Z IMMER HOLDINGS, INC . ann ual repor t 20 12
Zimmer Holdings, Inc., 345 East Main Street, P.O. Box 708, Warsaw, IN 46580, U.S.A.
Financial Highlights
(Dollars in millions except per-share amounts)
Corporate Information (As of March 21, 2013)
Sales b y Geographic Segment
2008
2009
2010
2011
2012
56%
26%
18%
Americas
$2,354
$2,372
$2,432
$2,441
$2,476
Europe
1,179
Asia Pacific
588
1,119
604
1,099
689
1,214
797
1,178
818
Consolidated
$4,121
$4,095
$4,220
$4,452
$4,472
Sales b y Product Category
2008
2009
2010
2011
2012
Reconstructive
$3,162
$3,120
$3,202
$3,344
$3,331
Knees
Hips
41%
30%
Extremities
Dental
Trauma
Spine
4%
5%
7%
8% 5%
Surgical & Other
1,761
1,280
121
227
222
230
280
1,756
1,228
136
205
235
253
282
1,790
1,262
1,825
1,356
1,815
1,342
150
219
246
234
319
163
248
286
225
349
174
238
308
209
386
Consolidated
$4,121
$4,095
$4,220
$4,452
$4,472
% Change 2011-2012
Constant
Reported Currency(1)
1%
-3%
3%
0%
2%
3%
3%
2%
% Change 2011-2012
Constant
Reported Currency(1)
0%
-1%
-1%
6%
-4%
8%
-7%
11%
0%
1%
1%
1%
8%
-2%
9%
-6%
12%
2%
Net Sales
Strong performances from a
Operating Profit
Zimmer continued to deliver
Operating Cash Flow
Through disciplined
number of international
exceptional operating profit
management of capital, Zimmer
markets and new product
margins in 2012, driven by
introductions across Zimmer’s
progress in the Company’s
supported new product
innovation and delivered
portfolio contributed to net
business transformation programs.
increased value to stockholders
Diluted Earnings per Share
Progress in Zimmer’s value
creation agenda supported
double-digit growth in
adjusted earnings per share
for 2012.
sales of $4.47 billion in 2012.
0% Reported
2
5
4
,
4
2
7
4
,
4
0
2
2
,
4
1
2
1
,
4
5
9
0
,
4
4% Adjusted(2)
2% Reported
5
3
2
,
1
0
9
0
,
1
3
8
1
,
1
9
1
0
,
1
9
6
2
,
1
4
2
0
,
1
2
3
2
,
1
7
1
9
9
1
3
,
1
7
4
0
,
1
while maintaining high levels of
operating cash flow.
-2% Reported
4
9
1
,
1
7
7
1
,
1
2
5
1
,
1
8
1
1
,
1
8
3
0
,
1
10% Adjusted(2)
6% Reported
5
0
4
.
2
7
3
.
4
9
3
.
2
3
3
.
3
3
4
.
7
9
2
.
0
3
5
.
9
2
4
.
0
8
4
.
3
0
4
.
Executive Vice President,
Finance and Chief Financial Officer
Norman D. Finch Jr.
Vice President,
Board of Directors
John L. Mc Goldrick
Chairman of the Board,
Zimmer Holdings, Inc.
Special Advisor,
International AIDS
Vaccine Initiative
Christopher B. Begley
Retired Executive Chairman
and Chief Executive Officer,
Hospira, Inc.
Betsy J. Bernard
Retired President,
AT&T Corp.
Management Team
David C. Dvorak
President and
Chief Executive Officer
James T. Crines
Joseph A. Cucolo
President,
Americas
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.
Gail K. Boudreaux
Chief Executive Officer,
UnitedHealthcare
Executive Vice President,
UnitedHealth Group
Marc N. Casper
President and
Chief Executive Officer,
Thermo Fisher Scientific Inc.
David C. Dvorak
President and
Chief Executive Officer,
Zimmer Holdings, Inc.
Derek M. Davis
Vice President, Finance
and Corporate Controller
and Chief Accounting Officer
Associate General Counsel
and Chief Compliance Officer
William P. Fisher
Senior Vice President,
Global Human Resources
President and Chief Executive Officer,
Blackstone Healthcare Partners
Larry C. Glasscock
Retired Chairman,
WellPoint, Inc.
Robert A. Hagemann
Senior Vice President
and Chief Financial Officer,
Quest Diagnostics Incorporated
Arthur J. Higgins
Consultant,
Cecil B. Pickett, Ph.D.
Retired President,
Research and Development,
Biogen Idec Inc.
Katarzyna Mazur-Hofsaess, M.D., Ph.D.
Emmanuel Nyakako
Senior Vice President,
Europe, Middle East and Africa
Global Quality and Regulatory Affairs
President,
Reconstructive
Jeffery A. McCaulley
President,
Zimmer Reconstructive
Bruno A. Melzi
Chairman,
Europe, Middle East and Africa
Stephen H. L. Ooi
President,
Asia Pacific
Chad F. Phipps
Senior Vice President,
General Counsel and Secretary
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:
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
+1-888-552-8493 (domestic)
+1-718-921-8124 (international)
Email: zimmer@amstock.com
Website: http://www.amstock.com
Investor Relations
Zimmer invites stockholders,
security analysts, portfolio
managers and other interested
parties to contact:
Robert J. Marshall Jr.
Treasurer
+1-574-371-8042
Vice President, Investor Relations and
robert.marshall@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.
Dividend Reinvestment and Stock Purchase Plan
American Stock Transfer & Trust Company, LLC administers the Investors Choice Dividend Reinvestment and Stock Purchase Plan, which allows registered
stockholders to purchase additional shares of Zimmer common stock through the automatic investment of dividends. The plan also allows registered stockhold-
ers to purchase shares with optional cash investments of at least $25, either by check or by automatic deductions from checking or savings accounts. The
maximum optional cash investment is $10,000 per transaction. Please direct inquiries concerning the plan to: Zimmer Holdings, Inc., c/o American Stock
Transfer & Trust Company, LLC, P.O. Box 922, Wall Street Station, New York, NY 10269-0560, +1-888-552-8493 (domestic), +1-718-921-8124 (international)
Stock Performance Graph
Comparison of Cumulative Total Return for years ended December 31
Assumes $100 was invested on
December 31, 2007 in Zimmer common
stock and each index and dividends
were reinvested. Returns over the indicated
period should not be considered indicative
of future returns.
$150
$100
$50
$0
This annual report is printed on paper
that contains 10% post-consumer waste.
Zimmer Holdings, Inc.
S&P 500 Stock Index
S&P 500 Health Care Equipment Index
2007
$100
100
100
2008
$61
63
73
2009
$89
80
93
2010
$81
92
91
2011
$81
94
90
2012
$102
109
105
08
(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 76.
(2) “Adjusted” refers to performance measures that exclude inventory step-up and other inventory charges, special items, the provision for certain Durom® Acetabular Component product claims,
goodwill impairment, and net curtailment and settlement and related tax benefits and other certain tax adjustments. See the reconciliations of these non-GAAP financial measures to the most
directly comparable GAAP measures on page 76.
11
12
10
11
12
10
09
08
10
11
09
08
11
10
09
08
09
12
12
To Our Stockholders:
For over 85 years, Zimmer has pioneered breakthrough technologies that improve the quality of life
for patients suffering from various musculoskeletal conditions. Our success is founded on a culture
of innovation, quality and exceptional customer service. Beyond our leading products, Zimmer has
become the most trusted name in the industry for one simple reason — we are uniquely committed to
the musculoskeletal healthcare market and to advancing the standard of musculoskeletal care.
As we work to build an even stronger Zimmer for the future, we are keenly focused on three key
strategic priorities: our innovation and growth platform; our transformation initiatives; and a
disciplined approach to capital allocation.
Success in these areas enabled Zimmer to deliver 2012 sales totaling $4.47 billion, with fully diluted
adjusted earnings per share of $5.30, an increase of 10.4% over the prior year. These 2012 results
were driven by strong performances in a number of geographies and product categories, as well
as significant progress in executing our global transformation programs and broader operational
excellence agenda.
In 2012, Zimmer once again achieved our financial commitments. But perhaps our most significant
accomplishments related to product and technology innovation. Throughout the past year, we
achieved significant milestones for a number of innovative products and technologies, in both our
core franchises and in adjacent musculoskeletal markets. This array of new technologies positions the
Company to accelerate growth in 2013 and beyond.
Innovation and Growth Across the Musculoskeletal Continuum of Care
Throughout Zimmer’s history, the Company has worked at the forefront of innovation in materials
science and the design of implants and instrumentation, bringing to market a series of revolutionary
technologies that have greatly expanded treatment options across the continuum of musculoskeletal
healthcare. In 2012, Zimmer advanced a number of clinically differentiated new products through
regulatory clearance and the initial stages of commercialization.
Of great significance, Zimmer gained regulatory approval of our next generation family of knee
solutions, PersonaTM, The Personalized Knee System. Building on the clinical legacy of our NexGen®
and Natural Knee® Systems, the Persona Knee enables surgeons to personalize each patient’s
treatment. The fundamental design principle behind this differentiated system is to achieve the
“forgotten knee” by improving fit for a more natural feeling knee. Zimmer employed a broad scientific
approach in the design of the Persona Knee, drawing upon morphological science, kinesiology,
psychology and materials science to develop a system that more closely replicates the natural
biomechanics of the knee. Persona, The Personalized Knee System, also incorporates major advances
in instrumentation technology and surgical kitting, supporting a more accurate and reproducible
procedure, as well as providing a number of efficiency benefits to hospitals. Launching a system of this
magnitude will involve multiple phases over the next several years, but we were pleased to begin its
introduction in late 2012.
Complementing the Persona System, and strengthening the value proposition of more accurate and
streamlined procedures, in 2012 Zimmer expanded our Intelligent Instrumentation offerings. In
addition to Zimmer® Patient Specific Instruments and the eLIBRA® Dynamic Knee Balancing System,
the Company received clearance for a new flagship technology in our Intelligent Instrument portfolio,
iASSISTTM Knee, The Personalized Guidance SystemTM. This new platform technology delivers on the
promise of accurate implant positioning and alignment validation without the cost and complexity
associated with competitive navigation and robotic systems.
Also in 2012, Zimmer continued our expansion into new, adjacent
categories of the musculoskeletal market. Laying the foundation
for our entry into the lower extremities market, Zimmer received
clearance for our Trabecular MetalTM Total Ankle, an exciting new
system supporting an innovative lateral surgical approach. The
Company also further established technologies acquired through
external development efforts, including new generations of Zimmer
Universal Power Equipment and the XtraFix® external fixation system
for traumatic injuries.
Furthering our commitment to provide comprehensive solutions
addressing the needs of patients across the continuum of
musculoskeletal healthcare, Zimmer continued to build out our
portfolio of early intervention products. These offerings extend our
reach into joint preservation and the early treatment of arthritis.
In addition to DeNovo® NT Natural Tissue Graft and Chondrofix®
Osteochondral Allograft, Zimmer began the broader introduction
of Gel-One® Cross-linked Hyaluronate in 2012. This product is
used to relieve pain earlier in the treatment cycle for patients with
osteoarthritis of the knee. Comprising a 3 mL single injection, Gel-
One Hyaluronate offers the lowest total volume complete treatment
available on the market.
Advancing Zimmer’s leadership in orthopaedic materials science,
the Company introduced Vivacit-E® advanced bearing technology in
2012. A scientifically advanced bearing surface material incorporating
Vitamin E, Vivacit-E offers extraordinary strength, ultra-low wear and
exceptional oxidative stability for long-term performance. Applications
of this exciting new proprietary technology include the Continuum®
Acetabular System, the Zimmer® Unicompartmental Knee System and
the Persona Knee System, with more applications on the horizon.
The remarkable range of new offerings Zimmer began introducing
in 2012 represents the culmination of significant research and
development investments, and is indicative of our continuing cycle of
innovation. A number of these products address new anatomical sites
for the Company, or are in adjacent market segments in which we had
not previously competed, generating incremental revenues.
Transformation Initiatives: Responding to Change and
Driving Growth
To generate the resources necessary to support investments in
growth drivers, including research and development and product
innovation, Zimmer continued to advance our global transformation
and operational excellence program in 2012.
This Company-wide transformation agenda includes efficiency and
quality initiatives across all corporate and commercial operations.
Completed and ongoing programs include a management delayering,
Gel-One® is a registered trademark of Seikagaku Corporation.
Trabecular Triumph: Celebrating
15 Years of Clinical Success with
Trabecular MetalTM Technology
In 2012, Zimmer celebrated the 15-year
anniversary of our Trabecular Metal Technology,
featured on the front cover of this report. A core
platform technology for Zimmer, Trabecular
Metal Technology represents one of the greatest
innovations in orthopaedics. No other porous
metal material is designed to so closely match
the unique structure, function and physiology
of trabecular bone. Trabecular Metal Material
features unrivaled porosity, which helps living
tissue and bone integrate with joint replacements
and implants.
Since its introduction in 1997, Trabecular Metal
Technology has been used in more than 800,000
surgeries worldwide. The technology has been
featured in more than 250 clinical publications,
and countless surgeons have adopted it for use
with their patients.
Over the past 15 years, Zimmer has expanded
the applications of Trabecular Metal Technology
across our portfolio. From its first applications
in hip replacement surgery, Trabecular Metal
Technology has expanded to knee, shoulder and
ankle replacements, trauma applications, spinal
implants, dental implants and bone void fillers,
and augments used for repair of oncology-related
defects.
As a key differentiator for Zimmer, this platform
technology positions the Company as the
clear leader in biologic fixation, an emerging
preference among the orthopaedic surgeon
community. We continue to discover even more
attributes of this unique technology, which
can potentially support exciting and novel
applications – the future is bright for Trabecular
Metal Technology.
1 Bobyn JD, Hacking SA, Chan SP, et al. Characterization of new
porous tantalum biomaterial for reconstructive orthopaedics.
Scientific Exhibition: 66th Annual Meeting of the American
Academy of Orthopaedic Surgeons; 1999; Anaheim, CA.
the establishment of shared service centers for many of our support functions and strategic
sourcing and manufacturing excellence initiatives. We also are making progress against longer-term
commercial excellence programs that will ultimately lead to more efficient sales, distribution and
logistics performance.
As well as making Zimmer a more effective organization, our transformation programs support
growth-driving investments and provide Zimmer with the opportunity to expand operating margins
and enhance returns on capital investments. These savings also enable the Company to respond
effectively to external challenges.
A significant example is the passage of the Affordable Care Act that imposed an onerous new tax on
the medical device industry in the United States, effective as of January 1, 2013. Our intent is to fully
offset the medical device excise tax with the savings from our transformation programs. Paying this
tax draws upon resources that would otherwise be deployed in innovation programs and other job-
creating, strategic priorities, and we will continue to work with our industry peers to petition for its full
repeal. We believe there is growing bipartisan support in Congress to accomplish repeal.
Disciplined Capital Allocation: Creating Value for Stockholders
Zimmer’s capital deployment philosophy is well established – our goal is to enhance stockholder
returns by delivering excess cash to stockholders through a combination of share repurchases and
dividend payments. We also continue to seek investment opportunities within the musculoskeletal
market that strengthen our leadership position in developed and emerging businesses and
geographic markets, subject to rigorous return requirements.
In line with our commitment to return excess cash to stockholders, Zimmer continued our broad
share repurchase program and initiated a dividend program in 2012, returning $94 million in cash
dividends, an annual dividend of 72 cents per share.
In 2012, the Company completed several prudent bolt-on acquisitions that strengthen and
extend our reach into adjacent markets. Early in 2012, we announced the acquisition of Synvasive
Technology, the developer of the leading STABLECUT® surgical cutting technology, and the
eLIBRA Dynamic Knee Balancing System, the industry’s premiere offering for flexion-gap and soft
tissue balancing. In the second quarter, the Company completed the acquisition of Exopro, a
manufacturer of differentiated dental implant offerings, developed in the PI Brånemark philosophy,
for the Brazilian market. This acquisition strengthens our position in this important emerging
market. Finally, at the close of the third quarter, Zimmer further expanded our surgical products
portfolio through the acquisition of Dornoch Medical Systems. Dornoch offers a range of medical
waste fluid disposal equipment and accessories, including its proprietary Transposal® integrated
infectious fluid collection and disposal system.
Positioned for Success: Accelerated Growth in Established
and Emerging Markets
The musculoskeletal market remains an exciting space with extraordinary growth potential in both
established and emerging markets. The drivers of this growth are well documented, including
aging populations around the globe. There also exists an increasing base of data indicating that
the solutions Zimmer provides are cost-effective, generating savings relative to the management of
chronic advanced-stage osteoarthritis.
Gel-One® is a registered trademark of Seikagaku Corporation.
With the industry’s most comprehensive portfolio of products addressing the entire continuum of
musculoskeletal health, combined with an expanding global footprint supported by opportunistic
acquisitions in key emerging markets, Zimmer is uniquely positioned to take advantage of present
and future opportunities.
The coming years will be decisive for Zimmer, as we maximize the benefits of an unprecedented
pipeline of new product and technology systems in our core franchises, and in a number of
adjacent musculoskeletal markets, delivering new opportunities for expanded top-line growth.
With an unwavering focus on our strategic priorities, we will continue to create value for our
stockholders, while serving our customers with pride. We are truly fortunate to work in an industry
that delivers the promise of restored mobility and revitalized lives to millions of patients around
the world.
David C. Dvorak
President and
Chief Executive Officer
John L. Mc Goldrick
Chairman
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, 2012
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
13-4151777
(IRS Employer Identification No.)
46580
(Address of principal executive offices)
(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 Í
No ‘
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 ‘
No Í
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 Í
No ‘
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 preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes Í No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ‘
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check One):
Large accelerated filer Í Accelerated filer ‘
Non-accelerated filer ‘
(Do not check if a smaller reporting company)
Smaller reporting company ‘
Indicate by checkmark whether the registrant is a shell company (as defined Exchange Act Rule 12b-2). Yes ‘
No Í
The aggregate market value of shares held by non-affiliates was $11,217,437,561 (based on the closing price of these shares on the
New York Stock Exchange on June 29, 2012 and assuming solely for the purpose of this calculation that all directors and executive
officers of the registrant are “affiliates”). As of February 15, 2013, 169,354,131 shares of the registrant’s $.01 par value common
stock were outstanding.
Document
Portions of the Proxy Statement with respect to the 2013 Annual Meeting of Stockholders
Form 10-K
Part III
Documents Incorporated by Reference
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Cautionary Note About Forward-Looking Statements
This Annual Report on Form 10-K includes “forward-looking” statements within the meaning of federal securities laws.
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often
include words such as “may,” “will,” “should,” “would,” “could,” “anticipate,” “expect,” “plan,” “seek,” “believe,” “predict,”
“estimate,” “potential,” “project,” “target,” “forecast,” “intend,” “strategy,” “future,” “opportunity,” and similar expressions.
Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which
may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties
that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled
“Risk Factors” (refer to Part I, Item 1A of this report). 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. We expressly disclaim any obligation to
update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K.
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
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
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accounting Fees and Services
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Exhibits, Financial Statement Schedules
Page
3
3
9
14
15
15
15
16
16
17
18
28
32
66
66
66
67
67
67
67
67
67
68
68
2
Z I M M E R HOL D I NG S , I NC .
PART I
ITEM 1. Business
OVERVIEW
We are a global leader in the design, development,
manufacture and marketing of orthopaedic reconstructive,
spinal and trauma devices, biologics, dental implants 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 clinicians and dentists.
We have operations in more than 25 countries and market
products in more than 100 countries. We manage our
operations through three major geographic segments – the
Americas, which is comprised principally of the U.S. and
includes other North, Central and South American markets;
Europe, which is comprised principally of Europe and includes
the Middle East and Africa markets; 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 upon shipment or
upon implantation of the product. Direct channel accounts
represented approximately 75 percent of our net sales in 2012.
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 2012.
We stock inventory in our warehouse facilities and retain
title to consigned inventory in sufficient quantities so that
products are available when needed for surgical procedures.
Safety stock levels are determined based on a number of
factors, including demand, manufacturing lead times and
quantities required to maintain service levels. We also carry
trade accounts receivable balances based on credit terms that
are generally consistent with local market practices.
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
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.
The following is a summary of our three reportable
segments. See Note 17 to the consolidated financial statements
for more information regarding our segments.
Americas. The Americas is our largest geographic
segment, accounting for $2,476.3 million, or 56 percent, of
2012 net sales, with the U.S. accounting for 92 percent of net
sales in this region. The U.S. sales force consists of a
combination of employees and independent sales agents, most
of whom sell products exclusively for Zimmer. The sales force
in the U.S. receives a commission on product sales and is
responsible for many operating decisions and costs.
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.
In the Americas, we monitor and rank independent sales
agents and our direct sales force across a range of performance
metrics, including the achievement of sales targets and
maintenance of efficient levels of working capital.
Europe. The European geographic segment accounted
for $1,177.4 million, or 26 percent, of 2012 net sales, with
France, Germany, Italy, Spain, Switzerland and the United
Kingdom collectively accounting for 70 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 segment is
comprised of direct sales associates, commissioned agents,
independent distributors and sales support personnel. We
emphasize the advantages of our clinically proven, established
designs and innovative solutions and new and enhanced
materials and surfaces. In most European countries, healthcare
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is sponsored by the government and therefore government
budgets impact healthcare spending, which can affect our sales
in this segment.
Asia Pacific. The Asia Pacific geographic segment
accounted for $818.0 million, or 18 percent, of 2012 net sales,
with Japan being the largest market within this segment,
accounting for 51 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 these sales
associates play a critical role in providing service, product
information and support to surgeons. In 2012, we opened a
research and development center in Beijing, China, which
focuses on products and technologies designed to meet the
unique needs of Asian patients and their healthcare providers.
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 can increase at the end
of the year once annual deductibles have been met on health
insurance plans.
DISTRIBUTION
We operate distribution facilities domestically in Warsaw,
Indiana; Southaven, Mississippi; and Carlsbad, California 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.
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 significant knee brands include the following:
(cid:129) NexGen® Complete Knee Solution
(cid:129) Natural-Knee® II System
(cid:129) Innex® Total Knee System
(cid:129) Persona™ The Personalized Knee System
(cid:129) Zimmer® Unicompartmental Knee System
(cid:129) Zimmer® Patient Specific Instruments
(cid:129) Zimmer® Segmental System
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. Hip implant
procedures involve the use of bone cement to attach or affix
the prosthetic components to the surrounding bone, or are
press-fit into bone, which means that they have a surface that
bone affixes to through either ongrowth or ingrowth
technologies.
Our significant hip brands include the following:
(cid:129) Zimmer® M/L Taper Hip Prosthesis and Zimmer M/L Taper
Hip Prosthesis with Kinectiv® Technology
(cid:129) Alloclassic® (Zweymüller®) Hip System
(cid:129) CLS® Spotorno® Hip System and CLS Brevius® Hip Stem
with Kinectiv Technology
(cid:129) Fitmore® Hip Stem
(cid:129) Continuum® Acetabular System
(cid:129) Trilogy® IT Acetabular System
(cid:129) Allofit® IT Alloclassic® Acetabular System
(cid:129) Trabecular MetalTM Modular Acetabular System
Extremity Implants
Our extremity portfolio, primarily shoulder and elbow
products, is designed to treat arthritic conditions, soft tissue
injuries and fractures.
We generally ship our orders via expedited courier. We do
Our significant extremity brands include the following:
not consider our backlog of firm orders to be material to an
understanding of our business.
PRODUCTS
Our products include orthopaedic reconstructive
(cid:129) Trabecular Metal Reverse Shoulder System
(cid:129) Bigliani/Flatow® Complete Shoulder Solution Family
(cid:129) Zimmer® Anatomical Shoulder™ System
(cid:129) Zimmer® Trabecular Metal Total Ankle
(cid:129) Coonrad/Morrey Total Elbow
implants, spinal and trauma devices, biologics, dental implants
and related surgical products.
Dental Implants
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. There are also procedures for partial
4
Our dental products division manufactures and/or
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 resemble the original
teeth; and (3) dental regenerative products — for soft tissue
and bone rehabilitation.
Our significant dental brands include the following:
(cid:129) Tapered Screw-Vent® Implant System
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(cid:129) Zimmer® Hex-Lock® Contour Abutment and Restorative
Products
(cid:129) Puros® Allograft Products1
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. Biologics treatments are used
in conjunction with traditional trauma devices to encourage
healing and replace bone lost during an injury.
Our significant trauma brands include the following:
(cid:129) Zimmer® Natural Nail® System
(cid:129) NCB® Polyaxial Locking Plate System
(cid:129) XtraFix® External Fixation System
(cid:129) Zimmer® Periarticular Locking Plate System
(cid:129) Zimmer® Universal Locking System
(cid:129) Zimmer® Cable-Ready® System
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.
