Zimmer Biomet Annual Report 2018

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FY2018 Annual Report · Zimmer Biomet

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ZIMMER BIOMET HOLDINGS, INC. ANNUAL REPORT

2018

Financial Highlights (Dollars in millions except per share amounts)

16%

Sales b y Geography

16%

2014(1)

2015(1)

2016

2017

2018

23%

16%
16%

23%
23%

61%

61%
61%

Americas

$2,594

$3,662

$4,787

$4,845

$4,837

EMEA

Asia Pacific

1,269

810

1,418

918

1,730

1,151

1,745

1,213

1,802

1,294

Consolidated

$4,673

$5,998

$7,668

$7,803

$7,933

Sales b y Product Category

2014(1)

2015(1)

2016

2017

2018

35%

35%
35%

Knees

Hips

S.E.T.

Spine & CMF

Dental

Other

$1,895

$2,277

$2,751

$2,734

$2,774

1,326

863

207

243

139

1,533

1,215

404

336

233

1,862

1,639

661

428

327

1,872

1,701

758

419

319

1,921

1,752

764

411

311

Consolidated

$4,673

$5,998

$7,668

$7,803

$7,933

5% 4%
5% 4%

10%

22%

5% 4%
5% 4%

22%
10%
10%

24%

22%
22%

24%

24%
24%

% Change 2017-2018

Constant
Reported Currency(2)

—

% Change 2017-2018

Constant
Reported Currency(2)

(2%)

(3%)

—

(3%)

Net Sales
Zimmer Biomet recorded net
sales of $7.933 billion in 2018,
reflecting 2% revenue growth
over 2017. We reported increased
sales growth in Knees and Hips,
our two largest product
categories, as well as S.E.T. Our
Spine & CMF product category
sales also improved, while our
Dental sales declined in 2018. Of
note, our consolidated sales
growth improved in the second
half of 2018, compared to the first
half of the year.

3
0
8
7

3
3
9
7

8
6
6
7

8
9
9

3
7
6

Operating Profit
Operating profit in 2018 declined
primarily related to goodwill
impairment charges, as well as
continued reinvestment in the
business and increased costs. Looking
forward, we will continue to reinvest
and focus on cost reduction.

Operating Cash Flow
Our strong cash flow generation in
2018 allowed us to pay down debt.
Looking forward to 2019, we intend
to use available cash for reinvestment
in the business, debt repayment and
long term shareholder value creation.
If the right opportunities arise, we
may also use available cash to pursue
business development opportunities.

Diluted Earnings (Loss) per Share
Diluted earnings per share decreased
from the prior year. Throughout 2018,
we invested in commercial and
operational execution, including a
number of innovative development
projects across our portfolio. We believe
these new products and technologies
represent opportunities for attractive
future return on investment.

(9%) Adjusted(3)

(96%) Reported

8
6
4

6
2
4

0
1
2

3
9
9

9
2
5

7
3
0

1
2
8

9
9
7

7
6
4

4
3

(5%) Adjusted(3)

(121%) Reported

0
9

3
0

6
9
7

4
6

2
3
6

2
8
5

7
4
7

0
9

0
4

0
2

1
6
0

0
5
8

1
5
1

7
7
0

)
6
8

1
(

14(1)

15(1)

14(1)

15(1)

GRAPH KEY

Reported

Adjusted

(1) Effective January 1, 2018 we adopted Accounting Standards Update 2014-09—Revenue from Contracts with Customers (Topic 606) and Accounting Standards Update 2017-07—Improving the Presentation of Net
Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. We adopted these new standards using the retrospective method, which resulted in restatement of the 2017 and 2016 periods. The 2015 and 2014
periods have not been restated.

(2) “Constant Currency” refers to changes in sales 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 88.

(3) “Adjusted” refers to performance measures that exclude the effects of inventory step-up; certain inventory and manufacturing-related charges, including charges to discontinue certain product lines; intangible asset
amortization; goodwill and intangible asset impairment; acquisition, integration and related expenses; quality remediation expenses; certain litigation gains and charges; expenses to comply with the new European
Union Medical Device Regulation; other charges; any related effects on our income tax provision associated with these items; the effect of U.S. tax reform; other certain tax adjustments; and provide for the effect of
dilutive shares assuming net earnings in periods of a reported net loss. See the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures on pages 85-87.

To Our Shareholders,

Zimmer Biomet made exciting progress in 2018. Our company has been a trusted leader
in healthcare for more than 90 years, and our achievements this year have enhanced our
commitment to our stakeholders, including our shareholders, patients, customers, Team
Members and the broader healthcare community.

I was appointed President and Chief Executive Officer roughly one year ago, and we quickly got
to work to implement a two-year turnaround plan focused on strengthening the foundation of our
business and positioning the Company for offense. We are now more than halfway through this
plan and have reshaped the Company into a more proactive and results-driven organization. We
still have work to do, but our momentum in 2018 supports our ongoing confidence that we are on-
track to drive sustainable long-term revenue growth and shareholder value.

Key Achievements in 2018

Zimmer Biomet’s 2018 net sales totaled $7.933 billion, an increase of 1.7% over the prior year
on a reported basis, and an increase of 0.8% over the prior year on a constant currency basis.
Diluted loss per share for 2018 was $1.86. Adjusted diluted earnings per share for the full year
was $7.64, a decrease of 4.9% from the prior year. Our 2018 sales reflected acceleration in
the second half of the year, driven by strengthened global large joint sales and the consistent
outperformance of our Asia Pacific business, in addition to our improving results in the Europe,
Middle East and Africa region. In the second half of 2018, we delivered our two strongest
quarters of large joint sales growth on a constant currency basis in the past two years.

Our turnaround plan laid out several strategic priorities aimed at stabilizing our operations
and the performance of the business, while positioning our commercial channel for offense
in 2019. We are pleased with the progress we made in 2018 and we will continue to focus on
these initiatives in the year ahead. Ultimately, we are working toward our goal of consistently
delivering revenue growth at or above our weighted average market growth rate in 2020.

