benefit obligation for
non-U.S. defined benefit retirement plans was $186.6 million
and $178.7 million as of December 31, 2009 and 2008,
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,
2010
2011
2012
2013
2014
2015-2019
U.S. and
Puerto Rico
Non-U.S.
$ 3.7
$16.1
5.1
6.5
7.2
8.5
64.0
15.4
15.2
14.9
15.0
78.2
The U.S. and Puerto Rico defined benefit retirement
plans’ overall investment strategy is to maximize total returns
by emphasizing long-term growth of capital while avoiding
risk. We have established target ranges of assets held by the
plans of 50 to 75 percent for equity securities and 25 to
50 percent for debt securities. The plans strive to have
56
U.S. and Puerto Rico
Non-U.S.
2009
$5.0
–
2008
$15.5
7.4
2009
$145.9
133.8
2008
$140.4
120.1
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 may be rebalanced quarterly based upon the target
asset allocation of the plans.
In the U.S. and Puerto Rico, we maintain an investment
policy statement that guides the investment allocation in the
plans. The investment policy statement describes the target
asset allocation positions described above. We have a benefits
committee to manage the general philosophy, objectives and
process of the plans. The benefits committee meets quarterly
to review performance and to ensure that the current
investment allocation is within the guidelines set forth in the
investment policy statement.
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
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
securities, 15 to 24 percent in real estate, 3 to 15 percent in
cash funds and 0 to 12 percent in other funds.
The fair value of our U.S. and Puerto Rico pension plan
assets as of December 31, 2009, by asset category are as
follows (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)
Asset Category
Cash and cash equivalents
Equity securities:
U.S. large-cap
U.S. small-cap
International
Intermediate fixed income
securities
Total
$ 12.1
67.6
20.8
22.5
79.1
$12.1
$
–
–
–
–
–
67.6
20.8
22.5
79.1
Total
$202.1
$12.1
$190.0
The fair value of our non-U.S. pension plan assets as of
December 31, 2009, by asset category are as follows (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)
$ 7.4
$
Asset Category
Cash and cash equivalents
Equity securities:
Total
$
7.4
Energy
Materials
Industrials
Consumer discretionary
Consumer staples
Healthcare
Financials
Information technology
Telecommunication
services
Utilities
Other equities
Fixed income securities:
Government bonds
Corporate bonds
Asset-backed securities
Other debt
Other types of investments:
Mortgage loans
Insurance contracts
Other investments
Real estate
Total
1.6
1.3
3.0
2.2
3.5
6.3
5.7
2.7
1.0
1.4
23.2
29.5
36.9
8.6
0.9
5.0
5.1
5.8
27.9
1.6
1.3
3.0
2.2
3.5
6.3
5.7
2.7
1.0
1.4
20.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2.7
29.5
36.9
8.6
0.9
5.0
5.1
5.8
–
$–
–
–
–
–
$–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
27.9
$179.0
$56.6
$94.5
$27.9
As of December 31, 2009 and 2008, our defined benefit
pension plans’ assets did not hold any direct investment in
Zimmer Holdings common stock.
Equity securities are valued using a market approach,
based on quoted prices for the specific security from
transactions in active exchange markets (Level 1), or in some
cases where we are invested in mutual or collective funds,
based upon the net asset value per unit of the fund which is
determined from quoted market prices of the underlying
securities in the fund’s portfolio (Level 2). Fixed income
securities are valued using a market approach, based upon
quoted prices for the specific security or from institutional bid
evaluations. Some fixed income securities are in funds with a
net asset value per unit which is determined using similar
techniques for the underlying securities in the fund’s portfolio.
Real estate is valued by discounting to present value the cash
flows expected to be generated by the specific properties.
The value of Level 3 assets has not changed significantly
from the prior year. Further information related to Level 3
assets has not been provided as we do not consider the
Level 3 assets significant to the consolidated financial
statements.
We expect that we will have no minimum funding
requirements by law in 2010 for the qualified U.S. and Puerto
Rico defined benefit retirement plans, however, subsequent
Congressional action may impact the minimum funding
requirement for 2010. We expect to voluntarily contribute
between $20 million to $30 million to these plans during 2010.
