2 0 1 3 A N N U A L R E P O R T
P E R S O N A ®
T H E P E R S O N A L I Z E D K N E E S Y S T E M
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)
Sales b y Geographic Segment
2009
2010
2011
2012
2013
57%
57%
26%
26%
17%
17%
Americas
$2,372
$2,432
$2,441
$2,476
$2,620
Europe
1,119
Asia Pacific
604
1,099
689
1,214
797
1,178
818
1,212
791
Consolidated
$4,095
$4,220
$4,452
$4,472
$4,623
Sales b y Product Category
2009
2010
2011
2012
2013
Reconstructive
$3,125
$3,210
$3,355
$3,350
$3,434
Knees
Hips
Extremities
Dental
Trauma
Spine
Surgical & Other
1,761
1,228
136
205
235
253
277
1,798
1,262
1,836
1,356
150
219
246
234
311
163
248
286
225
338
1,834
1,342
174
238
308
209
367
1,910
1,330
194
239
316
202
432
Consolidated
$4,095
$4,220
$4,452
$4,472
$4,623
29%
29%
41%
41%
4%
4%
5%
5%
7%
7%
9% 5%
9% 5%
% Change 2012-2013
Constant
Reported Currency(1)
6%
3%
-3%
3%
6%
1%
7%
5%
% Change 2012-2013
Constant
Reported Currency(1)
3%
4%
-1%
11%
1%
2%
-3%
18%
3%
4%
5%
1%
12%
0%
5%
-3%
21%
5%
Net Sales
Zimmer drove sales growth
Operating Profit
Zimmer continued to deliver
Operating Cash Flow
Zimmer’s operating cash flows
Diluted Earnings per Share
Zimmer produced steady adjusted
in 2013, recording constant
solid operating profit margins
provided flexibility to support
earnings per share growth of 8%,
currency net sales growth of 5%
in 2013 on an adjusted basis
ongoing commercialization of
reflecting the Company’s accelerated
fueled by a number of new
through leveraged sales
new products as well as funds to
top line coupled with the ongoing,
product and technology
acceleration and disciplined
enhance stockholder value
disciplined execution of Zimmer’s
introductions from across the
expense management.
through dividend and share
operational excellence initiatives.
Company’s portfolio. The
performance was highlighted by
the successful commercialization
of Zimmer’s flagship knee offering,
Persona® The Personalized Knee
System, during the year.
3% Reported
3
2
6
4
,
2
5
4
4
,
2
7
4
4
,
0
2
2
4
,
5
9
0
,
4
4% Adjusted(2)
-1% Reported
2
3
2
1
,
7
1
9
9
6
2
1
,
4
2
0
1
,
3
8
1
1
,
9
1
0
1
,
9
1
3
1
,
7
4
0
1
,
0
7
3
1
,
6
3
0
1
,
repurchase programs.
-16% Reported
4
9
1
1
,
7
7
1
1
,
8
1
1
1
,
2
5
1
1
,
3
6
9
8% Adjusted(2)
3% Reported
0
8
4
.
3
0
4
.
4
9
3
.
2
3
3
.
3
3
4
.
7
9
2
.
5
7
5
.
3
4
4
.
0
3
5
.
9
2
4
.
09
10
11
12
13
09
10
11
12
13
09
10
11
12
13
09
10
11
12
13
(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 75.
(2) “Adjusted” refers to performance measures that exclude inventory step-up and other inventory and manufacturing 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 75.
To Our Stockholders:
Zimmer has been committed to restoring mobility, alleviating pain and improving the
quality of life for patients for over 85 years. In that time, the Zimmer brand has come to
stand for leadership through innovation, exceptional customer service and high quality
standards. Our business results in 2013 have continued that legacy, while strengthening
our position as a global leader in musculoskeletal health.
We achieved accelerated revenue growth in 2013, while delivering on our financial
commitments and producing expanded operating leverage. Our 2013 sales totaled $4.62
billion, and our fully diluted adjusted earnings per share were $5.75, which was an
increase of 8.5% over the prior year. Our 2013 results were driven by strong performances
in a number of geographies and product categories. While new offerings, such as
Persona® The Personalized Knee System, continued to build on the strength of our market-
leading joint reconstruction business, we extended our reach across the continuum of
musculoskeletal care with innovative treatments and solutions to address new markets
and anatomical sites. We believe that this comprehensive portfolio both defines and
distinguishes Zimmer, and positions us to continue capturing global sales growth.
We continue to apply the kind of innovate and improve thinking that has proved
successful in our product development efforts to our operations as well. In 2013, we
continued to strengthen the foundations of our future success through our ongoing,
company-wide quality and operational excellence initiatives.
Meeting the Needs of Patients and Providers, Expanding Leadership
Across the Continuum of Care
Zimmer’s reputation has been built on a record of enabling positive patient outcomes
through a broad-based approach to product innovation. We are proud to offer a
comprehensive portfolio of clinically-relevant treatments, implant solutions and surgical
technologies. Over the last year, we have introduced a range of innovative new offerings,
and we are extremely excited about the future of our pipeline. Through a combination
of internal and external development, we are focused on solutions that address unmet
clinical needs in musculoskeletal care, with a particular focus on personalized solutions, new
product categories and interventions that reach patients earlier in the continuum of care.
As the innovation and market leader in knee replacement technology, Zimmer’s knee
implant systems have been the most widely used in operating rooms around the world
for more than a decade. In 2013, we continued that legacy with the ongoing introduction
of Persona The Personalized Knee System. Featuring revolutionary advances in implant
science, this next-generation total knee system has performed promisingly and garnered
positive clinical feedback from the surgeon community.
The Persona system builds upon the clinical heritage of the NexGen® and Natural-
Knee® families with design innovations that enable high levels of performance and
personalization. In addition, the Persona system uses Zimmer’s proprietary Trabecular
Metal™ Technology and Vivacit-E® Polyethylene, our advanced vitamin E infused bearing
material. This intuitive, next-generation total knee system also integrates with our suite of
intelligent surgical instruments. The iASSIST® Knee, The Personalized Guidance System™,
delivers intraoperative feedback and alignment validation to surgeons. Designed to
increase the precision and efficiency of joint replacement procedures, the iASSIST
system offers innovation in the operating room without the need for costly and complex
capital equipment. The iASSIST system joins our other advanced surgical solutions that
support the Persona knee system, including Zimmer® Patient Specific Instruments and
the eLIBRA® Dynamic Knee Balancing SystemTM. Together, these differentiated offerings
demonstrate that high-precision surgery can be adopted by healthcare institutions
economically, and can deliver other ongoing benefits.
In 2013, we continued to expand our portfolio into new anatomical sites and adjacent
musculoskeletal product categories. In addition to the ongoing introduction of the
Nexel® Total Elbow system to build-out our upper extremities portfolio, in August we
received 510(k) clearance from the Food and Drug Administration for commercial
distribution in the U.S. of the Zimmer® PSI Shoulder, Patient Specific Instruments to
complement and differentiate the Trabecular Metal Reverse Shoulder system. In lower
extremities, the Zimmer Trabecular Metal Total Ankle continued to gather customer
acceptance amid positive feedback from the surgeon community in 2013. In support
of this total ankle solution, we added to our portfolio with the acquisition of Germany-
based NORMED Medizin-Technik GmbH (Normed) in the second quarter of 2013. This
acquisition has added new product offerings, as well as design capabilities to help
strengthen our lower extremity and total ankle portfolio.
As we have communicated previously, in the years ahead we will strive to build a position
as the single solution-provider with the broadest offering of innovative and personalized
solutions. Our growing joint preservation range of products is central to that vision, and
we will continue to bring to market personalized and appropriate therapies for various
disease conditions. In 2013, we added the Subchondroplasty® Procedure to our growing
joint preservation portfolio. We believe this technology addresses an unmet need for
millions of new patients, and represents our entry into a previously untapped market.
The Subchondroplasty Procedure joins our single-injection hyaluronic acid treatment,
Gel-One® Cross-linked Hyaluronate, the Chondrofix® Osteochondral Allograft, DeNovo® NT
Natural Tissue Graft and the Zimmer Unicompartmental High-Flex Knee System designed
to deliver effective solutions to improve quality of life and potentially lower costs for
patients and healthcare institutions.
Transformation Initiatives: Driving Growth,
Deepening our Investment in Quality
We continued to make steady progress in 2013 in executing our quality and operational
excellence initiatives. This transformative agenda is designed to build a leaner and
more efficient sales, distribution and manufacturing operation while promoting
superior designs across our product portfolio. For example, in 2013 we implemented
a global brand rationalization effort to right-size our field inventory, in concert with the
modernization of our global logistics infrastructure. We also achieved significant savings
in 2013 through the centralization of raw and indirect material purchasing, as well as the
sourcing of service providers. These programs and others remain on-track to achieve a
targeted $400 million in operating cost savings opportunities by 2016. We will continue
directing these savings into the funding of growth investments, and towards initiatives
related to the delivery of expanded operating improvement efforts and enhanced returns
on invested capital for our stockholders. Additionally, we will continue to focus on the
expansion of these programs to our emerging businesses and markets.
At the same time, these initiatives have enabled us to respond to external challenges to
our business. The most notable example of this is the inclusion in the U.S. Affordable
Care Act of an onerous new excise tax imposed on the medical device industry that went
into effect in 2013. Our intent is to offset the impact of the medical device excise tax
with the savings from our transformation programs. However, paying this tax draws upon
resources that would otherwise be deployed in innovation programs and other job-
creating initiatives that could contribute to our growth and the broader economy. We will
continue to work with our peers to petition for repeal of the medical device excise tax.
Disciplined Capital Management: Returning Value to Stockholders
Our disciplined capital deployment philosophy has become one of the hallmarks of our
business. This strategy has supported our ability to allocate significant free cash flow for
return to stockholders. In 2013, we returned more than $850 million to stockholders in
the form of cash dividends and share repurchases. Also, by following a prudent approach
to external development, we added a number of highly valuable businesses to our
portfolio. These included our acquisition of Normed to strengthen our Extremities and
Trauma product portfolios, as well as our exclusive distribution agreements for the Lateral
Interbody System and APEX Spine System™ in an effort to increase the competitiveness
of our Spine business. We plan to continue to employ rigorous strategic and financial
evaluation metrics in identifying new technologies that have the potential to meaningfully
contribute to future value creation.
A Platform for Success
Musculoskeletal treatments and solutions remain an exciting market with strong growth
potential. In addition to supportive demographics aiding our performance globally, we
have seen economic expansion internationally, as well as investments to modernize
and increase access to healthcare services in less developed markets. As the global
healthcare landscape continues to evolve, we plan to be positioned to offer a compelling
value proposition to patients, surgeons and healthcare institutions with solutions that
generate savings relative to the management of chronic, advanced-stage osteoarthritis.
As we endeavor to further expand our portfolio of differentiated musculoskeletal
solutions, we believe that Zimmer is well-positioned to take advantage of present and
future opportunities.
As evidenced by our 2013 results, we have remained focused on sustaining the strategic
growth of our portfolio, optimizing the way we approach quality and operational
excellence and growing our footprint in key markets around the world. We are proud
of our achievements throughout the year, and will work to enhance stockholder value
while serving with pride the doctors, other healthcare providers and patients who use
our products. Our success would not be possible without the personal dedication of
our 9,000 employees worldwide. We are fortunate to work at a company that is driven
to develop innovative products that make a difference, an organization that strives to
deliver restored mobility, ease pain and improve the quality of life for millions of people
around the globe. The people of Zimmer remain dedicated to this noble purpose.
David C. Dvorak
President and
Chief Executive Officer
Larry C. Glasscock
Chairman of the Board
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, 2013
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. Í
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 $12,648,249,024 (based on the closing price of these shares on the
New York Stock Exchange on June 28, 2013 and assuming solely for the purpose of this calculation that all directors and executive
officers of the registrant are “affiliates”). As of February 14, 2014, 169,316,092 shares of the registrant’s $.01 par value common
stock were outstanding.
Document
Portions of the Proxy Statement with respect to the 2014 Annual Meeting of Stockholders
Form 10-K
Part III
Documents Incorporated by Reference
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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
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Z I M M E R H OL 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,
referred to as 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
80 percent of our net sales in 2013. 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 2013.
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 3 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, some 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 $2,619.8 million, or 57 percent, of
2013 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 $1,212.6 million, or 26 percent, of 2013 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
is sponsored by the government and therefore government
3
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
budgets impact healthcare spending, which can affect our sales
in this segment.
Asia Pacific. The Asia Pacific geographic segment
accounted for $791.0 million, or 17 percent, of 2013 net sales,
with Japan being the largest market within this segment,
accounting for 44 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 seasonal in nature to some extent, 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.
We generally ship our orders via expedited courier. We do
not consider our backlog of firm orders to be material to an
understanding of our business.
PRODUCTS
Our products include orthopaedic reconstructive
implants, spinal and trauma devices, biologics, dental implants
and related surgical products.
Orthopaedic Reconstructive Implants
Knees
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
reconstruction of the knee, which treat limited knee
4
degeneration and involve the replacement of only one side, or
compartment, of the knee with a unicompartmental knee
prosthesis. Our knee portfolio also includes early intervention
and joint preservation products, which seek to preserve the
joint by repairing or regenerating damaged tissues and by
treating osteoarthritis.
Our significant knee brands include the following:
(cid:129) Persona® The Personalized Knee System
(cid:129) NexGen® Complete Knee Solution
(cid:129) Natural-Knee® II System
(cid:129) Innex® Total Knee System
(cid:129) Zimmer® Unicompartmental Knee System
(cid:129) Zimmer® Patient Specific Instruments
(cid:129) Zimmer® Segmental System
(cid:129) Gel-One®1 Cross-linked Hyaluronate
(cid:129) DeNovo® NT Natural Tissue Graft
Hips
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) Avenir® Müller 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
Extremities
Our extremity portfolio, primarily shoulder and elbow
products, is designed to treat arthritic conditions, soft tissue
injuries and fractures.
Our significant extremity brands include the following:
(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
(cid:129) Nexel® Total Elbow
Dental
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;
1 Registered trademark of Seikagaku Corporation
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2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
(2) dental prosthetic 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
(cid:129) Zimmer® Hex-Lock® Contour Abutment and Restorative
Products
(cid:129) Puros® Allograft Products2
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
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, blood management and fluid waste management.
Our significant surgical brands include the following:
(cid:129) Transposal® and Transposal Ultra® Fluid Waste
Management Systems
(cid:129) PALACOS®3 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® Universal Power System
2 Manufactured for Zimmer Dental Inc. by RTI Biologics in Alachua, FL
and Tutogen Medical GmbH, Germany (an RTI Biologics, Inc.
company)
3 Registered trademark of Heraeus Medical GmbH
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, Montreal, Canada; Beijing, China; Winterthur,
Switzerland; Austin, Texas; Minneapolis, Minnesota; Carlsbad,
California; Philadelphia, Pennsylvania; Dover, Ohio; and
Parsippany, New Jersey. As of December 31, 2013, we employed
nearly 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
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).
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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.
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, state and
foreign laws concerning healthcare fraud and abuse, including
false claims and anti-kickback laws, as well as the Physician
Payments Sunshine Act and similar state and healthcare
professional payment transparency 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, state attorneys general and
various foreign government agencies. 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. 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.