Highlights of our accomplishments in 2018 and our priorities for 2019 include:

•

Improved Operational Stability: We continued to make solid progress on supply recovery
in 2018, successfully reducing back orders and increasing levels of safety stock. As a result of
these actions, supply is no longer a barrier for delivering on our financial commitments or our
stated objectives of going on offense and accelerating the performance of the business.

In the area of quality remediation, we are executing a detailed remediation plan at the
Warsaw North Campus that we expect to complete by the end of 2019. Patient safety,
quality and integrity are guiding principles of Zimmer Biomet, and we will continue to
invest accordingly to support this important work. In 2019 we will begin to shift our focus
from supply recovery efforts to supply efficiency programs and from quality remediation to
building best-in-class quality systems.

•

New Products to Expand our Unique Ecosystem: In 2018, we advanced a number of
important new products that will be in full launch by the second half of 2019, making this
a truly exciting time for our new product pipeline. Important new additions to our flagship
Persona® system give us competitive offerings in partial, cementless and revision knee
replacement. In the area of robotics, the ROSA® Knee System received CE Mark approval and
FDA 510(k) clearance in the first quarter of this year, marking an important milestone for our
ROSA platform, which is already cleared for brain applications. And in 2018, we introduced
mymobility™, our unique digital platform, which we developed in collaboration with Apple, to
connect patients with their surgical teams throughout their entire episode of care.

As part of an enhanced value proposition for customers, our commercial strategy will
increasingly focus on our unique ecosystem of solutions. For example, by bringing together
Persona, ROSA and mymobility, Zimmer Biomet can offer a digital health platform backed
by Apple and a robotic procedure with greater personalization aimed at transforming the
patient’s surgical journey and offering greater efficiency to our customers.

Significant Enhancements to Culture, Talent and Structure: When I joined the company
last year, we drafted a new One Zimmer Biomet corporate mission. We felt this was a vital
step toward rebuilding trust and a sense of shared purpose across the organization. Since
then, we have held Mission Ceremonies at Zimmer Biomet locations around the world,
meeting with more than half of our Team Members so far. This workforce outreach will
continue in 2019, to ensure that every Team Member feels a direct personal connection to our
mission and culture.

I’m also pleased to report that we have significantly enhanced the organization
with new talent, and we are benefiting from a more diverse range of expertise and
perspectives. Today, including myself, 70 percent of our Leadership Team are new to
their positions. We also restructured each of our businesses to streamline reporting and
decision-making, encouraging Team Members at every level to drive a more agile and
results-driven organization.

The Road Ahead: 2020 and Beyond

We will remain focused on our key priorities in 2019, as part of the two-year effort to reshape
Zimmer Biomet and position us for offense. The pillars of our strategy for 2020 and beyond build
on these areas with a focus on developing a best-in-class sustainable organization.

First, we will become the best and preferred place to work for our Team Members around
the globe—allowing us to continue to attract and benefit from the industry’s best talent, acting
with a shared sense of purpose and clearly defined values. Second, we will strengthen Zimmer
Biomet’s reputation as a trusted partner to all of our stakeholders, including our customers,
patients, regulators, Team Members and shareholders. I take this commitment very seriously,
as we continue to work to improve performance across the business. Finally, once we have
met our objective of delivering market growth in 2020, our vision is to work toward delivering
top-quartile performance in terms of total shareholder returns. We will deliver this level of
performance through a five-year plan that accelerates our revenue growth while expanding
operating margins and increasing free cash flow. To help ensure our Team Members are
connected to our strategy, we have already started to better align our compensation structure
with these metrics.

As I look back on all that we accomplished in 2018, I want to take a moment to thank our Board of
Directors for their support and guidance as we tackled the challenges of a transformational year. I
also want to express my sincere appreciation for our more than 23,000 Team Members around the
world, who have navigated through significant change and inspire me every day with their hard
work and commitment to achieving our mission. Together, we are shaping the future of our great
company and delivering on our mission to alleviate pain and improve the quality of life for people
around the world.

Sincerely,

Bryan C. Hanson
President and CEO, Zimmer Biomet

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, 2018

Commission file number 001-16407
ZIMMER BIOMET 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
1.414% Notes due 2022
2.425% Notes due 2026

Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
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 every Interactive Data File required to be submitted
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 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, a smaller
reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer Í Accelerated filer ‘ Non-accelerated filer ‘ Smaller reporting company ‘ Emerging growth company ‘

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘

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 $22,648,282,177 (based on the closing price of these shares on the New
York Stock Exchange on June 29, 2018 and assuming solely for the purpose of this calculation that all directors and executive officers
of the registrant are “affiliates”). As of February 15, 2019, 204,433,342 shares of the registrant’s $.01 par value common stock were
outstanding.

Document

Portions of the Proxy Statement with respect to the 2019 Annual Meeting of Stockholders