Our significant spine brands include the following:
(cid:129) PathFinder NXT® Minimally Invasive Pedicle Screw System
(cid:129) Trabecular Metal Implants
(cid:129) Sequoia® Pedicle Screw System
(cid:129) Trinica® Select Anterior Cervical Plating System
(cid:129) Dynesys® Dynamic Stabilization System
Surgical
We develop, manufacture and market products that
support reconstructive, trauma, spine and dental implant
procedures, with a focus on bone cements, surgical wound site
management and blood management.
Our significant surgical brands include the following:
(cid:129) PALACOS®2 Bone Cement
(cid:129) A.T.S.® Automatic Tourniquet Systems
(cid:129) Pulsavac® Plus, Pulsavac Plus AC and Pulsavac Plus LP
Wound Debridement Systems
(cid:129) Zimmer® Blood Reinfusion System
(cid:129) Hemovac® Blood Management System
(cid:129) Zimmer® Universal Power System
Biologics
Our research and development efforts include a Biologics
group based in Austin, Texas, with its own full-time staff and
dedicated projects focusing on the development of a variety of
1 Manufactured for Zimmer Dental, Inc. by Tutogen Medical GmbH, an
RTI Biologics, Inc. company
2 Registered trademark of Heraeus Kulzer GmbH
biologic technologies for joint preservation and other
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.
Significant biologics products we sell include the
following:
(cid:129) DeNovo® NT Natural Tissue Graft
(cid:129) Chondrofix® Osteochondral Allograft
(cid:129) Gel-One®3 Cross-linked Hyaluronate
RESEARCH AND DEVELOPMENT
We have extensive research and development activities to
develop new surgical techniques, materials, biologics and
product designs. The research and development teams work
closely with our strategic brand marketing function. The rapid
commercialization of innovative new materials, biologics
products, implant and instrument designs and surgical
techniques remains one of our core strategies and continues to
be an important driver of sales growth.
We are broadening our offerings in each of our product
categories and exploring new technologies with possible
applications in multiple areas. Our primary research and
development facility is located in Warsaw, Indiana. We have
other research and development personnel based in, among
other places, Beijing, China; Winterthur, Switzerland; Austin,
Texas; Minneapolis, Minnesota; Carlsbad, California; Dover,
Ohio; and Parsippany, New Jersey. As of December 31, 2012,
we employed more than 1,000 research and development
employees worldwide.
We expect to continue to identify innovative technologies,
which may include acquiring complementary products or
businesses, 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 Food and Drug
Administration (FDA) has enacted regulations that control all
aspects of the development, manufacture, advertising,
promotion and postmarket surveillance of medical products,
including medical devices. In addition, the FDA controls the
access of products to market through processes designed to
ensure that only products that are safe and effective are made
available to the public.
Most of our new products fall into an FDA classification
that requires 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
3 Registered trademark of Seikagaku Corporation
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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 U.S.
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 application 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 U.S. have been cleared
or approved by the FDA, with the exception of some devices
which were in commercial distribution prior to May 28, 1976.
The FDA has grandfathered these devices, so new FDA
submissions are not required.
Both before and after a product is commercially released,
we have ongoing responsibilities under FDA regulations. The
FDA reviews design and manufacturing practices, labeling and
record keeping, and manufacturers’ required reports of
adverse experiences and other information to identify potential
problems with marketed medical devices. We are also subject
to periodic inspection by the FDA for compliance with the
FDA’s Quality System regulations among other FDA
requirements, such as restrictions on advertising and
promotion. The Quality System regulations govern the
methods used in, and the facilities and controls used for, the
design, manufacture, packaging and servicing of all finished
medical devices intended for human use. If the FDA were to
conclude that we are not in compliance with applicable laws or
regulations, or that any of our medical devices are ineffective
or pose an unreasonable health risk, the FDA could require us
to notify healthcare professionals and others that the devices
present unreasonable risks of substantial harm to the public
health, order a recall, repair, replacement, or refund payment
of such devices, detain or seize adulterated or misbranded
medical devices, or ban such medical devices.
The FDA may also impose operating restrictions, enjoin
and/or restrain certain conduct resulting in violations of
applicable law pertaining to medical devices, and assess civil or
criminal penalties against our officers, employees or us. The
FDA may also recommend prosecution to the U.S. Department
of Justice.
The FDA, in cooperation with U.S. Customs and Border
Protection (CBP), administers controls over the import of
medical devices into the U.S. The CBP imposes its own
regulatory requirements on the import of our products,
including inspection and possible sanctions for noncompliance.
We are also subject to foreign trade controls administered by
certain U.S. government agencies, including the Bureau of
Industry and Security within the Commerce Department and
the Office of Foreign Assets Control within the Treasury
Department.
6
There are also 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
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 U.S.,
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). Our global operations are also subject
to foreign anti-corruption laws, such as the UK Bribery Act,
among others. As part of our global compliance program, we
seek to address anti-corruption 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 and broader musculoskeletal care
industry is highly competitive. In the global markets for
reconstructive implants, trauma and related surgical products,
our major competitors include: the DePuy Synthes Companies
of Johnson & Johnson, Stryker Corporation, Biomet, Inc.,
Smith & Nephew plc, Wright Medical Group, Inc. and Tornier,
Inc.
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In the Americas geographic segment, we and the DePuy
Synthes Companies, Stryker Corporation, Biomet, Inc.,
Smith & Nephew, Inc. (a subsidiary of Smith & Nephew plc)
and Wright Medical Group, Inc. account for a large majority of
the total reconstructive and trauma implant sales.
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. Many hip
implants sold in Europe are products developed specifically for
the European market. We intend to continue to develop and
produce specially tailored products to meet specific European
needs.
In the Asia Pacific market for reconstructive implant and
trauma products, we compete primarily with the DePuy
Synthes Companies, Stryker Corporation, Smith & Nephew plc
and Biomet, Inc., 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
smaller
companies, particularly those that are non-regional, to compete
effectively with the market leaders in the Asia Pacific region.
In the spinal implant category, we compete globally
primarily with the spinal and biologic business of Medtronic,
Inc., the DePuy Synthes Companies, Stryker Corporation,
Biomet Spine (a subsidiary of Biomet, Inc.), NuVasive, Inc. and
Globus Medical, Inc.
environments, make
it difficult
for
In the dental implant category, we compete primarily with
Nobel Biocare Holding AG, Straumann Holding AG, Dentsply
International 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 our products at various sites. Our
significant manufacturing locations include Warsaw, Indiana;
Winterthur, Switzerland; Ponce, Puerto Rico; Dover, Ohio;
Carlsbad, California; Parsippany, New Jersey; Shannon,
Ireland; and Beijing, China. We also strategically outsource
some manufacturing to qualified suppliers who are highly
capable of producing components.
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 improvement efforts in product quality, lead time
reduction and capacity optimization. Our continuous
improvement efforts are driven by Lean and Six Sigma
methodologies. In addition, at certain of our manufacturing
facilities, many of the employees are cross-trained to perform a
broad array of operations.
We generally target operating our manufacturing facilities
at optimal levels of total capacity. We continually evaluate the
potential to in-source and out-source production as part of our
manufacturing strategy to provide value to our stakeholders.
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 and processes; and negotiated cost reductions
from third-party suppliers.
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 4,500 issued patents and
patent applications throughout the world that relate to aspects
of the technology incorporated in many of our products.
EMPLOYEES
As of December 31, 2012, we employed more than 9,300
employees worldwide, including more than 1,000 employees
dedicated to research and development. Approximately 5,000
employees are located within the U.S. and approximately
4,300 employees are located outside of the U.S., primarily
throughout Europe and in Japan. We have approximately 3,800
employees dedicated to manufacturing our products
worldwide. The Warsaw, Indiana production facility employs
approximately 1,500 employees.
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Approximately 150 U.S. 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, AFL-CIO,
CLC for and on behalf of Local 2737-15 covering employees at
the Dover, Ohio facility, which continues in effect until
May 15, 2015.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our executive officers as of February 20, 2013.
Name
David C. Dvorak
James T. Crines
Joseph A. Cucolo
Derek M. Davis
Jeffery A. McCaulley
Bruno A. Melzi
Stephen H.L. Ooi
Jeffrey B. Paulsen
Chad F. Phipps
Age
Position
49
53
53
44
47
65
59
52
41
President and Chief Executive Officer
Executive Vice President, Finance and Chief Financial Officer
President, Americas Sales
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 in May 2007. From
December 2005 to April 2007, he served as Group President,
Global Businesses and Chief Legal Officer. Prior to that, he had
served as Executive Vice President, Corporate Services, Chief
Counsel and Secretary, as well as Chief Compliance Officer,
since October 2003. Mr. Dvorak joined Zimmer in 2001.
Mr. Crines was appointed Executive Vice President, Finance
and Chief Financial Officer in May 2007. From December 2005
to April 2007, he served as Senior Vice President, Finance,
Operations and Corporate Controller and Chief Accounting
Officer. Prior to that, he had served as Senior Vice President,
Finance/Controller and Information Technology since October
2003. Mr. Crines joined Zimmer in 1995.
Mr. Cucolo was appointed President, Americas Sales in
September 2012. He is responsible for sales and management
of the direct and indirect sales channels in the Americas
region, including the United States, Canada and Latin
America. From 1997 until he joined Zimmer as President,
Americas Sales, Mr. Cucolo was sole owner and President of
Zimmer New England, Inc., an independent third-party
distributor of Zimmer products in the northeast region of the
United States. Prior to that, Mr. Cucolo was employed by
Zimmer as a sales representative and territory manager in the
New York area from 1987 to 1997.
Mr. Davis was appointed Vice President, Finance and Corporate
Controller and Chief Accounting Officer 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, he served as Director, Financial
Planning and Accounting. Prior to that, he had served as
Director, Finance, Operations and Logistics since December
2003. Mr. Davis joined Zimmer in 2003.
Mr. McCaulley was appointed President, Zimmer Reconstructive
in November 2008. He has overall responsibility for the Global
Reconstructive Division, including direct responsibility for
Global Brand Management, Product Research and
Development, Quality and Regulatory Affairs, and Medical
Training and Education, as well as Americas Marketing
Management. Prior to joining Zimmer, he served as President
and Chief Executive Officer of the Health Division of Wolters
8
Kluwer from 2005, Vice President and General Manager of the
Diabetes Division of Medtronic, Inc. from 2002, and spent 14
years with GE Healthcare in numerous positions of increasing
responsibility, including President and Chief Executive Officer
of GE Clinical Services from 2000.
Mr. Melzi was appointed Chairman, Europe, Middle East and
Africa in October 2003. He is responsible for the sales,
marketing and distribution of products in the European,
Middle Eastern and African regions. Mr. Melzi joined Zimmer
in 1990. Mr. Melzi has announced his intention to retire from
his current positions as of March 31, 2013. We have entered
into a post-retirement directorship agreement with Mr. Melzi,
whereby he will perform consulting services for us for a three-
year period beginning May 1, 2013.
Mr. Ooi was appointed President, Asia Pacific in December
2005. He is responsible for the sales, marketing and
distribution of products in the Asia Pacific region. Prior to
that, he had served as President, Australasia since September
2003. Mr. Ooi joined Zimmer in 1986.
Mr. Paulsen was appointed Group President, Global Businesses
in December 2009. He has responsibility for Zimmer Spine,
Zimmer Dental, Zimmer Trauma and Zimmer Surgical. Prior to
joining Zimmer, 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. Prior to that, he served as Group President of
TriMas Corporation, a specialty manufacturing company, from
January 2007 to June 2008. Previously, Mr. Paulsen had held a
number of increasingly responsible executive roles at Stryker
Corporation from 1996 to December 2006, including President,
Orthopaedic Reconstructive Division.
Mr. Phipps was appointed Senior Vice President, General
Counsel and Secretary 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 Marketing and
Communications and Public Relations activities. From
December 2005 to May 2007, he served as Associate General
Counsel and Corporate Secretary. Prior to that, he had served
as Associate Counsel and Assistant Secretary since September
2003. Mr. Phipps joined Zimmer in 2003.
Z I M M E R HOL D I NG S , I NC .
AVAILABLE INFORMATION
Our Internet address is www.zimmer.com. We routinely
post important information for investors on our website in the
“Investor Relations” section, which may be accessed from our
homepage at www.zimmer.com or directly at http://
investor.zimmer.com. We use this website as a means of
disclosing material, non-public information and for complying
with our disclosure obligations under Regulation FD.
Accordingly, investors should monitor the Investor Relations
section of our website, in addition to following our press
releases, Securities and Exchange Commission (SEC) filings,
public conference calls, presentations and webcasts. Our goal
is to maintain the Investor Relations website as a portal
through which investors can easily find or navigate to pertinent
information about us, free of charge, including:
(cid:129) 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 Securities Exchange Act of 1934, as
amended (Exchange Act), as soon as reasonably practicable
after we electronically file that material with or furnish it to
the SEC;
(cid:129) announcements of investor conferences and events at which
our executives talk about our products and competitive
strategies. Podcasts and archives of these events are also
available;
(cid:129) press releases on quarterly earnings, product
announcements, legal developments and other material
news that we may post from time to time;
(cid:129) corporate governance information including our Corporate
Governance Guidelines, Code of Business Conduct, Code of
Ethics for Chief Executive Officer and Senior Financial
Officers, information concerning our Board of Directors and
its committees, including the charters of the Audit
Committee, Compensation and Management Development
Committee, Corporate Governance Committee and
Research, Innovation and Technology Committee, and other
governance-related policies;
(cid:129) stockholder services information, including ways to contact
our transfer agent and information on how to sign up for
direct deposit of dividends or enroll in our dividend
reinvestment plan; and
(cid:129) opportunities to sign up for email alerts and RSS feeds to
have information provided in real time.
The information available on our website is not
incorporated by reference in, or a part of, this or any other
report we file with or furnish to the SEC.
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. 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
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
business, financial condition and results of operations. If
any of the risks or uncertainties described below or any
additional risks and uncertainties actually occur, our
business, results of operations and financial condition
could be materially and adversely affected.
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 U.S., 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.
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;
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2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
(cid:129) differentiate our offerings from competitors’ offerings;
(cid:129) achieve positive clinical outcomes for new products;
(cid:129) satisfy the increased demands by healthcare payors,
providers and patients for shorter hospital stays, faster post-
operative recovery and lower-cost procedures;
(cid:129) innovate and develop new materials, product designs and
surgical techniques; and
(cid:129) provide adequate medical education relating to new
products.
In addition, new materials, product designs and surgical
techniques that we develop may not be accepted quickly, in
some or all markets, because of, among other factors:
(cid:129) entrenched patterns of clinical practice;
(cid:129) the need for regulatory clearance; and
(cid:129) uncertainty with respect to third-party reimbursement.
Moreover, innovations generally require a substantial
investment in research and development before we can
determine their commercial viability and we may not have the
financial resources necessary to fund the production. In
addition, even if we are able to successfully develop
enhancements or new generations of our products, these
enhancements or new generations of products may not
produce revenue in excess of the costs of development and
they may be quickly rendered obsolete by changing customer
preferences or the introduction by our competitors of products
embodying new technologies or features.
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 increased
pressure to reduce the prices of our products, which could
have a material adverse effect on our sales and results of
operations.
We have also experienced downward pressure on product
pricing and other effects of healthcare reform in our
international markets. If key participants in government
healthcare systems reduce the reimbursement levels for our
products, our sales and results of operations may be adversely
affected.
10
U.S. healthcare reform legislation includes
provisions that may materially adversely affect our
business and results of operations.
As the 2010 U.S. healthcare law continues to be phased in,
we believe the law will have an impact on various aspects of
our business operations. Imposition of the 2.3 percent medical
device excise tax effective 2013 has forced, and will continue
to force us to identify ways to reduce spending in other areas
to offset the expected earnings impact due to the tax. We do
not expect to be able to pass along the cost of the tax to
hospitals, which continue to face cuts to their Medicare
reimbursement per the healthcare law and the recently
enacted fiscal cliff legislation. Nor do we expect to be able to
offset the cost of the tax through higher sales volumes
resulting from the expansion of health insurance coverage
because of the demographics of the current uninsured
population. The medical device excise tax regulations and
interim guidance issued late 2012 by the U.S. Department of
Treasury did little to lessen the burden of complying with the
excise tax statute. In addition, the law’s Medicare payment
reforms, such as accountable care organizations and bundled
payments, could provide additional incentives for healthcare
providers to reduce spending on our medical device products
and reduce utilization of hospital procedures that use our
products. Accordingly, while it is still too early to fully
understand and predict the ultimate impact of the law on our
business, ongoing implementation of this legislation could have
a material adverse effect on our results of operations and cash
flows.
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.
We are subject to various governmental regulations
relating to the manufacturing, labeling and marketing of
our products, non-compliance with which could
adversely affect our business, financial condition and
results of operations.
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
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2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
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.
Both before and after a product is commercially released,
we have ongoing responsibilities under FDA regulations.
Compliance with the FDA’s requirements, including the
Quality System regulation, recordkeeping regulations, labeling
and promotional requirements and adverse event reporting
regulations, is subject to continual review and is monitored
rigorously through periodic inspections by the FDA, which may
result in observations on Form 483, and in some cases warning
letters, that require corrective action, or other forms of
enforcement. If the FDA were to conclude that we are not in
compliance with applicable laws or regulations, or that any of
our medical devices are ineffective or pose an unreasonable
health risk, the FDA could ban such medical devices, detain or
seize adulterated or misbranded medical devices, order a
recall, repair, replacement, or refund of payment of such
devices, refuse to grant pending premarket approval
applications, refuse to provide certificates to foreign
governments for exports, and/or require us to notify healthcare
professionals and others that the devices present unreasonable
risks of substantial harm to the public health. The FDA may
also impose operating restrictions on a company-wide basis,
enjoin and restrain certain violations of applicable law
pertaining to medical devices and assess civil or criminal
penalties against our officers, employees or us. The FDA may
also recommend prosecution to the U.S. Department of
Justice. Any adverse regulatory action, depending on its
magnitude, may restrict us from effectively marketing and
selling our products.
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 could be harmed.
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 U.S.,
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.
New regulations related to conflict minerals may
adversely affect the sourcing, availability and pricing of
materials used in the manufacture of our products, may
increase our costs, cause our profitability to decline
and harm our reputation.
In August 2012, as mandated by the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010, the SEC
adopted new disclosure regulations for public companies that
manufacture products that contain certain minerals and their
derivatives, namely tin, tantalum, tungsten or gold, known as
conflict minerals, if these minerals are necessary to the
functionality or production of the company’s products. These
regulations require such companies to report annually whether
or not the minerals originate from the Democratic Republic of
Congo (DRC) and adjoining countries and in some cases to
perform extensive due diligence on their supply chains for the
minerals. The implementation of these new requirements
could adversely affect the sourcing, availability and pricing of
conflict minerals used in the manufacture of medical devices,
including our products. In addition, we may incur additional
costs to comply with the disclosure requirements, including
costs related to determining the source of any of the relevant
minerals used in our products. Since our supply chain is
complex, the procedures that we implement may not enable us
to ascertain the origins for these minerals or determine that
these minerals are DRC conflict free, which may harm our
reputation. These new requirements also could have the effect
of limiting the pool of suppliers from which we source these
minerals, and we may be unable to obtain conflict-free
minerals at competitive prices, which could increase our costs
and adversely affect our manufacturing operations and our
profitability.
We conduct a significant amount of our sales
activity outside of the U.S., 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
derived almost 50 percent of our net sales in 2012 from outside
the U.S. We intend to continue to pursue growth opportunities
in sales internationally, including in emerging markets, 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 U.S.;
(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 U.S.;
(cid:129) complex data privacy requirements and labor relations laws;
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(cid:129) extraterritorial effects of U.S. laws such as the Foreign
Corrupt Practices Act;
(cid:129) effects of foreign anti-corruption laws, such as the UK
Bribery 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 may have additional tax liabilities.
We are subject to income taxes in the U.S. and many
foreign jurisdictions. Significant judgment is required in
determining our worldwide provision for income taxes. In the
ordinary course of our business, there are many transactions
and calculations where the ultimate tax determination is
uncertain. We regularly are under audit by tax authorities.
Although we believe our tax estimates are reasonable, the final
determination of tax audits and any related litigation could be
materially different from our historical income tax provisions
and accruals. The results of an audit or litigation could have a
material effect on our financial statements in the period or
periods for which that determination is made.
We earn a significant amount of our operating income
from outside the U.S., and any repatriation of funds
representing earnings of foreign subsidiaries may significantly
impact our effective tax rates. In addition, there have been
proposals to change U.S. tax laws that would significantly
impact how U.S. multinational corporations are taxed on
foreign earnings. Although we cannot predict whether or in
what form this proposed legislation will pass, if enacted it
could have a material adverse impact on our tax expense and
cash flow.
Challenging global economic conditions could
adversely affect our results of operations.
During 2012, growth in the healthcare industry and our
revenue growth were adversely affected by continuing
challenges in the global economy. Although the U.S. economy
is recovering from the worst recession in decades,
unemployment remains high and consumer confidence
remains low, resulting in reduced numbers of insured patients
and the deferral of elective reconstructive procedures. Global
economic conditions, particularly in Europe, our second-
largest operating segment, remain uncertain. We believe that
European austerity measures implemented to address the
ongoing financial crisis contributed to decreased healthcare
utilization and increased pricing pressure for some of our
products. We cannot assure you that challenges in the global
economy will not continue to negatively impact procedure
volumes, average selling prices and reimbursement rates from
third-party payors, any of which could adversely affect our
results of operations. In addition, we have experienced delays
in the collection of receivables from hospitals in certain
countries that have national healthcare systems, including
certain regions in Spain, Italy, Greece and Portugal, which are
12
the countries most directly affected by the Euro zone crisis.
Repayment of these receivables is dependent upon the
financial stability of the economies of those countries.
Continuing high unemployment in the U.S., a worsening of the
European financial crisis or a failure to receive payment of all
or a significant portion of our European receivables could
adversely affect our results of operations.
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 is generated
in Europe and Japan. The U.S. dollar value of our foreign-
generated revenues varies with currency exchange rate
fluctuations. Significant increases in the value of the U.S. 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.
Pending and future product liability claims and
litigation could adversely impact our financial condition
and results of operations and impair our reputation.
Our business exposes us to potential product liability risks
that are inherent in the design, manufacture and marketing of
medical devices. 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. As previously reported, we temporarily suspended
the marketing and distribution of our Durom® Acetabular
Component (Durom Cup) in the U.S. in July 2008.
Subsequently, a number of product liability lawsuits and other
claims have been asserted against us. We have settled some of
these claims and the others are still pending. Additional claims
may be asserted in the future. We are also currently defending
a number of other product liability lawsuits and claims related
to various other products. Any product liability claim brought
against us, with or without merit, can be costly to defend.
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, we have substantial self-insured retention
amounts that we must pay in full before obtaining any
insurance proceeds to satisfy a judgment or settlement.
Furthermore, even if any product liability loss is covered by
our insurance, it is possible that claims against us may exceed
the coverage limits of our insurance policies and we would
have to pay the amount of any settlement or judgment that is
in excess of our policy limits. Product liability claims in excess
of applicable insurance could have a material adverse effect on
our business, financial condition and results of operations.
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We are involved in legal proceedings that may
result in adverse outcomes.
In addition to intellectual property and product liability
claims and lawsuits, we are involved in various commercial
litigation and claims and other legal proceedings that arise
from time to time in the ordinary course of our business.
Although we believe we have substantial defenses in these
matters, litigation and other claims are subject to inherent
uncertainties and management’s view of these matters may
change in the future. Given the uncertain nature of legal
proceedings generally, we are not able in all cases to estimate
the amount or range of loss that could result from an
unfavorable outcome. We could in the future incur judgments
or enter into settlements of claims that could have a material
adverse effect on our results of operations in any particular
period.
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.
management and key personnel from other business issues. If
we were to lose such litigation involving material intellectual
property rights, such loss could result in significant damage
awards and injunctions that could prevent our manufacture
and sale of affected products or require us to pay significant
royalties in order to continue to manufacture or sell affected
products.
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 U.S. 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.
We depend on a limited number of suppliers for
Our long-term success largely depends on our ability to
some key raw materials and outsourced activities.
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 U.S. 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.
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.
Future material impairments in the carrying value
of our intangible assets, including goodwill, would
negatively affect our operating results.
In addition, intellectual property rights may be unavailable
Our assets include intangible assets, primarily goodwill.
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.
Pending and future intellectual property litigation
and infringement claims 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
The goodwill results from our acquisition activity and
represents the excess of the consideration transferred over the
fair value of the net assets acquired. We assess at least
annually whether events or changes in circumstances indicate
that the carrying value of our intangible assets may not be
recoverable. If the operating performance at one or more of
our business units falls significantly below current levels, if
competing or alternative technologies emerge, or if market
conditions or future cash flow estimates for one or more of our
businesses decline, we could be required, under current U.S.
accounting rules, to record a non-cash charge to operating
earnings for the amount of the impairment. Any write-off of a
material portion of our unamortized intangible assets would
negatively affect our results of operations.