The FDA may also impose operating restrictions, enjoin
Our facilities and operations are also subject to complex
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.
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
6
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., and
Smith & Nephew plc.
In the Americas geographic segment, we and the DePuy
Synthes Companies, Stryker Corporation, Biomet, Inc., and
Smith & Nephew, Inc. (a subsidiary of Smith & Nephew plc)
account for a large majority of the total reconstructive and
trauma implant sales. There are also many smaller competitors
actively engaging in this market. Some of these smaller
competitors have success by focusing on smaller subsegments
of the industry.
The European reconstructive implant and trauma product
markets are more fragmented than those markets in 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
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
(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 environments, make it difficult for
smaller companies, particularly those that are non-regional, to
compete effectively with the market leaders in the more
developed healthcare markets 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.
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.
In the dental implant category, we compete primarily with
INTELLECTUAL PROPERTY
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, price, 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.
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, 2013, we employed approximately
9,500 employees worldwide, including nearly 1,000 employees
dedicated to research and development. Approximately 5,200
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 3,900
employees dedicated to manufacturing our products
worldwide. The Warsaw, Indiana production facility employs
approximately 1,600 employees.
Approximately 180 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.
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EXECUTIVE OFFICERS
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
The following table sets forth certain information with respect to our executive officers as of February 20, 2014.
Name
Age
Position
David C. Dvorak
James T. Crines
Joseph A. Cucolo
Derek M. Davis
Katarzyna Mazur-Hofsaess, M.D., Ph.D.
Stephen H.L. Ooi
Chad F. Phipps
50
54
54
45
50
60
42
President and Chief Executive Officer
Executive Vice President, Finance and Chief Financial Officer
President, Americas
Vice President, Finance and Corporate Controller and Chief Accounting Officer
President, Europe, Middle East and Africa
President, Asia Pacific
Senior Vice President, General Counsel and Secretary
Mr. Dvorak was appointed President, Chief Executive Officer
and a member of the Board of Directors 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 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, 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.
Dr. Mazur-Hofsaess was appointed President, Europe, Middle
East and Africa in April 2013. She is responsible for the sales,
marketing and distribution of products in the European,
Middle Eastern and African (EMEA) regions. Dr. Mazur-
Hofsaess joined Zimmer in February 2010 as Senior Vice
President, EMEA Sales and Marketing and was appointed
President, EMEA Reconstructive in February 2012. She has
approximately 20 years’ experience within the pharmaceutical,
diagnostics and medical device sectors. Prior to joining
Zimmer, Dr. Mazur-Hofsaess served as Vice President,
Diagnostics – Europe of Abbott Laboratories from 2001.
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.
8
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 Corporate
Compliance, 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.
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
Z I M M E R H OL D I NG S , I NC .
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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
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;
(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
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Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
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.
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.
The U.S. healthcare reform legislation includes
provisions that may materially adversely affect our
business and results of operations.
The Patient Protection and Affordable Care Act of 2010,
as amended by the Health Care and Education Affordability
Reconciliation Act of 2010 (collectively, the Affordable Care
Act), was signed into law in March 2010 and mandates health
insurance coverage and other healthcare reforms with
staggered effective dates from 2010 to 2018. As part of the
Affordable Care Act, in January 2013 we began paying a 2.3
percent medical device excise tax on the vast majority of our
U.S sales. We continue to identify ways to reduce spending in
other areas to offset the earnings impact due to the tax. We are
not able to pass along the cost of the tax to hospitals, which
continue to face cuts to their Medicare reimbursement under
the Affordable Care Act and other legislation. Nor are we 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
subsequent guidance from the U.S. Department of Treasury
have not lessened the burden of complying with the excise tax
statute. In addition, without the implementation of proper
safeguards, the Affordable Care Act’s Medicare payment
reforms, such as accountable care organizations and bundled
payments, could provide additional incentives for healthcare
providers to reduce spending on some of 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 full impact of the Affordable Care
Act on our business, ongoing implementation could have a
material adverse effect on our results of operations and cash
flows.
10
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
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
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
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 and could have a material adverse effect
on our business, financial condition and results of operations.
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.
If we fail to comply with healthcare fraud and abuse
laws and regulations, we could face substantial
penalties and our business, operations and financial
condition could be adversely affected.
Our industry is subject to various federal, state and
foreign laws and regulations pertaining to healthcare fraud and
abuse, including the federal False Claims Act, the federal Anti-
Kickback Statute, the federal Stark law, the federal Physician
Payments Sunshine Act and similar state and foreign 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.
The “conflict minerals” rule 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.
We are subject to the SEC’s rule regarding disclosure of
the use of certain minerals, known as “conflict minerals”
(tantalum, tin and tungsten (or their ores) and gold), which
are mined from the Democratic Republic of the Congo and
adjoining countries. U.S. public companies that manufacture
products that contain conflict minerals that are necessary to
the functionality or production of their products must annually
disclose whether the minerals in their products originated from
one of these countries and the procedures employed to
determine the sourcing of such minerals. These requirements
became effective for the 2013 calendar year, with initial
disclosure reports due in May 2014. We are incurring costs to
comply with this rule, including for diligence in regard to the
sources of any conflict minerals used in our products. We
cannot be sure that we will be able to obtain the necessary
information on conflict minerals from our suppliers or that we
will be able to determine that all of our products are conflict-
free. As a result, we may face reputational challenges if we
determine that certain of our products contain minerals not
determined to be conflict-free or if we are unable to
sufficiently verify the origin of all conflict minerals used in our
products. This rule 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 2013 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;
(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
11
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
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.
Since 2008, the global economy has been impacted by an
ongoing series of financial crises. Although the U.S. economy is
recovering, 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 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.
Further, there are concerns for the overall stability and
suitability of the Euro as a single currency. Continuing high
unemployment in the U.S., a worsening of the European
financial situation 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
12
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.
We are substantially dependent on patent and other
proprietary rights, and failing to protect such rights or
to be successful in litigation related to our rights or the
rights of others may result in our payment of significant
monetary damages and/or royalty payments, negatively
impact our ability to sell current or future products, or
prohibit us from enforcing our patent and other
proprietary rights against others.
Claims of intellectual property infringement and litigation
regarding patent and other intellectual property rights are
commonplace in our industry and are frequently time
consuming and costly. At any given time, we may be involved
as either plaintiff or defendant in a number of patent
infringement actions, the outcomes of which may not be
known for prolonged periods of time. While it is not possible to
predict the outcome of patent and other intellectual property
litigation, such litigation could result in our payment of
significant monetary damages and/or royalty payments,
negatively impact our ability to sell current or future products,
or prohibit us from enforcing our patent and proprietary rights
against others, which could have a material adverse effect on
our business and results of operations.
Patents and other proprietary rights are essential to our
business. We rely on a combination of patents, trade secrets
and non-disclosure and other agreements to protect our
proprietary intellectual property, and we will continue to do so.
While we intend to defend against any threats to our
intellectual property, these patents, trade secrets and other
agreements may not adequately protect our intellectual
property. Further, our currently pending or future patent
applications may not result in patents being issued to us,
patents issued to or licensed by us in the past or in the future
may be challenged or circumvented by competitors, and such
patents may be found invalid, unenforceable or insufficiently
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
broad to protect our technology or to provide us with any
competitive advantage. Third parties could obtain patents that
may require us to negotiate licenses to conduct our business,
and the required licenses may not be available on reasonable
terms or at all.
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 non-disclosure and
other agreements with our employees, consultants and
collaborators. We cannot be certain that these agreements will
not be breached, that we will have adequate remedies for any
breach, that others will not independently develop
substantially equivalent proprietary information, or that third
parties will not otherwise gain access to our trade secrets or
proprietary knowledge.
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.
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
some key raw materials and outsourced activities.
We use a number of suppliers for raw materials that we
need to manufacture our products and to outsource some key
manufacturing activities. These suppliers must provide the
materials and perform the activities to our standards for us to
meet our quality and regulatory requirements. Some key raw
materials and outsourced activities can only be obtained from a
single source or a limited number of sources. A prolonged
disruption or other inability to obtain these materials or
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
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.
13
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
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.
14
Z I M M E R H OL D I NG S , I NC .
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 & 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 3 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
Owned
Leased
Owned
Leased
Owned
Leased
Owned
Leased
Leased
Owned
Leased
Leased
Leased
Owned
Leased
1,400,000
117,000
83,000
125,000
51,000
189,000
138,000
64,000
132,000
30,000
71,000
60,000
52,000
89,000
52,000
90,000
13,000
94,000
75,000
125,000
55,000
87,000
20,000
34,000
225,000
19,000
30,000
425,000
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 H OL D I NG S , I NC .
PART II
2 0 1 3 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 2013 and 2012 are set forth as follows:
Quarterly High-Low Share Prices and Declared Dividends
Year Ended December 31, 2013:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2012:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Declared
Dividends
$76.75
$81.92
$85.08
$93.70
$67.34
$72.31
$74.85
$80.55
$64.81
$66.41
$67.90
$69.09
$52.70
$58.23
$57.46
$61.97
$0.20
$0.20
$0.20
$0.20
–
$
$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 14, 2014 was approximately 233,201. On February 14, 2014, the
closing price of the common stock, as reported on the New York Stock Exchange, was $96.07 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, 2013:
October 2013
November 2013
December 2013
Total
Total Number of
Shares Purchased
Average Price
Paid per Share
245,000
791,099
1,631,684
2,667,783
$87.95
89.39
90.90
$90.18
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)
245,000
791,099
1,631,684
2,667,783
$514,828,590
444,111,051
295,789,806
$295,789,806
(1) Includes repurchases made under a program authorizing $1.5 billion of repurchases through December 31, 2014. In December 2013, our Board of
Directors authorized a new share repurchase program effective January 1, 2014. The new share repurchase program authorizes purchases of up to $1.0 billion
with no expiration date. No further purchases will be made under the previous share repurchase program.
16
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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):
STATEMENT OF EARNINGS DATA
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
2013
2012
2011
2010
2009
$4,623.4
761.0
$4,471.7
755.0
$4,451.8
760.8
$4,220.2
596.9
$4,095.4
717.4
$
$
4.49
4.43
0.80
$
$
4.32
4.29
0.54
$
$
4.05
4.03
0.18
$
$
2.98
2.97
–
$
$
3.34
3.32
–
169.6
171.8
174.9
176.0
187.6
188.7
200.0
201.1
215.0
215.8
$9,580.6
1,672.3
576.6
6,300.1
$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
17
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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 2012 and 2011
consolidated financial statements have been reclassified to
conform to the 2013 presentation.
EXECUTIVE LEVEL OVERVIEW
2013 Results
Our 2013 sales results reflected increased growth as
compared with 2012 trends. Sales from new product
introductions, such as Persona The Personalized Knee System
and the Transposal Fluid Waste Management System, as well
as a stable or slightly improved joint replacement market,
drove sales volume and product mix growth. This was partially
offset by continued pricing pressure, as well as negative
effects from changes in foreign currency exchange rates.
Our gross profit declined slightly in 2013 compared to
2012. We realized lower gross margins caused by excess and
obsolete inventory charges for products we intend to
discontinue, as well as a higher mix of lower margin product
and geographic revenues.
Operating expenses increased by $2.6 million in 2013, while
operating expenses as a percentage of sales decreased in 2013
relative to 2012. We incurred higher selling expenses, “Certain
claims” and “Special items” in 2013 relative to 2012, but we did not
incur a goodwill impairment charge in 2013, whereas in 2012 we
recorded a $96.0 million goodwill impairment charge. The selling
expense increase was due to sales growth. “Certain claims”
expense is a provision for estimated liabilities to Durom Cup
patients undergoing revision surgeries. “Special items” are
primarily related to our quality and operational excellence
initiatives, which are intended to improve our future operating
results and include centralizing or outsourcing certain functions
and improving quality, distribution, sourcing, manufacturing and
information technology systems.
Our effective tax rate (ETR) benefited from changes in
the mix of income between taxing jurisdictions. The significant
expenses for our excess and obsolete inventory charges,
“Certain claims” and “Special items” were primarily incurred in
jurisdictions with higher rates of tax, which lowered taxable
income in those jurisdictions.
Sales increased 3 percent in 2013 relative to 2012, while
net earnings increased 1 percent. Net earnings grew at a
slower pace than sales primarily due to lower gross profit.
2014 Outlook
We estimate our net sales will grow between 2.5 and 4.5
percent in 2014. This assumes the market for knee and hip
procedures will remain stable and grow in the low to mid-
18
single digits. We expect pricing to have a negative effect on
sales growth of between 2 and 3 percent, and foreign currency
exchange rates to have a negative effect on sales growth of
between 0 and 1 percent based upon December 31, 2013 rates.
Assuming currency rates remain at December 31, 2013
levels, we expect our gross margin to be between 73 and 74
percent of sales in 2014. This range assumes that foreign
currency hedge gains will be higher in 2014 than in 2013. The
range also takes into consideration the full year impact of the
2.3 percent medical device excise tax on a majority of our U.S.
sales. 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. Generally Accepted Accounting
Principles (GAAP), excise taxes incurred to transfer 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. Based upon
the levels of inventory we were carrying before the medical
device excise tax was effective, we did not recognize any of
the excise tax until the fourth quarter of 2013. The excise tax
is derived from a constructive sales price, as defined by U.S.
tax law and Internal Revenue Service (IRS) guidance. Prior to
the medical device excise tax effective date, the IRS issued
interim rules (see IRS Notice 2012-77) that provide, among
other things, that medical device manufacturers selling to an
affiliated distribution entity may apply a 28.75% discount off
retail selling prices when computing the tax base. We are in
discussions with the IRS as to what an appropriate
constructive sales price should be under IRS excise tax
regulations and our specific business model. As a result of our
discussions with the IRS, our ultimate medical device excise
tax may differ from the amount determined under Notice
2012-77. We estimate the cost in 2014 will be approximately
$10 million per quarter. Since we recognize the medical device
excise tax as a part of the cost of inventory, the amount
expensed in any particular quarter will vary according to U.S.
sales levels in that quarter.
We expect to continue making investments in research and
development (R&D) of between 4 and 4.5 percent of sales in 2014.
Selling, general and administrative expenses (SG&A) as a
percentage of sales is expected to be between 38.5 and 39 percent
in 2014 as we realize efficiencies from our quality and operational
excellence initiatives and further leverage revenue growth.
We expect to incur approximately $250 million of
expenses in 2014 related to our quality and operational
excellence initiatives and integration costs from recent
acquisitions. The quality and operational excellence programs
are intended to improve our future operating results and
include centralizing or outsourcing certain functions and
improving quality, distribution, sourcing, manufacturing and
information technology systems. We expect to recognize the
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
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.
that were incurred in jurisdictions with higher tax rates, to
recur, thus increasing the profit in those higher tax
jurisdictions.
Assuming variable interest rates remain at December 31,
Based upon the above, we expect reported net earnings
2013 levels, we expect interest income and expense, net, to be
similar to 2013.
We expect our ETR to increase in 2014 relative to 2013,
as we do not anticipate certain significant costs, such as
excess and obsolete inventory charges and “Certain claims”
and diluted earnings per share to increase in a range of
approximately 13 to 17 percent in 2014 relative to 2013,
stemming from anticipated higher sales and an improved gross
margin.