Form 10-K

Part III

Documents Incorporated by Reference

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 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,
including, among others, statements about our expectations, plans, strategies or prospects. We generally use the words “may,”
“will,” “expect,” “believe,” “anticipate,” “plan,” “estimate,” “project,” “assume,” “guide,” “target,” “forecast,” “see,” “seek,” “can,”
“should,” “could,” “would,” “intend” “predict,” “potential,” “strategy,” “is confident that,” “future,” “opportunity,” “work toward,” and
similar expressions to identify forward-looking statements. All statements other than statements of historical or current fact are, or
may be deemed to be, forward-looking statements. Such statements are based upon the current beliefs, expectations and
assumptions of management and are subject to significant risks, uncertainties and changes in circumstances that could cause actual
results to differ materially from the forward-looking statements. These risks, uncertainties and changes in circumstances include,
but are not limited to: the possibility that the anticipated synergies and other benefits from mergers and acquisitions will not be
realized, or will not be realized within the expected time periods; the risks and uncertainties related to our ability to successfully
integrate the operations, products, employees and distributors of acquired companies; the effect of the potential disruption of
management’s attention from ongoing business operations due to integration matters related to mergers and acquisitions; the effect
of mergers and acquisitions on our relationships with customers, vendors and lenders and on our operating results and businesses
generally; compliance with the Deferred Prosecution Agreement entered into in January 2017; the success of our quality and
operational excellence initiatives, including ongoing quality remediation efforts at our Warsaw North Campus facility; challenges
relating to changes in and compliance with governmental laws and regulations affecting our U.S. and international businesses,
including regulations of the U.S. Food and Drug Administration and foreign government regulators, such as more stringent
requirements for regulatory clearance of products; the ability to remediate matters identified in any inspectional observations or
warning letters issued by the U.S. Food and Drug Administration, while continuing to satisfy the demand for our products; the
outcome of government investigations; competition; pricing pressures; changes in customer demand for our products and services
caused by demographic changes or other factors; the impact of healthcare reform measures, including the impact of the U.S. excise
tax on medical devices if such tax is not further suspended or repealed; reductions in reimbursement levels by third-party payors
and cost containment efforts of healthcare purchasing organizations; dependence on new product development, technological
advances and innovation; shifts in the product category or regional sales mix of our products and services; supply and prices of raw
materials and products; control of costs and expenses; the ability to obtain and maintain adequate intellectual property protection;
the ability to form and implement alliances; changes in tax obligations arising from tax reform measures, including European Union
rules on state aid, or examinations by tax authorities; product liability and intellectual property litigation losses; the ability to retain
the independent agents and distributors who market our products; dependence on a limited number of suppliers for key raw
materials and outsourced activities; changes in general industry and market conditions, including domestic and international
growth rates; changes in general domestic and international economic conditions, including interest rate and currency exchange
rate fluctuations; and the impact of the ongoing financial and political uncertainty on countries in the Euro zone on the ability to
collect accounts receivable in affected countries.

See also the section titled “Risk Factors” (refer to Part I, Item 1A of this report) for further discussion of certain risks and

uncertainties that could cause actual results and events to differ materially from the forward-looking statements. Readers of this
report are cautioned not to rely on these forward-looking statements, since 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.

Z I M M E R BI OM E T HOL D I NG S , I NC .

TABLE OF CONTENTS

PART I

Item 1.

Business

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4. Mine Safety Disclosures

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity

Securities

Item 6.

Selected Financial Data

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8.

Financial Statements and Supplementary Data

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions and Director Independence

Item 14. Principal Accountant Fees and Services

PART IV

Item 15. Exhibits and Financial Statement Schedules

Item 16. 10-K Summary

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

Page

Z I M M E R BI OM E T HOL D I NG S , I NC .

PART I

Item 1. Business

Overview

Zimmer Biomet is a global leader in musculoskeletal
healthcare. We design, manufacture and market orthopedic
reconstructive products; sports medicine, biologics,
extremities and trauma products; office based technologies;
spine, craniomaxillofacial and thoracic products; dental
implants; and related surgical products. We collaborate with
healthcare professionals around the globe to advance the pace
of innovation. Our products and solutions help treat patients
suffering from disorders of, or injuries to, bones, joints or
supporting soft tissues. Together with healthcare
professionals, we help millions of people live better lives. In
this report, “Zimmer Biomet,” “we,” “us,” “our,” “the Company”
and similar words refer collectively to Zimmer Biomet
Holdings, Inc. and its subsidiaries. “Zimmer Biomet Holdings”
refers to the parent company only.

Zimmer Biomet 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, we were spun off from our former parent and
became an independent public company.

On June 24, 2015 (the “Closing Date”), we acquired LVB
Acquisition, Inc. (“LVB”), the parent company of Biomet, Inc.
(“Biomet”), and LVB and Biomet became our wholly-owned
subsidiaries (sometimes hereinafter referred to as the “Biomet
merger” or the “merger”). In connection with the merger, we
changed our name from Zimmer Holdings, Inc. to Zimmer
Biomet Holdings, Inc.

Customers, Sales and Marketing

Our primary customers include orthopedic surgeons,
neurosurgeons, oral surgeons, and other specialists, 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 throughout the world. We manage our
operations through three major geographic operating segments
and four product category operating segments. Our three
major geographic operating segments are the Americas, which
is comprised principally of the U.S. and includes other North,
Central and South American markets; EMEA, which is
comprised principally of Europe and includes the Middle East
and African markets; and Asia Pacific, which is comprised
primarily of Japan, China and Australia and includes other
Asian and Pacific markets. Our four product category
operating segments, which are individually not as significant as
our geographic operating segments, are as follows: 1) Spine,
less Asia Pacific (“Spine”); 2) Office Based Technologies; 3)
Craniomaxillofacial and Thoracic (“CMF”); and 4) Dental.
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

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

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, some healthcare
dealers, dental practices and dental laboratories, title to
product passes upon shipment. Consignment sales represented
approximately 80 percent of our net sales in 2018. 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 2018.

We stock inventory in our warehouse facilities and retain

title to consigned inventory in an effort to have sufficient
quantities available when products are 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.
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 orthopedic surgeons,
neurosurgeons, other specialists, dentists and oral surgeons
and the medical and dental procedures they perform.

We allocate resources to achieve our operating profit goals

through seven operating segments. Our operating segments
are comprised of both geographic and product category
business units. We are organized through a combination of
geographic and product category operating segments for
various reasons, including the distribution channels through
which products are sold. Our product category operating
segments generally have distribution channels focused
specifically on those product categories, whereas our
geographic operating segments have distribution channels that
sell multiple product categories. The following is a summary of
our seven operating segments. See Note 17 to our consolidated
financial statements for more information regarding our
segments.

Americas. The Americas geographic operating segment

is our largest operating segment. The U.S. accounts for
94 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

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

Biomet. 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.

EMEA. The EMEA geographic operating segment is our

second largest operating segment. France, Germany, Italy,
Spain and the United Kingdom collectively account for
56 percent of net sales in the region. This segment also
includes other key markets, including Switzerland, 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 budgets impact
healthcare spending, which can affect our sales in this
segment.

Asia Pacific. The Asia Pacific geographic operating
segment includes key markets such as Japan, China, Australia,
New Zealand, Korea, Taiwan, India, Thailand, Singapore, Hong
Kong and Malaysia. Japan is the largest market within this
segment, accounting for 46 percent of the region’s sales. 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 orthopedic surgeons and
neurosurgeons in their markets. The knowledge and skills of
these sales associates play a critical role in providing service,
product information and support to surgeons. We have 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.