We are increasingly dependent on sophisticated
information technology and if we fail to effectively
maintain or protect the integrity of our information
systems and data, our business could be adversely
affected.
We are increasingly dependent on sophisticated
information technology for our products and infrastructure. As
a result of technology initiatives, recently enacted regulations,
changes in our system platforms and integration of new
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2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
business acquisitions, we have been consolidating and
integrating the number of systems we operate and have
upgraded and expanded our information systems capabilities.
Our information systems require an ongoing commitment of
significant resources to maintain, protect, and enhance
existing systems and develop new systems to keep pace with
continuing changes in information technology, evolving
systems and regulatory standards, and the increasing need to
protect patient and customer information. In addition, third
parties may attempt to hack into our products or systems and
may obtain data relating to patients with our products or our
proprietary information. If we fail to maintain or protect our
information systems and data integrity effectively, we could
lose existing customers, have difficulty attracting new
customers, have problems in determining product cost
estimates and establishing appropriate pricing, have difficulty
preventing, detecting, and controlling fraud, have disputes
with customers, physicians, and other healthcare professionals,
have regulatory sanctions or penalties imposed, have increases
in operating expenses, incur expenses or lose revenues as a
result of a data privacy breach, or suffer other adverse
consequences. While we have invested heavily in the
protection of data and information technology, there can be no
assurance that our process of consolidating the number of
systems we operate, upgrading and expanding our information
systems capabilities, protecting and enhancing our systems
and developing new systems to keep pace with continuing
changes in information processing technology will be
successful or that systems issues will not arise in the future.
Any significant breakdown, intrusion, interruption, corruption,
or destruction of these systems could have a material adverse
effect on our business.
We may make additional acquisitions or enter into
strategic alliances that could increase our costs or
liabilities or be disruptive.
We intend to continue to look for additional strategic
acquisitions of other businesses that are complementary to our
businesses and other companies with whom we could form
strategic alliances or enter into other arrangements to develop
or exploit intellectual property rights. These activities involve
risks, including the following:
(cid:129) we may need to divert more management resources to
integration than we planned, which may adversely affect our
ability to pursue other more profitable activities;
(cid:129) the difficulties of integrating acquired businesses may be
increased if we need to integrate geographically separated
organizations, personnel with disparate business
backgrounds and companies with different corporate
cultures;
(cid:129) we may not recognize expected cost savings or the
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.
ITEM 1B. Unresolved Staff Comments
Not Applicable.
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ITEM 2. Properties
We have the following properties:
Location
Use
Warsaw, Indiana
Parsippany, New Jersey
Warsaw, Indiana
Warsaw, Indiana
Carlsbad, California
Minneapolis, Minnesota
Southaven, Mississippi
Dover, Ohio
Research & Development, Manufacturing, Warehousing, Marketing &
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Headquarters & The Zimmer Institute . . . . . . . . . . . . . . . . . . . . . . .
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . .
Offices & Research & Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research & Development, Manufacturing & . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office, Research & Development, Manufacturing, Warehousing & The
Zimmer Institute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Memphis, Tennessee
Offices, Administration, Research & Development . . . . . . . . . . . . . . . . . . . . . .
Austin, Texas
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sydney, Australia
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mississauga, Canada
Offices & Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beijing, China
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . .
Xianning, China
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shanghai, China
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Etupes, France
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Saint Priest, France
Distribution Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eschbach, Germany
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freiburg, Germany
Offices & Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shannon, Ireland
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Milan, Italy
Offices, Service Center & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gotemba, Japan
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tokyo, Japan
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Seoul, Korea
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ponce, Puerto Rico
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Singapore
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Barcelona, Spain
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . .
Winterthur, Switzerland
Münsingen, Switzerland
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Swindon, United Kingdom Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Owned /Leased
Square Feet
Owned
Owned
Leased
Leased
Owned
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Owned
Leased
Owned
Leased
Owned
Leased
Leased
Owned
Leased
Leased
Leased
Owned
Leased
1,400,000
117,000
90,000
125,000
51,000
189,000
140,000
61,000
135,000
30,000
70,000
33,000
52,000
88,000
53,000
45,000
90,000
13,000
94,000
75,000
125,000
55,000
87,000
20,000
33,000
225,000
19,000
27,000
394,000
76,000
10,000
We believe the current facilities, including manufacturing, warehousing, research and development and office space, provide
sufficient capacity to meet 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 U.S., 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 in which we are involved can be found in Note 19 to our consolidated financial
statements (see Part II, Item 8 of this report).
ITEM 4. Mine Safety Disclosures
Not Applicable.
15
Z I M M E R HOL D I NG S , I NC .
PART II
2 0 1 2 F O R M 1 0 - K AN 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 and the dividends declared for the calendar quarters
of fiscal years 2012 and 2011 are set forth as follows:
Quarterly High-Low Share Prices and Declared Dividends
Year Ended December 31, 2012:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2011:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Declared
Dividends
$64.81
$66.41
$67.90
$69.09
$52.70
$58.23
$57.46
$61.97
$65.22
$69.93
$66.03
$55.43
$52.15
$59.49
$49.92
$47.00
$
–
$0.18
$0.18
$0.18
–
$
–
$
$
–
$0.18
We expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the
Board of Directors and may be adjusted as business needs or market conditions change.
The number of holders of our common stock on February 15, 2013 was approximately 237,000. On February 15, 2013, the
closing price of the common stock, as reported on the New York Stock Exchange, was $75.90 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, 2012:
October 2012
November 2012
December 2012
Total
Total Number of
Shares Purchased
Average Price
Paid per Share
–
1,108,700
1,000,000
2,108,700
$
–
64.93
67.77
$66.28
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)
Approximate Dollar Value of
Shares that May Yet Be
Purchased Under Plans or
Programs (1)
–
1,108,700
1,000,000
2,108,700
$1,154,341,726
1,082,354,658
1,014,582,321
$1,014,582,321
(1) Includes repurchases made under the current program authorizing $1.5 billion of repurchases through December 31, 2014.
16
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
ITEM 6. Selected Financial Data
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
Dividends declared per share of common stock
Average common shares outstanding
Basic
Diluted
Balance Sheet Data
Total assets
Long-term debt
Other long-term obligations
Stockholders’ equity
2012
2011
2010
2009
2008
$4,471.7
755.0
$4,451.8
760.8
$4,220.2
596.9
$4,095.4
717.4
$4,121.1
848.6
$
$
4.32
4.29
0.54
$
$
4.05
4.03
0.18
$
$
2.98
2.97
–
$
$
3.34
3.32
–
$
$
3.73
3.72
–
174.9
176.0
187.6
188.7
200.0
201.1
215.0
215.8
227.3
228.3
$9,012.4
1,720.8
559.3
5,866.3
$8,515.3
1,576.0
557.4
5,514.8
$7,999.9
1,142.1
384.0
5,771.3
$7,785.5
1,127.6
328.5
5,638.7
$7,239.0
460.1
353.9
5,653.9
17
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN 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.
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 2011 and 2010
consolidated financial statements have been reclassified to
conform to the 2012 presentation.
EXECUTIVE LEVEL OVERVIEW
2012 Results
Our 2012 results reflect what we believe was above
market sales growth in our Europe and Asia Pacific reporting
segments and below market growth in our Americas reporting
segment in the musculoskeletal markets in which we compete.
As a result, 2012 net sales were flat when compared to 2011.
We believe 2012 net sales reflected strong commercial
execution in the Europe and Asia Pacific reporting segments
and under-performance in some areas of the Americas
reporting segment. We are focusing on improving those areas.
During 2012, we made substantial investments in a series
of operational excellence initiatives. We began implementing
these initiatives on a company-wide basis in 2010. They are
intended to improve our future operating results and include
centralizing or outsourcing certain functions, improving
quality, distribution, sourcing, manufacturing and our
information technology systems. We began realizing savings
from these operational initiatives in 2012 as indicated in the 80
basis point decline in our selling, general and administrative
(SG&A) expense as a percent of sales. Additionally, research
and development (R&D) spending was lower in 2012 as we
completed certain significant projects and realized some
operational savings from these initiatives.
We also recognized unanticipated expenses in 2012 for
goodwill impairment related to our U.S. Spine operations and
“Certain claims”. However, this was partially offset by a
favorable effective tax rate. We recorded a $34.3 million net
tax benefit related to restructuring of certain international
operations that resulted in the lower tax rate.
In total, our 2012 net earnings were slightly lower than
2011 primarily due to the significant investments in our
operational excellence initiatives and were lower than we
expected primarily due to the goodwill impairment.
2013 Outlook
We estimate our net sales will grow between 2 and 4
percent in 2013. This assumes the market for knee and hip
procedures will remain stable and grow in low single digits. We
expect pricing to have a negative effect on sales growth of
approximately 2 percent, and foreign currency exchange rates
18
to have a negative effect on sales growth of approximately 0.5
percent based upon December 31, 2012 rates.
Assuming currency rates remain at December 31, 2012
levels, we expect our gross margin to be between 74.5 and
75.5 percent of sales in 2013. This range assumes that foreign
currency hedge losses will be lower in 2013 than in 2012. The
range also takes into consideration the impact of the new 2.3
percent excise tax on a majority of our U.S. sales resulting
from U.S. healthcare reform. Pursuant to the tax regulations,
the excise tax is imposed on the first sale in the U.S. by the
manufacturer, producer or importer of a medical device to
either a third party or an affiliated distribution entity. We
distribute a majority of our musculoskeletal products through
an affiliated distribution entity. Under U.S. GAAP, excise taxes
incurred to get inventory to its current location can be
included in the cost of the inventory. Accordingly, a majority
of the excise tax will be capitalized in inventory and the
expense will be deferred until that inventory is sold on a first-
in-first-out basis. Therefore, while we started paying the tax in
January 2013, it will not significantly increase our cost of
products sold expense in our consolidated statement of
earnings until later in the year. Once our cost of products sold
starts reflecting this excise tax, we estimate the cost to be $10
to $15 million on a quarterly basis. The range of 74.5 to 75.5
percent does not take into consideration inventory step-up or
other inventory charges related to acquisitions or operational
excellence initiatives in 2013.
We do not expect to be able to offset the full impact of the
excise tax on net earnings through higher pricing on our
products or through higher sales volumes resulting from the
expansion of health insurance coverage. However, we do
expect to offset the tax with cost savings from our operational
excellence initiatives.
We expect to continue making investments in R&D of
approximately 5 percent of sales in 2013. SG&A as a percent
of sales is expected to be between 39.5 and 40.0 percent in
2013 as we realize efficiencies from our operational excellence
initiatives and further leverage revenue growth.
We expect to incur $120 to $130 million of expenses in
2013 related to our operational excellence initiatives. These
programs are targeted at streamlining the organization and
business processes. They are expected to be mostly completed
in 2013. We also expect to incur $5 to $15 million for certain
acquisition and integration costs connected with recent
acquisitions. We expect to recognize the majority of these
expenses in “Special items” on our statement of earnings, but
some will be related to inventory and be reflected in costs of
products sold. The gross margin and SG&A percentages
discussed above do not include these expenses.
Assuming variable interest rates remain at December 31,
2012 levels, we expect interest income and expense, net, to be
approximately $60 million in 2013, which is similar to 2012.
Z I M M E R HOL D I NG S , I NC .
RESULTS OF OPERATIONS
Net Sales by Reportable Segment
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
The following tables present net sales by reportable segment and the components of the percentage changes (dollars in
millions):
Americas
Europe
Asia Pacific
Total
Americas
Europe
Asia Pacific
Total
Year Ended December 31,
2012
2011
% Inc/(Dec)
Volume/
Mix
Price
Foreign
Exchange
$2,476.3
$2,440.8
1,177.4
1,214.5
818.0
796.5
$4,471.7
$4,451.8
Year Ended December 31,
2011
2010
$2,440.8
$2,431.6
1,214.5
1,099.5
796.5
689.1
$4,451.8
$4,220.2
1%
(3)
3
–
% Inc
-%
10
16
5
4% (2)% (1)%
4
5
4
(1)
(2)
(2)
(6)
–
(2)
Volume/
Mix
Price
Foreign
Exchange
2% (2)%
–%
5
7
4
–
(1)
(1)
5
10
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 tables present net sales by product category and the components of the percentage changes (dollars in millions):
Year Ended December 31,
2012
2011
% Inc (Dec)
Volume/
Mix
Price
Foreign
Exchange
Reconstructive
Knees
Hips
Extremities
Total
Dental
Trauma
Spine
Surgical and other
Total
Reconstructive
Knees
Hips
Extremities
Total
Dental
Trauma
Spine
Surgical and other
Total
$1,814.8
1,342.0
173.8
$1,825.1
1,355.6
163.4
3,330.6
3,344.1
237.7
307.9
208.9
386.6
248.1
285.8
225.0
348.8
$4,471.7
$4,451.8
(1)%
(1)
6
–
(4)
8
(7)
11
–
4% (3)% (2)%
4
9
(3)
(1)
(2)
(2)
4
(4)
10
(2)
12
4
(3)
2
(1)
(4)
–
(2)
(1)
(2)
(1)
(1)
(1)
(2)
Year Ended December 31,
2011
2010
% Inc (Dec)
Volume/
Mix
Price
Foreign
Exchange
$1,825.1
1,355.6
163.4
$1,789.9
1,262.3
150.1
3,344.1
3,202.3
248.1
285.8
225.0
348.8
219.0
245.5
234.4
319.0
$4,451.8
$4,220.2
2%
7
9
4
13
16
(4)
9
5
1% (2)% 3%
(2)
6
(1)
8
3
2
3
5
13
(4)
6
4
(2)
7
–
(2)
–
(1)
3
1
3
2
3
2
19
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
The following table presents net sales by product category by region (dollars in millions):
2012
2011
2010
2012 vs. 2011
% Inc (Dec)
2011 vs. 2010
% Inc (Dec)
$1,058.9
447.3
308.6
$1,067.5
462.6
295.0
$1,110.5
418.7
260.7
606.7
446.0
289.3
133.8
29.0
11.0
600.7
470.5
284.4
125.0
27.5
10.9
589.7
433.2
239.4
115.9
24.4
9.8
3,330.6
3,344.1
3,202.3
137.8
79.8
20.1
155.2
69.5
83.2
140.0
49.3
19.6
243.9
56.5
86.2
134.7
85.3
28.1
145.5
63.5
76.8
150.9
53.5
20.6
216.5
51.6
80.7
113.9
80.0
25.1
130.1
50.2
65.2
166.5
51.5
16.4
205.0
41.5
72.5
$4,471.7
$4,451.8
$4,220.2
(1)%
(3)
5
1
(5)
2
7
6
1
–
2
(6)
(29)
7
10
8
(7)
(8)
(5)
13
10
7
–
(4)%
10
13
2
9
19
8
13
12
4
18
7
12
12
26
18
(9)
4
25
6
24
11
5
Year Ended December 31,
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
Surgical and other
Americas
Europe
Asia Pacific
Total
20
Z I M M E R HOL D I NG S , I NC .
Demand (Volume and Mix) Trends
Increased volume and changes in the mix of product sales
contributed 4 percentage points of 2012 sales growth, which is
the same rate of growth from 2011 compared to 2010.
Consistent with our expectations, procedure volumes in
the broader musculoskeletal market remained stable in 2012
relative to 2011 at low to mid-single digit growth rates. We
believe long-term indicators point toward sustained growth
driven by an aging global population, growth in emerging
markets, 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 and the introduction of patient
specific devices is expected to continue to positively affect
sales growth.
Pricing Trends
Global average selling prices declined by 2 percent in 2012
compared to 2011. In all reporting segments, we continued to
see pricing pressure from governmental healthcare cost
containment efforts and from local hospitals and health
systems. For example, in Japan a biennial price adjustment
went into effect in April 2012 which lowered pricing. The
Japan downward price adjustment was greater than we had
anticipated coming into the year. For 2013, we estimate that
selling prices will have a negative effect of approximately 2
percent.
Foreign Currency Exchange Rates
For 2012, foreign currency exchange rates resulted in a 2
percent decline in sales. This was most notable in Europe due
to the strengthening of the U.S. Dollar versus the Euro year-
over-year. If foreign currency exchange rates remain
consistent with 2012 year end rates, we estimate that a
stronger U.S. Dollar versus foreign currency exchange rates
will have a negative effect in 2013 of approximately 0.5 percent
on sales. We address currency risk through regular operating
and financing activities and through the use of forward
contracts and options solely to manage foreign currency
volatility and risk. Changes to foreign currency exchange rates
affect sales growth, but due to 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.
Knees
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
We estimate that industry procedure volumes were
slightly positive on a global basis in 2012, while pricing was
negative. We also believe our Europe and Asia Pacific
reporting segments grew above the market, but in the
Americas we were lower than the market due to
underperformance in some areas. We are cautiously optimistic
that volume/mix trends will continue to remain stable in 2013.
The NexGen Complete Knee Solution product line,
including Gender Solutions® Knee Femoral Implants, the
NexGen LPS-Flex Knee and the NexGen CR-Flex Knee, led
knee sales in 2012. In addition, sales of our knee revision
systems, the Zimmer Unicompartmental High Flex Knee and
Zimmer Patient Specific Instruments exhibited growth.
Hips
Hip sales declined by 1 percent in 2012 compared to an
increase of 7 percent in 2011. A significant portion of that
change was caused by the impact of fluctuations in foreign
currency exchange rates. In Europe, changes in foreign
currency exchange rates affected hip sales in 2012 and 2011 by
negative 6 percent and positive 6 percent, respectively. In Asia
Pacific, changes in foreign currency exchange rates positively
affected hip sales in 2012 and 2011 by 1 percent and 10
percent, respectively.
Also, we experienced some specific positive growth
drivers in 2011, such as new product introductions and
product specific issues at competitors. Without these factors in
2012, our results were more reflective of market growth. We
estimate that industry procedure volumes were slightly
positive on a global basis in 2012, while pricing was negative.
Sales in 2012 were driven primarily by the Zimmer M/L
Taper Hip Prosthesis and the Zimmer M/L Taper Hip
Prosthesis with Kinectiv Technology, Fitmore Hip Stems, and
our Continuum Acetabular System, Trilogy IT Acetabular
System and Allofit IT Alloclassic Acetabular System. Other
leading products in our hips portfolio were the CLS Spotorno
Stem from the CLS Hip System and the Alloclassic
Zweymüller Hip Stem. We also commercialized our
Vivacit-E® Highly Crosslinked Polyethylene Liners in 2012
and expect this to drive sales growth in 2013.
Extremities
Extremities delivered solid sales growth the past two
years. The Zimmer Trabecular Metal Reverse Shoulder
System led extremities sales. Reverse shoulder procedures
continue to gain popularity as a solution for patients with
rotator cuff damage.
Knee sales experienced a 1 percent decline in 2012
compared to a 2 percent increase in 2011. However, most of
that change was caused by the impact of fluctuations in foreign
currency exchange rates. In Europe, changes in foreign
currency exchange rates affected knee sales in 2012 and 2011
by negative 6 percent and positive 4 percent, respectively. In
Asia Pacific, changes in foreign currency exchange rates had a
minimal effect on knee sales in 2012 and had a positive 9
percent effect in 2011.
Dental
Dental sales declined by 4 percent in 2012 compared to an
increase of 13 percent in 2011. While the Americas sales
increased in 2012, the overall performance of our dental
franchise was impacted by several factors, including softening
in certain international markets and lower inventory levels
maintained by our stocking distributors. Also, Americas sales
growth was aided by the acquisition of a small Brazilian dental
21
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
company. Sales were led by the Tapered Screw-Vent Implant
System. In addition, sales of our recently released Zimmer
Trabecular Metal Dental Implant positively affected sales.
2011 sales were buoyed by a change in a distribution
arrangement under which we started capturing end-user sales
as compared to the prior agreement where we only received a
commission on end-user sales.
Trauma
Trauma sales increased by 8 percent and 16 percent in
2012 and 2011, respectively, compared to the same prior year
periods. In 2011, we continued the launch of the Zimmer
Natural Nail System, which contributed significantly to our
trauma sales in 2011 and 2012. In addition to the Zimmer
Natural Nail System, the Zimmer Periarticular Locking
Plates System led trauma sales, while sales of the Zimmer
Universal Locking System also made a strong contribution in
2012.
Spine
We experienced mid-single digit sales declines in Spine
each of the past two years. This product category continues to
face challenges related to utilization, pricing pressure and
payor approvals. Overall, solid sales of the PathFinder NXT
and Sequoia Pedicle Screw Systems, our Universal ClampTM
Spinal Fixation System and Trabecular Metal Technology
products partly offset a decline in sales of the Dynesys System
and other products.
Surgical and other
Surgical and other delivered solid sales growth the past
two years. Surgical and other sales were led by PALACOS
Bone Cement and tourniquet products. Our wound
debridement products, powered instruments, DeNovo NT
Natural Tissue Graft, Chondrofix Osteochondral Allograft and
Gel-One Cross-linked Hyaluronate also made a positive
contribution to sales results. Additionally, our January 2012
acquisition of Synvasive Technology, Inc. and October 2012
acquisition of Dornoch Medical Systems, Inc. provided growth
in this product category.
The following table presents estimated* 2012 global
market size and market share information (dollars in billions):
Reconstructive
Knees
Hips
Extremities
Total
Dental
Trauma
Spine***
Global
Market
Size
$ 7.3
6.4
1.4
$15.1
$ 3.3
$ 5.5
$ 8.9
Global Market
% Growth**
Zimmer
Market
Share
Zimmer
Market
Position
3%
1
9
3
(1)
2
–
25%
21
12
22
7
6
2
1
2
3
1
5
4
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
22
Expenses as a Percent of Net Sales
Year Ended December 31,
2012
2011
2010
2012 vs. 2011
Inc (Dec)
2011 vs. 2010
Inc (Dec)
Cost of products sold
Research and
development
Selling, general and
administrative
Certain claims
Goodwill impairment
Special items
Operating margin
25.2% 25.2% 24.0%
–
5.0
5.4
5.2
40.4
0.3
2.1
3.5
23.4
41.2
3.5
–
1.7
23.0
41.6
1.8
4.8
0.8
21.7
(0.4)
(0.8)
(3.2)
2.1
1.8
0.4
1.2
0.2
(0.4)
1.7
(4.8)
0.9
1.3
Cost of Products Sold
Gross margin was the same in 2012 compared to 2011.
Our foreign currency hedging program had a favorable impact
to gross margin in 2012. Under the 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. Due to
the strengthening of the U.S. Dollar in 2012, foreign currency
hedge losses in costs of products sold were less in 2012 than
they were in 2011. Additionally, lower inventory step-up
charges from acquisitions were recognized in 2012 when
compared to 2011 based on the timing of acquisitions. This
favorability was offset by the effect of lower prices on gross
margin.
Gross margin declined in 2011 from 2010. The most
significant impact on gross margin in 2011 was from our
foreign currency hedging program. Due to the weakening of
the U.S. Dollar in 2011, we recognized foreign currency hedge
losses in costs of products sold versus hedge gains in 2010.
Also in 2011, lower selling prices, higher average costs per unit
sold, and higher inventory step-up charges all contributed to
lower gross margins.
The following table reconciles the gross margin changes
for 2012 and 2011:
Year Ended December 31,
Prior year gross margin
Lower average selling prices
Average cost per unit
Excess and obsolete inventory
Foreign currency exchange impact, net
Inventory step-up
Other
Current year gross margin
Operating Expenses
2012
2011
74.8% 76.0%
(0.5) (0.2)
(0.1) (0.2)
(0.1)
–
(1.0)
0.4
(0.2)
0.2
0.4
0.1
74.8% 74.8%
R&D expenses and R&D as a percent of sales decreased in
2012 compared to 2011 after increases in 2011 when compared
to 2010. In 2012, R&D spending benefitted from the effect of
our operational excellence initiatives, as well as a natural
decline related to certain large projects that achieved full
commercialization, including Persona, The Personalized Knee
System, and the Trabecular Metal Total Ankle, among other
products. The increase in 2011 was in line with our strategy to
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2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
invest in new product development activities across nearly all
of our product categories, as well as to increase spending on
external research, clinical, regulatory and quality initiatives.
We expect R&D spending in 2013 to be approximately 5
percent of sales for the year.
In 2012, SG&A decreased in dollars terms and as a percent
of sales. Changes in foreign currency exchange rates due to
the strengthening of the U.S. Dollar relative to 2011 lowered
SG&A expense.
Absent the effects of foreign currency exchange rates,
selling and distribution expenses were higher due to higher
sales. Other unfavorable items included increased intangible
amortization from business combinations, higher employee
recruiting and relocation costs, increased legal costs and
higher bad debt expense. These were offset by favorable
product liability claims, lower instrument excess and
obsolescence charges and lower advertising spend. SG&A as a
percent of sales decreased 80 basis points compared to the
prior year, reflecting disciplined discretionary spending and
the effect of our operational excellence initiatives, which has
lowered expenses such as salaries, wages and benefits.