RESULTS OF OPERATIONS
Net Sales by Reportable Segment
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,
2013
2012 % Inc/(Dec)
Volume/
Mix
Price
Foreign
Exchange
$2,619.8
1,212.6
791.0
$2,476.3
1,177.4
818.0
6%
3
(3)
8% (2)%
2
8
(1)
(1)
–%
2
(10)
$4,623.4
$4,471.7
3
7
(2)
(2)
Year Ended December 31,
2012
2011 % Inc/(Dec)
$2,476.3
1,177.4
818.0
$2,440.8
1,214.5
796.5
1%
(3)
3
Volume/
Mix
Price
Foreign
Exchange
4% (2)% (1)%
4
5
(1)
(2)
(6)
–
$4,471.7
$4,451.8
–
4
(2)
(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,
2013
2012
% 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
$1,909.9
1,330.5
193.8
$1,833.8
1,342.0
173.8
3,434.2
3,349.6
239.3
315.6
202.3
432.0
237.7
307.9
208.9
367.6
$4,623.4
$4,471.7
Year Ended December 31,
4%
(1)
11
3
1
2
(3)
18
3
2012
2011
% Inc (Dec)
$1,833.8
1,342.0
173.8
$1,835.9
1,355.6
163.4
3,349.6
3,354.9
237.7
307.9
208.9
367.6
248.1
285.8
225.0
338.0
$4,471.7
$4,451.8
–%
(1)
6
–
(4)
8
(7)
9
–
7% (2)% (1)%
3
14
(2)
(1)
(2)
(2)
6
–
6
(1)
21
7
(2)
–
(1)
(2)
–
(2)
(1)
1
(3)
–
(3)
(2)
Volume/
Mix
Price
Foreign
Exchange
4% (2)% (2)%
4
9
(2)
(2)
(3)
(1)
4
(4)
10
(2)
10
4
(3)
2
(1)
(4)
–
(2)
(1)
(2)
(1)
(1)
(1)
(2)
19
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
Beginning in 2013, our Knees product category net sales include certain early intervention products that are primarily used in
knee procedures. In 2012 and 2011, these products were included in the Surgical and other product category. Net sales in the years
ended December 31, 2012 and 2011 related to these products have been reclassified to conform to the 2013 presentation.
The following table presents net sales by product category by region (dollars in millions):
2013
2012
2011
2013 vs. 2012
% Inc (Dec)
2012 vs. 2011
% Inc (Dec)
$1,135.3
468.3
306.3
$1,077.9
447.3
308.6
$1,078.3
462.6
295.0
621.0
445.0
264.5
148.1
34.0
11.7
606.7
446.0
289.3
133.8
29.0
11.0
600.7
470.5
284.4
125.0
27.5
10.9
3,434.2
3,349.6
3,354.9
141.6
78.6
19.1
155.6
76.4
83.6
129.6
49.8
22.9
288.6
60.5
82.9
137.8
79.8
20.1
155.2
69.5
83.2
140.0
49.3
19.6
224.9
56.5
86.2
134.7
85.3
28.1
145.5
63.5
76.8
150.9
53.5
20.6
205.7
51.6
80.7
$4,623.4
$4,471.7
$4,451.8
5%
5
(1)
2
–
(9)
11
17
7
3
3
(2)
(5)
–
10
–
(7)
1
17
28
7
(4)
3
–
(3)
5
1
(5)
2
7
6
1
–
2
(6)
(29)
7
10
8
(7)
(8)
(5)
9
10
7
–
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 H OL D I NG S , I NC .
Demand (Volume and Mix) Trends
Increased volume and changes in the mix of product sales
contributed 7 percentage points of year-over-year sales growth
in 2013, which is a higher growth rate than experienced in
2012 compared to 2011. In 2013, accelerated growth was
fueled by the introduction of new products, such as Persona
The Personalized Knee System and the Transposal Fluid
Waste Management System.
We believe procedure volumes in the broader
musculoskeletal market remained stable or improved slightly
in 2013 relative to 2012. 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,
demand for clinically proven premium products and patient
specific devices will continue to positively affect sales growth
in markets that recognize the value in these advanced
technologies.
Pricing Trends
Global selling prices had a negative effect of 2 percent on
year-over-year sales during 2013. Our Americas and Europe
reporting segments and certain countries in our Asia Pacific
reporting segment continued to experience pricing pressure
from governmental healthcare cost containment efforts and
from local hospitals and health systems. For 2014, we estimate
that selling prices will decline slightly more than they did in
2013 due to a biennial price adjustment in Japan in the second
quarter of 2014 along with some moderately weaker pricing in
Europe. Overall, we estimate prices will have a negative effect
of 2 to 3 percent on year-over-year sales in 2014.
Foreign Currency Exchange Rates
For 2013, foreign currency exchange rates resulted in a 2
percent decrease in sales, primarily from the strengthening of
the U.S. Dollar versus the Japanese Yen in the period. If
foreign currency exchange rates remain consistent with
December 31, 2013 rates, we estimate that a stronger dollar
versus foreign currency exchange rates will have a negative
effect on sales in 2014 of 0 to 1 percent. We address currency
risk through regular operating and financing activities and
through the use of forward contracts and foreign currency
options solely to manage foreign currency volatility and risk.
Changes to foreign currency exchange rates affect sales
growth, but due to offsetting gains/losses on hedge contracts
and options, which are recorded in cost of products sold, the
effect on net earnings in the near term is expected to be
minimal.
Knees
Knee sales increased 4 percent in 2013 compared to flat
sales in 2012. Our Knee product category has benefited from
new product introductions, such as Persona The Personalized
Knee System and early intervention products, as well as
increased procedure volumes in the market. We are cautiously
optimistic that volume/mix trends will continue to remain
stable in 2014.
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
In 2013, we continued a broader launch of Persona The
Personalized Knee System. We intend to continue to deploy
implant and instrument sets to all geographic regions during
2014 and beyond. In the meantime, our NexGen Complete
Knee Solution product line is still our leading knee system in
terms of sales. Products driving growth in this category in 2013
in addition to Persona The Personalized Knee System
included Zimmer Patient Specific Instruments, the Zimmer
Unicompartmental High Flex Knee and our early intervention
products.
In Europe, changes in foreign currency exchange rates
affected knee sales in 2013 and 2012 by positive 2 percent and
negative 6 percent, respectively. In Asia Pacific, changes in
foreign currency exchange rates had a negative 9 percent
effect on knee sales in 2013 and a minimal effect in 2012.
Hips
Hip sales declined by 1 percent in each of the last two
years. We believe that industry procedure volumes were stable
or improved slightly in 2013, while pricing was negative. As
compared to our Knee product category, our overall Hip
product category is more exposed to certain negative factors in
Europe and Asia Pacific, as we derive a higher percentage of
total hip sales in those regions when compared to our Knee
business. More specifically, Europe continues to be a difficult
market with government budget constraints. In Asia Pacific,
the strengthening of the U.S. Dollar versus the Japanese Yen
caused a significant decline in Asia Pacific hip sales in 2013.
In Europe, changes in foreign currency exchange rates
affected hip sales in 2013 and 2012 by positive 2 percent and
negative 6 percent, respectively. In Asia Pacific, changes in
foreign currency exchange rates affected hip sales in 2013 and
2012 by negative 11 percent and positive 1 percent,
respectively.
Leading hip stem sales were the Zimmer M/L Taper Hip
Prosthesis, the Zimmer M/L Taper Hip Prosthesis with
Kinectiv Technology, the CLS Spotorno Stem from the CLS
Hip System and the Alloclassic Zweymüller Hip Stem.
Products experiencing growth in this category included the
Wagner SL Revision® Hip Stem, the Continuum Acetabular
System, the Trilogy IT Acetabular System, the Allofit IT
Alloclassic Acetabular System, Vivacit-E® Highly Crosslinked
Polyethylene Liners and BIOLOX®4 delta Heads.
Extremities
Extremities delivered solid sales growth the past two
years. The Zimmer Trabecular Metal Reverse Shoulder
System, the Sidus® Stem-Free Shoulder and the Zimmer
Trabecular Metal Total Ankle drove sales growth. Trabecular
Metal Technology continues to be an effective way to address
clinical needs in the extremities market. Additionally, our
acquisition of NORMED Medizin-Technik GmbH in June 2013
contributed to growth in this product category.
4 Registered trademark of CeramTec GmbH
21
Z I M M E R H OL D I NG S , I NC .
Dental
Dental sales increased 1 percent in 2013 after a 4 percent
decline in 2012. While the Americas dental 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. In 2013, the effects of those negative
factors in 2012 were less pronounced which resulted in slightly
improved sales of dental reconstructive implants and digital
solutions, offset by decreases in restorative products and
regenerative products. We believe the dental market continues
to be challenged both in the U.S. and internationally. Dental
sales in 2013 were led by the Tapered Screw-Vent Implant
System.
Trauma
Trauma sales increased by 2 percent and 8 percent in
2013 and 2012, respectively, compared to the same prior year
periods. In this product category, changes in foreign exchange
rates had a greater negative impact on 2013 sales than in our
other product categories due to the geographic mix of our
Trauma sales revenue. The Zimmer Natural Nail System
continued to increase sales significantly. However, this
increase was partially at the expense of our other
intramedullary nail systems. In addition to the Zimmer
Natural Nail System, the Zimmer Periarticular Locking
Plates System led trauma sales.
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 pricing pressure and payor approval.
In 2013, solid sales of the PathFinder NXT Minimally Invasive
Pedicle Screw System and Trabecular Metal Technology
products partly offset a decline in sales of the Dynesys
Dynamic Stabilization System, the Trinica Select Anterior
Cervical Plate System and other spine products.
Surgical and other
Surgical and other jumped to an 18 percent sales increase
in 2013 after a 9 percent increase in 2012. The primary driver
of sales growth in this product category was the Transposal
Fluid Waste Management System, which we acquired through
our acquisition of Dornoch Medical Systems, Inc. in October
2012. Other contributing products were PALACOS®5 Bone
Cement, tourniquets and wound debridement devices.
5 Registered trademark of Heraeus Medical GmbH
22
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
The following table presents estimated* 2013 global
market size and market share information (dollars in billions):
Reconstructive
Knees
Hips
Extremities
Total
Dental
Trauma
Spine***
Global
Market
Size
$ 7.5
6.4
1.7
$15.6
$ 3.3
$ 5.7
$ 8.8
Global Market
% Growth**
Zimmer
Market
Share
Zimmer
Market
Position
3%
3
11
4
1
3
1
26%
21
12
22
7
6
2
1
2
5
1
5
4
7
* Estimates are not precise and are based on competitor annual filings, Wall
Street equity research and Company estimates
** Excludes the effect of changes in foreign currency exchange rates on
sales growth
*** Spine includes related orthobiologics
Expenses as a Percent of Net Sales
Year Ended December 31,
2013
2012
2011
2013 vs. 2012
Inc (Dec)
2012 vs. 2011
Inc (Dec)
27.8% 25.2% 25.2%
2.6
–
4.4
5.0
5.4
(0.6)
(0.4)
39.7
1.0
–
4.7
22.4
40.4
0.3
2.1
3.5
23.4
41.2
3.5
–
1.7
23.0
(0.7)
0.7
(2.1)
1.2
(1.0)
(0.8)
(3.2)
2.1
1.8
0.4
Cost of products sold
Research and
development
Selling, general and
administrative
Certain claims
Goodwill impairment
Special items
Operating margin
Cost of Products Sold
The following table sets forth the factors that contributed
to the gross margin changes in each of 2013 and 2012
compared to the prior year:
Year Ended December 31,
Prior year gross margin
Lower average selling prices
Average cost per unit
Excess and obsolete inventory
Discontinued products and other certain excess and
obsolete inventory charges
Certain inventory and manufacturing related charges
related to quality
Foreign currency exchange impact, net
Inventory step-up
Other
Current year gross margin
2013
2012
74.8% 74.8%
(0.4) (0.5)
(1.2) (0.1)
(0.2) (0.1)
(1.0)
–
(0.3)
0.5
(0.1)
0.1
–
0.4
0.2
0.1
72.2% 74.8%
The decrease in gross margin in 2013 was primarily due to
higher average costs per unit sold as a result of changes in
product and geographic mix and increased excess and
obsolescence charges related to products we intend to
discontinue. Additionally, lower average selling prices and
certain inventory and manufacturing related charges
connected to quality enhancement and remediation efforts
reduced gross margin. These negative effects were partially
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
offset by hedge gains recorded in 2013 from our foreign
currency hedging program versus hedge losses recorded in
2012. The gains were primarily the result of the U.S. Dollar
strengthening against the Japanese Yen. 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.
Gross margin was the same in 2012 compared to 2011.
Our foreign currency hedging program also had a favorable
impact on gross margin in 2012. 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.
Operating Expenses
R&D expenses and R&D as a percentage of sales have
declined in the last three years. The lower spending reflected a
natural decline from certain large projects that achieved full
commercialization, including Persona The Personalized Knee
System, and a dedication of resources to our quality and
operational excellence initiatives. We expect R&D spending in
2014 to be between 4 and 4.5 percent of sales.
SG&A expenses increased, but SG&A as a percentage of
sales decreased in 2013 compared to 2012. The dollar increase
was primarily due to higher selling and distribution expenses
from higher sales and increased intangible asset amortization
from acquisitions. This was partially offset by lower bad debt
expenses as well as lower legal expenses due to the conclusion
of certain matters for which we are no longer incurring legal
expenses, as well as normal variations in the phases of
litigation, including product liability litigation. As a percentage
of sales, SG&A decreased 70 basis points in 2013 as our quality
and operational excellence initiatives have produced lower
variable and fixed costs in SG&A as well as the natural
leverage that occurs when sales increase against our fixed
costs, such as fixed intangible asset amortization from past
acquisitions.
In 2012, SG&A decreased in dollar 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 rates
lowered SG&A expense, especially in Europe. Absent the
effects of foreign currency exchange rates, selling and
distribution expenses were higher due to higher sales. Other
unfavorable items included increased intangible asset
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 in 2012 compared to
2011 for similar reasons noted in 2013.
“Certain claims” expense is for estimated liabilities to
Durom Cup patients undergoing revision surgeries. We
recorded expense of $15.0 million, $157.8 million, $75.0
million, $35.0 million and $69.0 million during 2012, 2011,
2010, 2009 and 2008, respectively. We recorded additional
expense of $47.0 million in 2013, bringing the total recorded
expense to $398.8 million for these claims, excluding a subset
of Durom Cup claims that were recorded in SG&A. The
additional expense recorded in 2013 was driven primarily by
more estimated claims than were previously expected. 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 test
performed in the fourth quarter of 2012, 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 a goodwill impairment charge of $96.0
million in 2012. We did not record a goodwill impairment
charge in 2013, as our annual goodwill impairment test
revealed that the carrying values of the net assets of our U.S.
Spine reporting unit were less than their estimated fair value.
For more information regarding goodwill impairment and the
factors that led to the 2012 impairment, see Note 8 to the
consolidated financial statements.