Spine. The Spine product category operating segment
includes all spine product results except those in Asia Pacific.
The U.S. accounts for the majority of sales in this operating
segment. The market dynamics of the Spine business are
similar to those described in the geographic operating
segments. However, our Spine business maintains a separate
sales force of employees and independent sales agents.
Office Based Technologies. Our Office Based

Technologies product category operating segment only sells to
U.S. customers. In this product category, we market our
products to doctors who prescribe them for use by patients.
The products are mostly provided directly by Zimmer Biomet

to patients and are paid for through patients’ insurance or by
patients themselves. Products are also sold through wholesale
channels on a limited basis.

CMF. Our CMF product category operating segment
competes across the world through a combination of direct and
independent sales agents. The U.S. accounts for the majority of
sales in this operating segment. The U.S. sales force consists of
a combination of employees and independent sales agents.
Internationally, our primary customers are independent
stocking distributors who market our products to their
customers.

Dental. Our Dental product category operating segment

competes across the world. Our sales force is primarily
composed of employees who market our products to
customers. We sell directly to dental practices or dental
laboratories, or to independent stocking distributors depending
on the market.

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 distribute our products both through large, centralized

warehouses and through smaller, market specific facilities,
depending on the needs of the market. We maintain large,
centralized warehouses in the U.S. and Europe to be able to
efficiently distribute our products to customers in those
regions. In addition to these centralized warehouses, we
maintain smaller distribution facilities in the U.S. and in each
of the countries where we have a direct sales presence. In
many locations, our inventory is consigned to the healthcare
institution.

We generally ship our orders via expedited courier. Since

most of our sales occur at the time of an elective procedure,
we generally do not have firm orders.

Products

Our products include orthopedic reconstructive products;

sports medicine, biologics, extremities and trauma products;
office based technologies; spine and CMF products; dental
implants; and related surgical products.

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
degeneration and involve the replacement of only one side, or

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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) Vanguard® Knee
(cid:129) Oxford® Partial Knee

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.

caused by degenerative conditions, deformities or traumatic
injury of the spine. Our CMF division includes face and skull
reconstruction products as well as products that fixate and
stabilize the bones of the chest in order to facilitate healing or
reconstruction after open heart surgery, trauma or for
deformities of the chest.

Our significant spine and CMF brands include the

following:
(cid:129) Polaris™ Spinal System
(cid:129) Mobi-C® Cervical Disc
(cid:129) SternaLock® Blu Closure System
(cid:129) SternaLock® Rigid Sternal Fixation

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;
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 hip brands include the following:

Our significant dental brands include the following:

(cid:129) Zimmer® M/L Taper Hip Prosthesis
(cid:129) Taperloc® Hip System
(cid:129) Arcos® Modular Hip System
(cid:129) Continuum® Acetabular System
(cid:129) G7® Acetabular System

S.E.T.

(cid:129) Tapered Screw-Vent® Implant System
(cid:129) 3i T3® Implant

OTHER

Our other product category primarily includes our bone

cement and office based technology products.

Our S.E.T. product category includes surgical, sports

Research and Development

medicine, biologics, foot and ankle, extremities and trauma
products. Our surgical products are used to support various
surgical procedures. Our sports medicine products are
primarily for the repair of soft tissue injuries, most commonly
used in the knee and shoulder. Our biologics products are used
as early intervention for joint preservation or to support
surgical procedures. Our foot and ankle and extremities
products are designed to treat arthritic conditions and
fractures in the foot, ankle, shoulder, elbow and wrist. Our
trauma products are used to stabilize damaged or broken
bones and their surrounding tissues to support the body’s
natural healing process.

Our significant S.E.T. brands include the following:

(cid:129) Intellicart® System
(cid:129) A.T.S.® Tourniquet Systems
(cid:129) JuggerKnot® Soft Anchor System
(cid:129) Gel-One®1 Cross-linked Hyaluronate
(cid:129) Zimmer® Trabecular MetalTM Reverse Shoulder System
(cid:129) Comprehensive® Shoulder
(cid:129) Zimmer® Natural Nail® System
(cid:129) A.L.P.S.® Plating System

SPINE and CMF

Our spine products division designs, manufactures and
distributes medical devices and surgical instruments to deliver
comprehensive solutions for individuals with back or neck pain

1 Registered trademark of Seikagaku Corporation

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 certain 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, Canada, China, France, Switzerland and other
U.S. locations. As of December 31, 2018, we employed
approximately 2,000 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 our products are

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brought to market. These include, among others, the Federal
Food, Drug and Cosmetic Act and regulations issued or
promulgated thereunder. The U.S. Food and Drug
Administration (“FDA”) has enacted regulations that control
all aspects of the development, manufacture, advertising,
promotion and postmarket surveillance of medical products,
including medical devices. In addition, the FDA controls the
access of products to market through processes designed to
ensure that only products that are safe and effective are made
available to the public.

Most of our new products fall into an FDA medical device

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).

All of our devices marketed in the U.S. have been cleared

or approved by the FDA, with the exception of some devices
which are exempt or 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 its
Quality System Regulation (21 CFR Part 820) (“QSR”), among
other FDA requirements, such as restrictions on advertising
and promotion. Our manufacturing operations, and those of
our third-party manufacturers, are required to comply with the
QSR, which addresses a company’s responsibility for product
design, testing and manufacturing quality assurance and the
maintenance of records and documentation. The QSR requires
that each manufacturer establish a quality system by which the
manufacturer monitors the manufacturing process and
maintains records that show compliance with FDA regulations
and the manufacturer’s written specifications and procedures
relating to the devices. QSR compliance is necessary to receive
and maintain FDA clearance or approval to market new and
existing products. The FDA conducts announced and
unannounced periodic and on-going inspections of medical
device manufacturers to determine compliance with the QSR.