Contributions to non-U.S. defined benefit plans are estimated
to be approximately $14 million in 2010. We do not expect the
plan assets in any of our plans to be returned to us in the
next year.
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 $21.6 million, $17.1 million and
$14.0 million related to these plans for the years ended
December 31, 2009, 2008 and 2007, respectively.
Postretirement Benefit Plans
During 2009 we amended the postretirement benefit
plans for certain U.S. and Puerto Rico employees. Participants
in the plan between the ages of 55 and 65 that were
previously receiving benefits will continue to receive benefits
until reaching the age of 65. For all other participants in the
plan, no benefits will be paid after January 1, 2010.
Additionally, we funded approximately $7 million to a
Voluntary Employees’ Beneficiary Association (VEBA) trust to
settle any future obligations. We recognized a curtailment gain
and settlement loss related to these actions.
57
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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 net periodic expense for the year
A reconciliation of the U.S. statutory income tax rate to
ended December 31, 2009, 2008 and 2007 for our unfunded
postretirement benefit plans are as follows (in millions):
our effective tax rate is as follows:
For the Years Ended December 31,
2009
2008
2007
2009
2008
2007
U.S. statutory income tax rate
$ 0.8
$ 1.5
$ 1.6
State taxes, net of federal deduction
35.0% 35.0% 35.0%
1.4
1.6
2.7
Net periodic benefit cost
$(29.9)
$ 4.1
$ 3.8
2007 settlement (tax benefit)
Foreign income taxes at rates different from
the U.S. statutory rate, net of foreign tax
credits
Tax benefit relating to U.S. manufacturer’s
deduction and export sales
R&D credit
In-process research and development charges
Goodwill impairment
Other
(9.9)
(9.8)
(10.1)
(1.5)
(1.3)
(0.3)
(0.1)
(1.2)
(0.4)
–
–
2.6
0.8
(2.8)
1.2
–
0.5
5.2
0.2
–
0.2
Effective income tax rate
28.1% 24.3% 31.6%
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.
In September 2007, we reached a settlement with the
U.S. government concerning our financial relationships with
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.
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.
Service cost
Interest cost
1.3
2.5
2.2
Amortization of prior service cost
(0.2)
(0.5)
(0.5)
Amortization of unrecognized actuarial loss
Settlement
Curtailment
0.3
3.2
(35.3)
0.6
0.5
–
–
–
–
We have not provided further disclosures related to these
postretirement benefit plans as other than the curtailment
gain and settlement loss in 2009 discussed above, these plans
are not significant to our results of operations or financial
position.
13.
INCOME TAXES
The components of earnings before taxes consist of the
following (in millions):
For the Years Ending December 31,
2009
2008
2007
United States operations
$489.7
$ 618.8
$ 597.0
Foreign operations
508.5
503.0
534.6
Total
$998.2
$1,121.8
$1,131.6
The provision for income taxes consists of (in millions):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
$204.9
$136.0
$173.0
23.3
72.3
27.3
107.0
25.0
96.0
300.5
270.3
294.0
(17.4)
(3.1)
31.6
(2.0)
0.8
(27.6)
(19.7)
2.0
39.0
19.0
5.9
63.9
Provision for income taxes
$280.8
$272.3
$357.9
Income taxes paid during 2009, 2008 and 2007 were
$268.5 million, $332.9 million and $255.9 million, respectively.
58
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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 deferred taxes consisted of the
The following is a tabular reconciliation of the total
following (in millions):
amounts of unrecognized tax benefits (in millions):
Deferred tax assets:
Inventory
Net operating loss carryover
Tax credit 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
2009
2008
$ 204.1
37.5
20.7
78.3
71.1
105.5
49.9
$ 165.9
64.8
23.7
105.4
49.4
95.5
38.4
567.1
(37.3)
529.8
543.1
(37.1)
506.0
$(105.0)
(162.7)
(2.4)
(1.5)
$ (79.1)
(188.1)
(0.4)
(4.4)
(271.6)
(272.0)
$ 258.2
$ 234.0
The net operating loss carryovers are available to reduce
future federal, state and foreign taxable earnings. At
December 31, 2009, 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 $13.2 million and $18.9 million at
December 31, 2009 and 2008, respectively. The tax credit
carryovers are available to offset future federal, state and
foreign tax liabilities. At December 31, 2009, 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 $17.9 million and
$12.9 million at December 31, 2009 and 2008, respectively.