“Special items” have increased significantly in the past
three years. We continue to implement our quality and
operational excellence initiatives, which are intended to
improve our future operating results by centralizing or
outsourcing certain functions and improving quality,
distribution, sourcing, manufacturing and our information
technology systems. “Special items” expenses include
consulting and professional fees, dedicated personnel costs,
severance benefits as well as other costs for those programs. In
addition to expenses for our quality and operational excellence
programs, we recognize expenses related to integration of
acquired businesses, impairment of assets, certain R&D
agreements, certain litigation settlements, contract
termination expenses and other items as “Special items.” 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 income and expense, net, were similar in 2013
and 2012 after an increase from 2011. Interest expense
increased in 2012 compared to 2011 primarily due to the $550
million offering of senior notes we completed in November
2012.
Our ETR on earnings before income taxes for the years
ended December 31, 2013, 2012 and 2011 was 22.6 percent,
24.0 percent and 22.4 percent, respectively. The variation of
our ETR has largely been affected by “Special items”, “Certain
claims”, goodwill impairment charges and a $34.3 million
benefit in 2012 from the recognition of deferred tax assets
related to a legal entity restructuring. Higher “Special items”
and “Certain claims” expense favorably affect our ETR because
these expenses have mostly been incurred within jurisdictions
with higher tax rates, resulting in lower taxable income in
23
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these higher tax jurisdictions. Goodwill impairment negatively
affects our ETR because no tax benefit is recorded on the
charge. In 2013, in addition to the effect of “Special items” and
“Certain claims,” our ETR benefited from the retroactive
reinstatement of the R&D tax credit and other tax benefits
applicable to us that applied to the 2012 and 2013 periods. Due
to the timing of the extension and the applicable GAAP rules,
we recognized the 2012 benefit in the 2013 period.
Additionally, in 2011 our ETR was favorably impacted by the
resolution of certain tax contingencies. The items discussed
accounted for the majority of the variation in our ETRs in the
past three years.
As a result of the revenues and expenses discussed
previously, net earnings in 2013 increased 1 percent compared
to 2012. In 2012, net earnings decreased 1 percent compared
to 2011. Basic and diluted earnings per share increased 4
percent and 3 percent, respectively, in 2013 compared to 2012,
while 2012 basic and diluted earnings per share increased 7
percent and 6 percent, respectively, compared to 2011. The
disproportionate changes in earnings per share as compared to
net earnings are attributed to the effect of share repurchases.
For our reporting segments, operating profit increased
each year in the Americas and Asia Pacific while in Europe it
has decreased over those same time periods. The increase in
the Americas is indicative of increasing sales in the geographic
region. In Europe and Asia Pacific, operating profit is impacted
by foreign currency exchange rates. In Europe, the decline in
operating profit from 2011 to 2012 was primarily related to a 3
percent decline in sales (a 6 percent decline due to changes in
foreign currency exchange rates offset by a 3 percent increase
from the combination of volume/mix and price). In 2013, while
sales did increase by 3 percent (a 2 percent increase from
changes in foreign currency exchange rates and 1 percent
increase from the combination of volume/mix and price) the
higher sales were largely offset by hedge losses recorded in the
2013 period versus hedge gains recorded in the 2012 period.
Additionally, operating profit in Europe declined due to
continuing price pressure in those markets as well as a change
in the mix of sales to higher growth markets with lower
operating profit margins. In Asia Pacific, the increase in
operating profit from 2011 to 2012 was driven by higher sales.
The increase in operating profit in Asia Pacific from 2012 to
2013 was driven by the 8 percent increase in sales from
volume/mix. While changes in foreign currency exchange rates
decreased sales by 10 percent in 2013 compared to 2012, this
decline was largely offset by hedge gains recorded in 2013
versus hedge losses recorded in 2012.
Non-GAAP operating performance measures
We use financial measures that differ from financial
measures determined in accordance with GAAP to evaluate
our operating performance. These non-GAAP financial
measures exclude the impact of inventory step-up, certain
inventory and manufacturing related charges connected to
quality enhancement and remediation efforts, inventory
obsolescence charges associated with products we intend to
discontinue, “Certain claims,” “Special items,” and any related
effects on our income tax provision associated with these items
24
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, 2013,
2012 and 2011 were $988.4 million, $932.5 million, and $905.6
million, respectively, and our non-GAAP adjusted diluted
earnings per share were $5.75, $5.30, and $4.80, 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,
2013
2012
2011
Net Earnings of Zimmer Holdings, Inc.
Inventory step-up and other inventory
and manufacturing related charges
Certain claims
Goodwill impairment
Special items
Taxes on above items and other certain
$ 761.0
$755.0
$760.8
70.5
47.0
–
216.7
4.8
15.0
96.0
155.4
11.4
157.8
–
75.2
tax adjustments*
(106.8)
(93.7)
(99.6)
Adjusted Net Earnings
$ 988.4
$932.5
$905.6
* The tax effect is calculated based upon the statutory rates for the
jurisdictions where the items were incurred.
Year ended December 31,
2013
2012
2011
Diluted EPS
Inventory step-up and other inventory and
manufacturing related charges
Certain claims
Goodwill impairment
Special items
Taxes on above items and other certain tax
adjustments*
Adjusted Diluted EPS
$ 4.43
$ 4.29
$ 4.03
0.41
0.27
–
1.26
0.03
0.09
0.54
0.88
0.06
0.84
–
0.40
(0.62)
(0.53)
(0.53)
$ 5.75
$ 5.30
$ 4.80
* 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
$963.1 million in 2013, compared to $1,151.9 million in 2012.
The principal source of cash from operating activities in 2013
was net earnings. Non-cash charges included in net earnings
accounted for another $288.8 million of operating cash. All
other items of operating cash flows in 2013 were outflows of
$84.9 million of cash. The lower cash flows provided by
operating activities in the 2013 period were primarily due to
increases in inventory caused by the medical device excise tax
and inventory investments to support new product launches.
Additionally, cash flows were unfavorable compared to the
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
prior year due to spending on our quality and operational
excellence initiatives. These unfavorable items were partially
offset by lower product liability payments for Durom Cup
claims, and lower funding required on our U.S. pension plans
for 2013.
At December 31, 2013, we had 65 days of sales
outstanding in trade accounts receivable, which was higher by
one day compared to December 31, 2012. At December 31,
2013, we had 285 days of inventory on hand, a decrease of 16
days compared to December 31, 2012. We consider the
changes in days of sales outstanding and days of inventory on
hand as normal fluctuations for our business.
Cash flows used in investing activities were $282.5 million
in 2013, compared to $592.1 million in 2012. Additions to
instruments increased in 2013 due to purchases for significant
product launches, such as Persona The Personalized Knee
System. Spending on other property, plant and equipment was
relatively consistent in 2013 relative to 2012, reflecting cash
outlays necessary to complete new product-related
investments and replace older machinery and equipment. In
2014, instrument additions are expected to be in a range of
$200 to $210 million as part of our ongoing launch of Persona
The Personalized Knee System. Property, plant and equipment
additions are expected to be approximately $150 million in
2014, reflecting the cash outlays necessary to update and
modernize our manufacturing capabilities and support new
product developments and commercialization activities. 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. In the past three years,
we have made a number of business acquisitions including
Knee Creations, LLC, NORMED Medizin-Technik GmbH,
Dornoch Medical Systems, Inc., Synvasive Technology, Inc.,
ExtraOrtho, Inc., and certain foreign-based distributors.
Cash flows used in financing activities were $467.3 million
in 2013, compared to $436.5 million in 2012. In 2013, we
returned cash to our stockholders in the form of cash
dividends of $132.4 million and share repurchases of
$719.0 million. Additionally, an increase in our stock price in
2013 resulted in many employees exercising stock options,
which provided us with additional cash. In 2012, we converted
some of the outstanding debt under our senior credit facility to
a term loan and we borrowed $100.0 million to repurchase
shares as well as fund other corporate cash needs. In 2013, we
paid off the amount we had borrowed under our senior credit
facility.
In 2013, we declared cash dividends in each quarter of
$0.20 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. The 2013
dividend declarations equate to an annual rate of $0.80
per share, which represents an 11 percent increase over the
2012 annualized rate.
As discussed more completely in Note 15 to our
consolidated financial statements, the IRS has issued proposed
adjustments for years 2006 through 2009 reallocating profits
between certain of our U.S. and foreign subsidiaries. We have
disputed these proposed adjustments and continue to pursue
resolution with the IRS. Although the ultimate timing for
resolution of the disputed tax issues is uncertain, we anticipate
that within the next twelve months we may settle certain tax
matters with the IRS, and pay amounts for other unresolved
tax matters in order to limit the potential impact of IRS
interest charges. Such payments may be significant to our 2014
operating cash flows.
As discussed in Note 19 to the consolidated financial
statements, we are defending a patent infringement lawsuit in
which the trial court awarded the plaintiff $210.0 million in
damages plus interest and attorneys’ fees. We have filed a
Notice of Appeal and have not recorded a liability because we
do not believe it is probable that we have incurred a loss.
Although we believe we have strong grounds to reverse the
trial court’s judgment, we could be required to pay
$210.0 million plus interest and attorneys’ fees in the future.
Also as discussed in Note 19 to the consolidated financial
statements, we have recorded a short-term liability of
$50.0 million and long-term liability of $329.0 million related to
Durom Cup product liability claims. We expect to continue
paying these claims over the next five years. We have also
recorded a long-term receivable of $218.0 million that we
expect to receive from insurance carriers once we reach our
self-insured retention under our insurance programs.
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.
Before our senior notes due November 30, 2014 become
payable, we intend to issue new senior notes in order to pay
the $250 million owed. If we are not able to issue new senior
notes, we intend to borrow against our senior credit facility to
pay these notes.
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We have a five year $1,350 million revolving, multi-
currency, senior unsecured credit facility maturing May 9,
2017 (Senior Credit Facility). There were no borrowings
outstanding under the Senior Credit Facility at December 31,
2013.
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, 2013.
Commitments under the Senior Credit Facility are subject to
certain fees, including a facility fee and a utilization fee.
We have a term loan agreement (Term Loan) with one of
the lenders under the Senior Credit Facility for 11.7 billion
Japanese Yen that 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 $50.7 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.
As of December 31, 2013, we had short-term and long-
term investments in debt securities with a fair value of $807.7
million. These investments are in debt securities of many
different issuers and therefore we believe 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.
Management believes that cash flows from operations and
available borrowings under the Senior Credit Facility or from
the public and private debt markets 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
2014
2015
and
2016
2017
and
2018
2019
and
Thereafter
Long-term debt
$1,664.5
$250.0
$112.4
$ 2.1
$1,300.0
Interest payments
1,045.5
Operating leases
192.1
68.1
47.6
131.7
126.4
66.9
36.4
719.3
41.2
Purchase
obligations
Other long-term
liabilities
Total contractual
obligations
8.0
8.0
–
–
–
398.2
–
136.4
103.2
158.6
$3,308.3
$373.7
$447.4
$268.1
$2,219.1
$21.4 million of the other long-term liabilities on our
balance sheet as of December 31, 2013 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 2014. Therefore, this table does
not include any amounts related to future contributions to our
plans. See Note 14 to our consolidated financial statements for
further information on our defined benefit plans.
As of December 31, 2013, $891.9 million of our cash and
Also included in other long-term liabilities on our balance
cash equivalents and short-term and long-term investments
were 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. $478.8 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. Effective January 1,
2014, we have a new share repurchase program that authorizes
purchases of up to $1.0 billion with no expiration date. No
further purchases will be made under the previous share
repurchase program.
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. Additionally, other long-term
liabilities on our balance sheet include long-term deferred tax
liabilities, primarily related to intangible assets acquired in
business combinations and fixed assets. We have excluded
these liabilities from this table as well, as they do not represent
liabilities that will be settled in cash. See Note 15 to our
consolidated financial statements for further information on
these tax-related accounts.
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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 $45 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
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 $450.2 million related to the
Durom Cup, including $47.0 million in 2013. 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 value 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. 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. In 2013, we employed a similar combination of
27
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income and market approaches to estimate this reporting
unit’s fair value and determined there was no impairment
charge in 2013.
We have five 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. Since in the past we have incurred
goodwill impairment charges for our U.S. Spine reporting unit,
which required us to decrease goodwill to its implied fair value,
the estimated fair value of this reporting unit did not
substantially exceed its carrying value. Additionally, due to
challenging market conditions associated with our U.S. Dental
reporting unit, that reporting unit’s estimated fair value did not
substantially exceed its carrying value either. These two
reporting units remain sensitive to changes in market
conditions which could result in goodwill being impaired in the
future. For each of our other four 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.
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.
28
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, 2013, 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 2014 through June 2016.
The notional amounts of outstanding forward contracts
entered into with third parties to purchase U.S. Dollars at
December 31, 2013 were $1,574.6 million. The notional
amounts of outstanding forward contracts entered into with
third parties to purchase Swiss Francs at December 31, 2013
were $353.3 million. The weighted average contract rates
outstanding at December 31, 2013 were Euro:USD 1.32, Swiss
Franc:USD 1.09, USD:Japanese Yen 88.13, British Pound:USD
1.56, USD:Canadian Dollar 1.04, Australian Dollar:USD 0.94,
USD:Korean Won 1,154, USD:Swedish Krona 6.78, USD:Czech
Koruna 19.41, USD:Thai Baht 32.06, USD:Taiwan Dollar 29.22,
USD:South African Rand 10.05, USD:Russian Ruble 34.47 and
USD:Indian Ruppee 62.58.
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
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
outstanding at December 31, 2013 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
$69.1
35.9
33.6
14.6
12.1
13.5
4.1
3.2
0.5
1.2
2.4
0.8
2.2
0.9
Any change in the fair value of foreign currency exchange
forward contracts as a result of a fluctuation in a currency
exchange rate is expected to be largely offset by a change in
the value of the hedged transaction. Consequently, foreign
currency exchange contracts would not subject us to material
risk due to exchange rate movements because gains and losses
on these contracts offset gains and losses on the assets,
liabilities and transactions being hedged.
We have net assets in legal entities with non-U.S. Dollar
functional currencies of $2,295.6 million at December 31, 2013,
primarily in Euros, Japanese Yen and Australian Dollars.
$1,354.3 million of the net asset exposure at December 31,
2013 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.
We have multiple fixed-to-variable interest rate swap
agreements that we have designated as fair value hedges of the
fixed interest rate obligations on our Senior Notes due 2019
and 2021. The total notional amounts are $250 million and
$300 million for the Senior Notes due 2019 and 2021,
respectively. On the interest rate swap agreements for the
Senior Notes due 2019, 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 the interest rate
swap agreements for the Senior Notes due 2021, we receive a
fixed interest rate of 3.375 percent and pay variable interest
equal to the three-month LIBOR plus an average of 99 basis
points.
The interest rate swap agreements are intended 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 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, 2013, a change of 10 percent in interest rates,
assuming the principal 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
29
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
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.
The ongoing financial uncertainties in the Euro zone impact
the indirect credit exposure we have to those governments
through their public hospitals. As of December 31, 2013, 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 $226.4 million. With allowances for doubtful accounts of
$9.5 million recorded in those countries, the net balance was
$216.9 million, representing 24 percent of our total
consolidated short-term and long-term trade accounts
receivable balance, net. Italy and Spain accounted for $209.7
million of that net amount. We are actively monitoring the
situations in these countries. We maintain contact with
customers in these countries 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. To the extent the
respective 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 H OL D I NG S , I NC .