In 2011, SG&A increased in dollar terms, but decreased as
a percent of sales from 2010. The increase in dollars was
primarily due to variable selling and distribution expenses from
higher sales, increased intangible asset amortization from
acquisitions completed in December 2010 and higher bad debt
expenses primarily from our Europe operating segment. These
were partially offset by lower product liability charges
recorded in SG&A related to the Durom Cup. For more
information regarding Durom Cup claims, see Note 19 to the
consolidated financial statements. SG&A as a percent of sales
in 2011 decreased by 40 basis points from 2010 reflecting
disciplined spending and the effect of our operational
excellence initiatives.
“Certain claims” expense is a provision for estimated
liabilities to Durom Cup patients undergoing revision
surgeries. Provisions of $157.8 million, $75.0 million, $35.0
million and $69.0 million were originally recorded during 2011,
2010, 2009 and 2008, respectively, with an additional $15.0
million recorded during 2012, bringing the total provision to
$351.8 million for these claims, excluding a subset of Durom
Cup claims that were recorded in SG&A. The additional
expense in 2012 was primarily for more estimated claims
outside the U.S. than were previously expected, as well as
higher estimated legal costs. For more information regarding
these claims, see Note 19 to the consolidated financial
statements.
In connection with our annual goodwill impairment tests
performed in the fourth quarters of 2012 and 2010, we noted
that the carrying values of the net assets of our U.S. Spine
reporting unit were in excess of the reporting unit’s estimated
fair value. As a result, we recorded goodwill impairment
charges of $96.0 million and $204.0 million in 2012 and 2010,
respectively. For more information regarding goodwill
impairment and the factors that led to the impairment, see
Note 9 to the consolidated financial statements.
“Special items” expenses for the years ended
December 31, 2012, 2011 and 2010 were $155.4 million, $75.2
million, and $34.7 million, respectively.
“Special items” in 2012 included significant expenses
incurred for consulting and professional fees and dedicated
project personnel for our operational excellence initiatives.
These initiatives are intended to improve our future operating
results and include centralizing or outsourcing certain
functions, improving quality, distribution, sourcing,
manufacturing and our information technology systems. Other
significant expenses in 2012 were from impairments from
intangible assets acquired in business combinations,
settlement of various legal matters, including royalty disputes,
and severance expenses related to various organizational
changes as well as facility closures.
“Special items” in 2011 resulted from a continued
reduction in management layers and restructuring in certain
areas, resulting in $23.1 million of severance and termination-
related expenses. In 2011, we also incurred $26.0 million in
consulting and professional fees associated with acquisitions
and our operational excellence initiatives. As a result of our
acquisitions and operational excellence initiatives, we also
incurred asset impairments, facility and employee relocation
costs, contract termination expenses and other costs.
“Special items” in 2010 included expenses related to
restructuring of our information technology infrastructure as
well as our management structure. This resulted in $7.7 million
of asset impairment charges and $6.7 million of employee
severance and termination-related expenses. In 2010, we also
incurred consulting and professional fees, facility and
employee relocation costs, contract termination expenses and
other various expenses resulting from acquisitions. “Special
items” also included the impairment of an available-for-sale
security that was acquired as part of a business acquisition and
certain litigation related matters.
See Note 2 to the consolidated financial statements for
more information regarding “Special items” charges.
Interest Income, Interest Expense, Income Taxes and
Net Earnings
Interest expense increased in 2012 compared to 2011
primarily due to the $550 million offering of senior notes we
completed in November 2011. Interest expense decreased in
2011 compared to 2010 as the result of interest rate swap
agreements we entered into in late 2010 and early 2011 to
convert a portion of our fixed-rate debt into variable-rate debt.
Interest income has increased the last two years due to higher
balances of cash and cash equivalents and short-term and long-
term investments upon which interest income is being earned.
Our effective tax rate (ETR) on earnings before income
taxes for the years ended December 31, 2012, 2011 and 2010
was 24.0 percent, 22.4 percent and 30.6 percent, respectively.
The variation of our ETR has largely been affected by “Certain
claims”, goodwill impairment charges and a $34.3 million
benefit from the recognition of deferred tax assets related to a
23
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
legal entity restructuring. “Certain claims” expense favorably
affects our ETR because it lowers the income within our U.S.
operations relative to our foreign operations. Goodwill
impairment charges negatively affect our ETR because no tax
benefit is recorded on such charges. Additionally, in 2011 and
2010 our ETR was favorably impacted by the resolution of
certain tax contingencies. These discrete items account for the
majority of the variation in our ETRs in the past three years.
Our ETR for 2013 will reflect certain tax benefits resulting
from the enactment in January 2013 of U.S. federal laws
extending the R&D credit and other tax benefits applicable to
us. The extension applies to both 2012 and 2013, and as a
result of the timing of the law’s enactment, the 2012 tax year
benefits must be recognized in the first quarter of 2013 for
financial reporting purposes. As a result, our 2013 financial
results will reflect a reduction to our ETR of approximately 0.3
percent related to the 2012 tax year benefits.
As a result of the revenues and expenses discussed
previously, net earnings in 2012 decreased 1 percent compared
to 2011. In 2011, net earnings increased 27 percent compared
to 2010. Basic and diluted earnings per share increased 7
percent and 6 percent, respectively, in 2012 compared to 2011,
while 2011 basic and diluted earnings per share increased 36
percent from 2010. The disproportionate change in earnings
per share as compared to net earnings is attributed to the
effect of share repurchases.
Non-GAAP operating performance measures
We use non-GAAP financial measures to evaluate our
operating performance that differ from financial measures
determined in accordance with U.S. generally accepted
accounting principles (GAAP). Our non-GAAP financial
measures exclude the impact of inventory step-up and other
inventory charges, “Special items,” “Certain claims,” goodwill
impairment, and the taxes on those items in addition to certain
other tax adjustments. We use this information internally and
believe it is helpful to investors because it allows more
meaningful period-to-period comparisons of our ongoing
operating results, it helps to perform trend analysis and to
better identify operating trends that may otherwise be masked
or distorted by these types of items, and it provides a higher
degree of transparency of certain items. Certain of these non-
GAAP financial measures are used as metrics for our incentive
compensation programs.
Our non-GAAP adjusted net earnings used for internal
management purposes for the years ended December 31, 2012,
2011 and 2010 were $932.5 million, $905.6 million, and $871.6
million, respectively, and our non-GAAP adjusted diluted
earnings per share were $5.30, $4.80, and $4.33, respectively.
The following are reconciliations from our GAAP net
earnings and diluted earnings per share to our non-GAAP
adjusted net earnings and non-GAAP adjusted diluted earnings
per share used for internal management purposes (in millions,
except per share amounts).
Year ended December 31,
2012
2011
2010
Net Earnings of Zimmer Holdings, Inc.
Inventory step-up and other inventory
charges
Certain claims
Goodwill impairment
Special items
Taxes on above items and other certain
$755.0
$760.8
$596.9
4.8
15.0
96.0
155.4
11.4
157.8
–
75.2
1.4
75.0
204.0
34.7
tax adjustments*
(93.7)
(99.6)
(40.4)
Adjusted Net Earnings
$932.5
$905.6
$871.6
* The tax effect is calculated based upon the statutory rates for the
jurisdictions where the items were incurred.
Year ended December 31,
2012
2011
2010
Diluted EPS
Inventory step-up and other inventory
charges
Certain claims
Goodwill impairment
Special items
Taxes on above items and other certain tax
adjustments*
Adjusted Diluted EPS
$ 4.29
$ 4.03
$ 2.97
0.03
0.09
0.54
0.88
0.06
0.84
–
0.40
0.01
0.37
1.01
0.17
(0.53)
(0.53)
(0.20)
$ 5.30
$ 4.80
$ 4.33
* The tax effect is calculated based upon the statutory rates for the
jurisdictions where the items were incurred.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $1,151.9
million in 2012, compared to $1,176.9 million in 2011. The
principal source of cash from operating activities in 2012 was
net earnings. Non-cash charges included in net earnings
accounted for another $454.1 million of operating cash. All
other items of operating cash flows in 2012 were outflows of
$55.1 million of cash. The lower cash flows provided by
operating activities in 2012 were primarily due to increased
investments in inventory to support significant new product
launches and increased product liability payments. We paid
approximately $90 million, $60 million and $45 million in 2012,
2011 and 2010, respectively, related to Durom Cup product
liability claims. We estimate the net remaining liability after
insurance recovery for Durom Cup claims as of December 31,
2012, is $162.8 million. We expect to pay the majority of this
amount over the next five years.
24
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
At December 31, 2012, we had 64 days of sales
outstanding in trade accounts receivable, which was the same
as December 31, 2011. At December 31, 2012, we had 301 days
of inventory on hand, an increase of 24 days compared to
December 31, 2011. Days of inventory on hand have increased
due to significant new product launches.
Cash flows used in investing activities were $592.1 million
in 2012, compared to $624.4 million in 2011. Additions to
instruments and additions to other property, plant and
equipment did not change significantly year-over-year. In 2013,
instrument additions are expected to be in a range of $125 to
$145 million and property, plant and equipment additions are
expected to be in a range of $115 to $135 million. We feel this
level of capital spending is necessary to support new product-
related investments and replacement of older machinery and
equipment. We invest some of our cash and cash equivalents in
highly-rated debt securities. The purchases and any sales or
maturities of these investments are reflected as cash flows
from investing activities. The timing of these investments can
vary from year to year depending on the maturity of the debt
securities and other cash and cash equivalent needs. Acquired
intellectual property rights 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 prior contractual arrangements. In the past
three years, we have made various business acquisitions
including Dornoch Medical Systems, Inc., Synvasive
Technology, Inc., ExtraOrtho, Inc., Beijing Montagne Medical
Device Co., Ltd., Sodem Diffusion S.A. and certain foreign-
based distributors.
Cash flows used in financing activities were $436.5 million
for 2012, compared to $455.8 million in 2011. In 2012, we
returned cash to our stockholders in the form of cash
dividends of $94.4 million and share repurchases of $485.6
million. In 2012 as it relates to our senior credit facility, we
converted some of the outstanding debt to a term loan and we
borrowed $100.0 million to repurchase shares as well as fund
other corporate cash needs. We plan to repay that $100.0
million in the first quarter of 2013. In 2011, we issued senior
unsecured notes in public offerings and used some of the
proceeds to repurchase shares.
In 2012, we paid cash dividends quarterly, starting in
April, at an annualized rate of $0.72 per share. We expect to
continue paying cash dividends on a quarterly basis; however,
future dividends are subject to approval of the Board of
Directors and may be adjusted as business needs or market
conditions change. In December 2012, our Board of Directors
declared a cash dividend of $0.18 per share that was paid in
January 2013.
We have four tranches of senior notes outstanding: $250
million aggregate principal amount of 1.4 percent notes due
November 30, 2014, $500 million aggregate principal amount of
4.625 percent notes due November 30, 2019, $300 million
aggregate principal amount of 3.375 percent notes due
November 30, 2021 and $500 million aggregate principal
amount of 5.75 percent notes due November 30, 2039. Interest
on each series is payable on May 30 and November 30 of each
year until maturity.
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 15 basis points
in the case of the 2014 notes, 20 basis points in the case of the
2019 and 2021 notes, and 25 basis points in the case of the
2039 notes. We would also pay the accrued and unpaid interest
on the senior notes to the redemption date.
In May 2012, we entered into a new five-year $1,350
million revolving, multi-currency, Senior Credit Facility
maturing May 9, 2017. The Senior Credit Facility replaced a
previous credit facility with similar terms that was due to
mature on November 30, 2012. As of December 31, 2012, we
had $100.0 million outstanding under the Senior Credit Facility
and an availability of $1,250.0 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 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 or
transfers of assets. Financial covenants include a maximum
leverage ratio of 3.0 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, 2012.
Commitments under the Senior Credit Facility are subject to
certain fees, including a facility and a utilization fee.
Borrowings under the Senior Credit Facility at December 31,
2012 are U.S. Dollar-based.
Borrowings of 11.7 billion Japanese Yen outstanding under
the previous credit facility were converted to the Senior Credit
Facility. On May 24, 2012, we refinanced these borrowings by
entering into a separate Term Loan agreement with one of the
lenders under the Senior Credit Facility for 11.7 billion
Japanese Yen and we repaid the outstanding borrowings under
the Senior Credit Facility.
The Term Loan will mature on May 31, 2016. Borrowings
under the Term Loan bear interest at a fixed rate of 0.61
percent per annum until maturity.
We also have available uncommitted credit facilities
totaling $79.1 million.
We place our cash and cash equivalents in highly-rated
financial institutions and limit the amount of credit exposure to
any one entity. We invest only in high-quality financial
instruments in accordance with our internal investment policy.
25
Z I M M E R HOL D I NG S , I NC .
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As of December 31, 2012, we had short-term and long-
term investments in debt securities with a fair value of $915.7
million. These investments are in debt securities of many
different issuers and therefore we have no significant
concentration of risk with a single issuer. All of these debt
securities remain highly-rated and we believe the risk of
default by the issuers is low.
As of December 31, 2012, $1,063.1 million of our cash and
cash equivalents and short-term and long-term investments are
held in jurisdictions outside of the U.S. and are expected to be
indefinitely reinvested for continued use in foreign operations.
Repatriation of these assets to the U.S. may have tax
consequences. $829.8 million of this amount is denominated in
U.S. Dollars and therefore bears no foreign currency
translation risk. The balance of these assets is denominated in
currencies of the various countries where we operate.
We may use excess cash to repurchase common stock
under our share repurchase program. As of December 31,
2012, $1,014.6 million remained authorized under a $1.5 billion
repurchase program, which will expire on December 31, 2014.
Management believes that cash flows from operations and
available borrowings under the Senior Credit Facility are
sufficient to meet our working capital, capital expenditure and
debt service needs, as well as return cash to stockholders in
the form of dividends and share repurchases. 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 that will require future
payments. The following table illustrates our contractual
obligations (in millions):
Contractual Obligations
Total
2013
2014
and
2015
2016
and
2017
2018
and
Thereafter
Long-term debt
$1,688.6
$
–
$250.0
$138.6
$1,300.0
Interest payments
1,045.4
Operating leases
192.0
67.7
45.9
132.0
126.4
59.5
39.5
719.3
47.1
Purchase
obligations
Other long-term
liabilities
Total contractual
obligations
12.0
12.0
–
–
–
295.7
–
148.1
106.7
40.9
$3,233.7
$125.6
$589.6
$411.2
$2,107.3
$48.1 million of the other long-term liabilities on our
balance sheet as of December 31, 2012, are liabilities related to
defined benefit pension plans. Defined benefit plan liabilities
are based upon the underfunded status of the respective plans;
they are not based upon future contributions. Due to
uncertainties regarding future plan asset performance,
changes in interest rates and our intentions with respect to
voluntary contributions, we are unable to reasonably estimate
future contributions beyond 2013. Therefore, this table does
not include any amounts related to future contributions to our
26
plans. See Note 14 to our consolidated financial statements for
further information on our defined benefit plans.
Also included in other long-term liabilities on our balance
sheet are liabilities related to unrecognized tax benefits and
corresponding interest and penalties thereon. Due to the
uncertainties inherent in these liabilities, such as the ultimate
timing and resolution of tax audits, we are unable to
reasonably estimate the amount or period in which potential
tax payments related to these positions will be made.
Therefore, this table does not include any obligations related
to unrecognized tax benefits. See Note 15 to our consolidated
financial statements for further information on these
unrecognized tax benefits.
We have entered into various agreements that may result
in future payments dependent upon various events such as the
achievement of certain product R&D milestones, sales
milestones, or at our discretion to maintain exclusive rights to
distribute a product. Since there is uncertainty on the timing
or whether such payments will have to be made, we have not
included them in this table. These payments could range from
$0 to $54 million.
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.
Accordingly, inventory and instruments are written down to
their net realizable value. To determine the appropriate net
realizable value, 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-process inventory, which is recorded at cost. Obsolete
or discontinued items are generally destroyed and completely
written off. Management evaluates the need for changes to
inventory and instruments net realizable values 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 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
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
benefits. We evaluate deferred tax assets on an ongoing basis
and provide valuation allowances unless we determine it is
“more likely than not” that the deferred tax benefit will 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
over time are statistically analyzed to arrive at factors which
are then applied to loss estimates in the actuarial model.
In addition to our general product liability, we have
recorded provisions totaling $403.2 million related to the
Durom Cup, including $15.0 million in 2012. See Note 19 to
our consolidated financial statements for further discussion of
the Durom Cup.
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 2012, 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
guideline public company methodology, which uses valuation
indicators determined from other businesses that are similar to
our U.S. Spine reporting unit.
As a result, we recorded a goodwill impairment charge for
the U.S. Spine reporting unit of $96.0 million in 2012. In 2010,
we also recorded an impairment charge related to this
reporting unit of $204.0 million. See Note 8 to our consolidated
financial statements for further discussion and the factors that
contributed to these impairment charges and the factors that
could lead to further impairment.
We have six other reporting units with goodwill assigned
to them. We estimated 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, or by doing a
qualitative assessment of changes in fair value from the prior
year’s income approach. For each of those six reporting units,
the estimated fair value substantially exceeded the 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 actively
traded options on our stock. 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
See Note 2 to our consolidated financial statements to see
how recent accounting pronouncements have affected or may
affect our financial position, results of operations or cash flows.
27
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
We are exposed to certain market risks as part of our
ongoing business operations, including risks from changes in
foreign currency exchange rates, interest rates and commodity
prices that could affect our financial condition, results of
operations and cash flows. We manage our exposure to these
and other market risks through regular operating and
financing activities and through the use of derivative financial
instruments. We use derivative financial instruments solely as
risk management tools and not for speculative investment
purposes.
FOREIGN CURRENCY EXCHANGE RISK
We operate on a global basis and are exposed to the risk
that our financial condition, results of operations and cash
flows could be adversely affected by changes in foreign
currency exchange rates. We are primarily exposed to foreign
currency exchange rate risk with respect to transactions and
net assets denominated in Euros, Swiss Francs, Japanese Yen,
British Pounds, Canadian Dollars, Australian Dollars, Korean
Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan
Dollars, South African Rand, Russian Rubles and Indian
Rupees. 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, 2012, we had
obligations to purchase U.S. Dollars and sell Euros, Japanese
Yen, British Pounds, Canadian Dollars, Australian Dollars,
Korean Won, Swedish Krona, Czech Koruna, Thai Baht,
Taiwan Dollars, South African Rand, Russian Rubles and
Indian Rupees and purchase Swiss Francs and sell U.S. Dollars
at set maturity dates ranging from January 2013 through June
2015. The notional amounts of outstanding forward contracts
entered into with third parties to purchase U.S. Dollars at
December 31, 2012 were $1,548.8 million. The notional
amounts of outstanding forward contracts entered into with
third parties to purchase Swiss Francs at December 31, 2012
were $303.9 million. The weighted average contract rates
outstanding at December 31, 2012 were Euro:USD 1.33, Swiss
28
Franc:USD 1.08, USD:Japanese Yen 78.27, British Pound:USD
1.58, USD:Canadian Dollar 1.01, Australian Dollar:USD 0.96,
USD:Korean Won 1,169, USD:Swedish Krona 6.85, USD:Czech
Koruna 18.66, USD:Thai Baht 32.09, USD:Taiwan Dollar 29.01,
USD:South African Rand 8.72, USD:Russian Ruble 33.42 and
USD:Indian Ruppee 54.58.
We maintain written policies and procedures governing
our risk management activities. Our policy requires that
critical terms of hedging instruments be 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, 2012 indicated that, if the U.S. Dollar uniformly
changed in value by 10 percent relative to the various
currencies, with no change in the interest differentials, the fair
value of those contracts would increase or decrease earnings
before income taxes in periods through June 2016, depending
on the direction of the change, by the following average
approximate amounts (in millions):
Currency
Euro
Swiss Franc
Japanese Yen
British Pound
Canadian Dollar
Australian Dollar
Korean Won
Swedish Krona
Czech Koruna
Thai Baht
Taiwan Dollars
South African Rand
Russian Rubles
Indian Rupees
Average
Amount
$68.2
30.0
35.1
14.5
11.4
12.5
3.2
3.0
0.6
1.2
2.1
0.7
2.1
1.0
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.
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
We had net investment exposures to net foreign currency
denominated assets and liabilities of $2,494.5 million at
December 31, 2012, primarily in Euros and Japanese Yen.
$1,320.9 million of the net asset exposure at December 31,
2012 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 monetary 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 material
effect on our consolidated financial position, results of
operations or cash flows.
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.
We invest our cash and cash equivalents primarily in
highly-rated corporate commercial paper and bank deposits.
We also have short-term and long-term investments in highly-
rated corporate debt securities, U.S. government and agency
debt securities, U.S. government treasury funds, municipal
bonds, foreign government debt securities, commercial paper
and certificates of deposit. The primary investment objective is
to ensure capital preservation of our invested principal funds.
Currently, we do not use derivative financial instruments in
our investment portfolio.
We are exposed to interest rate risk on our debt
obligations and our cash and cash equivalents. Presently, all of
our debt outstanding under the Senior Credit Facility bears
interest at short-term variable rates.
In 2010, we entered into interest rate swap agreements
with a consolidated notional amount of $250 million that hedge
a portion of our $500 million 4.625 percent Senior Notes due
November 30, 2019. On the interest rate swap agreements
outstanding as of December 31, 2012, we receive a fixed
interest rate of 4.625 percent and we pay variable interest
equal to the three-month LIBOR plus an average of 133 basis
points.
The interest rate swap agreements are to manage our
exposure to interest rate movements by converting fixed-rate
debt into variable-rate debt. The objective of the instruments is
to more closely align interest expense with interest income
received on cash and cash equivalents.
These derivative instruments are designated as fair value
hedges under U.S. GAAP. Changes in the fair value of the
derivative instrument are recorded in earnings and are offset
by gains or losses on the underlying debt instrument.
Based upon our overall interest rate exposure as of
December 31, 2012, a change of 10 percent in interest rates,
assuming the amount outstanding remains constant, would not
have a material effect on net interest expense. 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 and cash
equivalents, short-term and long-term investments, derivative
instruments, counterparty transactions and accounts
receivable.
We place our investments in highly-rated financial
institutions or highly-rated debt securities 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
or counterparties issuing the debt security 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.
Our concentrations of credit risks 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. Substantially 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.
Our ability to collect accounts receivable in some
countries depends in part upon the financial stability of these
hospital and healthcare sectors and the respective countries’
national economic and healthcare systems. Most notably, in
Europe healthcare is typically sponsored by the government.
Since we sell products to public hospitals in those countries,
we are indirectly exposed to government budget constraints.
29
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
The ongoing financial crisis in the Euro zone continues to
impact the indirect credit exposure we have to those
governments through their public hospitals. We have
experienced an increasing number of days sales outstanding in
some European countries compared to levels in 2010. As of
December 31, 2012, in Greece, Italy, Portugal and Spain,
countries that have been widely recognized as presenting the
highest risk, our gross short-term and long-term trade
accounts receivable combined were $209.2 million. With
allowances for doubtful accounts of $7.8 million recorded in
those countries, the net balance was $201.4 million,
representing 24 percent of our total consolidated short-term
and long-term trade accounts receivable balance, net. Italy and
Spain account for $191.6 million of that net amount. We are
actively monitoring the situations in these countries. We
maintain contact with these customers on a regular basis. We
continue to receive payments, albeit at a slower rate than in
the past. We believe our allowance for doubtful accounts is
adequate in these countries, as ultimately we believe the
governments in these countries will be able to pay. As evidence
of this, in Spain we received significant payments in July 2012,
to settle certain past due accounts receivable. To the extent
these governments’ ability to fund their public hospital
programs deteriorates, we may have to record significant bad
debt expenses in the future.
While we are exposed to risks from the broader healthcare
industry in Europe and around the world, there is no
significant net exposure due to any individual customer.
Exposure to credit risk is controlled through credit approvals,
credit limits and monitoring procedures and we believe that
reserves for losses are adequate.
30
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Management’s Report on Internal Control Over Financial Reporting
The management of Zimmer Holdings, Inc. is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) promulgated under the
Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and
principal financial officers and effected by the company’s Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
(cid:129) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of the assets of the company;
(cid:129) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and
(cid:129) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, the company’s internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
The company’s management assessed the effectiveness of the company’s internal control over financial reporting as of
December 31, 2012. 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, 2012, 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, 2012, as stated in its report which appears in Item 8 of this Annual Report on
Form 10-K.
31
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
ITEM 8. Financial Statements and Supplementary Data
Zimmer Holdings, Inc.