The remaining valuation allowances of $6.2 million and
$5.3 million at December 31, 2009 and 2008, respectively,
relate primarily to potential capital losses. We have
established valuation allowances related to certain business
combination transactions through goodwill. These allowances
were approximately $14.5 million and $19.3 million at
December 31, 2009 and 2008, respectively.
At December 31, 2009, we had an aggregate of
approximately $1,835 million of unremitted earnings of foreign
subsidiaries that have been, or are intended to be, indefinitely
reinvested for continued use in foreign operations. If the total
undistributed earnings of foreign subsidiaries were remitted, a
significant amount of the additional tax would be offset by the
allowable foreign tax credits. It is not practical for us to
determine the additional tax of remitting these earnings.
Balance at January 1
Increases related to prior periods
Decreases related to prior periods
Increases related to current period
Decreases related to settlements
2009
2008
2007
$129.5
32.9
(26.7)
17.4
$135.2
12.1
(32.0)
15.8
$ 95.7
27.4
(5.5)
21.9
with taxing authorities
(1.1)
(1.3)
(1.3)
Decreases related to lapse of statute
of limitations
(1.6)
(0.3)
(3.0)
Balance at December 31
$150.4
$129.5
$135.2
Included in the balance of unrecognized tax benefits at
December 31, 2009 are $100.4 million of tax benefits that, if
recognized, would affect the effective tax rate.
We recognize accrued interest and penalties related to
unrecognized tax benefits as income tax expense and accrued
interest and penalties of $5.7 million during 2009, and as of
December 31, 2009, had recognized a liability for interest and
penalties of $28.6 million. During 2008, we accrued interest
and penalties of $3.3 million, and as of December 31, 2008,
had recognized a liability for interest and penalties of
$22.9 million. During 2007, we accrued interest and penalties
of $10.0 million, and as of December 31, 2007, had recognized
a liability for interest and penalties of $19.6 million.
We expect that the net amount of tax liability for
unrecognized tax benefits will change in the next twelve
months. We are currently under audit in numerous federal,
state and foreign jurisdictions. While it is possible that such
matters will be resolved in the next twelve months, we cannot
reasonably estimate the amount or the periods in which
changes in the unrecognized tax benefits will occur.
During the third quarter of 2009, we settled various tax
matters with the IRS for all years prior to 2005. Our
U.S. federal returns for years 2005 through 2007 are currently
under IRS examination.
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
generally 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.
Our tax returns are currently under examination in
various foreign jurisdictions. 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 (2004 onward), Canada
(2003 onward), France (2007 onward), Germany (2005
onward), Italy (2005 onward), Japan (2003 onward), Korea
(2004 onward), Puerto Rico (2005 onward), Singapore (2003
onward), Switzerland (2006 onward) and the United Kingdom
(2008 onward).
59
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
14. 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, 2009.
program to December 31, 2010. Approximately $211.1 million
remains authorized for future repurchases under this plan.
15. SEGMENT DATA
The numerator for both basic and diluted earnings per
We design, develop, manufacture and market orthopaedic
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):
2009
2008
2007
Weighted average shares outstanding for
basic net earnings per share
215.0
227.3
235.5
Effect of dilutive stock options and
other equity awards
Weighted average shares outstanding for
0.8
1.0
2.0
diluted net earnings per share
215.8
228.3
237.5
For the year ended December 31, 2009, an average of
14.3 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, 2008 and 2007, an average of
11.2 million and 3.1 million options, respectively, were not
included.
During 2009, we repurchased approximately 19.8 million
shares of our common stock at an average price of $46.56 per
share for a total cash outlay of $923.7 million, including
commissions. In April 2008, we announced that our Board of
Directors authorized a $1.25 billion share repurchase program
which was originally set to expire on December 31, 2009. In
September 2009, the Board of Directors extended this
reconstructive implants, dental implants, spinal implants,
trauma products and related surgical products which include
surgical supplies and instruments designed to aid in 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 reportable 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,
realignment and other expenses, net curtailment and
settlement, 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.