2 0 1 3 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, 2013. 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 (1992).
Based on that assessment, management has concluded that, as of December 31, 2013, 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, 2013, 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 H OL D I NG S , I NC .
2 0 1 3 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, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
Page
33
34
35
36
37
38
39
32
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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, 2013 and 2012, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 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, 2013, based on criteria
established in Internal Control - Integrated Framework 1992 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 Management’s Report on Internal Control over Financial Reporting appearing
under Part II, Item 7A. 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 28, 2014
33
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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)
2013
2012
2011
$4,623.4
1,286.1
$4,471.7
1,125.2
$4,451.8
1,122.0
3,337.3
3,346.5
3,329.8
204.2
1,833.8
47.0
–
216.7
225.6
1,807.1
15.0
96.0
155.4
238.4
1,834.3
157.8
–
75.2
2,301.7
2,299.1
2,305.7
1,035.6
15.6
(70.1)
1,047.4
15.6
(72.9)
1,024.1
10.1
(55.3)
981.1
221.9
759.2
(1.8)
990.1
237.2
752.9
(2.1)
978.9
218.9
760.0
(0.8)
$ 761.0
$ 755.0
$ 760.8
$
$
$
4.49
4.43
169.6
171.8
0.80
$
$
$
4.32
4.29
174.9
176.0
0.54
$
$
$
4.05
4.03
187.6
188.7
0.18
34
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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
Reclassification adjustments on cash flow hedges, net of tax
Unrealized gains/(losses) on securities, net of tax
Adjustments to prior service cost and unrecognized actuarial assumptions, net of tax
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)
2013
2012
2011
$759.2
$752.9
$760.0
(44.4)
33.4
(4.4)
0.1
38.5
23.2
46.1
10.9
3.3
0.4
4.6
(30.6)
24.5
0.2
11.8
(48.3)
72.5
(49.6)
782.4
825.4
710.4
(2.0)
(2.2)
(0.9)
$784.4
$827.6
$711.3
35
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
(in millions)
2013
2012
$ 1,080.6
727.0
936.6
1,074.5
107.1
271.9
4,197.7
1,224.7
2,611.2
707.7
839.3
$
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
$ 9,580.6
$ 9,012.4
$
$
146.3
221.2
0.5
663.6
1,031.6
576.6
184.1
22.8
100.1
559.0
866.0
559.3
1,672.3
1,720.8
3,280.5
3,146.1
2.6
4,000.6
7,712.7
367.1
(5,785.7)
2.6
3,500.6
7,085.9
343.9
(5,072.1)
6,297.3
2.8
5,860.9
5.4
6,300.1
5,866.3
$ 9,580.6
$ 9,012.4
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,
264.3 million (257.1 million in 2012) issued
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, 94.5 million shares (85.5 million shares in 2012)
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 H OL D I NG S , I NC .
2 0 1 3 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
Accumulated
Other
Comprehensive
Income
Treasury Shares
Number
Amount
Noncontrolling
Interest
(in millions)
Total
Stockholders’
Equity
254.6
–
–
$2.5
–
–
$3,293.5
–
–
$5,699.4
760.8
–
$321.0
–
(49.6)
(59.0) $(3,545.1)
–
–
–
–
$
–
(0.8)
(0.1)
$ 5,771.3
760.0
(49.7)
–
–
1.3
–
255.9
–
–
–
1.2
–
257.1
–
–
–
–
7.2
–
–
–
–
–
2.5
–
–
–
0.1
–
2.6
–
–
–
–
–
–
–
–
105.7
–
3,399.2
–
–
–
101.4
–
3,500.6
–
–
–
(32.1)
(1.3)
–
6,426.8
755.0
–
(93.3)
(2.6)
–
7,085.9
761.0
–
(1.1)
–
–
(135.4)
501.1
–
1.2
–
–
–
–
–
271.4
–
72.5
–
–
–
343.9
–
23.2
–
–
–
–
–
–
–
(18.9)
(77.9)
–
–
–
0.1
(7.7)
(85.5)
–
–
–
–
–
–
2.4
(1,050.0)
(4,592.7)
–
–
–
6.2
(485.6)
(5,072.1)
–
–
–
–
0.1
(9.1)
5.4
(719.0)
8.5
–
–
–
7.6
(2.1)
(0.1)
–
–
–
5.4
(1.8)
(0.2)
(0.6)
–
–
–
8.5
(32.1)
106.8
(1,050.0)
5,514.8
752.9
72.4
(93.3)
105.1
(485.6)
5,866.3
759.2
23.0
(1.7)
(135.4)
507.7
(719.0)
Balance January 1, 2011
Net earnings
Other comprehensive loss
Business combination with a
noncontrolling interest
Cash dividends declared
Stock compensation plans,
including tax benefits
Share repurchases
Balance December 31, 2011
Net earnings
Other comprehensive income
Cash dividends declared
Stock compensation plans,
including tax benefits
Share repurchases
Balance December 31, 2012
Net earnings
Other comprehensive income
Purchase of additional shares
from noncontrolling interest
Cash dividends declared
Stock compensation plans,
including tax benefits
Share repurchases
Balance December 31, 2013
264.3
$2.6
$4,000.6
$7,712.7
$367.1
(94.5) $(5,785.7)
$ 2.8
$ 6,300.1
The accompanying notes are an integral part of these consolidated financial statements.
37
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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
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
Purchases of investments
Sales of investments
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
Purchase of additional shares from noncontrolling interest
Repurchase of common stock
Net cash used in financing activities
Effect of exchange rates on cash and cash equivalents
Increase 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)
2013
2012
2011
$ 759.2
$
752.9
$
760.0
358.5
363.1
359.9
–
48.5
38.4
(8.6)
8.0
96.0
55.0
11.0
(2.7)
4.8
–
60.5
12.9
(5.0)
11.4
(126.2)
(64.8)
(19.7)
96.8
(74.3)
(128.4)
38.3
(47.1)
59.2
(45.5)
(67.5)
47.8
(57.4)
14.6
(63.2)
7.2
20.0
18.3
963.1
1,151.9
1,176.9
(192.9)
(148.9)
(155.4)
(100.0)
(114.7)
(113.8)
(732.7)
(1,130.1)
(662.1)
830.8
(74.2)
(13.5)
878.5
(59.0)
(17.9)
394.8
(56.8)
(31.1)
(282.5)
(592.1)
(624.4)
–
(97.5)
–
(132.4)
–
474.8
8.6
(1.8)
–
(50.1)
147.3
(94.4)
(3.3)
46.9
2.7
–
549.3
0.5
–
–
(4.0)
43.4
5.0
–
(719.0)
(485.6)
(1,050.0)
(467.3)
(436.5)
(455.8)
(17.0)
(7.3)
196.3
884.3
116.0
768.3
2.7
99.4
668.9
$1,080.6
$
884.3
$
768.3
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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.
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, 2013, 2012 and 2011. Certain amounts
in the 2012 and 2011 consolidated financial statements have
been reclassified to conform to the 2013 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, 2013, 2012 and
2011 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 represented
approximately 80 percent of our net sales in 2013. 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 accounted for approximately
20 percent of our net sales in 2013. 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, 2013, 2012 and 2011.
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 $163.6 million, $139.5 million and
$142.1 million for the years ended December 31, 2013, 2012
and 2011, 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
39
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
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 that 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 R&D agreements, certain contract
terminations, consulting and professional fees and asset
impairment or loss on disposal charges connected with global
restructuring, operational and quality 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/loss on disposal of assets
Consulting and professional fees
Employee severance and retention, including
share-based compensation acceleration
Dedicated project personnel
Certain R&D agreements
Relocated facilities
Distributor acquisitions
Certain litigation matters
Contract terminations
Contingent consideration adjustments
Accelerated software amortization
Other
2013
2012
2011
$ 10.9
99.1
$ 14.6
90.1
$ 8.4
26.0
14.2
34.0
0.8
3.6
0.4
26.9
3.9
9.0
6.0
7.9
8.2
15.1
–
1.8
0.8
13.7
6.6
(2.8)
4.5
2.8
23.1
3.2
–
–
2.0
0.1
6.3
–
–
6.1
Special items
$216.7
$155.4
$75.2
Impairment/ loss on disposal of assets relates to
impairment of intangible assets that were acquired in business
combinations or impairment of or a loss on the disposal of
other assets.
Consulting and professional fees relate to third-party
consulting, professional fees and contract labor related to our
quality and 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
quality and operational excellence initiatives are company-
wide and include improvements in quality, distribution,
sourcing, manufacturing and information technology, among
other areas.
In 2013, 2012 and 2011, we eliminated positions 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 2013, 2012 and 2011, approximately
170, 400 and 500 positions, respectively, from across the globe
were affected by these actions. As a result of these changes in
our work force and headcount reductions in connection with
40
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 expenses include the salary,
benefits, travel expenses and other costs directly associated
with employees who are 100 percent dedicated to our
operational and quality excellence initiatives or integration of
acquired businesses.
Certain R&D agreements relate to agreements with upfront
payments to obtain intellectual property to be used in R&D
projects that have no alternative future use in other projects.
Relocated facilities expenses are the moving costs and the
lease expenses incurred during the relocation period in
connection with relocating certain 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 represent 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 resulting from a reduction in 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 H OL D I NG S , I NC .
2 0 1 3 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, 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 $22.7
million and $22.8 million as of December 31, 2013 and 2012,
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 fifteen 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 year
ended December 31, 2012, we recorded a goodwill impairment
charge of $96.0 million related to our U.S. Spine reporting unit.
We did not record a goodwill impairment charge during the
year ended December 31, 2013. See Notes 8 and 9 for more
information regarding goodwill and goodwill impairment.
41
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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 that 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
comprised of foreign currency translation adjustments,
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
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. In 2013,
we purchased additional shares of the company from the
minority shareholders. 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 – Effective January 1, 2013,
we adopted the FASB’s Accounting Standard Updates (ASUs)
requiring reporting of amounts reclassified out of accumulated
other comprehensive income (OCI) and balance sheet
offsetting between derivative assets and liabilities. These ASUs
only change financial statement disclosure requirements and
therefore do not impact our financial position, results of
operations or cash flows. See Note 12 for disclosures relating
to OCI. See Note 13 for disclosures relating to balance sheet
offsetting.
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,
2013
2012
2011
Stock options
RSUs and other
Total expense, pre-tax
Tax benefit related to awards
$ 24.7
$ 32.4
$ 41.7
23.8
22.6
18.8
48.5
55.0
60.5
(15.6)
(16.6)
(17.8)
Total expense, net of tax
$ 32.9
$ 38.4
$ 42.7
Share-based compensation cost capitalized as part of
inventory for the years ended December 31, 2013, 2012 and
2011 was $4.1 million, $6.1 million, and $8.8 million,
respectively. As of December 31, 2013 and 2012,
approximately $2.4 million and $3.3 million of capitalized costs
remained in finished goods inventory.
Stock Options
We had two equity compensation plans in effect at
December 31, 2013: the 2009 Stock Incentive Plan (2009 Plan)
and the Stock Plan for Non-Employee Directors. The 2009 Plan
succeeded 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, 2013. 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
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, 2013, an aggregate of 10.4 million shares were
available for future grants and awards under these plans.
Stock options granted to date under our plans generally
vest over four years 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.
43
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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 summary of stock option activity for the year ended December 31, 2013 is as follows (options in thousands):
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
Intrinsic
Value
(in millions)
Stock Options
16,638
$68.74
1,603
(7,008)
(304)
(188)
73.40
67.67
65.68
76.09
10,741
$70.06
10,329
$70.12
7,375
$71.44
5.0
4.9
3.5
$248.4
$238.3
$160.4
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,
2013
2012
2011
Dividend yield
Volatility
Risk-free interest rate
Expected life (years)
1.1%
1.1%
–%
24.5% 25.6% 26.1%
1.1%
1.5%
2.2%
6.1
6.1
6.1
Weighted average fair value of options
granted
$16.33
$15.40
$18.33
Intrinsic value of options exercised (in
millions)
$ 97.9
$ 17.1
$ 27.5
As of December 31, 2013, there was $33.5 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 2.7 years.
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 on our RSUs range from one to five
years.
Outstanding at January 1, 2013
Options granted
Options exercised
Options forfeited
Options expired
Outstanding at December 31, 2013
Vested or expected to vest as of December 31, 2013
Exercisable at December 31, 2013
We use a Black-Scholes option-pricing model to
determine the fair value of our stock options. For stock
options granted in 2012 and 2011, 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. In 2013, we used a
combination of historical volatility and implied volatility
because the traded options that were actively traded around
the grant date of our stock options did not have 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 H OL D I NG S , I NC .
2 0 1 3 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 summary of nonvested RSU activity for the year ended
5.
PROPERTY, PLANT AND EQUIPMENT
December 31, 2013 is as follows (RSUs in thousands):
Property, plant and equipment consisted of the following
Outstanding at January 1, 2013
Granted
Vested
Forfeited
Outstanding at December 31, 2013
RSUs
1,445
581
(434)
(138)
1,454
Weighted Average
Grant Date
Fair Value
$61.11
74.22
55.80
65.03
(in millions):
As of December 31,
Land
Building and equipment
Capitalized software costs
Instruments
67.42
Construction in progress
2013
2012
$
21.7
$
22.1
1,353.1
1,232.8
272.6
241.8
1,610.6
1,579.8
58.2
117.8
3,316.2
3,194.3
(2,091.5)
(1,983.6)
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,
2013, we estimate that approximately 875,900 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, 2013 was $34.0 million and is
expected to be recognized over a weighted-average period of
2.2 years. The fair value of RSUs vesting during the years
ended December 31, 2013, 2012 and 2011 based upon our
stock price on the date of vesting was $32.5 million, $18.9
million and $11.8 million, respectively.
4.
INVENTORIES
Inventories consisted of the following (in millions):
As of December 31,
Finished goods
Work in progress
Raw materials
Inventories
2013
2012
$ 817.0
$786.3
77.4
52.3
180.1
156.7
$1,074.5
$995.3
Amounts charged to the consolidated statement of
earnings for excess and obsolete inventory in the years
ended December 31, 2013, 2012 and 2011 were $112.0 million,
$55.1 million and $47.6 million, respectively. The increase in
the 2013 period primarily resulted from our decision to
discontinue certain products.
Accumulated depreciation
Property, plant and equipment, net
$ 1,224.7
$ 1,210.7
Depreciation expense was $262.6 million, $266.0 million
and $266.1 million for the years ended December 31, 2013,
2012 and 2011, respectively.
6.
ACQUISITIONS
We made a number of business acquisitions during the
years 2013, 2012 and 2011. In May 2013, we acquired the
business assets of Knee Creations, LLC (Knee Creations). The
Knee Creations acquisition enhances our product portfolio of
early intervention knee treatments. In June 2013, we acquired
NORMED Medizin-Technik GmbH (Normed). The Normed
acquisition strengthens our Extremities and Trauma product
portfolios and brings new product development capabilities in
the foot and ankle and hand and wrist markets. In January
2012, we acquired Synvasive Technology, Inc. (Synvasive).
The Synvasive acquisition enhances 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
external fixation market.
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
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.
45
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
7.
INVESTMENTS
8.
FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES
We invest in short and long-term investments classified as
available-for-sale securities. Information regarding our
investments is as follows (in millions):
The following financial assets and liabilities are recorded
at fair value on a recurring basis (in millions):
As of December 31, 2013
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, 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
Gross Unrealized
Amortized
Cost
Gains
Losses
Fair
value
$457.6
$0.4
$(0.1) $457.9
211.1
0.1
3.1
68.3
67.2
–
–
–
–
–
–
–
211.2
3.1
68.3
67.2
$807.3
$0.5
$(0.1) $807.7
$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
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, 2013
Amortized Cost
Due in one year or less
Due after one year through two years
Total
$726.7
80.6
$807.3
Fair
Value
$727.0
80.7
$807.7
In January 2014, we sold certain debt securities with
amortized cost and fair values as of December 31, 2013 of
$567.5 million and $567.8 million, respectively. Included in that
total were $161.2 million of securities at fair value with
maturities of one year through two years that we classified as
short-term investments on our consolidated balance sheet. The
table above reflects these securities in the due in one year or
less category even though their contractual maturities were
longer.
As of December 31, 2013
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)
Description
Assets
Available-for-sale securities
Corporate debt securities $457.9
$–
$457.9
$–
U.S. government and
agency debt
securities
Foreign government debt
securities
Commercial paper
Certificates of deposit
211.2
3.1
68.3
67.2
Total available-for-sale
securities
807.7
Derivatives, current and
long-term
Foreign currency
forward contracts and
options
Interest rate swaps
Liabilities
Derivatives, current and
long-term
Foreign currency
forward contracts and
options
Interest rate swaps
68.7
16.3
$892.7
20.6
7.0
$ 27.6
–
–
–
–
–
–
–
$–
–
–
$–
211.2
3.1
68.3
67.2
807.7
68.7
16.3
$892.7
20.6
7.0
$ 27.6
–
–
–
–
–
–
–
$–
–
–
$–
46
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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
The following nonfinancial assets were measured at fair
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)
Description
Assets
Available-for-sale securities
Corporate debt securities $383.8
$–
$383.8
$–
U.S. government and
agency debt securities
295.9
–
–
–
–
–
295.9
5.0
138.7
92.3
915.7
5.0
138.7
92.3
915.7
28.4
33.9
$978.0
–
–
$–
28.4
33.9
$978.0
–
–
–
–
–
–
–
$–
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
forward contracts
$ 10.8
$–
$ 10.8
$–
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.
value on a nonrecurring basis (in millions):
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
Description
Total
Year Ended December 31, 2013
Indefinite-lived
intangible
assets
$21.0
Year Ended December 31, 2012
Goodwill
$41.0
$–
$–
Indefinite-lived
intangible
assets
24.2
–
$–
$–
–
$21.0
$ 2.8
$41.0
$96.0
24.2
11.6
We conduct our annual goodwill impairment testing 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
2012, it was determined that our U.S. Spine reporting unit’s
carrying value was in excess of its fair value. 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. 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.
In estimating the future cash flows of the reporting unit,
we utilized a combination of market and company specific
inputs that a market participant would use in assessing the fair
value of the reporting unit. The primary market input was
revenue growth rates. These rates were based upon historical
trends and estimated future growth drivers such as an aging
global population, obesity and more active lifestyles.
Significant company specific inputs included assumptions
regarding how the reporting unit could leverage operating
expenses as revenue grows and the impact any new products
will have on revenues.
47
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
We will continue to monitor the fair value of our U.S.
Spine and U.S. Dental reporting units as well as our other four
reporting units in our interim and annual reporting periods. If
estimated cash flows for these reporting units decrease, we
may be required 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 2013 and 2012, we also recorded $2.8 million and $11.6
million, respectively, 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 negative publicity in the
marketplace related to certain hip devices and our challenges
in the global spine market 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 2013 and 2012.
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 the reporting unit near the bottom of the valuation
indicators of the comparable companies.
The fair value of the reporting unit’s assets and liabilities
were determined by using the same methods that are used in
business combination purchase accounting.
Factors that contributed to impairment of the U.S. Spine
reporting unit included broader market issues as well as
company specific issues. The U.S. spine market was and
continues to be under pressure due to a constrained economic
environment leading to continuing high unemployment and
payer pushback on the necessity of certain procedures.
Additionally, pricing was and continues to decline across the
industry. Company specific issues included turnover with our
independent sales agents and lack of execution in developing
new, competitive products which resulted in a less than
optimal product portfolio in our U.S. Spine reporting unit.
Before the economic downturn in 2008, we estimated the
U.S. spine market was growing in the low double digits, but
declined to flat or in the low single digits in 2012. Previous
goodwill impairment tests forecasted some recovery in the
market which did not occur. 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 would not have as
significant of a positive effect as we had previously forecasted.
As a result, we tempered our expectations of recovery in the
U.S. market and for our U.S. Spine reporting unit and
recognized an impairment charge.
In our 2013 annual goodwill impairment test of our U.S.
Spine reporting unit, we concluded no impairment charge was
necessary. While our estimated fair value of the reporting unit
declined slightly, the net assets of the reporting unit declined
by more. The decrease in the net assets was primarily due to
continued amortization of intangible assets acquired in
business combinations and lower working capital needs.
However, the estimated fair value of the reporting unit did not
substantially exceed its carrying value.
We have five other reporting units with goodwill assigned
to them. We estimate the fair value of those reporting units
using the income approach by discounting to present value the
estimated future cash flows of the reporting unit. Due to
challenging market conditions associated with our U.S. Dental
reporting unit, that reporting unit’s estimated fair value did not
substantially exceed its carrying value in our 2013 goodwill
impairment test. For each of the other four reporting units, the
estimated fair value substantially exceeded its carrying value.
48
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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, 2012
Goodwill
Accumulated impairment losses
U.S. Spine reporting unit impairment
Acquisitions
Currency translation
Balance at December 31, 2012
Goodwill
Accumulated impairment losses
Acquisitions
Currency translation
Balance at December 31, 2013
Goodwill
Accumulated impairment losses
The components of identifiable intangible assets are as follows (in millions):
Americas
Europe
Asia Pacific
Total
$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
11.0
(5.0)
24.0
34.5
–
(25.1)
35.0
4.4
1,629.9
1,187.1
167.2
2,984.2
(373.0)
–
–
(373.0)
$1,256.9
$1,187.1
$167.2
$2,611.2
As of December 31, 2013:
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, 2012:
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
$ 700.4
$ 173.4
$ 43.3
$216.2
$ 95.1
$1,228.4
(401.4)
(142.5)
(33.9)
(76.4)
(43.9)
(698.1)
–
–
177.4
–
–
177.4
$ 299.0
$ 30.9
$186.8
$139.8
$ 51.2
$ 707.7
$ 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
49
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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):
For the Years Ended December 31,
2013
2012
2011
Cost of products sold
Selling, general and administrative
$18.3
77.6
$24.0
73.1
$26.7
67.1
Total intangible amortization
$95.9
$97.1
$93.8
Estimated annual amortization expense based upon
intangible assets recognized as of December 31, 2013 for the
years ending December 31, 2014 through 2018 is (in millions):
For the Years Ending December 31,
2014
2015
2016
2017
2018
$98.0
84.7
74.4
61.6
45.8
Our debt consisted of the following (in millions):
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
Other long-term debt
Debt discount
Adjustment related to interest rate swaps
2013
2012
$
$
–
$ 100.0
0.5
0.1
0.5
$ 100.1
$ 250.0
$ 250.0
500.0
300.0
500.0
112.4
2.1
(1.5)
9.3
500.0
300.0
500.0
138.6
–
(1.7)
33.9
10. OTHER CURRENT AND LONG-TERM LIABILITIES
Total long-term debt
$1,672.3
$1,720.8
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
2013
2012
$109.2
$ 92.3
50.0
122.8
381.6
50.0
118.8
297.9
$663.6
$559.0
$115.0
$213.0
329.0
132.6
210.8
135.5
$576.6
$559.3
We have a five year $1,350 million revolving, multi-
currency, senior unsecured credit facility maturing May 9,
2017 (Senior Credit Facility). There were no borrowings
outstanding under the Senior Credit Facility at December 31,
2013.
We have a term loan agreement (Term Loan) with one of
the lenders under the Senior Credit Facility for 11.7 billion
Japanese Yen that 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, 2013, based upon publicly
available market yield curves and the terms of the debt
(Level 2), was $112.2 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, 2013.
Commitments under the Senior Credit Facility are subject to
certain fees, including a facility and a utilization fee.
50
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
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, 2013, based on quoted prices for the
specific securities from transactions in over-the-counter
markets (Level 2), was $1,649.5 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 and 2021. See
Note 13 for additional information regarding the interest rate
swap agreements.
Before our senior notes due November 30, 2014 become
payable, we intend to issue new senior notes in order to pay
the $250 million owed. If we are not able to issue new senior
notes, we intend to borrow against our Senior Credit Facility to
pay these notes. Since we have the ability and intent to
refinance these senior notes on a long-term basis with new
notes or through our Senior Credit Facility, we have classified
these senior notes as long-term debt as of December 31, 2013.
We also have available uncommitted credit facilities
totaling $50.7 million.
At December 31, 2013, the weighted average interest rate
for our long-term borrowings was 3.3 percent. 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 $68.1 million, $67.8 million and
$55.0 million in interest during 2013, 2012 and 2011,
respectively.
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
OCI refers to certain gains and losses that under GAAP
are included in comprehensive income but are excluded from
net earnings as these amounts are initially recorded as an
adjustment to stockholders’ equity. Amounts in OCI may be
reclassified to net earnings upon the occurrence of certain
events.
Our OCI is 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 on our defined benefit plans.
Foreign currency translation adjustments are reclassified to
net earnings upon sale or upon a complete or substantially
complete liquidation of an investment in a foreign entity.
Unrealized gains and losses on cash flow hedges are
reclassified to net earnings when the hedged item affects net
earnings. Unrealized gains and losses on available-for-sale
securities are reclassified to net earnings if we sell the security
before maturity or if the unrealized loss is considered to be
other-than-temporary. We typically hold our available-for-sale
securities until maturity and are able to realize their amortized
cost and therefore we do not have reclassification adjustments
to net earnings on these securities. Amounts related to defined
benefit plans that are in OCI are reclassified over the service
periods of employees in the plan. The reclassification amounts
are allocated to all employees in the plans and therefore the
reclassified amounts may become part of inventory to the
extent they are considered direct labor costs. See Note 14 for
more information on our defined benefit plans.
The following table shows the changes in the components
of OCI, net of tax (in millions):
Foreign
Currency
Translation
$445.5
(44.4)
–
Cash
Flow
Hedges
$ 4.1
33.4
(4.4)
Unrealized
Gains on
Securities
Defined
Benefit
Plan
Items
$0.4
0.1
–
$(106.1)
30.6
7.9
Balance December 31, 2012
OCI before reclassifications
Reclassifications
Balance December 31, 2013
$401.1
$33.1
$0.5
$ (67.6)
51
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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 following table shows the reclassification adjustments from OCI (in millions):
Component of OCI
Cash flow hedges
Foreign exchange forward contracts
Foreign exchange options
Cross-currency interest rate swaps
Defined benefit plans
Prior service cost
Unrecognized actuarial (loss)
Total reclassifications
Amount of Gain / (Loss)
Reclassified from OCI
For the Years Ended December 31,
2013
2012
2011
Location on Statement of Earnings
$ 8.0
(0.2)
–
7.8
3.4
$(12.0)
(0.4)
0.2
(12.2)
(8.9)
$(32.9)
–
(8.3)
(41.2)
(16.7)
$ 4.4
$ (3.3)
$(24.5)
$ 3.9
(16.6)
$ 2.9
(13.3)
$ 0.8
(7.4)
(12.7)
(4.8)
(10.4)
(3.9)
(6.6)
(2.6)
$ (7.9)
$ (6.5)
$ (4.0)
$ (3.5)
$ (9.8)
$(28.5)
Cost of products sold
Cost of products sold
Interest expense
Total before tax
Provision for income taxes
Net of tax
*
*
Total before tax
Provision for income taxes
Net of tax
Net of tax
* These OCI components are included in the computation of net periodic pension expense (see Note 14).
The following table shows the tax effects on each component of OCI recognized in our consolidated statements of
comprehensive income (in millions):
For the Years Ended December 31,
Foreign currency cumulative translation adjustments
Unrealized cash flow hedge gains/(losses)
Reclassification adjustments on foreign currency hedges
Unrealized gains on securities
Adjustments to prior service cost and unrecognized actuarial
Before Tax
2013
2012
2011
2013
$(44.4) $46.1
15.2
12.2
0.4
63.6
(7.8)
0.1
$
$ 4.6
(34.9)
41.2
0.2
$
–
30.2
(3.4)
–
Tax
2012
–
4.3
8.9
–
Net of Tax
2011
2013
2012
2011
$
–
(4.3)
16.7
–
$(44.4) $46.1
10.9
3.3
0.4
33.4
(4.4)
0.1
$ 4.6
(30.6)
24.5
0.2
assumptions
50.3
20.3
(71.3)
11.8
8.5
(23.0)
38.5
11.8
(48.3)
Total Other Comprehensive Gain/(Loss)
$ 61.8
$94.2
$(60.2) $38.6
$21.7
$(10.6) $ 23.2
$72.5
$(49.6)
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.
We have multiple fixed-to-variable interest rate swap
agreements that we have designated as fair value hedges of the
fixed interest rate obligations on our Senior Notes due 2019
and 2021. The total notional amounts are $250 million and $300
million for the Senior Notes due 2019 and 2021, respectively.
On the interest rate swap agreements for the Senior Notes due
2019, 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 the interest rate swap
agreements for the Senior Notes due 2021, we receive a fixed
interest rate of 3.375 percent and pay variable interest equal to
the three-month LIBOR plus an average of 99 basis points.
52
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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
We operate on a global basis and are exposed to the risk
that our financial condition, results of operations and cash
flows could be adversely affected by changes in foreign
currency exchange rates. To reduce the potential effects of
foreign currency exchange rate movements on net earnings,
we enter into derivative financial instruments in the form of
foreign currency exchange forward contracts and options with
major financial institutions. We are primarily exposed to
foreign currency exchange rate risk with respect to
transactions and net assets denominated in Euros, Swiss
Francs, Japanese Yen, British Pounds, Canadian Dollars,
Australian Dollars, Korean Won, 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 foreign currency exchange forward contracts and
options outstanding at December 31, 2013, 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
obligations to purchase Swiss Francs and sell U.S. Dollars.
These derivatives mature at dates ranging from January 2014
through June 2016. As of December 31, 2013, the notional
amounts of outstanding forward contracts and options entered
into with third parties to purchase U.S. Dollars were $1,574.6
million. As of December 31, 2013, the notional amounts of
outstanding forward contracts and options entered into with
third parties to purchase Swiss Francs were $353.3 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
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.