If in connection with these inspections the FDA believes the
manufacturer has failed to comply with applicable regulations
and/or procedures, it may issue inspectional observations on
Form 483 that would necessitate prompt corrective action. If
FDA inspectional observations are not addressed and/or
corrective action is not taken in a timely manner and to the
FDA’s satisfaction, the FDA may issue a warning letter (which
would similarly necessitate prompt corrective action) and/or
proceed directly to other forms of enforcement action,
including the imposition of operating restrictions, including a
ceasing of operations, on one or more facilities, enjoining and
restraining certain violations of applicable law pertaining to
medical devices and assessing civil or criminal penalties
against our officers, employees or us. The FDA could also issue
a corporate warning letter, a recidivist warning letter or a
consent decree of permanent injunction. The FDA may also
recommend prosecution to the U.S. Department of Justice
(“DOJ”). Any adverse regulatory action, depending on its
magnitude, may restrict us from effectively manufacturing,
marketing and selling our products and could have a material
adverse effect on our business, financial condition and results
of operations. For information regarding certain warning
letters and FDA Form 483 inspectional observations that we
are addressing, see Note 19 to our consolidated financial
statements.

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 (“OFAC”).

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 products in these countries are
similar to those of the FDA. The member countries of the
European Union (the “EU”) 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 (e.g., ISO 13485 certification)
enable the manufacturer to place a CE mark on its products.
To obtain authorization to affix the CE mark to a product, a
recognized European Notified Body must assess a
manufacturer’s quality system 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. In May 2017, a new EU Medical
Device Regulation was published that will impose significant
additional premarket and postmarket requirements. The

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regulation has a three-year implementation period, and after
that time all products marketed in the EU will require
certification according to these new requirements. In addition,
many countries, including Canada and Japan, have very
specific additional regulatory requirements for quality
assurance and manufacturing with which we must comply.

Further, we are subject to other federal, state and foreign

laws concerning healthcare fraud and abuse, including false
claims and anti-kickback laws, as well as the U.S. Physician
Payments Sunshine Act and similar state and foreign
healthcare professional payment transparency laws. These
laws are administered by, among others, the DOJ, the Office of
Inspector General of the Department of Health and Human
Services (“OIG-HHS”), 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 health programs.

Our operations in foreign countries are subject to the

extraterritorial application of the U.S. Foreign Corrupt
Practices Act (“FCPA”). Our global operations are also subject
to foreign anti-corruption laws, such as the United Kingdom
(“UK”) Bribery Act, among others. As part of our global
compliance program, we seek to address anti-corruption risks
proactively. On January 12, 2017, we resolved previously-
disclosed FCPA matters involving Biomet and certain of its
subsidiaries. As part of that settlement, we entered into a
Deferred Prosecution Agreement (“DPA”) with the DOJ. For
information regarding the DPA, see Note 19 to our
consolidated financial statements.

Our facilities and operations are also subject to complex

federal, state, local and foreign environmental and
occupational safety laws and regulations, including those
relating to discharges of substances in the air, water and land,
the handling, storage and disposal of wastes and the clean-up
of properties contaminated 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.
In addition, we are subject to federal, state and

international data privacy and security laws and regulations
that govern the collection, use, disclosure and protection of
health-related and other personal information. The FDA has
issued guidance to which we may be subject concerning data
security for medical devices. In addition, certain of our
affiliates are subject to privacy and security regulations
promulgated under the Health Insurance Portability and
Accountability Act of 1996 and the Health Information
Technology for Economic and Clinical Health Act (collectively,
“HIPAA”). HIPAA governs the use, disclosure, and security of
protected health information by HIPAA “covered entities” and
their “business associates.” Covered entities are health care
providers that engage in specific types of electronic
transactions, health plans, and health care clearinghouses. A

business associate is any person or entity (other than members
of a covered entity’s workforce) that performs a service on
behalf of a covered entity involving the use or disclosure of
protected health information. The U.S. Department of Health
and Human Services (“HHS”) (through the Office for Civil
Rights) has direct enforcement authority against covered
entities and business associates with regard to compliance with
HIPAA regulations. On December 12, 2018, the Office for Civil
Rights of HHS issued a request for information seeking input
from the public on how the HIPAA regulations could be
modified to amend existing obligations relating to the
processing of protected health information. We will monitor
this process and assess the impact of changes to the HIPAA
regulations to our business.

In addition to the FDA guidance and HIPAA regulations

described above, a number of U.S. states have also enacted
data privacy and security laws and regulations that govern the
confidentiality, security, use and disclosure of sensitive
personal information, such as social security numbers, medical
and financial information and other personal information.
These laws and regulations may be more restrictive and not
preempted by U.S. federal laws. These state laws include the
California Consumer Privacy Act (“CCPA”), which was signed
into law on June 28, 2018 and largely takes effect January 1,
2020. The CCPA, among other things, contains new disclosure
obligations for businesses that collect personal information
about California residents and affords those individuals new
rights relating to their personal information that may affect our
ability to use personal information. We will continue to monitor
and assess the impact of the CCPA, which has substantial
penalties for non-compliance and carries significant potential
liability, on our business.

Outside of the U.S., data protection laws, including the EU

General Data Protection Regulation and member state
implementing legislation, also apply to some of our operations
in the countries in which we provide services to our customers.
Legal requirements in these countries relating to the
collection, storage, processing and transfer of personal data
continue to evolve. The EU General Data Protection
Regulation, which became effective on May 25, 2018 (the
“GDPR”), imposes, among other things, data protection
requirements that include strict obligations and restrictions on
the ability to collect, analyze and transfer EU personal data, a
requirement for prompt notice of data breaches to data
subjects and supervisory authorities in certain circumstances,
and possible substantial fines for any violations (including
possible fines for certain violations of up to 4% of total
company revenue).

Failure to comply with U.S. and international data
protection laws and regulations could result in government
enforcement actions (which could include civil and/or criminal
penalties), private litigation and/or adverse publicity and could
negatively affect our operating results and business.

Competition

The orthopedics and broader musculoskeletal care
industry is highly competitive. In the global markets for our

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knees, hips, and S.E.T. products, our major competitors
include: the DePuy Synthes Companies of Johnson & Johnson;
Stryker Corporation; and Smith & Nephew plc. There are
smaller competitors in these product categories as well who
have success by focusing on smaller subsegments of the
industry.