60
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
Net sales, segment operating profit and year-end assets are as follows (in millions):
Net Sales
Operating Profit
Year-End Assets
2009
2008
2007
2009
2008
2007
2009
2008
$2,372.4
1,119.2
603.8
$2,353.9
1,179.1
588.1
$2,277.0
1,081.0
539.5
$1,168.7
436.8
257.4
$1,209.4
470.2
257.1
$1,184.2
429.6
259.5
$3,022.4
2,273.6
443.6
$2,845.6
2,200.0
395.1
$4,095.4
$4,121.1
$3,897.5
Americas
Europe
Asia Pacific
Net sales
Share-based payment expense
Inventory step-up
Settlement
Certain claims
Goodwill impairment
Acquisition, integration,
realignment and other
Net curtailment and settlement
Global operations and
corporate functions
Operating profit
Total assets
U.S. sales were $2,237.5 million, $2,212.3 million and
$2,142.2 million for the years ended December 31, 2009, 2008
and 2007, respectively. Sales within any other individual
country were less than 10 percent of our consolidated sales.
Sales are attributable to a country based upon the customer’s
country of domicile.
Beginning in 2009, we no longer include our Dental
product category sales within our Reconstructive products
category. Prior year amounts related to Dental product
category sales have been reclassified to conform to the
current year presentation.
Net sales by product category are as follows (in millions):
Reconstructive
Knees
Hips
Extremities
Total
Dental
Trauma
Spine
OSP and other
Total
$1,760.6
1,228.5
135.6
$1,763.1
1,279.4
121.0
$1,634.6
1,221.4
104.0
3,124.7
204.7
234.8
253.6
277.6
3,163.5
227.5
222.3
229.7
278.1
2,960.0
221.0
205.8
197.0
313.7
$4,095.4
$4,121.1
$3,897.5
Long-lived tangible assets as of December 31, 2009 and
2008 are as follows (in millions):
Americas
Europe
Asia Pacific
Total
2009
2008
$ 851.0
285.0
85.7
$ 918.3
272.5
73.3
$1,221.7
$1,264.1
(73.8)
(12.5)
–
(35.0)
(73.0)
(75.3)
32.1
(69.9)
(7.0)
–
(69.0)
–
(68.5)
–
(70.1)
(0.5)
(169.5)
–
–
(25.2)
–
(606.6)
(632.3)
(480.4)
2,045.9
1,798.3
$1,018.8
$1,090.0
$1,127.6
$7,785.5
$7,239.0
The Americas long-lived tangible assets are located
primarily in the U.S. Approximately $232.9 million of Europe
long-lived tangible assets as of December 31, 2009 are located
in Switzerland.
Capital expenditures by reportable segment for the years
ended December 31, 2009, 2008 and 2007 were as follows (in
millions):
Americas
Additions to other property, plant and
equipment
Europe
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
2009
2008
2007
$
0.6
$
1.5
$
0.7
17.0
25.3
25.4
28.8
59.6
24.6
5.3
5.1
2.2
9.4
1.2
2.4
101.4
210.4
111.9
equipment
70.6
179.5
165.0
For segment reporting purposes, deployed instruments
are included in the measurement of reportable 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 reportable segments as needed for the business.
61
2009
2008
2007
Additions to instruments
Additions to other property, plant and
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
Depreciation and amortization included in reportable
segment profit for the years ended December 31, 2009, 2008
and 2007 was as follows (in millions):
Americas
Europe
Asia Pacific
Global operations and corporate
functions
2009
2008
2007
$ 86.4
64.8
26.7
$ 78.5
57.0
25.6
$ 66.9
60.7
22.7
159.5
114.0
79.7
$337.4
$275.1
$230.0
16. LEASES
Future minimum rental commitments under non-
cancelable operating leases in effect as of December 31, 2009
were $37.3 million for 2010, $26.7 million for 2011,
$20.9 million for 2012, $15.8 million for 2013, $10.8 million for
2014 and $23.1 million thereafter. Total rent expense for the
years ended December 31, 2009, 2008 and 2007 aggregated
$43.5 million, $41.4 million and $37.1 million, respectively.
17. 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. 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 additional claims may be submitted.