Index to Consolidated Financial Statements
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings for the Years Ended December 31, 2012, 2011 and 2010
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010
Notes to Consolidated Financial Statements
Page
33
34
35
36
37
38
39
32
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Zimmer Holdings, Inc.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all
material respects, the financial position of Zimmer Holdings, Inc. and its subsidiaries at December 31, 2012 and 2011, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 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, 2012, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule,
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s
internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
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 27, 2013
33
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN 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
Certain claims (Note 19)
Goodwill impairment (Note 8)
Special items (Note 2)
Operating expenses
Operating Profit
Interest income
Interest expense
Earnings before income taxes
Provision for income taxes
Net earnings
Less: Net loss 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
Cash Dividends Declared Per Common Share
The accompanying notes are an integral part of these consolidated financial statements.
(in millions, except per share amounts)
2012
2011
2010
$4,471.7
1,125.2
$4,451.8
1,122.0
$4,220.2
1,012.2
3,346.5
3,329.8
3,208.0
225.6
1,807.1
15.0
96.0
155.4
238.4
1,834.3
157.8
–
75.2
218.5
1,759.1
75.0
204.0
34.7
2,299.1
2,305.7
2,291.3
1,047.4
15.6
(72.9)
1,024.1
10.1
(55.3)
990.1
237.2
752.9
(2.1)
978.9
218.9
760.0
(0.8)
916.7
3.7
(60.2)
860.2
263.3
596.9
–
$ 755.0
$ 760.8
$ 596.9
$
$
4.32
4.29
$
$
4.05
4.03
174.9
176.0
$0.54
187.6
188.7
$0.18
$
$
$
2.98
2.97
200.0
201.1
–
34
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN 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 cash flow hedge gains/(losses), net of tax effects of (4.3) in 2012, 4.3 in 2011 and 10.1 in
2010
Reclassification adjustments on cash flow hedges, net of tax effects of (8.9) in 2012, (16.7) in 2011
and (4.3) in 2010
Unrealized gains/(losses) on securities, net of tax effects of 0.0 in 2012, 0.0 in 2011 and 0.3 in 2010
Reclassification adjustments on securities, net of tax effects of (1.2) in 2010
Adjustments to prior service cost and unrecognized actuarial assumptions, net of tax effects of
(8.5) in 2012, 23.0 in 2011 and 4.4 in 2010
Total Other Comprehensive Income (Loss)
Comprehensive Income
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)
2012
2011
2010
$752.9
$760.0
$596.9
46.1
4.6
(38.6)
10.9
(30.6)
21.6
3.3
0.4
–
24.5
(11.6)
0.2
–
(0.8)
2.2
11.8
(48.3)
(10.4)
72.5
(49.6)
(37.6)
825.4
710.4
559.3
(2.2)
(0.9)
–
$827.6
$711.3
$559.3
35
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
(in millions)
2012
2011
$
884.3
671.6
884.6
995.3
76.3
196.6
3,708.7
1,210.7
2,571.8
740.7
780.5
$
768.3
455.5
838.8
929.8
73.7
210.5
3,276.6
1,207.3
2,626.0
798.5
606.9
$ 9,012.4
$ 8,515.3
$
$
184.1
22.8
100.1
559.0
866.0
559.3
143.3
8.6
143.3
571.9
867.1
557.4
1,720.8
1,576.0
3,146.1
3,000.5
2.6
3,500.6
7,085.9
343.9
(5,072.1)
2.5
3,399.2
6,426.8
271.4
(4,592.7)
5,860.9
5.4
5,507.2
7.6
5,866.3
5,514.8
$ 9,012.4
$ 8,515.3
Consolidated Balance Sheets
As of December 31,
ASSETS
Current Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, less allowance for doubtful accounts
Inventories
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
Short-term debt
Other current liabilities
Total Current Liabilities
Other long-term liabilities
Long-term debt
Total Liabilities
Commitments and Contingencies (Note 19)
Stockholders’ Equity:
Common stock, $0.01 par value, one billion shares authorized,
257.1 million (255.9 million in 2011) issued
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, 85.5 million shares (77.9 million shares in 2011)
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.
36
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Consolidated Statements of Stockholders’ Equity
Zimmer Holdings, Inc. Stockholders
Common Shares
Number Amount
Paid-in
Capital
Retained
Earnings
$2.5 $3,214.6 $5,102.5
596.9
–
–
–
–
–
Accumulated
Other
Comprehensive
Treasury Shares
Income Number
Amount
$358.6
–
(37.6)
(49.9) $(3,039.5)
–
–
–
–
–
–
2.5
–
–
–
–
–
–
2.5
–
–
–
0.1
–
78.9
–
–
–
3,293.5
–
–
5,699.4
760.8
–
–
–
105.7
–
3,399.2
–
–
–
(32.1)
(1.3)
–
6,426.8
755.0
–
–
(93.3)
101.4
–
(2.6)
–
–
–
–
(9.1)
–
(505.6)
321.0
–
(49.6)
(59.0)
–
–
(3,545.1)
–
–
–
–
–
–
271.4
–
72.5
–
–
–
–
–
(18.9)
(77.9)
–
–
2.4
(1,050.0)
(4,592.7)
–
–
–
–
–
–
–
0.1
(7.7)
6.2
(485.6)
Balance January 1, 2010
Net earnings
Other comprehensive loss
Stock compensation plans, including
tax benefits
Share repurchases
Balance December 31, 2010
Net earnings
Other comprehensive loss
Business combination with a
noncontrolling interest
Cash dividend declared of $0.18 per
share of common stock
Stock compensation plans, including
tax benefits
Share repurchases
Balance December 31, 2011
Net earnings
Other comprehensive income
Cash dividend declared of $0.54 per
share of common stock
Stock compensation plans, including
tax benefits
Share repurchases
254.1
–
–
0.5
–
254.6
–
–
–
–
1.3
–
255.9
–
–
–
1.2
–
(in millions)
Total
Stockholders’
Equity
$ 5,638.7
596.9
(37.6)
78.9
(505.6)
5,771.3
760.0
(49.7)
Noncontrolling
Interest
$
–
–
–
–
–
–
(0.8)
(0.1)
8.5
8.5
–
–
–
(32.1)
106.8
(1,050.0)
7.6
(2.1)
(0.1)
5,514.8
752.9
72.4
–
–
–
(93.3)
105.1
(485.6)
Balance December 31, 2012
257.1
$2.6 $3,500.6 $7,085.9
$343.9
(85.5) $(5,072.1)
$ 5.4
$ 5,866.3
The accompanying notes are an integral part of these consolidated financial statements.
37
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Consolidated Statements of Cash Flows
For the Years Ended December 31,
Cash flows provided by (used in) operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
Goodwill impairment
Share-based compensation
Income tax benefit from stock option exercises
Excess income tax benefit from stock option exercises
Inventory step-up and other inventory charges
Deferred income tax provision
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 investments
Sales of investments
Other business combination investments
Investments in other assets
Net cash used in investing activities
Cash flows provided by (used in) financing activities:
Proceeds from issuance of notes
Net proceeds (payments) under revolving credit facilities
Proceeds from term loans
Dividends paid to stockholders
Debt issuance costs
Proceeds from employee stock compensation plans
Excess income tax benefit from stock option exercises
Repurchase of common stock
Net cash used in financing activities
Effect of exchange rates on cash and 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.
38
(in millions)
2012
2011
2010
$
752.9
$
760.0
$ 596.9
363.1
359.9
96.0
55.0
11.0
(2.7)
4.8
–
60.5
12.9
(5.0)
11.4
340.2
204.0
62.0
4.2
(1.3)
1.4
(64.8)
(19.7)
(72.5)
59.2
(45.5)
(67.5)
47.8
(57.4)
14.6
(63.2)
7.2
20.0
18.3
7.7
(33.0)
25.8
(0.8)
58.9
1,151.9
1,176.9
1,193.5
(148.9)
(155.4)
(192.5)
(114.7)
(113.8)
(79.2)
(0.9)
(18.9)
(8.5)
(1,130.1)
(662.1)
(413.3)
878.5
(59.0)
(17.0)
394.8
(56.8)
(12.2)
67.5
(82.6)
(18.3)
(592.1)
(624.4)
(726.9)
–
(50.1)
147.3
(94.4)
(3.3)
46.9
2.7
549.3
0.5
–
–
(4.0)
43.4
5.0
–
(2.2)
–
–
–
16.9
1.3
(485.6)
(1,050.0)
(505.6)
(436.5)
(455.8)
(489.6)
(7.3)
116.0
768.3
2.7
99.4
668.9
0.2
(22.8)
691.7
$
884.3
$
768.3
$ 668.9
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN 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, spinal and trauma devices, biologics, dental
implants and related surgical products. We also provide other
healthcare related services. Orthopaedic reconstructive
devices 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
devices 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 financial interest.
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. The
consolidated financial statements for some of our international
subsidiaries are for an annual period that ended on
December 25, 2012, 2011 and 2010. Certain amounts in the
2011 and 2010 consolidated financial statements have been
reclassified to conform to the 2012 presentation.
Use of Estimates – The consolidated financial statements
are prepared in conformity with accounting principles
generally accepted in the U.S. 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
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, 2012, 2011 and 2010 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 75 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
25 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.
If sales incentives are 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, 2012, 2011 and 2010.
Taxes collected from customers and remitted to
governmental authorities are presented on a net basis and
excluded from revenues.
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 $139.5 million, $142.1 million and
39
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
$129.1 million for the years ended December 31, 2012, 2011
and 2010, respectively.
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. Where contingent
milestone payments are due to third parties under research
and development arrangements, the milestone payment
obligations are expensed when the milestone results are
achieved.
Litigation – We record a liability for contingent losses,
including future legal costs, settlements and judgments, when
we consider it is probable a liability has been incurred and the
amount of the loss can be reasonably estimated.
Special Items – We recognize expenses resulting directly
from our business combinations, employee termination
benefits, certain contract terminations, consulting and
professional fees and asset impairment charges connected with
global restructuring and operational excellence initiatives, and
other items as “Special items” in our consolidated statement of
earnings. “Special items” included (in millions):
For the Years Ended December 31,
Impairment of assets
Consulting and professional fees
Employee severance and retention, including
share-based compensation acceleration
Dedicated project personnel
Information technology integration
Relocated facilities
Distributor acquisitions
Certain litigation matters
Contract terminations
Contingent consideration adjustments
Accelerated software amortization
Other
2012
2011
2010
$ 14.6
90.1
$ 8.4
26.0
$11.4
4.9
8.2
15.1
–
1.8
0.8
13.7
6.6
(2.8)
4.5
2.8
23.1
3.2
0.5
–
2.0
0.1
6.3
–
–
5.6
6.7
2.0
0.1
0.2
1.9
(0.3)
3.9
–
–
3.9
Special items
$155.4
$75.2
$34.7
Impairment of assets relates to impairment of intangible
assets that were acquired in business combinations or
impairment of other assets related to various reasons.
Consulting and professional fees relate to third-party
consulting, professional fees and contract labor related to our
operational excellence initiatives, third-party consulting fees
related to certain information system implementations, third-
party integration consulting performed in a variety of areas
such as tax, compliance, logistics and human resources for our
business combinations, third-party fees related to severance
and termination benefits matters and legal fees related to
certain product liability matters. Our operational excellence
initiatives are across the company and include improvements
in quality, distribution, sourcing, manufacturing, and
information technology, among other areas.
In 2012, 2011 and 2010, we terminated some employees as
we reduced management layers, restructured certain areas,
announced closures of certain facilities, and commenced
initiatives to focus on business opportunities that best support
our strategic priorities. In 2012, 2011 and 2010, approximately
40
400, 500 and 60 positions, respectively, 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
incurred expenses related to severance benefits, redundant
salaries as we worked through transition periods, share-based
compensation acceleration and other employee termination-
related costs. The majority of 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 the year they were incurred.
Dedicated project personnel are the salary, benefits, travel
expenses and other costs directly associated with employees
who are 100 percent dedicated to our operational excellence
initiatives or integration of acquired businesses.
Information technology integration relates to the non-
capitalizable costs associated with integrating the information
systems of acquired businesses.
Relocated facilities expenses are the moving costs and the
lease expenses incurred during the relocation period related to
relocating certain office facilities.
Over the past few years we have acquired a number of
U.S. and foreign-based distributors. We have incurred various
costs related to the consummation and integration of those
businesses.
Certain litigation matters relate to costs and adjustments
recognized during the year for the estimated or actual
settlement of various legal matters, including royalty disputes,
patent litigation matters, commercial litigation matters and
matters arising from our acquisitions of certain competitive
distributorships in prior years.
Contract termination costs relate to terminated
agreements in connection with the integration of acquired
companies and changes to our distribution model as part of
business restructuring and operational excellence initiatives.
The terminated contracts primarily relate to sales agents and
distribution agreements.
Contingent consideration adjustments are the changes in
the fair value of contingent consideration obligations to be paid
to the prior owners of acquired businesses.
Accelerated software amortization is the incremental
amortization caused by changing the estimated life of certain
software. In 2012, we approved a plan to replace certain
software. As a result, the estimated economic useful life of the
existing software was decreased to represent the period of
time expected to implement replacement software. As a result,
the amortization from the shortened life of this software is
substantially higher than the previous amortization being
recognized.
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.
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
Investments – We invest our excess cash and cash
equivalents in debt securities. Our investments include
corporate debt securities, U.S. government and agency debt
securities, municipal bonds, foreign government debt
securities, commercial paper and certificates of deposit and
are classified and accounted for as available-for-sale. Available-
for-sale debt securities are recorded at fair value on our
consolidated balance sheet. Investments with a contractual
maturity of less than one year are classified as short-term
investments on our consolidated balance sheet, or in other
non-current assets if the contractual maturity is greater than
one year. Changes in fair value for available-for-sale securities
are recorded, net of taxes, as a component of accumulated
other comprehensive loss on our consolidated balance sheet.
We review our investments for other-than-temporary
impairment at each reporting period. If an unrealized loss for
any investment is considered to be other-than-temporary, the
loss will be recognized in the consolidated statement of
earnings in the period the determination is made. See Note 7
for more information regarding our investments.
Accounts Receivable – Accounts receivable consists of
trade and other miscellaneous receivables. We grant credit to
customers in the normal course of business and maintain an
allowance for doubtful accounts for potential credit losses. We
determine the allowance for doubtful accounts by geographic
market and take into consideration historical credit
experience, creditworthiness of the customer and other
pertinent information. We make concerted efforts to collect all
accounts receivable, but sometimes we have to write-off the
account against the allowance when we determine the account
is uncollectible. The allowance for doubtful accounts was $22.8
million and $17.2 million as of December 31, 2012 and 2011,
respectively.
Inventories – Inventories 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.
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 or weighted average estimated
user 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 or realizable value.
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 either
comparing a reporting unit’s estimated fair value to its carrying
amount or doing a qualitative assessment of a reporting unit’s
fair value from the last quantitative assessment to determine if
there is potential impairment. We may do a qualitative
assessment when the results of the previous quantitative test
indicated the reporting unit’s estimated fair value was
significantly in excess of the carrying value of its net assets
and we do not believe there have been significant changes in
the reporting unit’s operations that would significantly
decrease its estimated fair value or significantly increase its
net assets. If a quantitative assessment is performed, the fair
value of the reporting unit and the implied fair value of
goodwill are determined based upon a discounted cash flow
analysis and/or use of a market approach by looking at market
values of comparable companies. Significant assumptions are
incorporated into our 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 years
ended December 31, 2012 and 2010, we recorded goodwill
impairment charges of $96.0 million and $204.0 million,
respectively, related to our U.S. Spine reporting unit. See Note
9 for more information regarding goodwill and goodwill
impairment.
41
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
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
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 or a qualitative assessment may
be performed for any changes to the asset’s fair value from the
last quantitative assessment. 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. We may
do a qualitative assessment when the results of the previous
quantitative test indicated the asset’s fair value was
significantly in excess of its carrying value.
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
42
patent or the period for which we maintain exclusivity over the
intellectual property.
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
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 reduce our deferred tax assets by a valuation
allowance if it is more likely than not that we will not realize
some portion or all of the deferred tax assets. 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.
We operate on a global basis and are subject to numerous
and complex tax laws and regulations. Our income tax filings
are regularly under audit in multiple federal, state and foreign
jurisdictions. Income tax audits may require an extended
period of time to reach resolution and may result in significant
income tax adjustments when interpretation of tax laws or
allocation of company profits is disputed. Because income tax
adjustments in certain jurisdictions can be significant, we
record accruals representing management’s best estimate of
the probable resolution of these matters. To the extent
additional information becomes available, such accruals are
adjusted to reflect the revised estimated probable outcome.
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 13
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
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
comprised of foreign currency translation adjustments,
unrealized gains and losses on cash flow hedges, unrealized
gains and losses on available-for-sale securities and
amortization of prior service costs and unrecognized gains and
losses in actuarial assumptions.
Treasury Stock – We account for repurchases of common
stock under the cost method and present treasury stock as a
reduction of stockholders’ equity. We reissue common stock
held in treasury only for limited purposes.
Noncontrolling Interest – In 2011, we made an
investment in a company in which we acquired a controlling
financial interest, but not 100 percent of the equity. Further
information related to the noncontrolling interests of that
investment has not been provided as it is not significant to our
consolidated financial statements.
Accounting Pronouncements – In 2011, the Financial
Accounting Standards Board (FASB) issued an accounting
standard update (ASU) requiring companies to present net
income and other comprehensive income in either a single
continuous statement or in two separate, but consecutive,
statements of net income and of comprehensive income. This
requirement became effective for us January 1, 2012. The ASU
changes the presentation, but not the accounting
requirements, of other comprehensive income and therefore
had no effect on our financial position, results of operations or
cash flows.
In 2012, the FASB issued an ASU that allowed companies
when performing their annual indefinite lived intangible asset
impairment test to do a qualitative assessment to evaluate
whether impairment has occurred versus performing a
quantitative calculation of estimated fair value. We elected to
early adopt this standard and performed a qualitative
assessment on one of our intangible assets that in the prior
year had an estimated fair value that was substantially in
excess of its carrying value. This ASU just changed the
methodology of testing for impairment and would not affect
the outcome of impairment testing. Therefore, it did not have
an effect on our financial position, results of operations or cash
flows.
There are no other recently issued accounting
pronouncements that we have not yet adopted that are
expected to have a material effect on our financial position,
results of operations or cash flows.
3.
SHARE-BASED COMPENSATION
Our share-based payments primarily consist of stock
options, restricted stock, restricted stock units (RSUs), and an
employee stock purchase plan. Share-based compensation
expense is as follows (in millions):
For the Years Ended December 31,
2012
2011
2010
Stock options
RSUs and other
Total expense, pre-tax
Tax benefit related to awards
Total expense, net of tax
$ 32.4
$ 41.7
$ 47.6
22.6
55.0
18.8
60.5
14.4
62.0
(16.6)
(17.8)
(16.2)
$ 38.4
$ 42.7
$ 45.8
Share-based compensation cost capitalized as part of
inventory for the years ended December 31, 2012, 2011 and
2010 was $6.1 million, $8.8 million, and $12.2 million,
respectively. As of December 31, 2012 and 2011,
approximately $3.3 million and $4.8 million of capitalized costs
remained in finished goods inventory.
Stock Options
We had two equity compensation plans in effect at
December 31, 2012: the 2009 Stock Incentive Plan (2009 Plan)
and the Stock Plan for Non-Employee Directors. The 2009 Plan
succeeds the 2006 Stock Incentive Plan (2006 Plan) and the
TeamShare Stock Option Plan (TeamShare Plan). No further
awards have been granted under the 2006 Plan or under the
TeamShare Plan since May 2009, and shares remaining
available for grant under those plans have been 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, 2012. 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 57.9 million shares
of common stock under these plans. 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
43
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
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, except in limited circumstances where they are issued
from treasury stock. 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, 2012, an aggregate of 8.7 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.
A summary of stock option activity for the year ended December 31, 2012 is as follows (options in thousands):
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
Intrinsic
Value
(in millions)
Stock Options
16,748
$68.04
1,720
(933)
(239)
(658)
64.26
46.05
60.21
75.43
16,638
$68.74
16,169
$68.94
12,977
$71.34
4.8
4.7
3.9
$64.2
$61.9
$38.0
The following table presents information regarding the
weighted average fair value for stock options granted, the
assumptions used to determine fair value, and the intrinsic
value of options exercised in the indicated year:
For the Years Ended December 31,
2012
2011
2010
Dividend yield
Volatility
Risk-free interest rate
Expected life (years)
1.1 %
—%
—%
25.6% 26.1% 26.3%
1.5 %
2.2 %
2.8 %
6.1
6.1
5.9
Weighted average fair value of options
granted
$15.40
$18.33
$18.17
Intrinsic value of options exercised (in
millions)
$ 17.1
$ 27.5
$ 8.5
As of December 31, 2012, there was $38.4 million of
unrecognized share-based payment expense related to
nonvested stock options granted under our plans. That
expense is expected to be recognized over a weighted average
period of 2.5 years.
Outstanding at January 1, 2012
Options granted
Options exercised
Options cancelled
Options expired
Outstanding at December 31, 2012
Vested or expected to vest as of December 31, 2012
Exercisable at December 31, 2012
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 traded
options on our stock 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 was determined using the implied yield currently available
for zero-coupon U.S. government issues with a remaining term
approximating the expected life of the options. We began
paying dividends in 2012. Accordingly, prior to 2012 we
assumed no dividend yield. Starting in 2012, the dividend yield
was determined by using an estimated annual dividend and
dividing it by the market price of our stock on the grant date.
44
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
RSUs
We have awarded RSUs to our employees. The terms of
the awards have been three to five years. Some of the awards
have only service conditions while some have performance and
market conditions as well. The service condition awards vest
ratably on the anniversary date of the award. The awards that
have performance and market conditions vest all at once on
the third anniversary date. Future service conditions may be
waived if an employee retires after the first anniversary date of
the award, but performance and market conditions continue to
apply. Accordingly, the requisite service period used for share-
based payment expense ranges from one to five years.
A summary of nonvested RSU activity for the year ended
December 31, 2012 is as follows (in thousands):
Outstanding at January 1, 2012
Granted
Vested
Forfeited
Outstanding at December 31, 2012
Weighted Average
Grant Date
Fair Value
$56.25
65.91
52.92
64.58
60.03
RSUs
1,187
685
(299)
(363)
1,210
For the RSUs with service conditions only, the fair value of
the awards was determined based upon the fair market value
of our common stock on the date of grant. For the RSUs with
market conditions, a Monte Carlo valuation technique was used
to simulate the market conditions of the awards. The outcome
of the simulation was used to determine the fair value of the
awards.
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,
2012, we estimate that approximately 1,113,000 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, 2012 was $38.9 million and is
expected to be recognized over a weighted-average period of
2.3 years. The fair value of RSUs vesting during the years
ended December 31, 2012, 2011 and 2010 based upon our
stock price on the date of vesting was $18.9 million, $11.8
million and $3.2 million, respectively.
4.
INVENTORIES
Inventories consisted of the following (in millions):
As of December 31,
Finished goods
Work in progress
Raw materials
Inventories
2012
2011
$786.3
$743.0
52.3
47.8
156.7
139.0
$995.3
$929.8
Amounts charged to the consolidated statement of
earnings for excess and obsolete inventory in the years ended
December 31, 2012, 2011 and 2010 were $55.1 million, $47.6
million and $45.8 million, respectively.
5.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following
(in millions):
As of December 31,
Land
Building and equipment
Capitalized software costs
Instruments
Construction in progress
Accumulated depreciation
2012
2011
$
22.1
$
22.3
1,232.8
1,196.8
241.8
208.4
1,579.8
1,509.2
117.8
76.4
3,194.3
3,013.1
(1,983.6)
(1,805.8)
Property, plant and equipment, net
$ 1,210.7
$ 1,207.3
Depreciation expense was $266.0 million, $266.1 million
and $247.9 million for the years ended December 31, 2012,
2011 and 2010, respectively.
6.
ACQUISITIONS
We made a number of business acquisitions during the
years 2012, 2011 and 2010. In January 2012, we acquired
Synvasive Technology, Inc. (Synvasive). The Synvasive
acquisition enhanced our product portfolio through the
addition of the STABLECUT® surgical saw blades, as well as
the eLIBRA® Dynamic Knee Balancing SystemTM for soft tissue
balancing. In October 2012, we acquired Dornoch Medical
Systems, Inc. (Dornoch). The Dornoch acquisition enhances
our product portfolio through the addition of a medical waste
fluid management and disposal technology. In November 2011,
we acquired ExtraOrtho, Inc. (ExtraOrtho). The ExtraOrtho
acquisition enhances our position in the estimated $820 million
external fixation market. In December 2010, we acquired
Beijing Montagne Medical Device Co., Ltd. (Montagne) and
Sodem Diffusion S.A. (Sodem). The Montagne acquisition
makes us a significant provider of orthopaedic solutions in
China and provides product lines tailored exclusively to the
rapidly growing Chinese market. The Sodem acquisition
broadens our portfolio of surgical power tools and strengthens
our position in the estimated $1 billion surgical power tool
market. Additionally, we have acquired a number of foreign-
based distributors during the three year period.