In the spine and CMF categories, we compete globally
primarily with the spinal and biologic business of Medtronic
plc, the DePuy Synthes Companies, Stryker Corporation,
NuVasive, Inc. and Globus Medical, Inc.

In the dental implant category, we compete primarily with
Nobel Biocare Holding AG (part of the Danaher Corporation),
Straumann Holding AG and Dentsply Sirona Inc.

Competition within the industry is primarily based on

pricing, technology, innovation, quality, reputation and
customer service. A key factor in our continuing success in the
future will be our ability to develop new products and improve
existing products and technologies.

Manufacturing and Raw Materials

We manufacture our products at various sites. We also

strategically outsource some manufacturing to qualified
suppliers who are highly capable of producing components.
The manufacturing operations at our 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 outsource production as part of our
manufacturing strategy to provide value to our stakeholders.

In most of our manufacturing network, we have improved

our manufacturing processes to harmonize and optimize our
quality systems and 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. Our
Warsaw North Campus facility is in the process of

implementing many of these manufacturing process
improvements. These process improvements are an integral
part of our quality remediation plans.

We use a diverse and broad range of raw materials in the

manufacturing of our products. We purchase all of our raw
materials and select components used in manufacturing our
products from external suppliers. In addition, we purchase
some supplies from single sources for reasons of quality
assurance, sole source availability, cost effectiveness or
constraints resulting from regulatory requirements. We work
closely with our suppliers to assure continuity of supply while
maintaining high quality and reliability. To date, we have not
experienced any significant difficulty in locating and obtaining
the materials necessary to fulfill our production schedules.

Intellectual Property

Patents and other proprietary rights are important to the

continued success of our business. We also rely upon trade
secrets, know-how, continuing technological innovation and
licensing opportunities to develop and maintain our
competitive position. We protect our proprietary rights
through a variety of methods, including confidentiality
agreements and proprietary information agreements with
vendors, employees, consultants and others who may have
access to proprietary information. We own or control through
licensing arrangements over 8,500 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, 2018, we employed approximately

19,000 employees worldwide, including approximately
2,000 employees dedicated to research and
development. Approximately 9,000 employees are located
within the U.S. and approximately 10,000 employees are
located outside of the U.S., primarily throughout Europe and in
Japan. We have approximately 8,500 employees dedicated to
manufacturing our products worldwide. The Warsaw, Indiana
production facilities employ approximately 3,000 employees in
the aggregate.

We have production employees represented by a labor

union in each of Dover, Ohio and Bridgend, South Wales. We
have other employees in Europe who are represented by
Works Councils. We believe that our relationship with our
employees is satisfactory.

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EXECUTIVE OFFICERS

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The following table sets forth certain information with respect to our executive officers as of February 25, 2019.

Name

Bryan C. Hanson

Aure Bruneau

Didier Deltort

Daniel P. Florin

Chad F. Phipps

Ivan Tornos

Sang Yi

Age

Position

President and Chief Executive Officer

Group President, Spine, CMF, Thoracic and Surgery Assisting Technology

President, Europe, Middle East and Africa

Executive Vice President and Chief Financial Officer

Senior Vice President, General Counsel and Secretary

Group President, Orthopedics

President, Asia Pacific

Mr. Hanson was appointed President and Chief Executive
Officer and a member of the Board of Directors in December
2017. Previously, Mr. Hanson served as Executive Vice
President and President, Minimally Invasive Therapies Group
of Medtronic plc from January 2015 until joining Zimmer
Biomet. Prior to that, he was Senior Vice President and Group
President, Covidien of Covidien plc from October 2014 to
January 2015; Senior Vice President and Group President,
Medical Devices and United States of Covidien from October
2013 to September 2014; Senior Vice President and Group
President of Covidien for the Surgical Solutions business from
July 2011 to October 2013; and President of Covidien’s
Energy-based Devices business from July 2006 to June 2011.
Mr. Hanson held several other positions of increasing
responsibility in sales, marketing and general management
with Covidien from October 1992 to July 2006.

Mr. Bruneau was appointed Group President with responsibility
for the Company’s, Spine, Craniomaxillofacial, Thoracic and
Surgery Assisting Technology businesses in December
2017. Prior to that, Mr. Bruneau served as Vice President and
General Manager with global responsibility for the Company’s
Craniomaxillofacial and Thoracic businesses beginning in June
2015. He also led the integration of the Robotics business until
assuming his current role. Previously, Mr. Bruneau served in
Vice President roles of increasing responsibility in marketing,
business development and general management at Biomet
from September 2008 until June 2015. Prior to joining Biomet,
Mr. Bruneau held numerous positions with Sofamor Danek
Group and Medtronic over a 12-year period.

Mr. Deltort was appointed President, Europe, Middle East and
Africa in August 2018. He is responsible for the marketing,
sales and distribution of products, services and solutions in the
European, Middle Eastern and African (EMEA) regions. Prior
to joining Zimmer Biomet, Mr. Deltort served as Senior Vice
President and General Manager, Global Healthcare Solutions
and Partnerships of Boston Scientific Corporation, based in
France from May 2016 until August 2018. Before joining
Boston Scientific Corporation, he spent 14 years with GE
Healthcare in positions of increasing responsibility in
Germany, Finland, Dubai and the United States, most recently
serving as Global Senior Vice President and General Manager
of the global Monitoring Solutions business as well as
Managing Director of GE Healthcare Finland. Prior to GE,

Mr. Deltort served at Philips, Hewlett-Packard and Marquette
Electronics in various international healthcare executive roles.

Mr. Florin was appointed Executive Vice President and Chief
Financial Officer in February 2018. Prior to that appointment,
he served as Senior Vice President and Chief Financial Officer
from June 2015 to February 2018. In addition, he served as
Interim Chief Executive Officer from July 2017 to December
2017. Prior to the Biomet merger, Mr. Florin served as Senior
Vice President and Chief Financial Officer of Biomet from
June 2007 to June 2015. Before joining Biomet, he served as
Vice President and Corporate Controller of Boston Scientific
Corporation from 2001 through May 2007. Prior to that,
Mr. Florin served in financial leadership positions within
Boston Scientific Corporation and its various business units.
Before joining Boston Scientific Corporation, Mr. Florin
worked for C.R. Bard from October 1990 through June 1995.
From August 1986 until October 1990, Mr. Florin worked in
the Audit Practice of Deloitte Haskins & Sells.