We recorded a provision of $69.0 million in 2008, representing
management’s estimate of these Durom Cup-related claims. In
the third quarter of 2009, based on claims information we
received after we made our initial estimate, we increased our
estimate of the number of claims we may receive and
increased the provision by $35.0 million. The current reserve
is $71.9 million as of December 31, 2009. We expect to pay
the majority of these claims within the next three years. The
provision is limited to revisions within two years of an original
surgery that occurred prior to July 2008. 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,
reducing the number of claims at issue in the suit to five. On
62
April 9, 2009, in response to our earlier petition, the
U.S. Patent and Trademark Office instituted re-examination
proceedings against U.S. Patent No. 6,818,020. The
U.S. Patent and Trademark Office rejected all previously
issued claims of U.S. Patent No. 6,818,020 as being
unpatentable in light of one or more prior art references. On
September 30, 2009, the Court issued an order staying
proceedings in the litigation pending the outcome of the re-
examination process. Subsequent to that stay order,
Howmedica filed a motion seeking to certify an appeal of the
summary judgment ruling on the ’934, ’814 and ’308 patents.
That motion was granted on January 13, 2010. We expect that
the U.S. Court of Appeals for the Federal Circuit will hear the
appeal of that ruling in 2010. We continue to believe that our
defenses against infringement are valid and meritorious, and
we intend to continue to defend this lawsuit vigorously.
In addition to certain claims related to the Durom Cup
within the parameters 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 legal 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 September 2007, we and other orthopaedic companies
settled a U.S. government investigation pertaining to
consulting contracts, professional services agreements and
other agreements by which remuneration is provided to
orthopaedic surgeons. As part of the settlement, we entered
into a Corporate Integrity Agreement (CIA) with the Office of
Inspector General of the Department of Health and Human
Services (OIG-HHS). Under the CIA, which has a term
expiring in 2012, we agreed, among other provisions, to
continue the operation of our enhanced Corporate Compliance
Program, designed to promote compliance with federal
healthcare program requirements, in accordance with the
terms set forth in the CIA. We also agreed to retain an
independent review organization 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 (42 U.S.C. § 1320a-7b).
A material breach of the CIA may subject us 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
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
seeking additional information regarding our financial
relationships 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 investigation regarding potential violations of
the Foreign Corrupt Practices Act (FCPA) in the sale of
medical devices in a number of foreign countries by
companies in the medical device industry. In November 2007,
we received a letter from the U.S. Department of Justice
(DOJ) requesting that any information provided to the SEC
also be provided to the DOJ on a voluntary basis. We are
continuing to provide information and cooperate fully with the
SEC and the DOJ with regard to this pending investigation. In
addition, as part of our global compliance program, we have
been conducting our own proactive reviews regarding FCPA
compliance in jurisdictions that have not been involved in the
pending investigation. These reviews have yielded information
indicating that certain third-party, independent distributors of
our products in two South American countries made certain
payments that may have potential FCPA implications. In the
course of continuing dialogues with the agencies, we
voluntarily disclosed information relating to these matters to
the SEC and the DOJ, and the reviews are ongoing. We
cannot currently predict the outcome of the investigation or
the impact of our voluntary disclosures to the authorities.
Putative Class Actions
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 related to a
putative class action on behalf of persons who purchased our
common stock between January 29, 2008 and July 22, 2008.
The complaint alleged that the defendants violated the federal
securities law by allegedly failing to disclose developments
relating to our orthopaedic surgical products manufacturing
operations in Dover, Ohio and the Durom Cup. The plaintiff
sought unspecified damages and interest, attorneys’ fees,
costs and other relief. On December 24, 2008, the lead
plaintiff filed a consolidated complaint that alleged the same
claims and related to the same time period. The defendants
filed a motion to dismiss the consolidated complaint on
February 23, 2009. On December 1, 2009, the Court granted
defendants’ motion to dismiss, without prejudice. On
January 15, 2010, the plaintiff filed a motion for leave to
amend the consolidated complaint. That motion is pending.
We believe this lawsuit is without merit, and we and the
individual defendants intend to defend it vigorously.