53
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
Income Statement Presentation
Derivatives Designated as Fair Value Hedges
Derivative instruments designated as fair value hedges had the following effects on our consolidated statements of earnings (in
millions):
Derivative Instrument
Interest rate swaps
Gain / (Loss) on Instrument
Gain / (Loss) on Hedged Item
Year Ended December 31,
Year Ended December 31,
Location on Statement of Earnings
2013
2012
2011
2013
2012
2011
Interest expense
$(24.6) $6.1
$26.3
$24.6
$(6.1) $(26.3)
We had no ineffective fair value hedging instruments nor any amounts excluded from the assessment of hedge effectiveness
during the years ended December 31, 2013, 2012 and 2011.
Derivatives Designated as Cash Flow Hedges
Derivative instruments designated as cash flow hedges had the following effects, before taxes, on OCI and net earnings on our
consolidated statements of earnings, consolidated statements of comprehensive income and consolidated balance sheets (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
2013
2012
2011
Location on Statement of Earnings
2013
2012
2011
Foreign exchange forward contracts
$63.9
$16.3
$(34.9)
Cost of products sold
$ 8.0
$(12.0) $(32.9)
Foreign exchange options
Cross-currency interest rate swaps
(0.3)
(1.1)
(0.2)
–
–
0.2
$63.6
$15.2
$(34.9)
Cost of products sold
(0.2)
(0.4)
–
Interest expense
–
0.2
(8.3)
$ 7.8
$(12.2) $(41.2)
The net amount recognized in earnings during the years ended December 31, 2013, 2012 and 2011 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, 2013, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized
gain of $60.8 million, or $33.1 million after taxes, which is deferred in accumulated other comprehensive income. Of the net
unrealized gain, $23.9 million, or $10.0 million after taxes, is 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 statements of earnings (in
millions):
Derivative Instrument
Foreign exchange forward contracts
Location on
Statement of Earnings
Year Ended December 31,
2013
2012
2011
Cost of products sold
$–
$(2.0)
$2.7
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.
54
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
Balance Sheet Presentation
As of December 31, 2013 and December 31, 2012, 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 sheets, 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. Under these master netting agreements, we are able to settle derivative instrument assets and liabilities with the
same counterparty in a single transaction, instead of settling each derivative instrument separately. We have master netting
agreements with all of our counterparties. The fair value of derivative instruments on a gross basis is as follows (in millions):
As of December 31, 2013
As of December 31, 2012
Balance Sheet Location
Fair
Value
Balance Sheet Location
Fair
Value
Asset Derivatives
Foreign exchange forward contracts
Other current assets
$ 60.2
Other current assets
$29.7
Foreign exchange options
Foreign exchange forward contracts
Interest rate swaps
Total asset derivatives
Liability Derivatives
Foreign exchange forward contracts
Foreign exchange forward contracts
Interest rate swaps
Total liability derivatives
Other current assets
Other assets
Other assets
–
30.2
16.3
$106.7
Other current assets
Other assets
Other assets
0.6
19.8
33.9
$84.0
Other current liabilities
$ 26.4
Other long-term liabilities
Other long-term liabilities
15.9
7.0
$ 49.3
Other current liabilities
$20.2
Other current liabilities
12.3
Other long-term liabilities
–
$32.5
The table below presents the effects of our master netting agreements on our consolidated balance sheets (in millions):
Description
Asset Derivatives
Cash flow hedges
Cash flow hedges
Liability Derivatives
Cash flow hedges
Cash flow hedges
14. RETIREMENT BENEFIT PLANS
As of December 31, 2013
As of December 31, 2012
Location
Gross
Amount
Offset
Net Amount
in Balance
Sheet
Gross
Amount
Offset
Net Amount
in Balance
Sheet
Other current assets
$60.2
$13.5
$46.7
$30.3
$15.2
$15.1
Other assets
30.2
8.2
22.0
19.8
6.5
13.3
Other current liabilities
Other long-term liabilities
26.4
15.9
13.5
8.2
12.9
7.7
20.2
12.3
15.2
6.5
5.0
5.8
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 foreign 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.
55
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
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
Foreign
2013
2012
2011
2013
2012
2011
$ 11.9
$ 11.4
$ 11.4
$16.1
$15.0
$16.8
13.2
13.3
13.0
5.6
6.1
7.3
(28.7)
(25.5)
(21.9)
(6.7)
(7.6)
(9.6)
–
(2.6)
14.8
0.7
(2.0)
11.4
–
–
–
–
–
(1.3)
(0.9)
(0.8)
6.2
1.8
1.9
1.2
$ 8.6
$ 9.3
$ 8.7
$15.5
$14.5
$14.9
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
Foreign
2013
2012
2011
2013
2012
2011
4.32%
3.29%
7.75%
4.97%
3.81%
7.75%
5.82%
3.81%
7.75%
2.13%
2.29%
2.74%
2.58%
2.77%
3.51%
2.82%
2.64%
4.01%
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.
56
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2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
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
Expenses paid
Translation loss
U.S. and Puerto Rico
Foreign
2013
2012
2013
2012
$314.3
11.9
13.2
–
–
(10.4)
–
(12.3)
–
–
$290.0
11.4
13.3
(17.1)
–
(7.0)
(1.1)
24.8
–
–
$259.4
16.1
5.6
118.9
15.9
(29.4)
–
(17.7)
(0.2)
2.9
$235.1
15.0
6.1
(3.7)
17.5
(21.3)
–
6.9
(0.2)
4.0
Projected benefit obligation – end of year
$316.7
$314.3
$371.5
$259.4
Plan assets at fair market value – beginning of year
Actual return on plan assets
Employer contributions
Employee contributions
Plan amendments
Benefits paid
Expenses paid
Translation gain
$363.0
25.2
20.8
–
–
(10.4)
–
–
$275.1
40.7
54.2
–
–
(7.0)
–
–
$231.6
9.7
15.0
15.9
126.7
(29.4)
(0.2)
3.0
$205.1
11.4
15.5
17.5
–
(21.3)
(0.2)
3.6
Plan assets at fair market value – end of year
$398.6
$363.0
$372.3
$231.6
Funded status
$ 81.9
$ 48.7
$ 0.8
$(27.8)
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
$ 92.7
(0.7)
(10.1)
$ 61.9
(0.4)
(12.8)
$ 81.9
$ 48.7
$ 12.1
–
(11.3)
$ 0.8
$ 7.5
–
(35.3)
$(27.8)
$(12.0)
113.3
$(14.5)
136.9
$ (8.3)
15.5
$ (9.6)
35.9
$101.3
$122.4
$ 7.2
$ 26.3
We estimate the following amounts recorded as part of accumulated other comprehensive income will be recognized as part of
our net pension expense during 2014 (in millions):
Unrecognized prior service cost
Unrecognized actuarial loss
U.S. and
Puerto Rico
Foreign
$(2.6)
$(1.2)
10.9
$ 8.3
0.4
$(0.8)
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2 0 1 3 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
2013
2012
2011
2013
4.98%
3.29%
4.32%
3.29%
5.05%
3.81%
2.45%
1.52%
Foreign
2012
2.15%
2.75%
2011
2.49%
2.76%
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
Foreign
2013
2012
2013
2012
$10.8
–
$29.3
16.0
$318.1
$233.1
307.4
197.7
Total accumulated benefit obligations and plans with accumulated benefit obligations in excess of plan assets were as follows
(in millions):
As of December 31,
Total accumulated benefit obligations
Plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligation
Plan assets at fair market value
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,
2014
2015
2016
2017
2018
U.S. and
Puerto Rico
Foreign
$ 11.5
$ 18.3
11.6
13.3
14.7
16.3
19.4
19.2
19.3
19.9
2019-2023
104.8
106.0
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 40 to 45 percent for equity securities, 30 to 35 percent
for debt securities and 20 to 25 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.
U.S. and Puerto Rico
Foreign
2013
2012
2013
2012
$273.8
$268.7
$362.1
$244.9
8.8
–
26.9
16.0
308.9
303.7
191.9
168.8
For the U.S. and Puerto Rico plans, we maintain an
investment policy statement that guides the investment
allocation in the plans. The investment policy statement
describes the target asset allocation positions described above.
Our benefits committee, along with our investment advisor,
monitor compliance with and administer the investment policy
statement and the plans’ assets and oversee the general
investment strategy and objectives of the plans. Our 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 foreign based plans vary
according to the plan provisions and local laws. The majority
of the assets in foreign 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.
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Notes to Consolidated Financial Statements (Continued)
The fair value of our U.S. and Puerto Rico pension plan
The fair value of our foreign pension plan assets was as
assets by asset category was as follows (in millions):
follows (in millions):
As of December 31, 2013
Fair Value Measurements at Reporting Date Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$0.8
$
–
$–
–
–
–
–
–
–
79.6
22.3
87.7
43.4
42.1
122.7
–
–
–
–
–
–
$0.8
$397.8
$–
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
$–
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
$
0.8
79.6
22.3
87.7
43.4
42.1
122.7
$398.6
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
As of December 31, 2013
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)
$ 13.9
$
–
$
Asset Category
Cash and cash equivalents
Equity securities:
Total
$ 13.9
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
4.7
5.7
7.6
5.2
6.8
9.7
15.8
5.8
2.6
3.4
35.7
64.4
65.9
24.0
2.8
9.0
6.4
14.7
68.2
4.7
5.7
7.6
5.2
6.8
9.7
15.8
5.8
2.6
3.4
33.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2.5
64.4
65.9
24.0
2.8
9.0
6.4
14.7
–
$372.3
$114.4
$189.7
$68.2
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
59
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
68.2
–
–
–
37.1
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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, 2013 and 2012, our defined benefit
15.
INCOME TAXES
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 foreign 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,
2013
$37.1
0.1
1.2
28.1
1.7
$68.2
We expect that we will have no legally required minimum
funding requirements in 2014 for the qualified U.S. and Puerto
Rico defined benefit retirement plans. We expect to voluntarily
contribute approximately $2.0 million to these plans during
2014. Contributions to foreign defined benefit plans are
estimated to be approximately $14.0 million in 2014. 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 $29.6 million, $26.5
million and $25.7 million related to these plans for the years
ended December 31, 2013, 2012 and 2011, respectively.
60
The components of earnings before income taxes and the
income taxes paid consisted of the following (in millions):
For the Years Ended December 31,
2013
2012
2011
United States operations
$400.7
$409.9
$485.7
Foreign operations
580.4
580.2
493.2
Total
$981.1
$990.1
$978.9
The provision for income taxes consisted of (in millions):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
$ 199.0
$179.8
$148.4
20.6
128.5
348.1
13.8
108.4
302.0
14.3
75.9
238.6
(87.7)
(58.8)
(8.5)
(30.0)
0.7
(6.7)
(2.6)
(0.9)
(16.2)
(126.2)
(64.8)
(19.7)
Provision for income taxes
$ 221.9
$237.2
$218.9
Income taxes paid
$ 272.3
$227.6
$236.4
A reconciliation of the U.S. statutory income tax rate to
our effective tax rate is as follows:
For the Years Ended December 31,
2013
2012
2011
U.S. statutory income tax rate
35.0%
35.0%
35.0%
State taxes, net of federal deduction
0.8
1.0
0.7
Tax impact of foreign operations,
including foreign tax credits
Tax impact of certain significant
(12.2)
(10.4)
(11.0)
transactions
1.6
(3.5)
–
Tax benefit relating to U.S.
manufacturer’s deduction and
export sales
R&D credit
Goodwill impairment
Other
(1.8)
(0.6)
–
(0.2)
(1.9)
–
3.4
0.4
(1.6)
(0.5)
–
(0.2)
Effective income tax rate
22.6%
24.0%
22.4%
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 2014 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 H OL D I NG S , I NC .
2 0 1 3 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
2013
2012
$ 271.1
$ 225.1
26.4
187.1
7.8
72.0
74.6
25.6
11.2
26.8
16.4
4.0
67.0
106.3
172.3
42.3
675.8
660.2
(42.7)
(41.3)
For the Years Ended December 31,
2013
2012
2011
Balance at January 1
$285.5
$158.4
$168.0
Increases related to prior periods
16.5
118.7
11.4
Decreases related to prior periods
(17.3)
(8.9)
(49.0)
Increases related to current period
22.5
19.1
34.4
Decreases related to settlements with
taxing authorities
(2.9)
(0.6)
(4.8)
Decreases related to lapse of statute of
limitations
–
(1.2)
(1.6)
Balance at December 31
$304.3
$285.5
$158.4
Amounts impacting effective tax rate, if
recognized balance at December 31
$186.3
$159.0
$132.7
Total deferred tax assets after valuation
633.1
618.9
Deferred tax liabilities:
Fixed assets
Intangible assets
Other
Total deferred tax liabilities
Total net deferred tax assets
$ (97.7) $ (93.9)
(106.4)
(140.6)
(1.2)
(1.0)
(205.3)
(235.5)
$ 427.8
$ 383.4
The net operating loss carryovers are available to reduce
future federal, state and foreign taxable earnings. At
December 31, 2013, 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 $17.3 million and $17.0 million at
December 31, 2013 and 2012, respectively. The tax credit
carryovers are available to offset future federal, state and
foreign tax liabilities. At December 31, 2013, 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 $14.9 million and $14.2 million at
December 31, 2013 and 2012, respectively. The capital loss
carryover is also available to reduce future federal capital gains.
At December 31, 2013 these capital loss carryovers generally
expire within a period of 4 to 5 years. We have established
valuation allowances for certain capital loss carryovers in the
amount of $7.8 million and $4.0 million at December 31, 2013
and 2012, respectively. The remaining valuation allowances of
$2.7 million and $6.1 million at December 31, 2013 and 2012,
respectively, relate primarily to potential capital losses.
At December 31, 2013, we had an aggregate of
approximately $3,354 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.
We recognize accrued interest and penalties, related to
unrecognized tax benefits, as income tax expense. During
2013, we accrued interest and penalties of $8.2 million, and as
of December 31, 2013, had recognized a liability for interest
and penalties of $42.1 million.
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.
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. The amount of
unrecognized tax benefits may change within the next twelve
months between $0 and $60 million due to changes in audit
status, expiration of statutes of limitations, settlements of tax
assessments and other events which could impact our
determination of unrecognized tax benefits.
During the second quarter of 2011, the IRS concluded
their examination of our U.S. federal returns for years 2005
through 2007 and during the fourth quarter of 2013, the IRS
concluded their examination of our U.S. federal returns for
years 2008 through 2009. For years 2006 through 2009, the IRS
has proposed adjustments reallocating profits between certain
of our U.S. and foreign subsidiaries. We have disputed these
proposed adjustments and continue to pursue resolution with
the IRS. Although the ultimate timing for resolution of the
disputed tax issues is uncertain, we anticipate that within the
next twelve months we may settle certain tax matters with the
IRS, and pay amounts for other unresolved tax matters in
order to limit the potential impact of IRS interest charges.
Final resolution of these matters could have a material impact
on our income tax expense, results of operations, and cash
flows for future periods.
61
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
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 certain
other inventory and manufacturing related 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.
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 (2009 onward), Canada
(2007 onward), France (2011 onward), Germany (2009
onward), Ireland (2009 onward), Italy (2010 onward), Japan
(2010 onward), Korea (2008 onward), Puerto Rico (2008
onward), Switzerland (2012 onward), and the United Kingdom
(2012 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, 2013.