Mr. Phipps was appointed Senior Vice President, General
Counsel and Secretary in May 2007. He has global
responsibility for the Company’s Legal Affairs and he serves as
Secretary to the Board of Directors. Mr. Phipps also oversees
the Company’s Government Affairs activities. Previously,
Mr. Phipps served as Associate General Counsel and Corporate
Secretary from December 2005 to May 2007. He joined the
Company in September 2003 as Associate Counsel and
Assistant Secretary. Prior to joining the Company, he served
as Vice President and General Counsel of L&N Sales and
Marketing, Inc. in Pennsylvania and he practiced law with the
firm of Morgan, Lewis & Bockius in Philadelphia, focusing on
corporate and securities law, mergers and acquisitions and
financial transactions.

Mr. Tornos was appointed Group President, Orthopedics in
November 2018. Prior to joining Zimmer Biomet, Mr. Tornos
served as Worldwide President of the Global Urology, Medical
and Critical Care Divisions of Becton, Dickinson and Company
(“BD”) (and previously, C. R. Bard, Inc. (“Bard”)) from June
2017 until October 2018. From June 2017 until BD’s
acquisition of Bard in December 2017, Mr. Tornos also
continued to serve as President, Europe, Middle East and
Africa (“EMEA”) of Bard, a position to which he was
appointed in September 2013. Mr. Tornos joined Bard in

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August 2011 and, prior to his appointment as President,
EMEA, served as Vice President and General Manager with
leadership responsibility for Bard’s business in Southern
Europe, Central Europe and the Emerging Markets Region of
the Middle East and Africa. Before joining Bard, Mr. Tornos
served as Vice President and General Manager of the Americas
Pharmaceutical and Medical/Imaging Segments of Covidien
International from April 2009 to August 2011. Before that, he
served as International Vice President, Business Development
and Strategy with Baxter International Inc. from July 2008 to
April 2009 and, prior to that, Mr. Tornos spent 11 years with
Johnson & Johnson in positions of increasing responsibility.

Mr. Yi was appointed President, Asia Pacific in June 2015. He is
responsible for the sales, marketing and distribution of
products in the Asia Pacific region. Mr. Yi joined the Company
in March 2013 as Senior Vice President, Asia Pacific.
Previously, he served as Vice President and General Manager
of St. Jude Medical for Asia Pacific and Australia from 2005 to
2013. Prior to that, Mr. Yi held several leadership positions
over a ten-year period with Boston Scientific Corporation,
ultimately serving as Vice President for North Asia.

AVAILABLE INFORMATION

Our Internet address is www.zimmerbiomet.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.zimmerbiomet.com or
directly at http://investor.zimmerbiomet.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, as well as archives of these events;
(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 and
Ethics, Code of Ethics for Chief Executive Officer and
Senior Financial Officers, information concerning our Board
of Directors and its committees, including the charters of the
Audit Committee, Compensation and Management

Development Committee, Corporate Governance Committee
and Quality, Regulatory 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

We operate in a rapidly changing economic and
technological environment that presents numerous risks,
many of which are driven by factors that we cannot control
or predict. Our business, financial condition and results of
operations may be impacted by a number of factors. In
addition to the factors discussed elsewhere in this report,
the following risks and uncertainties could materially
harm our business, financial condition or results of
operations, including causing our actual results to differ
materially from those projected in any forward-looking
statements. The following list of significant risk factors is
not all-inclusive or necessarily in order of importance.
Additional risks and uncertainties not presently known to
us, or that we currently deem immaterial, also may
materially adversely affect us in future periods. You
should carefully consider these risks and uncertainties
before investing in our securities.

If we fail to comply with the terms of the DPA that
we entered into in January 2017, we may be subject to
criminal prosecution and/or exclusion from federal
healthcare programs.

On January 12, 2017, we resolved previously-disclosed FCPA
matters involving Biomet and certain of its subsidiaries. As part of
the settlement, we entered into a DPA with the DOJ. A copy of
the DPA is incorporated by reference as an exhibit to this report.
If we do not comply with the terms of the DPA, we could

be subject to prosecution for violating the internal controls
provisions of the FCPA and the conduct of Biomet and its
subsidiaries described in the DPA, which conduct pre-dated
our acquisition of Biomet, as well as any new or continuing
violations. We could also be subject to exclusion by OIG-HHS
from participation in federal healthcare programs, including
Medicaid and Medicare. Any of these events could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.

We may not be able to effectively integrate
acquired businesses into our operations or achieve
expected cost savings or profitability from our
acquisitions.

Our acquisitions involve numerous risks, including:
(cid:129) unforeseen difficulties in integrating personnel and sales
forces, operations, manufacturing, logistics, research and

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development, information technology, communications,
purchasing, accounting, marketing, administration and other
systems and processes;

(cid:129) difficulties harmonizing and optimizing quality systems and

operations;

(cid:129) diversion of financial and management resources from

existing operations;

(cid:129) unforeseen difficulties related to entering geographic

materials and components prior to their use in our products
and the complex nature of our and many of our vendors’
manufacturing processes. A reduction or interruption in the
supply of materials or components used in manufacturing our
products; an inability to timely develop and validate alternative
sources if required; or a significant increase in the price of
such materials or components could adversely affect our
business, financial condition and results of operations.

regions where we do not have prior experience;

Moreover, we are subject to the SEC’s rule regarding

(cid:129) potential loss of key employees;
(cid:129) unforeseen liabilities associated with businesses acquired;

and

(cid:129) inability to generate sufficient revenue or realize sufficient

cost savings to offset acquisition or investment costs.

As a result, if we fail to evaluate and execute acquisitions

properly, we might not achieve the anticipated benefits of such
acquisitions and we may incur costs in excess of what we
anticipate. These risks would likely be greater in the case of
larger acquisitions.

Interruption of our manufacturing operations could

adversely affect our business, financial condition and
results of operations.