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
defendants filed a motion to dismiss the amended complaint
on March 23, 2009. The motion to dismiss is pending with the
court. On June 12, 2009, the U.S. Judicial Panel on
Multidistrict Litigation entered an order transferring the
Dewald case to the U.S. District Court for the Southern
District of Indiana for coordinated or consolidated pretrial
proceedings with the Plumbers & Pipefitters Local Union 719
Pension Fund case referenced above. We believe this lawsuit
is without merit, and we and the individual defendants intend
to defend it vigorously.
63
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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)
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in millions, except per share data)
Net sales
Gross profit
Net earnings of Zimmer Holdings, Inc.
Earnings per common share
Basic
Diluted
2009 Quarter Ended
2008 Quarter Ended
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
$992.6
762.3
202.2
$1,019.9
783.1
210.1
$975.6
726.3
149.9
$1,107.3
832.9
155.2
$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
0.91
0.91
0.98
0.98
0.70
0.70
0.74
0.74
1.03
1.02
0.99
0.99
0.96
0.95
0.75
0.75
64
Z I M M E R H O L D I N G S , I N C .
2 0 0 9 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, 2009 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 2009, 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.
65
Z I M M E R H O L D I N G S , I N C .
PART III
2 0 0 9 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 2010 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 2010 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 2010 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 2010 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 2010 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.
66
Z I M M E R H O L D I N G S , I N C .
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
(a) 1. Financial Statements
2 0 0 9 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, 2009, 2008 and 2007
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2009, 2008 and 2007
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.
67
Z I M M E R H O L D I N G S , I N C .
Signatures
2 0 0 9 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 25, 2010
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
/s/ MARC N. CASPER
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 25, 2010
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 25, 2010
February 25, 2010
February 25, 2010
February 25, 2010
February 25, 2010
February 25, 2010
February 25, 2010
February 25, 2010
February 25, 2010
/s/ AUGUSTUS A. WHITE, III, M.D., PH.D.
Director
February 25, 2010
Augustus A. White, III, M.D., Ph.D.
68
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 9 F O R M 1 0 - K A N N U A L R E P O R T
3.1
3.2
4.1
4.2
4.3
4.4
4.5
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*
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)
Indenture dated as of November 17, 2009 between Zimmer Holdings, Inc. and Wells Fargo Bank, National Association,
as Trustee (incorporated by reference to the form filed as Exhibit 4.8 to the Registrant’s Registration Statement on
Form S-3 filed November 12, 2009)
First Supplemental Indenture to the Indenture dated as of November 17, 2009 between Zimmer Holdings, Inc. and
Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s
Current Report on Form 8-K filed November 17, 2009)
Form of 4.625% Note due 2019 (incorporated by reference to Exhibit 4.3 above)
Form of 5.750% Note due 2039 (incorporated by reference to Exhibit 4.3 above)
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)
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 (incorporated by reference to Exhibit 10.10 to the
Registrant’s Annual Report on Form 10-K filed February 27, 2009)
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 (incorporated by
reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K filed February 27, 2009)
Form of Change in Control Severance Agreement with Jeffery A. McCaulley and Chad F. Phipps (incorporated by
reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed February 27, 2009)
Change in Control Severance Agreement with Derek M. Davis (incorporated by reference to Exhibit 10.14 to the
Registrant’s Annual Report on Form 10-K filed February 27, 2009)
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 (incorporated by reference to Exhibit 10.16 to the
Registrant’s Annual Report on Form 10-K filed February 27, 2009)
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
(incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K filed February 27, 2009)
Form of Confidentiality, Non-Competition and Non-Solicitation Employment Agreement with U.S.-Based Executive
Officers (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 7,
2009)
10.15* 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)
10.16*
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)
69
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 9 F O R M 1 0 - K A N N U A L R E P O R T
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
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 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)
Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors, as amended (incorporated by reference to Appendix C
to the Registrant’s Definitive Proxy Statement filed on March 20, 2009)
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 Performance-Based Restricted Stock Unit Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive
Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 17,
2009)
Restated Zimmer Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors (incorporated by reference
to Appendix D to the Registrant’s Definitive Proxy Statement filed on March 20, 2009)
Zimmer Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Appendix B to the Registrant’s
Definitive Proxy Statement filed on March 20, 2009)
10.28*
Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2009 Stock Incentive Plan
10.29*
10.30*
10.31*
10.32*
Form of Nonqualified Stock Option Award Letter for Non-U.S. Employees under the Zimmer Holdings, Inc. 2009 Stock
Incentive Plan
Form of Performance-Based Restricted Stock Unit Award Letter under the Zimmer Holdings, Inc. 2009 Stock Incentive
Plan
Form of Performance-Based Restricted Stock Unit Award Letter for Non-U.S. Employees under the Zimmer Holdings,
Inc. 2009 Stock Incentive Plan
Form of Restricted Stock Unit Award Letter (five-year vesting) under the Zimmer Holdings, Inc. 2009 Stock Incentive
Plan
10.33*
Summary Compensation Sheet
10.34
10.35
$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)
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)
10.36
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
21
23
31.1
31.2
70
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 9 F O R M 1 0 - K A N N U A L R E P O R T
32
101
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
The following materials from Zimmer Holdings, Inc.’s Annual Report on Form 10-K for the year ended December 31,
2009, formatted in XBRL (Extensible Business Reporting Language): (1) the Consolidated Statements of Earnings, (2)
the Consolidated Balance Sheets, (3) the Consolidated Statements of Stockholders’ Equity, (4) the Consolidated
Statements of Cash Flows, (5) the Consolidated Statements of Comprehensive Income and (6) Notes to Consolidated
Financial Statements, tagged as blocks of text.
* indicates management contracts or compensatory plans or arrangements
71
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, 2007
Year Ended December 31, 2008
Year Ended December 31, 2009
Excess and Obsolete Inventory:
Year Ended December 31, 2007
Year Ended December 31, 2008
Year Ended December 31, 2009
Excess and Obsolete Instruments:
Year Ended December 31, 2007
Year Ended December 31, 2008
Year Ended December 31, 2009
2 0 0 9 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
$ 20.4
21.7
20.0
$129.5
143.7
199.6
$ 40.7
31.7
37.1
Additions
Charged
(Credited)
to Expense
Deductions
to Reserve
Effects of
Foreign
Currency
Acquired
Abbott Spine
Allowances
Balance at
End of
Period
$ 1.4
(0.5)
0.1
$ (1.2)
(1.9)
(1.8)
$ 1.1
(1.2)
0.5
$
–
1.9
–
$ 21.7
20.0
18.8
$38.6
66.5
81.7
$ 3.1
5.6
22.7
$(26.9)
(23.1)
(33.5)
$ 2.5
(2.6)
7.3
$
–
15.1
–
$143.7
199.6
255.1
$(12.5)
(2.9)
(6.5)
$ 0.4
0.3
0.5
$
–
2.4
–
$ 31.7
37.1
53.8
72
Z I M M E R H O L D I N G S , I N C .
Reconciliations
2 0 0 9 F O R M 1 0 - K A N N U A L R E P O R T
Reconciliation of Operating Profit to Adjusted Operating Profit for the Years Ended December 31, 2009, 2008, 2007, 2006 and 2005
2009
Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,018.8
12.5
Inventory step-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.0
Certain claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73.0
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75.3
Acquisition, integration, realignment and other . . . . . . . . . .
(32.1)
Net curtailment and settlement . . . . . . . . . . . . . . . . . . . . .
Adjusted Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . $1,182.5
(in millions, unaudited)
For the Years Ended December 31,
2008
$1,090.0
7.0
—
69.0
—
68.5
—
$1,234.5
2007
$1,127.6
0.5
169.5
—
—
25.2
—
$1,322.8
2006
$1,165.2
—
—
—
—
6.1
—
$1,171.3
Reconciliation of Diluted EPS to Adjusted Diluted EPS for the Years Ended December 31, 2009, 2008, 2007, 2006 and 2005
2009
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.32
0.06
Inventory step-up. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.16
Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.34
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.35
Acquisition, integration, realignment and other . . . . . . . . . . . . . . . . . .
Net curtailment and settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.15)
Taxes on inventory step-up, settlement, certain claims, acquisition,
integration, realignment and other, and net curtailment and
settlement* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from settlement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.14)
—
Adjusted Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.94
(unaudited)
For the Years Ended December 31,
2008
$ 3.72
0.03
—
0.30
—
0.30
—
(0.17)
(0.13)
$ 4.05
2007
$ 3.26
—
0.71
—
—
0.11
—
(0.03)
—
$ 4.05
2006
$3.40
—
—
—
—
0.03
—
0.01
—
$3.44
* The tax effect is calculated based upon the statutory rates for the jurisdictions where the items were incurred.