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,
2013
2012
2011
Weighted average shares outstanding for basic
net earnings per share
169.6
174.9
187.6
Effect of dilutive stock options and other
equity awards
2.2
1.1
1.1
Weighted average shares outstanding for
diluted net earnings per share
171.8
176.0
188.7
For the year ended December 31, 2013, an average of
3.1 million options to purchase shares of common stock were
not included in the computation of diluted earnings per share
as the exercise prices of these options were greater than the
average market price of the common stock. For the years
ended December 31, 2012 and 2011, an average of 11.9 million
and 13.2 million options, respectively, were not included.
During 2013, we repurchased 9.1 million shares of our
common stock at an average price of $78.88 per share for a
total cash outlay of $719.0 million, including commissions.
Effective January 1, 2014, we have a new share repurchase
program that authorizes purchases of up to $1.0 billion with no
expiration date. No further purchases will be made under the
previous share repurchase program.
62
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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, 2013
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, 2012
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
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
Americas
Europe
Asia
Pacific
Global
Operations
and
Corporate
Functions
$2,619.8
70.9
1,302.6
$1,212.6
72.6
359.7
$791.0
30.7
342.3
$
–
184.3
(648.8)
810.8
2,814.9
0.2
9.0
306.3
2,343.8
14.8
10.3
107.6
541.9
6.5
7.6
–
3,880.0
171.4
73.1
$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
Total
$4,623.4
358.5
1,355.8
(48.5)
(8.0)
(47.0)
(216.7)
1,035.6
1,224.7
9,580.6
192.9
100.0
$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
63
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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. $211.6 million of Europe long-lived
tangible assets as of December 31, 2013 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., Puerto Rico and Ireland-
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 $2,418.2 million, $2,280.7 million and
$2,263.7 million for the years ended December 31, 2013, 2012
and 2011, respectively. Sales within any other individual
country were less than 10 percent of our consolidated sales.
Sales are attributable to a country based upon the customer’s
country of domicile.
Beginning in 2013, our Knees product category net sales
include certain early intervention products that are primarily
used in knee procedures. In 2012 and 2011, these products
were included in the Surgical and other product category. Net
sales in the 2012 and 2011 periods related to these products
have been reclassified to conform to the 2013 presentation.
Net sales by product category are as follows (in millions):
For the Years Ended December 31,
2013
2012
2011
Reconstructive
Knees
Hips
Extremities
Dental
Trauma
Spine
Surgical and other
Total
$1,909.9
$1,833.8
$1,835.9
1,330.5
1,342.0
1,355.6
193.8
173.8
163.4
3,434.2
3,349.6
3,354.9
239.3
315.6
202.3
432.0
237.7
307.9
208.9
367.6
248.1
285.8
225.0
338.0
$4,623.4
$4,471.7
$4,451.8
64
18. LEASES
Total rent expense for the years ended December 31,
2013, 2012 and 2011 aggregated $49.2 million, $46.3 million
and $47.0 million, respectively.
Future minimum rental commitments under non-
cancelable operating leases in effect as of December 31, 2013
were (in millions):
For the Years Ending December 31,
2014
2015
2016
2017
2018
Thereafter
$47.6
39.2
27.7
20.4
16.0
41.2
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
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
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,
2013
2012
2011
2010
2009
2008
Total
Certain claims
$47.0 $15.0 $157.8 $75.0 $35.0 $69.0 $398.8
Selling, general and
administrative
–
–
4.2 15.4 24.6
7.2
51.4
Total
$47.0 $15.0 $162.0 $90.4 $59.6 $76.2 $450.2
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
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 $218.0 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, 2013, of the remaining
liability for all Durom Cup-related claims is $379.0 million, of
which $50.0 million is classified as short-term in “Other current
liabilities” and $329.0 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 as scheduled on March 13, 2012. On
March 1, 2013, the Superior Court of Pennsylvania vacated the
$27.6 million judgment and remanded the case for a new trial.
On March 15, 2013, plaintiffs filed a motion for re-argument en
banc, and on March 28, 2013, we filed our response in
opposition. On May 9, 2013, the Superior Court of
Pennsylvania granted plaintiffs’ motion for re-argument en
banc. Oral argument (re-argument en banc) before the
Superior Court of Pennsylvania was held on October 16, 2013.
On December 20, 2013, the Court issued its opinion again
vacating the trial court judgment and remanding the case for a
new trial. On January 21, 2014, plaintiffs filed a petition for
allowance of appeal in the Supreme Court of Pennsylvania, and
on February 4, 2014, we filed our response in opposition.
Although we are defending this lawsuit vigorously, its ultimate
resolution is uncertain.
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, 2013,
discovery in these lawsuits was underway and no trial dates
had been set. 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 are
vigorously defending these lawsuits, their ultimate resolution is
uncertain.
65
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2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
Notes to Consolidated Financial Statements (Continued)
Intellectual Property-Related Claims
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. We filed multiple post-trial motions,
including a motion seeking a new trial. On August 7, 2013, the
trial court issued a ruling denying all of our motions and
awarded treble damages and attorneys’ fees to Stryker. We
filed a notice of appeal to the Court of Appeals for the Federal
Circuit to seek reversal of both the jury’s verdict and the trial
court’s rulings on our post-trial motions. That appeal is
pending. We have not accrued an estimated loss related to this
matter in our consolidated statement of earnings for the
quarter ended December 31, 2013 or any prior period 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 trial court’s judgment, the ultimate resolution of
this matter is uncertain. In the future we could be required to
record a charge of up to $210.0 million plus interest and
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in millions, except per share data)
attorneys’ fees that could have a material adverse effect on our
results of operations.
Regulatory Matters
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 during inspections
in Ponce. As of December 31, 2013, the warning letter remains
pending. 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. In addition to responding to the warning
letter described above, we are in the process of addressing
various FDA Form 483 inspectional observations at certain of
our manufacturing facilities. The ultimate outcome of these
matters is presently uncertain.
Net sales
Gross profit
Net earnings of Zimmer Holdings, Inc.
Earnings per common share
Basic
Diluted
2013 Quarter Ended
2012 Quarter Ended
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
$1,138.9
$1,169.5
$1,074.3
$1,240.7
$1,140.7
$1,125.0
$1,025.5
$1,180.5
846.0
218.6
845.9
152.1
745.5
154.4
899.9
235.9
852.0
209.6
843.1
214.5
769.8
178.1
881.6
152.8
1.30
1.28
0.90
0.89
0.91
0.90
1.38
1.36
1.18
1.17
1.22
1.22
1.02
1.02
0.88
0.88
The quarter ending December 31, 2012 included a $96.0 million goodwill impairment charge.
66
Z I M M E R H OL D I NG S , I NC .
2 0 1 3 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 2013, we transitioned work to a third-party service
provider to outsource certain finance functions that
ITEM 9B. Other Information
During the fourth quarter of 2013, 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.
historically had been performed in multiple countries
throughout Europe and in the U.S. We also centralized other
finance functions that historically had been performed in a
decentralized manner. This outsourcing and centralization are
part of our ongoing operational excellence initiatives.
Also in 2013, we implemented and began to use new
software to consolidate our worldwide financial information.
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, 2013 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.
67
Z I M M E R H OL D I NG S , I NC .
PART III
2 0 1 3 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 is incorporated by reference from our definitive Proxy Statement for the annual meeting of
stockholders to be held on May 6, 2014 (the “2014 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 our 2014 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 our 2014 Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions and Director Independence
Information required by this item is incorporated by reference from our 2014 Proxy Statement.
ITEM 14. Principal Accounting Fees and Services
Information required by this item is incorporated by reference from of our 2014 Proxy Statement.
68
Z I M M E R H OL D I NG S , I NC .
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
(a) 1.
Financial Statements
2 0 1 3 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, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
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.
69
Z I M M E R H OL D I NG S , I NC .
Signatures
2 0 1 3 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 28, 2014
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 28, 2014
Executive Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
February 28, 2014
Vice President, Finance, and Corporate Controller and Chief
Accounting Officer (Principal Accounting Officer)
February 28, 2014
/s/ CHRISTOPHER B. BEGLEY
Director
February 28, 2014
Christopher B. Begley
/s/ BETSY J. BERNARD
Betsy J. Bernard
/s/ PAUL M. BISARO
Paul M. Bisaro
/s/ GAIL K. BOUDREAUX
Gail K. Boudreaux
/s/ LARRY C. GLASSCOCK
Larry C. Glasscock
/s/ ROBERT A. HAGEMANN
Robert A. Hagemann
Arthur J. Higgins
/s/ JOHN L. MCGOLDRICK
John L. McGoldrick
Director
Director
Director
Director
Director
Director
Director
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
/s/ CECIL B. PICKETT, PH.D.
Director
February 28, 2014
Cecil B. Pickett, Ph.D.
70
Z I M M E R H OL D I NG S , I NC .
Index to Exhibits
Exhibit No
Description
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
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*
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 December 13, 2013 (incorporated by reference to Exhibit 3.1 to
the Registrant’s Current Report on Form 8-K filed December 19, 2013)
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 May 7, 2013 (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 13, 2013)
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 28, 2009)
Change in Control Severance Agreement with Katarzyna Mazur-Hofsaess (incorporated by reference to Exhibit 10.3 to
the Registrant’s Quarterly Report on Form 10-Q filed August 7, 2013)
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 28, 2009)
Form of Change in Control Severance Agreement with Chad F. Phipps (incorporated by reference to Exhibit 10.13 to
the Registrant’s Annual Report on Form 10-K filed February 28, 2009)
Form of Change in Control Severance Agreement with 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 28, 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 28, 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 28, 2009)
71
Z I M M E R H OL D I NG S , I NC .
Exhibit No
Description
2 0 1 3 F O R M 1 0 - K AN N U A L R E P O R T
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
10.31*
10.32*
10.33*
10.34*
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 Katarzyna Mazur-Hofsaess (incorporated by
reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed August 7, 2013)
Agreement by and between Bruno A. Melzi, Zimmer S.r.l. and Zimmer, Inc. dated December 12, 2012 (incorporated by
reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K filed February 27, 2013)
Agreement by Private Deed between Zimmer S.r.l. and Bruno A. Melzi dated December 12, 2012 (incorporated by
reference to Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K filed February 27, 2013)
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)
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, as amended May 7, 2013 (incorporated by reference to Exhibit 10.2
to the Registrant’s Current Report on Form 8-K filed May 13, 2013)
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)
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)
10.35*
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)
72
Z I M M E R H OL D I NG S , I NC .
Exhibit No
Description
2 0 1 3 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
21
23
31.1
31.2
32
$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)
Amendment No. 1 dated as of December 13, 2013 to the 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 on December 19, 2013)
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
73
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)
$14.4
$ 4.5
$(1.7) $
17.2
22.8
7.1
1.9
(1.8)
(1.5)
–
–
(0.5)
$ –
$17.2
0.3
–
22.8
22.7
$39.9
$ 1.1
$(0.7) $
40.3
41.3
(0.9)
1.5
(0.3)
(0.1)
–
–
–
$ –
$40.3
2.2
–
41.3
42.7
Valuation and Qualifying Accounts
Description
Allowance for Doubtful Accounts:
Year Ended December 31, 2011
Year Ended December 31, 2012
Year Ended December 31, 2013
Deferred Tax Asset Valuation Allowances:
Year End December 31, 2011
Year End December 31, 2012
Year End December 31, 2013
74
Z I M M E R H OL D I NG S , I NC .
Reconciliations
2 0 1 3 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, 2013, 2012, 2011, 2010 and 2009 (in millions, unaudited)
For the Years Ended December 31,
2013
2012
2011
2010
2009
Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory step-up and other inventory and manufacturing related charges . . .
Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net curtailment and settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,035.6
70.5
47.0
—
216.7
—
$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)
Adjusted Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,369.8
$1,318.6
$1,268.5
$1,231.8
$1,182.5
Reconciliation of Diluted EPS to Adjusted Diluted EPS for the Years Ended December 31, 2013, 2012, 2011, 2010 and 2009 (unaudited)
For the Years Ended December 31,
2013
2012
2011
2010
2009
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory step-up and other inventory and manufacturing related charges . . . . . . . . . . .
Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net curtailment and settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes on above items and other certain tax adjustments* . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4.43
0.41
0.27
—
1.26
—
(0.62)
$ 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)
Adjusted Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5.75
$ 5.30
$ 4.80
$ 4.33
$ 3.94
* 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, 2013 (unaudited)
For the Year Ended December 31, 2013
Reported
% Growth
Foreign
Exchange
Impact
Constant
Currency
% Growth
Geographic Segment
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product Category
Reconstructive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Knees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extremities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dental
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trauma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surgical and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6%
3
(3)
3
3
4
(1)
11
1
2
(3)
18
3
—
2
(10)
(2)
(1)
(1)
(2)
(1)
1
(3)
—
(3)
(2)
6%
1
7
5
4
5
1
12
—
5
(3)
21
5
75
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Corporate Information (As of March 17, 2014)
Board of Directors
Larry C. Glasscock
Chairman of the Board,
Zimmer Holdings, Inc.
Retired Chairman,
President and Chief Executive Officer,
WellPoint, Inc.
Christopher B. Begley
Retired Executive Chairman
and Chief Executive Officer,
Hospira, Inc.
Management Team
David C. Dvorak
President and
Chief Executive Officer
Audrey M. Beckman
Senior Vice President,
Strategic Quality Initiatives
James T. Crines
Executive Vice President,
Finance and Chief Financial Officer
Stockholder Information
Headquarters
Zimmer Holdings, Inc.
345 East Main Street
Warsaw, IN 46580, U.S.A.
+1-574-267-6131
www.zimmer.com
Stock Listing
Zimmer is listed on the
New York Stock Exchange
and the SIX Swiss Exchange
under the symbol ZMH.
Betsy J. Bernard
Retired President,
AT&T Corp.
Paul M. Bisaro
Chairman, President
and Chief Executive Officer,
Actavis PLC
Gail K. Boudreaux
Chief Executive Officer,
UnitedHealthcare
Executive Vice President,
UnitedHealth Group
Joseph A. Cucolo
President,
Americas
Derek M. Davis
Vice President, Finance
and Corporate Controller
and Chief Accounting Officer
William P. Fisher
Senior Vice President,
Global Human Resources
David C. Dvorak
President and
Chief Executive Officer,
Zimmer Holdings, Inc.
Robert A. Hagemann
Retired Senior Vice President
and Chief Financial Officer,
Quest Diagnostics Incorporated
Arthur J. Higgins
Consultant,
Blackstone Healthcare Partners
John L. Mc Goldrick
Special Advisor,
International AIDS
Vaccine Initiative
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
Stephen H. L. Ooi
President,
Asia Pacific
Matt E. Monaghan
Senior Vice President, Global Hips
and Reconstructive Research
Chad F. Phipps
Senior Vice President,
General Counsel and Secretary
Emmanuel Nyakako
Senior Vice President,
Global Quality, Regulatory and
Clinical Affairs
Richard C. Stair
Senior Vice President,
Global Operations and Logistics
Stephen E. White
Senior Vice President and
General Manager, Knees
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
stockholders 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, 2008 in Zimmer common
stock and each index and that dividends
were reinvested. Returns over the indicated
period should not be considered indicative
of future returns.
This annual report is printed on paper
that contains 10% post-consumer waste.
Zimmer Holdings, Inc., 345 East Main Street, P.O. Box 708, Warsaw, IN 46580, U.S.A.