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 recorded as goodwill. Pro forma financial
45
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
The amortized cost and fair value of our available-for-sale
fixed-maturity securities by contractual maturity are as follows
(in millions):
As of December 31, 2012
Amortized Cost
Due in one year or less
Due after one year through two years
Total
$671.3
244.0
$915.3
Fair
Value
$671.6
244.1
$915.7
8.
FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES
The following financial assets and liabilities are recorded
at fair value on a recurring basis (in millions):
As of December 31, 2012
Fair Value Measurements at Reporting Date Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Recorded
Balance
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$383.8
$–
$383.8
$–
–
–
–
–
–
–
–
$–
295.9
5.0
138.7
92.3
915.7
28.4
33.9
$978.0
–
–
–
–
–
–
–
$–
Description
Assets
Available-for-sale
securities
Corporate debt
securities
U.S. government and
agency debt
securities
Foreign government
debt securities
Commercial paper
Certificates of
deposit
Total
295.9
5.0
138.7
92.3
available-for-sale
securities
915.7
Derivatives, current
and long-term
Foreign currency
forward contracts
and options
Interest rate swaps
Liabilities
Derivatives, current
and long-term
Foreign currency
28.4
33.9
$978.0
forward contracts
$ 10.8
$–
$ 10.8
$–
information and other information required have not been
included as the acquisitions, individually and in the aggregate,
did not have a material impact upon our financial position or
results of operations.
7.
INVESTMENTS
We invest in short and long-term investments classified as
available-for-sale securities. Information regarding our
investments is as follows (in millions):
As of December 31, 2012
Corporate debt securities
U.S. government and agency debt
securities
Foreign government debt
securities
Commercial paper
Certificates of deposit
Total short and long-term
investments
As of December 31, 2011
Corporate debt securities
U.S. government and agency debt
securities
Municipal bonds
Foreign government debt
securities
Commercial paper
Certificates of deposit
Total short and long-term
investments
Amortized
Cost
Gross Unrealized
Gains
Losses
Fair
value
$383.6
$0.3
$(0.1) $383.8
295.8
0.1
5.0
138.7
92.2
–
–
0.1
–
–
–
–
295.9
5.0
138.7
92.3
$915.3
$0.5
$(0.1) $915.7
$324.8
$0.2
$(0.3) $324.7
177.1
1.0
0.1
–
6.8
74.5
88.5
–
–
–
–
–
–
–
–
177.2
1.0
6.8
74.5
88.5
$672.7
$0.3
$(0.3) $672.7
The following table shows the fair value and gross
unrealized losses for all available-for-sale securities in an
unrealized loss position deemed to be temporary (in millions):
As of December 31, 2012
As of December 31, 2011
Fair
Value
Unrealized
Losses
Fair
value
Unrealized
Losses
Corporate debt securities
$144.2
$(0.1)
$164.5
$(0.3)
All securities in the table above have been in an unrealized
loss position for less than twelve months. A total of 79
securities were in an unrealized loss position as of
December 31, 2012.
The unrealized losses on our investments in corporate
debt securities were caused by increases in interest yields
resulting from changes in the global credit markets. We believe
the unrealized losses associated with our available-for-sale
securities as of December 31, 2012 are temporary because we
do not intend to sell these investments before maturity, and we
do not believe we will be required to sell them before recovery
of their amortized cost basis.
46
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
As of December 31, 2011
Fair Value Measurements at Reporting Date Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Recorded
Balance
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
curves, foreign currency exchange rates obtained from active
markets and the terms of our swaps. We also performed
ongoing assessments of counterparty credit risk.
The following nonfinancial assets were measured at fair
value on a nonrecurring basis (in millions):
$324.7
$–
$324.7
$–
Description
Total
Description
Assets
Available-for-sale
securities
Corporate debt
securities
U.S. government and
agency debt
securities
Municipal bonds
Foreign government
debt securities
Commercial paper
Certificates of
deposit
Total available-for-
sale securities
Derivatives, current
and long-term
Foreign currency
forward contracts
and options
Interest rate swaps
Liabilities
Derivatives, current
and long-term
Foreign currency
177.2
1.0
6.8
74.5
88.5
672.7
18.3
27.8
–
–
–
–
–
–
–
–
177.2
1.0
6.8
74.5
88.5
672.7
18.3
27.8
–
–
–
–
–
–
–
–
$718.8
$ –
$718.8
$ –
forward contracts
$ 25.2
Cross-currency
interest rate swaps
8.2
$ 33.4
$ –
–
$ –
$ 25.2
8.2
$ 33.4
$ –
–
$ –
We value our available-for-sale securities using a market
approach based on broker prices for identical assets in over-
the-counter markets and we perform ongoing assessments of
counterparty credit risk.
We value our foreign currency forward contracts and
foreign currency options using a market approach based on
foreign currency exchange rates obtained from active markets
and we perform ongoing assessments of counterparty credit
risk.
We value our interest rate swaps using a market approach
based on publicly available market yield curves and the terms
of our swaps and we perform ongoing assessments of
counterparty credit risk.
We valued our cross-currency interest rate swaps using a
market approach based upon publicly available market yield
Fair Value Measurements Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Losses
Year Ended December 31, 2012
Goodwill
$ 41.0
Indefinite-
lived
intangible
assets
24.2
Year Ended December 31, 2010
Goodwill
137.0
$ 41.0
$ 96.0
–
–
–
–
24.2
11.6
137.0
204.0
We conduct our annual goodwill 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
each of 2012 and 2010, it was determined that our U.S. Spine
reporting unit’s carrying value was in excess of its fair value. In
2012, the goodwill for this reporting unit was written down to
its implied fair value of $41.0 million from its previous carrying
value of $137.0 million, resulting in a $96.0 million non-cash
impairment charge. In 2010, the goodwill was written down to
its implied fair value of $137.0 million from its previous
carrying value of $341.0 million, resulting in a $204.0 million
non-cash impairment charge. 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. In determining the
implied fair value of the U.S. Spine reporting unit’s 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 guideline public company methodology, which uses
valuation indicators from publicly traded companies that are
similar to our U.S. Spine reporting unit and considers control
premiums that would result from a sale of the reporting unit
and the level of assets in the reporting unit versus the
comparable companies.
47
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
In estimating the future cash flows of the reporting unit,
We have six 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 six reporting units, the estimated fair value substantially
exceeded its carrying value.
We will continue to monitor the fair value of our U.S.
Spine reporting unit as well as our other six 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
unforeseen changes in the healthcare market, or our inability
to generate new product revenue from our research and
development activities, and 2) our inability 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 or comparable company valuation indicators,
which may impact our estimated fair values.
In 2012, we also recorded $11.6 million of impairment
charges in “Special items” related to certain indefinite lived
intangible assets. The impairment was a result of lower future
estimated revenues from products using certain trademarks.
The lower future estimated revenue resulted from our
challenges in the global spine market and from negative
publicity in the marketplace related to certain hip devices that
have adversely affected sales of these products. Further
information regarding how the fair value of these indefinite
lived trademarks was determined has not been provided as we
do not believe this non-cash charge was significant to our
results for 2012.
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 guideline public company methodology, we
took into consideration specific risk differences between our
reporting unit and the comparable companies, such as recent
financial performance, size risks and product portfolios, among
other considerations. Based upon our reporting unit’s recent
financial performance, market share and product portfolio, we
valued ourselves near the bottom of the valuation indicators of
the comparable companies.
The fair value of the reporting unit’s assets and liabilities
was determined by using the same methods that are used in
business combination purchase accounting.
Factors that contributed to impairment of the U.S. Spine
reporting unit include broader market issues as well as
company specific issues. The U.S. spine market has been under
pressure due to a constrained economic environment leading
to continuing high unemployment and payer pushback on the
necessity of certain procedures. Additionally, pricing has
continued to decline across the industry. Company specific
issues have included turnover with our independent sales
agents and lack of execution in developing new, competitive
products which has resulted in a less than optimal product
portfolio in our U.S. Spine reporting unit.
The U.S. spine market five years ago was growing in the
low double digits, but now we estimate is flat or in the low
single digits. Previous goodwill impairment tests forecasted
some recovery in the market which has not come to fruition.
Through the first three quarters of 2012, while U.S. Spine sales
were lower than we expected, cash flows were not significantly
lower as expenses were favorable and net working capital was
better than planned. As we completed our annual operating
plan in the fourth quarter of 2012, it became clearer that the
U.S. spine market recovery may take longer than we planned,
including the persistence of significant negative pricing
pressures. Additionally, we concluded that new product
introductions made in 2012 will not have as significant of a
positive effect as we had previously forecasted. As a result, we
have tempered our expectations of recovery in the U.S. market
and for our U.S. Spine reporting unit and have recognized an
impairment charge.
In 2010, the implied fair value of goodwill was determined
using similar methodologies utilized in the 2012 valuation. An
impairment charge was caused by similar market and
company-specific factors discussed above.
48
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
9.
GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the changes in the carrying amount of goodwill (in millions):
Balance at January 1, 2011
Goodwill
Accumulated impairment losses
Acquisitions
Currency translation
Balance at December 31, 2011
Goodwill
Accumulated impairment losses
U.S. Spine reporting unit impairment
Acquisitions
Currency translation
Balance at December 31, 2012
Goodwill
Accumulated impairment losses
The components of identifiable intangible assets are as follows (in millions):
Americas
Europe
Asia Pacific
Total
$1,562.8
$1,107.1
$187.9
$2,857.8
(277.0)
–
–
(277.0)
1,285.8
1,107.1
187.9
2,580.8
33.3
(0.8)
–
4.7
–
8.0
33.3
11.9
1,595.3
1,111.8
195.9
2,903.0
(277.0)
–
–
(277.0)
1,318.3
1,111.8
195.9
2,626.0
(96.0)
25.9
2.7
–
–
–
–
16.8
(3.6)
(96.0)
25.9
15.9
1,623.9
1,128.6
192.3
2,944.8
(373.0)
–
–
(373.0)
$1,250.9
$1,128.6
$192.3
$2,571.8
As of December 31, 2012:
Intangible assets subject to amortization:
Gross carrying amount
Accumulated amortization
Intangible assets not subject to amortization:
Gross carrying amount
Total identifiable intangible assets
As of December 31, 2011:
Intangible assets subject to amortization:
Gross carrying amount
Accumulated amortization
Intangible assets not subject to amortization:
Gross carrying amount
Total identifiable intangible assets
Intellectual
Property
Rights
Trademarks
and Trade
Names
Customer
Relationships
Technology
Other
Total
$ 695.1
$ 173.4
$ 47.4
$177.0
$ 95.7
$1,188.6
(362.5)
(124.2)
(31.1)
(61.7)
(46.0)
(625.5)
–
–
177.6
–
–
177.6
$ 332.6
$ 49.2
$193.9
$115.3
$ 49.7
$ 740.7
$ 674.9
$ 172.5
$ 40.4
$164.3
$ 82.7
$1,134.8
(315.4)
(100.2)
(26.9)
(46.7)
(39.4)
(528.6)
–
–
192.3
–
–
192.3
$ 359.5
$ 72.3
$205.8
$117.6
$ 43.3
$ 798.5
49
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
Intangible amortization expense was recorded as follows
11. DEBT
(in millions):
Our debt consisted of the following (in millions):
For the Years Ended December 31,
2012
2011
2010
Cost of products sold
Sellling, general and administrative
$24.0
$26.7
$33.1
73.1
67.1
59.2
Total intangible amortization
$97.1
$93.8
$92.3
Estimated annual amortization expense based upon
intangible assets recognized as of December 31, 2012 for the
years ending December 31, 2013 through 2017 is (in millions):
For the Years Ending December 31,
2013
2014
2015
2016
2017
$94.1
91.3
77.3
67.8
61.8
10. OTHER CURRENT AND LONG-TERM LIABILITIES
Other current and long-term liabilities consisted of the
following (in millions):
As of December 31,
Other current liabilities:
License and service agreements
Certain claims accrual (Note 19)
Salaries, wages and benefits
Accrued liabilities
Total other current liabilities
Other long-term liabilities:
Long-term income tax payable
Certain claims accrual (Note 19)
Other long-term liabilities
Total other long-term liabilities
2012
2011
$ 92.3
$106.1
50.0
118.8
297.9
50.0
116.5
299.3
$559.0
$571.9
$213.0
$125.8
210.8
135.5
261.1
170.5
$559.3
$557.4
50
As of December 31,
Short-term debt
Senior Credit Facility
Other short-term debt
Total short-term debt
Long-term debt
Senior Notes due 2014
Senior Notes due 2019
Senior Notes due 2021
Senior Notes due 2039
Term Loan
Debt discount
Adjustment related to interest rate swaps
2012
2011
$ 100.0
$ 143.0
0.1
0.3
$ 100.1
$ 143.3
$ 250.0
$ 250.0
500.0
300.0
500.0
138.6
(1.7)
33.9
500.0
300.0
500.0
–
(1.8)
27.8
Total long-term debt
$1,720.8
$1,576.0
In May 2012, we entered into a new five-year $1,350
million revolving, multi-currency, senior unsecured credit
facility maturing May 9, 2017 (Senior Credit Facility). As of
December 31, 2012, we had $100.0 million outstanding under
the Senior Credit Facility and an availability of $1,250.0
million. The Senior Credit Facility replaced a previous credit
facility with similar terms that was due to mature on
November 30, 2012.
Borrowings of 11.7 billion Japanese Yen outstanding under
the previous credit facility were converted to the Senior Credit
Facility. On May 24, 2012, we refinanced these borrowings by
entering into a separate term loan agreement with one of the
lenders under the Senior Credit Facility (Term Loan) for 11.7
billion Japanese Yen and we repaid the outstanding borrowings
under the Senior Credit Facility.
The Term Loan will mature on May 31, 2016. Borrowings
under the Term Loan bear interest at a fixed rate of 0.61
percent per annum until maturity. The estimated fair value of
the Term Loan as of December 31, 2012, based upon publicly
available market yield curves and the terms of the debt (Level
2), was $138.1 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 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 or
transfers of assets. Financial covenants include a maximum
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
leverage ratio of 3.0 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, 2012.
Commitments under the Senior Credit Facility are subject to
certain fees, including a facility and a utilization fee.
Borrowings under the Senior Credit Facility at December 31,
2012 are U.S. Dollar-based.
We have four tranches of senior notes outstanding: $250
million aggregate principal amount of 1.4 percent notes due
November 30, 2014, $500 million aggregate principal amount of
4.625 percent notes due November 30, 2019, $300 million
aggregate principal amount of 3.375 percent notes due
November 30, 2021 and $500 million aggregate principal
amount of 5.75 percent notes due November 30, 2039. Interest
on each series is payable on May 30 and November 30 of each
year until maturity. The estimated fair value of our Senior
Notes as of December 31, 2012, based on quoted prices for the
specific securities from transactions in over-the-counter
markets (Level 2), was $1,745.8 million.
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 15 basis points
in the case of the 2014 Notes, 20 basis points in the case of the
2019 Notes and 2021 Notes, and 25 basis points in the case of
the 2039 Notes. We would also pay the accrued and unpaid
interest on the Senior Notes to the redemption date.
We have entered into interest rate swap agreements
which we designated as fair value hedges of underlying fixed-
rate obligations on our Senior Notes due 2019. See Note 13 for
additional information regarding the interest rate swap
agreements.
We also have available uncommitted credit facilities
totaling $79.1 million.
At December 31, 2012, the weighted average interest rate
for short-term and long-term borrowings was 1.1 percent and
3.5 percent, respectively. We paid $67.8 million, $55.0 million
and $59.8 million in interest during 2012, 2011 and 2010,
respectively.
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income items
represent certain amounts that are reported as components of
stockholders’ equity in our consolidated balance sheet,
including foreign currency translation adjustments, unrealized
gains and losses, net of tax, on available-for-sale investments
and hedging instruments and pension liability adjustments.
Accumulated other comprehensive income consisted of
the following (in millions):
As of December 31,
Foreign currency translation
Cash flow hedges
Unrealized loss on securities
Unrecognized prior service cost and unrecognized
2012
2011
$ 445.5
4.1
0.4
$ 399.4
(10.1)
–
loss in actuarial assumptions
(106.1)
(117.9)
Accumulated other comprehensive income
$ 343.9
$ 271.4
13. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to certain market risks relating to our
ongoing business operations, including foreign currency
exchange rate 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 risks that we manage through the use of
derivative instruments are interest rate risk and foreign
currency exchange rate risk.
Interest Rate Risk
Derivatives Designated as Fair Value Hedges
We use interest rate derivative instruments to manage our
exposure to interest rate movements by converting fixed-rate
debt into variable-rate debt. Under these agreements, we agree
to exchange, at specified intervals, the difference between
fixed and variable interest amounts calculated by reference to
an agreed-upon notional principal amount. The objective of the
instruments is to more closely align interest expense with
interest income received on cash and cash equivalents. These
derivative instruments are designated as fair value hedges
under GAAP. Changes in the fair value of the derivative
instrument are recorded in current earnings and are offset by
gains or losses on the underlying debt instrument.
In 2010, we entered into multiple nine-year fixed-to-
variable interest rate swap agreements with a total notional
amount of $250 million. These interest rate swap agreements
were designated as fair value hedges of the fixed interest rate
obligation of our 2019 Notes. We receive a fixed interest rate of
4.625 percent and pay variable interest equal to the three-
month LIBOR plus an average of 133 basis points on these
interest rate swap agreements.
Foreign Currency Exchange Rate 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. 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
51
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
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, Swedish Krona, Czech
Koruna, Thai Baht, Taiwan Dollars, South African Rand,
Russian Rubles and Indian Rupees. We do not use derivative
financial instruments for trading or speculative purposes.
Derivatives Designated as Cash Flow Hedges
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 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 immediately
reported in cost of products sold.
For forward contracts and options outstanding at
December 31, 2012, we have obligations to purchase U.S.
Dollars and sell Euros, Japanese Yen, British Pounds,
Canadian Dollars, Australian Dollars, Korean Won, Swedish
Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South
African Rand, Russian Rubles and Indian Rupees and purchase
Swiss Francs and sell U.S. Dollars at set maturity dates
ranging from January 2013 through June 2015. As of
December 31, 2012, the notional amounts of outstanding
forward contracts and options entered into with third parties
to purchase U.S. Dollars were $1,548.8 million. As of
December 31, 2012, the notional amounts of outstanding
forward contracts and options entered into with third parties
to purchase Swiss Francs were $303.9 million.
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
52
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 $1.7 billion per quarter.
Foreign Currency Exchange and Interest Rate Risk
Derivatives Designated as Cash Flow Hedges
In 2011, our subsidiary in Japan, with a functional
currency of Japanese Yen, borrowed variable-rate debt of
$143.0 million denominated in U.S. Dollars under our previous
credit facility. To manage the foreign currency exchange risk
associated with remeasuring the debt to Japanese Yen and the
interest rate risk associated with the variable-rate debt, we
entered into multiple cross-currency interest rate swap
agreements with a total notional amount of 11,798 million
Japanese Yen. We designated these swaps as cash flow hedges
of the foreign currency exchange and interest rate risks. The
effective portion of changes in fair value of the cross-currency
interest rate swaps was temporarily recorded in other
comprehensive income and then recognized in interest
expense when the hedged item affected net earnings. The
cross-currency interest rate swap agreements matured in 2012
and we paid off the subsidiary’s U.S. Dollar debt with Japanese
Yen debt borrowed under our previous credit facility.
Income Statement Presentation
Derivatives Designated as Fair Value Hedges
Derivative instruments designated as fair value hedges
had the following effects on our consolidated statement of
earnings (in millions):
Gain on
Instrument
Loss on Hedged
Item
Year Ended
December 31,
Year Ended
December 31,
2012
2011
2010
2012
2011
2010
$6.1
$26.3
$1.5
$(6.1) $(26.3) $(1.5)
Derivative
Instrument
Interest
rate
swaps
Location on
Statement of
Earnings
Interest
expense
We had no ineffective fair value hedging instruments nor
any amounts excluded from the assessment of hedge
effectiveness during the years ended December 31, 2012, 2011
and 2010.
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
Derivatives Designated as Cash Flow Hedges
Derivative instruments designated as cash flow hedges had the following effects on other comprehensive income (OCI) on our
consolidated balance sheet and our consolidated statement of earnings (in millions):
Amount of Gain / (Loss)
Recognized in OCI
Year Ended December 31,
Amount of Gain / (Loss)
Reclassified from OCI
Year Ended December 31,
Derivative Instrument
2012
2011
2010
Location on Statement of Earnings
2012
2011
2010
Foreign exchange forward contracts
$16.3
$(34.9) $ 11.2
Cost of products sold
$(12.0) $(32.9) $7.3
Foreign exchange options
Cross-currency interest rate swaps
(1.1)
(0.2)
–
0.2
0.3
–
$15.2
$(34.9)
$11.5
Cost of products sold
Interest expense
(0.4)
0.2
–
(8.3)
–
–
$(12.2) $(41.2) $7.3
The net amount recognized in earnings during the years ended December 31, 2012, 2011 and 2010 due to ineffectiveness and
amounts excluded from the assessment of hedge effectiveness were not significant.
The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on the balance sheet at
December 31, 2012, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized gain
of $4.8 million, or $4.1 million after taxes, which is deferred in accumulated other comprehensive income. Of the net unrealized gain,
losses of $5.3 million, or $4.5 million after taxes, are expected to be reclassified to earnings over the next twelve months.
Derivatives Not Designated as Hedging Instruments
The following gains/(losses) from these derivative instruments were recognized on our consolidated statement of earnings (in
millions):
Derivative Instrument
Foreign exchange forward contracts
Location on
Statement of Earnings
Year Ended December 31,
2012
2011
2010
Cost of products sold
$(2.0)
$2.7
$3.3
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.
Balance Sheet Presentation
As of December 31, 2012 and December 31, 2011, all derivative instruments designated as fair value hedges and 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 is as follows (in millions):
Asset Derivatives
Foreign exchange forward contracts
Foreign exchange options
Foreign exchange forward contracts
Foreign exchange options
Interest rate swaps
Total asset derivatives
Liability Derivatives
Foreign exchange forward contracts
Cross-currency interest rate swaps
Foreign exchange forward contracts
Total liability derivatives
As of December 31, 2012
As of December 31, 2011
Balance Sheet Location
Fair
Value
Balance Sheet Location
Fair
Value
Other current assets
$29.7
Other current assets
$24.9
Other current assets
Other assets
Other assets
0.6
19.8
–
Other assets
33.9
$84.0
Other current liabilities
$20.2
Other current liabilities
–
Other long-term liabilities
12.3
$32.5
Other current assets
Other assets
Other assets
Other assets
1.4
14.5
1.0
27.8
$69.6
Other current liabilities
$35.6
Other current liabilities
Other long-term liabilities
8.2
13.1
$56.9
53
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
14. RETIREMENT BENEFIT PLANS
We have defined benefit pension plans covering certain U.S. and Puerto Rico employees. The employees who are not
participating in the defined benefit plans receive additional benefits under our defined contribution plans. Plan benefits are
primarily based on years of credited service and the participant’s average eligible compensation. In addition to the U.S. and Puerto
Rico defined benefit pension plans, we sponsor various non-U.S. pension arrangements, including retirement and termination
benefit plans required by local law or coordinated with government sponsored plans.
We use a December 31 measurement date for our benefit plans.
Defined Benefit Plans
The components of net pension expense for our defined benefit retirement plans are as follows (in millions):
For the Years Ended December 31,
Service cost
Interest cost
Expected return on plan assets
Settlement
Amortization of prior service cost
Amortization of unrecognized actuarial loss
Net periodic benefit cost
U.S. and Puerto Rico
Non-U.S.
2012
2011
2010
2012
2011
2010
$ 11.4
$ 11.4
$ 10.9
$15.0
$16.8
$14.6
13.3
13.0
11.5
6.1
7.3
6.7
(25.5)
(21.9)
(18.1)
(7.6)
(9.6)
(8.0)
0.7
(2.0)
11.4
—
—
6.2
—
—
—
—
(0.1)
(0.9)
(0.8)
(0.7)
2.4
1.9
1.2
1.2
$ 9.3
$ 8.7
$ 6.6
$14.5
$14.9
$13.8
The weighted average actuarial assumptions used to determine net pension expense for our defined benefit retirement plans
were as follows:
For the Years Ended December 31,
Discount rate
Rate of compensation increase
Expected long-term rate of return on plan assets
U.S. and Puerto Rico
Non-U.S.
2012
2011
2010
2012
2011
2010
4.97%
3.81%
7.75%
5.82%
3.81%
7.75%
6.26%
3.80%
7.50%
2.58%
2.77%
3.51%
2.82%
2.64%
4.01%
3.19%
2.63%
4.12%
54
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN 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 were (in millions):
For the Years Ended December 31,
Projected benefit obligation – beginning of year
Service cost
Interest cost
Plan amendments
Employee contributions
Benefits paid
Settlement
Actuarial (gain) loss
Prior service cost
Expenses paid
Translation loss
U.S. and Puerto Rico
Non-U.S.