Reconciliation of Sales Growth Rate to Constant Currency Sales Growth Rate for the Year Ended December 31, 2009
2005
$1,055.0
5.0
—
—
—
56.6
—
$1,116.6
2005
$ 2.93
0.02
—
—
—
0.23
—
(0.08)
—
$ 3.10
(unaudited)
For the Twelve Months Ended December 31, 2009
Reported
% Growth
Foreign
Exchange
Impact
Constant
Currency
% Growth
Geographic Segment
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product Category
Reconstructive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Knees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extremities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dental
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trauma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OSP and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1%
(5)
3
(1)
(1)
—
(4)
12
(10)
6
10
—
(1)
—%
(6)
3
(2)
(1)
(2)
(2)
(2)
(2)
—
(2)
—
(2)
1%
1
—
1
—
2
(2)
14
(8)
6
12
—
1
73
Corporate Information
Board of Directors
John L. McGoldrick
Chairman of the Board,
Zimmer Holdings, Inc.
Senior Advisor,
International AIDS
Vaccine Initiative
Betsy J. Bernard
Retired President,
AT&T Corp.
Officers and Key Management
David C. Dvorak
President and
Chief Executive Officer
Cheryl R. Blanchard, Ph.D.
Senior Vice President
and Chief Scientific Officer
James T. Crines
Executive Vice President,
Finance and Chief Financial Officer
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 SIX Swiss Exchange
under the symbol ZMH.
Marc N. Casper
President and
Chief Executive Officer,
Thermo Fisher Scientific Inc.
Robert A. Hagemann
Senior Vice President
and Chief Financial Officer,
Quest Diagnostics Incorporated
Cecil B. Pickett, Ph.D.
Retired President,
Research and Development,
Biogen Idec Inc.
David C. Dvorak
President and
Chief Executive Officer,
Zimmer Holdings, Inc.
Larry C. Glasscock
Retired Chairman,
WellPoint, Inc.
Derek M. Davis
Vice President, Finance,
Corporate Controller
and Chief Accounting Officer
Norman D. Finch Jr.
Vice President,
Associate General Counsel
and Chief Compliance Officer
William P. Fisher
Senior Vice President,
Global Human Resources
Arthur J. Higgins
Chairman of the Board
of Management,
Bayer HealthCare AG
Augustus A. White, III, M.D., Ph.D.
Ellen and Melvin Gordon
Distinguished Professor of
Medical Education,
Professor of Orthopaedic Surgery
and former Master of the Oliver
Wendell Holmes Society,
Harvard Medical School
Jeffery A. McCaulley
President,
Zimmer Reconstructive
Jeffrey B. Paulsen
Group President,
Global Businesses
Bruno A. Melzi
Chairman,
Europe, Middle East and Africa
Chad F. Phipps
Senior Vice President,
General Counsel and Secretary
Stephen H. L. Ooi
President,
Asia Pacific
Richard C. Stair
Senior Vice President,
Global Operations and Logistics
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
Corporate Governance
Quotient (CGQ®)*
Index Ranking: 91.6
Industry Ranking: 98.7
Zimmer Holdings, Inc. outperformed
91.6 percent of the companies in
the S&P 500 Index and 98.7 percent
of the companies in the healthcare
equipment and services group as
of February 23, 2010.
Assumes $100 was invested on
December 31, 2004 in Zimmer
common stock and each index and
dividends were 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
2004
$100
100
S&P 500 Health Care Equipment Index
100
2005
$ 84
103
100
2006
$ 98
117
103
2007
$ 83
121
107
2008
$ 50
75
77
2009
$ 74
92
98
* Trademark of RiskMetrics Group. Originally introduced in 2002, the 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.
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Zimmer is well-positioned to recognize opportunities and leverage
strengths through our global operations and presence in markets
in more than 100 countries worldwide.
Zimmer Holdings, Inc.
345 East Main Street, P.O. Box 708
Warsaw, IN 46580, U.S.A.
www.zimmer.com
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