2012
2011
2012
2011
$290.0
11.4
13.3
(17.1)
–
(7.0)
(1.1)
24.8
–
–
–
$227.1
11.4
13.0
–
–
(4.5)
–
43.0
–
–
–
$235.1
15.0
6.1
–
17.5
(21.3)
–
6.9
(3.7)
(0.2)
4.0
$226.5
16.8
7.3
–
15.9
(36.7)
–
0.4
(1.6)
(0.1)
6.6
Projected benefit obligation – end of year
$314.3
$290.0
$259.4
$235.1
Plan assets at fair market value – beginning of year
Actual return on plan assets
Employer contributions
Employee contributions
Benefits paid
Expenses paid
Translation gain
$275.1
40.7
54.2
–
(7.0)
–
–
$244.9
(2.1)
36.8
–
(4.5)
–
–
$205.1
11.4
15.5
17.5
(21.3)
(0.2)
3.6
$206.0
(2.5)
16.0
15.9
(36.7)
(0.1)
6.5
Plan assets at fair market value – end of year
$363.0
$275.1
$231.6
$205.1
Funded status
$ 48.7
$(14.9)
$(27.8)
$(30.0)
Amounts recognized in consolidated balance sheet:
Prepaid pension
Short-term accrued benefit liability
Long-term accrued benefit liability
Net amount recognized
Amounts recognized in accumulated other comprehensive income:
Unrecognized prior service cost
Unrecognized actuarial loss
Total amount recognized
$ 61.9
(0.4)
(12.8)
$ 48.7
$(14.5)
136.9
$122.4
$
–
(1.0)
(13.9)
$(14.9)
$ 0.6
140.4
$141.0
$ 7.5
–
(35.3)
$ 4.3
–
(34.3)
$(27.8)
$(30.0)
$ (9.6)
35.9
$ (6.7)
45.5
$ 26.3
$ 38.8
We estimate the following amounts recorded as part of accumulated other comprehensive income will be recognized as part of
our net pension expense during 2013 (in millions):
Unrecognized prior service cost
Unrecognized actuarial loss
U.S. and
Puerto Rico
Non-U.S.
$(2.6)
$(1.3)
15.4
$12.8
1.9
$ 0.6
55
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
The weighted average actuarial assumptions used to determine the projected benefit obligation for our defined benefit
retirement plans were as follows:
For the Years Ended December 31,
Discount rate
Rate of compensation increase
U.S. and Puerto Rico
Non-U.S .
2012
2011
2010
2012
2011
2010
4.32%
3.29%
5.05%
3.81%
5.82%
3.80%
2.15%
2.75%
2.49%
2.76%
2.82%
2.61%
Plans with projected benefit obligations in excess of plan assets were as follows (in millions):
As of December 31,
Projected benefit obligation
Plan assets at fair market value
U.S. and Puerto Rico
Non-U.S.
2012
2011
2012
2011
$29.3
16.0
$290.0
$233.1
$211.5
275.1
197.7
177.3
Plans with accumulated benefit obligations in excess of plan assets were as follows (in millions):
U.S. and Puerto Rico
Non-U.S.
2012
2011
2012
2011
$26.9
16.0
$22.4
13.0
$191.9
$190.4
168.8
168.7
allocation in the plans. The investment policy statement
describes the target asset allocation positions described above.
We have a benefits committee to monitor compliance with and
administer the investment policy statement and the plans’
assets and oversee the general investment strategy and
objectives of the plans. The benefits committee generally
meets quarterly to review performance and to ensure that the
current investment allocation is within the parameters of 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 securities, 15 to 24
percent in real estate, 3 to 15 percent in cash funds and 0 to
12 percent in other funds.
As of December 31,
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 $268.7
million and $241.3 million as of December 31, 2012 and 2011,
respectively. The accumulated benefit obligation for non-U.S.
defined benefit retirement plans was $244.9 million and
$219.9 million as of December 31, 2012 and 2011, 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,
2013
2014
2015
2016
2017
2018-2022
U.S. and
Puerto Rico
Non-U.S.
$ 8.9
$ 16.2
10.4
11.4
13.1
14.6
96.5
14.2
16.3
16.1
16.4
109.7
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 mitigating
risk. We have established target ranges of assets held by the
plans of 45 to 50 percent for equity securities, 35 to 40 percent
for debt securities and 5 to 15 percent in non-traditional
investments. The plans strive to have sufficiently diversified
assets so that adverse or unexpected results from one asset
class will not have an unduly detrimental impact on the entire
portfolio. We regularly review the investments in the plans and
we may rebalance them from time-to-time based upon the
target asset allocation of the plans.
For the U.S. and Puerto Rico plans, we maintain an
investment policy statement that guides the investment
56
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
The fair value of our U.S. and Puerto Rico pension plan
The fair value of our non-U.S. pension plan assets was as
assets by asset category was as follows (in millions):
follows (in millions):
As of December 31, 2012
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)
$3.2
$
–
$–
–
–
–
–
–
–
60.3
22.1
87.5
29.5
38.3
122.1
–
–
–
–
–
–
$3.2
$359.8
$–
As of December 31, 2011
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)
$1.4
$
–
$–
–
–
–
–
–
–
52.9
17.4
50.0
18.7
25.0
109.7
–
–
–
–
–
–
$1.4
$273.7
$–
Asset Category
Cash and cash equivalents
Equity securities:
U.S. large-cap
U.S. small-cap
International
Real estate
Commodity-linked mutual
funds
Intermediate fixed income
securities
Total
Total
$
3.2
60.3
22.1
87.5
29.5
38.3
122.1
$363.0
Asset Category
Cash and cash equivalents
Equity securities:
U.S. large-cap
U.S. small-cap
International
Real estate
Commodity-linked
mutual funds
Intermediate fixed income
securities
Total
Total
$
1.4
52.9
17.4
50.0
18.7
25.0
109.7
$275.1
As of December 31, 2012
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)
$12.7
$
–
$
Asset Category
Cash and cash equivalents
Equity securities:
Total
$ 12.7
Energy
Materials
Industrials
Consumer discretionary
Consumer staples
Healthcare
Financials
Information technology
Telecommunication services
Utilities
Other
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
1.7
2.6
4.1
2.2
3.0
4.9
7.3
2.5
1.0
1.6
35.1
44.9
37.9
13.2
1.0
5.4
5.9
7.5
37.1
1.7
2.6
4.1
2.2
3.0
4.9
7.3
2.5
1.0
1.6
32.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2.6
44.9
37.9
13.2
1.0
5.4
5.9
7.5
–
$231.6
$76.1
$118.4
$37.1
As of December 31, 2011
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)
$10.8
$
–
$
Asset Category
Cash and cash equivalents
Equity securities:
Total
$ 10.8
Energy
Materials
Industrials
Consumer discretionary
Consumer staples
Healthcare
Financials
Information technology
Telecommunication services
Utilities
Other
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
1.9
2.0
3.7
2.1
4.0
6.0
5.8
2.3
1.0
1.6
28.9
42.5
35.5
8.4
1.1
5.2
5.5
5.0
31.8
1.9
2.0
3.7
2.1
4.0
6.0
5.8
2.3
1.0
1.6
26.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2.3
42.5
35.5
8.4
1.1
5.2
5.5
5.0
–
$205.1
$67.8
$105.5
$31.8
57
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
37.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
31.8
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
As of December 31, 2012 and 2011, 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 following table provides a reconciliation of the
beginning and ending balances of our non-U.S. pension plan
assets measured at fair value that used significant
unobservable inputs (Level 3) (in millions):
Beginning Balance
Gains on assets sold
Change in fair value of assets
Net purchases and sales
Translation gain
Ending Balance
December 31,
2012
31.8
0.2
0.9
3.3
0.9
15.
INCOME TAXES
The components of earnings before income taxes consist
of the following (in millions):
For the Years Ended December 31,
2012
2011
2010
United States operations
$409.9
$485.7
$382.4
Foreign operations
580.2
493.2
477.8
Total
$990.1
$978.9
$860.2
The provision for income taxes consists of (in millions):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
$179.8
$148.4
$235.3
13.8
108.4
302.0
14.3
75.9
19.5
81.0
238.6
335.8
(58.8)
0.7
(6.7)
(2.6)
(0.9)
(16.2)
(54.9)
(2.0)
(15.6)
(64.8)
(19.7)
(72.5)
Provision for income taxes
$237.2
$218.9
$263.3
Income taxes paid during 2012, 2011 and 2010 were
$227.6 million, $236.4 million and $330.6 million, respectively.
A reconciliation of the U.S. statutory income tax rate to
$37.1
our effective tax rate is as follows:
We expect that we will have no legally required minimum
funding requirements in 2013 for the qualified U.S. and Puerto
Rico defined benefit retirement plans. We expect to voluntarily
contribute between $24 million and $42 million to these plans
during 2013. Contributions to non-U.S. defined benefit plans
are estimated to be approximately $16 million in 2013. We do
not expect the 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 offered
under these plans are reflective of local customs and practices
in the countries concerned. We expensed $26.5 million, $25.7
million and $24.4 million related to these plans for the years
ended December 31, 2012, 2011 and 2010, respectively.
58
For the Years Ended December 31,
2012
2011
2010
U.S. statutory income tax rate
35.0%
35.0%
35.0%
State taxes, net of federal deduction
1.0
0.7
1.3
Tax impact of foreign operations,
including foreign tax credits
Tax impact of significant non-
recurring transactions
Tax benefit relating to U.S.
manufacturer’s deduction and
export sales
R&D credit
Goodwill impairment
Other
(10.4)
(11.0)
(10.6)
(3.5)
–
–
(1.9)
–
3.4
0.4
(1.6)
(0.5)
–
(0.2)
(2.6)
(0.8)
8.3
–
Effective income tax rate
24.0%
22.4%
30.6%
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 2026.
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. Valuation allowances are
recorded to reduce deferred income tax assets when it is more
likely than not that an income tax benefit will not be realized.
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN 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):
As of December, 31
Deferred tax assets:
Inventory
Net operating loss carryover
Tax credit carryover
Capital loss carryover
Accrued liabilities
Share-based compensation
Unremitted earnings of foreign subsidiaries
Other
Total deferred tax assets
Less: Valuation allowances
2012
2011
For the Years Ended December 31,
2012
2011
2010
$ 225.1
$ 218.5
Increases related to prior periods
118.7
11.4
23.1
Balance at January 1
$158.4
$168.0
$150.4
26.8
16.4
4.0
67.0
106.3
172.3
42.3
23.5
16.9
4.0
116.1
98.3
103.9
73.1
Decreases related to prior periods
(8.9)
(49.0)
(6.1)
Increases related to current period
19.1
34.4
23.7
Decreases related to settlements with
taxing authorities
(0.6)
(4.8)
(14.1)
Decreases related to lapse of statute of
limitations
(1.2)
(1.6)
(9.0)
Balance at December 31
$285.5
$158.4
$168.0
660.2
654.3
(41.3)
(40.3)
Amounts impacting effective tax rate, if
recognized balance at December 31
$159.0
$132.7
$112.2
Total deferred tax assets after valuation
618.9
614.0
Deferred tax liabilities:
Fixed assets
Intangible assets
Accrued liabilities
Other
Total deferred tax liabilities
Total net deferred tax assets
$ (93.9) $(111.6)
(140.6)
(148.9)
–
(1.0)
(1.0)
–
(235.5)
(261.5)
$ 383.4
$ 352.5
We recognize accrued interest and penalties related to
unrecognized tax benefits as income tax expense. During 2012,
we accrued interest and penalties of $23.2 million, and as of
December 31, 2012, had recognized a liability for interest and
penalties of $33.9 million. We decreased interest and penalties
by $12.1 million during 2011, and as of December 31, 2011, had
recognized a liability for interest and penalties of $10.7 million.
During 2010, we decreased interest and penalties by $5.8
million, and as of December 31, 2010, had recognized a liability
for interest and penalties of $22.8 million.
The net operating loss carryovers are available to reduce
We operate on a global basis and are subject to numerous
future federal, state and foreign taxable earnings. At
December 31, 2012, 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 $17.0 million and $14.6 million at
December 31, 2012 and 2011, respectively. The tax credit
carryovers are available to offset future federal, state and
foreign tax liabilities. At December 31, 2012, these tax credit
carryovers generally expire within a period of 1 to 10 years. We
have established valuation allowances for certain tax credit
carryovers in the amount of $14.2 million and $15.3 million at
December 31, 2012 and 2011, respectively. The capital loss
carryover is also available to reduce future federal taxable
earnings. However, the entire $4.0 million capital loss
carryover is subject to a valuation allowance and expires in 4
years. The remaining valuation allowances of $6.1 million and
$6.4 million at December 31, 2012 and 2011, respectively,
relate primarily to potential capital losses.
At December 31, 2012, we had an aggregate of
approximately $2,790 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 related to remitting these
earnings.
and complex tax laws and regulations. Our income tax filings
are regularly under audit in multiple federal, state and foreign
jurisdictions. Income tax audits may require an extended
period of time to reach resolution and may result in significant
income tax adjustments when interpretation of tax laws or
allocation of company profits is disputed. The net amount of
tax liability for unrecognized tax benefits may change within
the next twelve months due to changes in audit status,
expiration of statutes of limitations and other events which
could impact our determination of unrecognized tax benefits.
Currently, we cannot reasonably estimate the amount by which
our unrecognized tax benefits will change.
During the second quarter of 2011, the IRS concluded
their examination of our U.S. federal returns for years 2005
through 2007 and issued income tax assessments reallocating
profits between certain of our U.S. and foreign subsidiaries. We
believe that we have followed applicable U.S. tax laws and are
vigorously defending our income tax positions. The ultimate
resolution of this matter is uncertain and could have a material
impact on our income tax expense, results of operations, and
cash flows for future periods.
U.S. and Europe tax returns for years 2007 through 2009
are in various stages of review by the relevant tax authorities.
During the fourth quarter of 2012, we received indication from
taxing jurisdictions that our as-filed tax positions, with regard
to profit allocations, are in dispute. Although in each case we
believe we have followed applicable tax laws in establishing
59
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
During 2012, we repurchased 7.7 million shares of our
common stock at an average price of $63.39 per share for a
total cash outlay of $485.6 million, including commissions. As
of December 31, 2012, $1,014.6 million remained authorized
under a $1.5 billion repurchase program, which will expire on
December 31, 2014.
17. SEGMENT DATA
We design, develop, manufacture and market orthopaedic
reconstructive implants, biologics, 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. We manage
operations through three major geographic segments – the
Americas, which is comprised principally of the U.S. and
includes other North, Central and South American markets;
Europe, which is comprised principally of Europe and includes
the Middle East and African markets; 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
share-based payment expense, inventory step-up and other
certain inventory charges, “Certain claims,” goodwill
impairment, “Special items,” and global operations and
corporate functions. Global operations and corporate functions
include research, development engineering, medical education,
brand management, corporate legal, finance, and human
resource functions, U.S., Puerto Rico and Ireland-based
manufacturing operations and logistics and intangible asset
amortization resulting from business combination accounting.
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.,
Puerto Rico and Ireland-based manufacturing operations and
logistics and corporate assets.
our filed tax positions, this new information impacted our
determination of unrecognized tax benefits resulting in an
increase in both the net amount of tax liability for
unrecognized tax benefits and income tax expense. The
ultimate resolution of this matter is uncertain and could have a
material impact on our income tax expense, results of
operations, and cash flows for future periods.
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 (2008 onward), Canada
(2006 onward), France (2010 onward), Germany (2009
onward), Ireland (2008 onward), Italy (2006 onward), Japan
(2010 onward), Korea (2007 onward), Puerto Rico (2008
onward), Switzerland (2011 onward), and the United Kingdom
(2011 onward).
16. 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, 2012.
The numerator for both basic and diluted earnings per
share is net earnings available to common stockholders. The
denominator for basic earnings per share is the weighted
average number of common shares outstanding during the
period. The denominator for diluted earnings per share is
weighted average shares outstanding adjusted for the effect of
dilutive stock options and other equity awards. The following is
a reconciliation of weighted average shares for the basic and
diluted share computations (in millions):
For the Years Ended December 31,
2012
2011
2010
Weighted average shares outstanding for basic
net earnings per share
174.9
187.6
200.0
Effect of dilutive stock options and other
equity awards
1.1
1.1
1.1
Weighted average shares outstanding for
diluted net earnings per share
176.0
188.7
201.1
For the year ended December 31, 2012, an average of
11.9 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, 2011 and 2010, an average of 13.2 million
and 13.7 million options, respectively, were not included.
60
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
Net sales and other information by segment is as follows (in millions):
As of and for the Year Ended December 31, 2012
Net sales
Depreciation and amortization
Segment operating profit
Share-based payment expense
Inventory step-up and other inventory charges
Certain claims
Goodwill impairment
Special items
Operating profit
Long-lived assets
Total assets
Additions to instruments
Additions to other property, plant and equipment
As of and for the Year Ended December 31, 2011
Net sales
Depreciation and amortization
Segment operating profit
Share-based payment expense
Inventory step-up
Certain claims
Special items
Operating profit
Long-lived assets
Total assets
Additions to instruments
Additions to other property, plant and equipment
As of and for the Year Ended December 31, 2010
Net sales
Depreciation and amortization
Segment operating profit
Share-based payment expense
Inventory step-up
Certain claims
Goodwill impairment
Special items
Operating profit
Long-lived assets
Total assets
Additions to instruments
Additions to other property, plant and equipment
Americas
Europe
Asia
Pacific
Global
Operations
and
Corporate
Functions
$2,476.3
73.7
1,256.3
$1,177.4
73.6
369.1
$818.0
36.3
311.1
$
–
179.5
(562.9)
776.0
2,690.6
–
0.7
326.1
2,308.0
14.0
21.9
108.6
578.3
7.1
6.4
–
3,435.5
127.8
85.7
$2,440.8
81.0
1,220.4
$1,214.5
74.9
411.5
$796.5
36.3
290.6
$
–
167.7
(593.5)
769.0
2,571.6
–
1.3
330.6
2,345.5
15.2
23.8
107.7
602.4
7.7
4.7
–
2,995.8
132.5
84.0
$2,431.6
78.1
1,214.6
$1,099.5
70.5
398.0
$689.1
30.0
259.9
$
–
161.6
(578.7)
841.5
2,578.0
–
0.3
281.7
2,210.8
22.9
16.9
90.6
561.4
5.2
7.6
–
2,649.7
164.4
54.4
Total
$4,471.7
363.1
1,373.6
(55.0)
(4.8)
(15.0)
(96.0)
(155.4)
1,047.4
1,210.7
9,012.4
148.9
114.7
$4,451.8
359.9
1,329.0
(60.5)
(11.4)
(157.8)
(75.2)
1,024.1
1,207.3
8,515.3
155.4
113.8
$4,220.2
340.2
1,293.8
(62.0)
(1.4)
(75.0)
(204.0)
(34.7)
916.7
1,213.8
7,999.9
192.5
79.2
61
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
The Americas long-lived tangible assets are located
primarily in the U.S. $226.1 million of Europe long-lived
tangible assets as of December 31, 2012 are located in
Switzerland.
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., Puerto Rico and Ireland-
based manufacturing operations and logistics and are deployed
to the reportable segments as needed for the business.
Therefore, the reportable segment assets include deployed
instruments even though that reportable segment may not
report the instrument addition.
U.S. sales were $2,280.7 million, $2,263.7 million and
$2,277.2 million for the years ended December 31, 2012, 2011
and 2010, 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.
Net sales by product category are as follows (in millions):
For the Years Ended December 31,
2012
2011
2010
Reconstructive
Knees
Hips
Extremities
Dental
Trauma
Spine
Surgical and other
$1,814.8
$1,825.1
$1,789.9
1,342.0
1,355.6
1,262.3
173.8
163.4
150.1
3,330.6
3,344.1
3,202.3
237.7
307.9
208.9
386.6
248.1
285.8
225.0
348.8
219.0
245.5
234.4
319.0
Total
$4,471.7
$4,451.8
$4,220.2
18. LEASES
Total rent expense for the years ended December 31,
2012, 2011 and 2010 aggregated $46.3 million, $47.0 million
and $46.2 million, respectively.
Future minimum rental commitments under non-
cancelable operating leases in effect as of December 31, 2012
were (in millions):
For the Years Ending December 31,
2013
2014
2015
2016
2017
Thereafter
62
$45.9
33.1
26.4
21.3
18.2
47.1
19. COMMITMENTS AND CONTINGENCIES
Product Liability-Related Claims
We are subject to product liability claims arising in the
ordinary course of our business. We establish standard
accruals for product liability 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. These standard product liability
accruals are recognized in selling, general and administrative
expense. We may also establish provisions for certain product
liability claims outside of the standard accruals that are
recorded separately on our statement of earnings, such as the
provision for claims related to the Durom Cup discussed
below. We maintain insurance, subject to self-insured retention
requirements, for losses from these and other claims.
On July 22, 2008, we temporarily suspended marketing
and distribution of the Durom Cup in the U.S. Subsequently, a
number of product liability lawsuits and other claims have
been asserted against us. We have settled some of these claims
and the others are still pending. Additional claims may be
asserted in the future.
Initially, we estimated that any revision surgeries required
would manifest themselves within two years of the original
surgery. In the second quarter of 2010, based upon more
recent claims information available, we revised our estimate to
include all claims for revisions of original surgeries performed
before July 22, 2008 (i.e., before our temporary suspension) on
a worldwide basis, regardless of the amount of time between
the revision surgery and the original surgery. In the fourth
quarter of 2011, as additional claims information became
available, we revised our estimates and methodology again to
consolidate all estimated liabilities associated with Durom
Cup-related claims regardless of whether the original surgery
occurred before or after our temporary sales suspension. We
recognized estimated claims that met the parameters noted in
this paragraph during that time period as “Certain claims” on
our statement of earnings. We recognized estimated claims
outside these parameters as part of selling, general and
administrative expense. The following table shows the line of
our statement of earnings and the period in which Durom
Cup-related claims were recognized:
For the Years Ended December 31,
2012
2011
2010
2009
2008
Total
Certain claims
$15.0 $157.8 $75.0 $35.0 $69.0 $351.8
Selling, general and
administrative
–
4.2
15.4
24.6
7.2
51.4
Total
$15.0 $162.0 $90.4 $59.6 $76.2 $403.2
As noted above, we maintain insurance for product
liability claims, subject to self-insurance retention
requirements. In 2008, we notified our insurance carriers of
potential claims related to the Durom Cup. Based upon our
most recent estimates for liabilities associated with the Durom
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
Cup, as detailed above, we believe we may exhaust our self-
insured retention under our insurance program. In this event,
we would have a claim for insurance proceeds for ultimate
losses which exceed the self-insured retention amount, subject
to a 20 percent co-payment requirement and a cap. We believe
our contracts with the insurance carriers are enforceable for
these claims and therefore we believe it is highly probable that
we would recover some amount from our insurance carriers if
our ultimate losses exceed our self-insured retention.
Accordingly, we have recognized a $98.0 million receivable in
“other assets” on our consolidated balance sheet that reduced
“Certain claims” expense for estimated insurance recoveries.
As is customary in this process, our insurance carriers have
reserved all rights under their respective policies and could
still ultimately deny coverage for some or all of our insurance
claims.
Our estimate, as of December 31, 2012, of the remaining
liability for all Durom Cup-related claims is $260.8 million, of
which $50.0 million is classified as short-term in “Other current
liabilities” and $210.8 million is classified as long-term in
“Other long-term liabilities” on our consolidated balance sheet.
We expect to pay the majority of the Durom Cup-related
claims within the next five years.
Our understanding of clinical outcomes with the Durom
Cup and other large diameter hip cups continues to evolve. We
rely on significant estimates in determining the provisions for
Durom Cup-related claims, including the number of claims
that we will receive and the average amount we will pay per
claim. The actual number of claims that we receive and the
amount we pay per claim may differ from our estimates. Since
our understanding of the clinical outcomes is still evolving, we
cannot reasonably estimate the possible loss or range of loss
that may result from Durom Cup-related claims in excess of
the losses we have accrued.
On August 20, 2008, Margo and Daniel Polett filed an
action against us and an unrelated third party, Public
Communications, Inc. (PCI), in the Court of Common Pleas,
Philadelphia, Pennsylvania seeking an unspecified amount of
damages for injuries and loss of consortium allegedly suffered
by Mrs. Polett and her spouse, respectively. The complaint
alleged that defendants were negligent in connection with
Mrs. Polett’s participation in a promotional video featuring one
of our knee products. The case was tried in November 2010
and the jury returned a verdict in favor of plaintiffs. The jury
awarded $27.6 million in compensatory damages and
apportioned fault 30 percent to plaintiffs, 34 percent to us and
36 percent to PCI. Under applicable law, we may be liable for
any portion of the damages apportioned to PCI that it does not
pay. On December 2, 2010, we and PCI filed a Motion for Post-
Trial Relief seeking a judgment notwithstanding the verdict, a
new trial or a remittitur. On June 10, 2011, the trial court
entered an order denying our Motion for Post-Trial Relief and
affirming the jury verdict in full and entered judgment for
$20.3 million against us and PCI. On June 29, 2011, we filed a
Notice of Appeal to the Superior Court of Pennsylvania and
posted a bond for the verdict amount plus interest. Oral
argument before the appellate court in Philadelphia,
Pennsylvania was held on March 13, 2012. A ruling has not yet
been issued. We do not believe the facts and evidence support
the jury’s verdict. Although we believe we have strong grounds
to reverse the jury’s verdict, the ultimate resolution of this
matter is uncertain and could result in a loss of up to $20
million in excess of the amount accrued.
Following a wide-spread advertising campaign conducted
by certain law firms beginning in 2010, a number of product
liability lawsuits have been filed against us in various
jurisdictions. The plaintiffs seek damages for personal injury,
alleging that certain products within the NexGen Knee System
suffer from defects that cause them to loosen prematurely. The
majority of the cases are currently pending in a federal
Multidistrict Litigation in the Northern District of Illinois.
Other cases are pending in other state and federal courts, and
additional lawsuits may be filed. As of December 31, 2012,
discovery in these lawsuits was underway and no trial dates
had been set. We expect initial bellwether trials to commence
sometime in mid-to-late 2014. We have not accrued an
estimated loss relating to these lawsuits because we believe
the plaintiffs’ allegations are not consistent with the record of
clinical success for these products. As a result, we do not
believe that it is probable that we have incurred a liability, and
we cannot reasonably estimate any loss that might eventually
be incurred. Although we intend to vigorously defend these
lawsuits, their ultimate resolution is uncertain.
Intellectual Property-Related Claims
We are involved in certain ongoing contractual and other
disputes pertaining to certain royalty arrangements. We intend
to defend ourselves vigorously against these claims. These
matters are in varying stages of dispute resolution processes.
In the twelve month period ended December 31, 2012, we
accrued losses related to one of these matters. With respect to
the other matters, we cannot reasonably estimate the possible
loss, if any, we may incur. An adverse result in any of these
matters could have an adverse effect on our results of
operations in any particular period.
On December 10, 2010, Stryker Corporation and related
entities (Stryker) filed suit against us in the U.S. District Court
for the Western District of Michigan, alleging that certain of
our Pulsavac Plus wound debridement products infringe three
U.S. patents assigned to Stryker. The case was tried beginning
on January 15, 2013, and on February 5, 2013, the jury found
that we infringed certain claims of the subject patents. The
jury awarded $70.0 million in monetary damages for lost
profits. The jury also found that we willfully infringed the
subject patents. Final judgment has not yet been entered. We
intend to file a number of post-trial motions challenging the
verdict. Following the trial court’s rulings on these post-trial
motions and entry of final judgment, we intend to timely
appeal the unfavorable verdict. We have not accrued an
estimated loss related to this matter in our consolidated
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2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
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. In the first quarter of 2011, we
received a subpoena from the SEC seeking documents and
other records pertaining to our business activities in
substantially all countries in the Asia Pacific region where we
operate. We produced documents responsive to the subpoena
and reported to the government concerning the results of our
own reviews regarding FCPA compliance. During a meeting in
December 2012, representatives from the agencies informed us
that the SEC and the DOJ planned to close their investigation
without pursuing any enforcement action against us. The DOJ
and SEC formally notified us through letters of declination
dated December 19, 2012 and February 1, 2013, respectively,
that the agencies have closed their inquiries into this matter.
While we are pleased with the government’s declination
decision in this matter, we are committed to continuing to
enhance our global anti-corruption compliance program.
Regulatory Matter
In September 2012, we received a warning letter from the
U.S. Food and Drug Administration (FDA) citing concerns
relating to certain manufacturing and validation processes
pertaining to Trilogy® Acetabular System products
manufactured at our Ponce, Puerto Rico manufacturing
facility. We have provided detailed responses to the FDA as to
our corrective actions and will continue to work expeditiously
to address the issues identified by the FDA. Until the violations
are corrected, we may be subject to additional regulatory
action by the FDA, including seizure, injunction and/or civil
monetary penalties. Additionally, requests for Certificates to
Foreign Governments related to products manufactured at the
Ponce facility may not be granted and premarket approval
applications for Class III devices to which the Quality System
regulation deviations are reasonably related will not be
approved until the violations have been corrected.
statement of earnings for the year ended December 31, 2012,
because we do not believe that it is probable that we have
incurred a liability. Although we believe we have strong
grounds to reverse the jury’s verdict, the ultimate resolution of
this matter is uncertain. In the future we could be required to
record a charge of up to $70.0 million that could have a
material adverse effect on our results of operations in any
particular period.
Putative Class Action Closure
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 related 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 alleged, 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 sought
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
alleged the same claims and clarified that the class period was
October 5, 2007 through September 2, 2008. The defendants
filed a motion to dismiss the amended complaint on March 23,
2009. 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. On
December 23, 2011, the Court granted the defendants’ motion
to dismiss the amended complaint. On January 20, 2012, the
plaintiff filed a motion for leave to file a second amended
complaint. On November 16, 2012, the Court denied the
plaintiff’s motion for leave to amend the amended complaint
and dismissed the case with prejudice. The plaintiff’s deadline
to challenge the Court’s decision has passed. The case is now
closed and we will not be reporting the status of this matter in
the future.
Government Investigation Closure
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
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2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
20. 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
2012 Quarter Ended
2011 Quarter Ended
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
$1,140.7
$1,125.0
$1,025.5
$1,180.5
$1,115.6
$1,137.4
$1,031.5
$1,167.3
852.0
209.6
843.1
214.5
769.8
178.1
881.6
152.8
836.6
208.9
849.5
203.8
779.6
191.5
864.1
156.6
1.18
1.17
1.22
1.22
1.02
1.02
0.88
0.88
1.08
1.08
1.06
1.06
1.02
1.01
0.88
0.87
The quarter ending December 31, 2012 includes a $96.0 million goodwill impairment charge.
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2 0 1 2 F O R M 1 0 - K AN 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 maintain disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act) that are
designed to provide reasonable assurance that information
required to be disclosed in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and
communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosures.
Because of inherent limitations, disclosure controls and
procedures, no matter how well designed and operated, can
provide only reasonable, and not absolute, assurance that the
objectives of disclosure controls and procedures are met.
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. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that,
as of the end of the period covered by this report, our
disclosure controls and procedures are effective at a
reasonable assurance level.
During 2012, we continued transitioning work to a third-
party service provider to outsource certain finance functions
that historically have been performed in multiple countries
throughout Europe and in the U.S. We also continued
ITEM 9B. Other Information
During the fourth quarter of 2012, the Audit Committee of
our Board of Directors approved the engagement of
PricewaterhouseCoopers LLP, our independent registered
public accounting firm, to perform certain non-audit services
related to certain tax matters. This disclosure is made
pursuant to Section 10A(i)(2) of the Exchange Act.
centralizing other finance functions that historically have been
performed in a decentralized manner. This outsourcing and
centralization are part of our ongoing operational excellence
initiatives, and we plan to finalize transitioning work to the
service provider and the centralized finance departments
during 2013.
Also in 2012, we implemented and tested new software to
consolidate our worldwide financial information. We will start
to use this software for our consolidated financial statements
starting in the first quarter of 2013. This software
implementation is part of our operational excellence initiatives
in order to improve the overall efficiency and effectiveness of
our financial reporting process.
In connection with the outsourcing, centralization of
finance functions, and software implementation and the
resulting business process changes, we continue to enhance
the design and documentation of our internal control
processes to ensure suitable controls over our financial
reporting. There were no other changes in our internal control
over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act) that occurred during the quarter ended
December 31, 2012 that have materially affected, or are
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.
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PART III
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
ITEM 10. Directors, Executive Officers and Corporate Governance
Information required by this item regarding our Directors is incorporated by reference from the section entitled “Proposal
No. 1: Election of Directors” in our definitive Proxy Statement for the annual meeting of stockholders to be held on May 7, 2013
(the “2013 Proxy Statement”). Information about our Audit Committee is incorporated by reference from the section entitled
“Committees of the Board” in our 2013 Proxy Statement. Information regarding the procedures by which stockholders may
recommend nominees to the Board of Directors is incorporated by reference from the section entitled “Corporate Governance –
Nominations for Directors” in our 2013 Proxy Statement. Information regarding our executive officers is set forth in Item 1 of Part I
of this report under the caption “Executive Officers.” Information about compliance with Section 16(a) of the Exchange Act is
incorporated by reference from the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2013 Proxy
Statement.
We have adopted the Zimmer Code of Ethics for Chief Executive Officer and Senior Financial Officers (the “finance code of
ethics”), a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and
Corporate Controller, and other finance organization senior employees. The finance code of ethics is publicly available in the
Investor Relations section of our website, which may be accessed from our homepage at www.zimmer.com or directly at http://
investor.zimmer.com. If we make any substantive amendments to the finance code of ethics or grant any waiver, including any
implicit waiver, from a provision of the code to our Chief Executive Officer, Chief Financial Officer, or Chief Accounting Officer and
Corporate Controller, we will disclose the nature of that amendment in the Investor Relations section of our website.
ITEM 11. Executive Compensation
Information required by this item is incorporated by reference from the sections entitled “Committees of the Board”,
“Compensation of Directors” and “Executive Compensation” in our 2013 Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this item is incorporated by reference from the sections entitled “Security Ownership of Certain
Beneficial Owners,” “Security Ownership of Directors and Executive Officers” and “Equity Compensation Plan Information” in our
2013 Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions and Director Independence
Information required by this item is incorporated by reference from the sections entitled “Corporate Governance – Certain
Relationships and Related Person Transactions” and “Corporate Governance – Director Independence” in our 2013 Proxy
Statement.
ITEM 14. Principal Accounting Fees and Services
Information required by this item is incorporated by reference from the sections entitled “Audit and Non-Audit Fees” and
“Audit Committee Pre-Approval of Services of Independent Registered Public Accounting Firm” in “Proposal No. 3” of our 2013
Proxy Statement.
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PART IV
ITEM 15. Exhibits, Financial Statement Schedules
(a) 1.
Financial Statements
2 0 1 2 F O R M 1 0 - K AN 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, 2012, 2011 and 2010
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
Schedule II. Valuation and Qualifying Accounts
Other financial statement schedules are omitted because they are not applicable or the required information is shown in
the financial statements or the notes thereto.
3. Exhibits
A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes
such exhibits and is incorporated herein by reference.
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Signatures
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
ZIMMER HOLDINGS, INC.
By: /S/ DAVID C. DVORAK
David C. Dvorak
President and Chief Executive Officer
Dated: February 27, 2013
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
President, Chief Executive Officer and Director (Principal
Executive Officer)
February 27, 2013
Executive Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
February 27, 2013
Vice President, Finance, and Corporate Controller and Chief
Accounting Officer (Principal Accounting Officer)
February 27, 2013
/s/ CHRISTOPHER B. BEGLEY
Director
February 27, 2013
Christopher B. Begley
/s/ BETSY J. BERNARD
Betsy J. Bernard
/s/ GAIL K. BOUDREAUX
Gail K. Boudreaux
/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
Director
Director
Director
Director
Director
Director
Director
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
/s/ CECIL B. PICKETT, PH.D.
Director
February 27, 2013
Cecil B. Pickett, Ph.D.
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Index to Exhibits
Exhibit No
Description
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
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 8, 2012 (incorporated by reference to Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K filed May 14, 2012)
Specimen Common Stock certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on
Form 10-Q filed November 6, 2012)
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)
Second Supplemental Indenture dated as of November 10, 2011, 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 4.1 to the Registrant’s Current Report on Form 8-K filed November 10, 2011)
Form of 1.400% Note due 2014 (incorporated by reference to Exhibit 4.6 above)
Form of 3.375% Note due 2021 (incorporated by reference to Exhibit 4.6 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 (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)
Form of Change in Control Severance Agreement with Jeffrey B. Paulsen and Joseph A. Cucolo (incorporated by
reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed May 5, 2010)
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)
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)
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)
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
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*
70
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Exhibit No
Description
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
10.15*
10.16*
10.17*
Form of Confidentiality, Non-Competition and Non-Solicitation Agreement with U.S.-Based Executive Officers
(incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed November 6, 2012)
Non-Disclosure, Non-Competition and Non-Solicitation Employment Agreement with Stephen Hong Liang, Ooi
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed March 27, 2006)
Confidentiality, Non-Competition and Non-Solicitation Agreement with Bruno A. Melzi (incorporated by reference to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed March 27, 2006)
10.18*
Agreement by and between Bruno A. Melzi, Zimmer S.r.l. and Zimmer, Inc. dated December 12, 2012
10.19*
Agreement by Private Deed between Zimmer S.r.l. and Bruno A. Melzi dated December 12, 2012
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
10.31*
10.32*
10.33*
10.34*
10.35*
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 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 March 20, 2009)
Zimmer Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Appendix B to the Registrant’s
Definitive Proxy Statement filed March 20, 2009)
Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2009 Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed May 5, 2011)
Form of Nonqualified Stock Option Award Letter for Non-U.S. Employees under the Zimmer Holdings, Inc. 2009 Stock
Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed
May 5, 2011)
Form of Performance-Based Restricted Stock Unit Award Letter (one-year performance period) under the Zimmer
Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly
Report on Form 10-Q filed May 5, 2011)
Form of Performance-Based Restricted Stock Unit Award Letter for Non-U.S. Employees (one-year performance
period) under the Zimmer Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the
Registrant’s Quarterly Report on Form 10-Q filed May 5, 2011)
Form of Restricted Stock Unit Award Letter (five-year vesting) under the Zimmer Holdings, Inc. 2009 Stock Incentive
Plan (incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K filed February 25,
2010)
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Exhibit No
Description
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
10.36*
10.37*
10.38
10.39
10.40
21
23
31.1
31.2
32
Form of Performance-Based Restricted Stock Unit Award Letter (three-year performance period) under the Zimmer
Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual
Report on Form 10-K filed February 27, 2012)
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)
$1,350,000,000 Credit Agreement dated as of May 9, 2012 (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed May 15, 2012)
Term Loan Agreement ¥11,700,000,000 dated as of May 24, 2012 (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed May 31, 2012)
Letter of Guarantee dated as of May 24, 2012 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K filed May 31, 2012)
List of Subsidiaries of Zimmer Holdings, Inc.
Consent of PricewaterhouseCoopers LLP
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive
Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial
Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
* Management contract or compensatory plan or arrangement
Schedule II
Balance at
Beginning
of Period
Additions
Charged
(Credited)
to Expense
Deductions
to Reserve
Effects of
Foreign
Currency
Acquired
Allowances
Balance at
End of
Period
(in millions)
18.8
14.4
17.2
(1.0)
4.5
7.1
(3.1)
(1.7)
(1.8)
(0.6)
–
–
0.3
–
0.3
14.4
17.2
22.8
Valuation and Qualifying Accounts
Description
Allowance for Doubtful Accounts:
Year Ended December 31, 2010
Year Ended December 31, 2011
Year Ended December 31, 2012
72
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Exhibit 31.1
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David C. Dvorak, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Zimmer Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 27, 2013
David C. Dvorak
President and Chief Executive Officer
73
Z I M M E R HOL D I NG S , I NC .
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Exhibit 31.2
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James T. Crines, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Zimmer Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 27, 2013
James T. Crines
Executive Vice President, Finance and
Chief Financial Officer
74
Z I M M E R HOL D I NG S , I NC .
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Exhibit 32
In connection with the Annual Report of Zimmer Holdings, Inc. (the “Company”) on Form 10-K for the period ending December 31,
2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
David C. Dvorak
President and Chief Executive Officer
February 27, 2013
James T. Crines
Executive Vice President, Finance and
Chief Financial Officer
February 27, 2013
75
Z I M M E R HOL D I NG S , I NC .
Reconciliations
2 0 1 2 F O R M 1 0 - K AN N U A L R E P O R T
Reconciliation of Operating Profit to Adjusted Operating Profit for the Years Ended December 31, 2012, 2011, 2010, 2009 and 2008 (in millions, unaudited)
For the Years Ended December 31,
2012
2011
2010
2009
2008
Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory step-up and other inventory charges . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net curtailment and settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,047.4
4.8
15.0
96.0
155.4
—
$1,024.1
11.4
157.8
—
75.2
—
$ 916.7
1.4
75.0
204.0
34.7
—
$1,018.8
12.5
35.0
73.0
75.3
(32.1)
$1,090.0
7.0
69.0
—
68.5
—
Adjusted Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,318.6
$1,268.5
$1,231.8
$1,182.5
$1,234.5
Reconciliation of Diluted EPS to Adjusted Diluted EPS for the Years Ended December 31, 2012, 2011, 2010, 2009 and 2008 (unaudited)
For the Years Ended December 31,
2012
2011
2010
2009
2008
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory step-up and other inventory charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net curtailment and settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes on above items and other certain tax adjustments* . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4.29
0.03
0.09
0.54
0.88
—
(0.53)
$ 4.03
0.06
0.84
—
0.40
—
(0.53)
$ 2.97
0.01
0.37
1.01
0.17
—
(0.20)
$ 3.32
0.06
0.16
0.34
0.35
(0.15)
(0.14)
$ 3.72
0.03
0.30
—
0.30
—
(0.30)
Adjusted Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5.30
$ 4.80
$ 4.33
$ 3.94
$ 4.05
* 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, 2012 (unaudited)
Geographic Segment
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product Category
Reconstructive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Knees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extremities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dental
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trauma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surgical and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Year Ended December 31, 2012
Reported
% Growth
Foreign
Exchange
Impact
Constant
Currency
% Growth
1%
(3)
3
—
—
(1)
(1)
6
(4)
8
(7)
11
—
(1)%
(6)
—
(2)
(1)
(2)
(2)
(2)
(2)
(1)
(1)
(1)
(2)
2%
3
3
2
1
1
1
8
(2)
9
(6)
12
2
76
Financial Highlights
(Dollars in millions except per-share amounts)
Corporate Information (As of March 21, 2013)
Sales b y Geographic Segment
2008
2009
2010
2011
2012
Reported Currency(1)
% Change 2011-2012
Constant
56%
26%
18%
Americas
$2,354
$2,372
$2,432
$2,441
$2,476
Europe
1,179
Asia Pacific
588
1,119
604
1,099
689
1,214
797
1,178
818
Consolidated
$4,121
$4,095
$4,220
$4,452
$4,472
1%
-3%
3%
0%
2%
3%
3%
2%
Sales b y Product Category
2008
2009
2010
2011
2012
Reported Currency(1)
Reconstructive
$3,162
$3,120
$3,202
$3,344
$3,331
30%
Extremities
41%
Knees
Hips
Dental
Trauma
Spine
4%
5%
7%
8% 5%
Surgical & Other
1,761
1,280
121
227
222
230
280
1,756
1,228
136
205
235
253
282
1,790
1,262
1,825
1,356
1,815
1,342
150
219
246
234
319
163
248
286
225
349
174
238
308
209
386
Consolidated
$4,121
$4,095
$4,220
$4,452
$4,472
% Change 2011-2012
Constant
0%
-1%
-1%
6%
-4%
8%
-7%
11%
0%
1%
1%
1%
8%
-2%
9%
-6%
12%
2%
Net Sales
Operating Profit
Strong performances from a
Zimmer continued to deliver
Operating Cash Flow
Through disciplined
Diluted Earnings per Share
Progress in Zimmer’s value
number of international
exceptional operating profit
management of capital, Zimmer
creation agenda supported
markets and new product
margins in 2012, driven by
introductions across Zimmer’s
progress in the Company’s
supported new product
innovation and delivered
double-digit growth in
adjusted earnings per share
portfolio contributed to net
business transformation programs.
increased value to stockholders
for 2012.
sales of $4.47 billion in 2012.
0% Reported
2
5
4
,
4
2
7
4
,
4
0
2
2
,
4
1
2
1
,
4
5
9
0
,
4
4% Adjusted(2)
2% Reported
5
3
2
,
1
0
9
0
,
1
3
8
1
,
1
9
1
0
,
1
9
6
2
,
1
4
2
0
,
1
2
3
2
,
1
7
1
9
9
1
3
,
1
7
4
0
,
1
while maintaining high levels of
operating cash flow.
-2% Reported
4
9
1
,
1
7
7
1
,
1
2
5
1
,
1
10% Adjusted(2)
6% Reported
5
0
.
4
2
7
.
3
4
9
.
3
2
3
.
3
3
3
.
4
7
9
.
2
0
3
.
5
9
2
.
4
0
8
.
4
3
0
.
4
8
1
1
,
1
8
3
0
,
1
08
09
10
11
12
08
09
10
11
12
08
09
10
11
12
08
09
10
11
12
(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 76.
(2) “Adjusted” refers to performance measures that exclude inventory step-up and other inventory charges, special items, the provision for certain Durom® Acetabular Component product claims,
goodwill impairment, and net curtailment and settlement and related tax benefits and other certain tax adjustments. See the reconciliations of these non-GAAP financial measures to the most
directly comparable GAAP measures on page 76.
Board of Directors
John L. Mc Goldrick
Chairman of the Board,
Zimmer Holdings, Inc.
Special Advisor,
International AIDS
Vaccine Initiative
Christopher B. Begley
Retired Executive Chairman
and Chief Executive Officer,
Hospira, Inc.
Betsy J. Bernard
Retired President,
AT&T Corp.
Management Team
David C. Dvorak
President and
Chief Executive Officer
James T. Crines
Executive Vice President,
Finance and Chief Financial Officer
Joseph A. Cucolo
President,
Americas
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.
Gail K. Boudreaux
Chief Executive Officer,
UnitedHealthcare
Executive Vice President,
UnitedHealth Group
Marc N. Casper
President and
Chief Executive Officer,
Thermo Fisher Scientific Inc.
David C. Dvorak
President and
Chief Executive Officer,
Zimmer Holdings, Inc.
Derek M. Davis
Vice President, Finance
and 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
Larry C. Glasscock
Retired Chairman,
President and Chief Executive Officer,
WellPoint, Inc.
Robert A. Hagemann
Senior Vice President
and Chief Financial Officer,
Quest Diagnostics Incorporated
Arthur J. Higgins
Consultant,
Blackstone Healthcare Partners
Cecil B. Pickett, Ph.D.
Retired President,
Research and Development,
Biogen Idec Inc.
Katarzyna Mazur-Hofsaess, M.D., Ph.D.
President,
Europe, Middle East and Africa
Reconstructive
Jeffery A. McCaulley
President,
Zimmer Reconstructive
Bruno A. Melzi
Chairman,
Europe, Middle East and Africa
Emmanuel Nyakako
Senior Vice President,
Global Quality and Regulatory Affairs
Stephen H. L. Ooi
President,
Asia Pacific
Chad F. Phipps
Senior Vice President,
General Counsel and Secretary
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:
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
+1-888-552-8493 (domestic)
+1-718-921-8124 (international)
Email: zimmer@amstock.com
Website: http://www.amstock.com
Investor Relations
Zimmer invites stockholders,
security analysts, portfolio
managers and other interested
parties to contact:
Robert J. Marshall Jr.
Vice President, Investor Relations and
Treasurer
+1-574-371-8042
robert.marshall@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.
Dividend Reinvestment and Stock Purchase Plan
American Stock Transfer & Trust Company, LLC administers the Investors Choice Dividend Reinvestment and Stock Purchase Plan, which allows registered
stockholders to purchase additional shares of Zimmer common stock through the automatic investment of dividends. The plan also allows registered stockhold-
ers to purchase shares with optional cash investments of at least $25, either by check or by automatic deductions from checking or savings accounts. The
maximum optional cash investment is $10,000 per transaction. Please direct inquiries concerning the plan to: Zimmer Holdings, Inc., c/o American Stock
Transfer & Trust Company, LLC, P.O. Box 922, Wall Street Station, New York, NY 10269-0560, +1-888-552-8493 (domestic), +1-718-921-8124 (international)
Stock Performance Graph
Comparison of Cumulative Total Return for years ended December 31
Assumes $100 was invested on
December 31, 2007 in Zimmer common
stock and each index and dividends
were reinvested. Returns over the indicated
period should not be considered indicative
of future returns.
$150
$100
$50
$0
This annual report is printed on paper
that contains 10% post-consumer waste.
Zimmer Holdings, Inc.
S&P 500 Stock Index
S&P 500 Health Care Equipment Index
2007
$100
100
100
2008
$61
63
73
2009
$89
80
93
2010
$81
92
91
2011
$81
94
90
2012
$102
109
105
ZIMMER HO LDINGS, INC . a nnua l repor t 2 0 1 2
Zimmer Holdings, Inc., 345 East Main Street, P.O. Box 708, Warsaw, IN 46580, U.S.A.