We have manufacturing sites all over the world. In some

instances, however, the manufacturing of certain of our
product lines is concentrated in one or more of our plants.
Damage to one or more of our facilities from weather or
natural disaster-related events, or issues in our manufacturing
arising from failure to follow specific internal protocols and
procedures, compliance concerns relating to the QSR and
Good Manufacturing Practice requirements, equipment
breakdown or malfunction or other factors could adversely
affect our ability to manufacture our products. In the event of
an interruption in manufacturing, we may be unable to move
quickly to alternate means of producing affected products or to
meet customer demand. In the event of a significant
interruption, for example, as a result of a failure to follow
regulatory protocols and procedures, we may experience
lengthy delays in resuming production of affected products
due primarily to the need for regulatory approvals. As a result,
we may experience loss of market share, which we may be
unable to recapture, and harm to our reputation, which could
adversely affect our business, financial condition and results of
operations.

Disruptions in the supply of the materials and
components used in manufacturing our products could
adversely affect our business, financial condition and
results of operations.

We purchase many of the materials and components used

in manufacturing our products from third-party vendors and
we outsource some key manufacturing activities. Certain of
these materials and components and outsourced activities can
only be obtained from a single source or a limited number of
sources due to quality considerations, expertise, costs or
constraints resulting from regulatory requirements. In certain
cases, we may not be able to establish additional or
replacement vendors for such materials or components or
outsourced activities in a timely or cost effective manner,
largely as a result of FDA regulations that require validation of

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. This rule could adversely affect
the sourcing, availability and pricing of materials used in the
manufacture of our products, which could adversely affect our
manufacturing operations and our profitability. In addition, we
are incurring additional costs to comply with this rule,
including costs related to determining the source of any
relevant minerals and metals used in our products. We have a
complex supply chain and we may not be able to sufficiently
verify the origins of the minerals and metals used in our
products through our due diligence procedures. As a result, we
may face reputational challenges with our customers and other
stakeholders.

We are subject to costly and complex laws and

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 products 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 these products 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 and
other local, state and foreign requirements. Compliance with
these requirements, including the QSR, 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 and other regulators, which may result
in observations (such as on Form 483), and in some cases
warning letters, that require corrective action, or other forms
of enforcement. If the FDA or another regulator were to
conclude that we are not in compliance with applicable laws or
regulations, or that any of our products are ineffective or pose
an unreasonable health risk, they could ban such products,
detain or seize adulterated or misbranded products, order a
recall, repair, replacement, or refund of payment of such
products, refuse to grant pending premarket approval
applications, refuse to provide certificates for exports, and/or
require us to notify healthcare professionals and others that

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the products present unreasonable risks of substantial harm to
the public health. The FDA or other regulators may also
impose operating restrictions, including a ceasing of operations
at one or more facilities, enjoin and restrain certain violations
of applicable law pertaining to our products and assess civil or
criminal penalties against our officers, employees or us. The
FDA or other regulators could also issue a corporate warning
letter, a recidivist warning letter, a consent decree of
permanent injunction, and/or recommend prosecution. Any
adverse regulatory action, depending on its magnitude, may
restrict us from effectively manufacturing, marketing and
selling our products and could have a material adverse effect
on our business, financial condition and results of operations.
In 2012, we received a warning letter from the FDA citing

concerns relating to certain processes pertaining to products
manufactured at our Ponce, Puerto Rico manufacturing
facility. In May 2016, we received a warning letter from the
FDA related to observed non-conformities with current good
manufacturing practice requirements of the QSR at our facility
in Montreal, Quebec, Canada. In August 2018, we received a
warning letter from the FDA related to observed
non-conformities with current good manufacturing practice
requirements of the QSR at our Warsaw North Campus
manufacturing facility. As of February 20, 2019, these warning
letters remained pending. Until the violations are corrected, we
may become subject to additional regulatory action by the FDA
as described above, the FDA may refuse to grant premarket
approval applications and/or the FDA may refuse to grant
export certificates, any of which could have a material adverse
effect on our business, financial condition and results of
operations. Additional information regarding these and other
FDA regulatory matters can be found in Note 19 to our
consolidated financial statements.

Governmental regulations outside the U.S. have and may
continue to become increasingly stringent and complex. In the
EU, for example, a new Medical Device Regulation was
published in 2017 which, when it enters into full force in 2020,
will include significant additional premarket and post-market
requirements. Complying with the requirements of this
regulation will require us to incur significant expense.
Additionally, the availability of industry notified body services
certified to the new requirements is limited, which may cause
delays in our receipt of CE certificate approvals and EU
Medical Device Regulation submission approvals. Any such
delays, or any failure to meet the requirements of the new
regulation, could adversely impact our business in the EU and
other regions that tie their product registrations to the EU
requirements.

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

or data privacy and security 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. In
addition, we are subject to various federal and foreign laws
concerning anti-corruption and anti-bribery matters, sales to
countries or persons subject to economic sanctions and other
matters affecting our international operations. 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 health programs. These laws are
administered by, among others, the DOJ, the OIG-HHS, the
SEC, the OFAC, the Bureau of Industry and Security of the
U.S. Department of Commerce and state attorneys general.

We are also subject to federal, state and international data

privacy and security laws and regulations that govern the
collection, use, disclosure and protection of health-related and
other personal information. The FDA also has issued guidance
to which we may be subject concerning data security for
medical devices. In addition, certain of our affiliates are subject
to privacy and security regulations promulgated under HIPAA.
HIPAA governs the use, disclosure, and security of protected
health information by HIPAA “covered entities” and their
“business associates.” Covered entities are health care
providers that engage in specific types of electronic
transactions, health plans, and health care clearinghouses. A
business associate is any person or entity (other than members
of a covered entity’s workforce) that performs a service on
behalf of a covered entity involving the use or disclosure of
protected health information. HHS (through the Office for Civil
Rights) has direct enforcement authority against covered
entities and business associates with regard to compliance with
HIPAA regulations. On December 12, 2018, the Office for Civil
Rights of HHS issued a request for information seeking input
from the public on how the HIPAA regulations could be
modified to amend existing obligations relating to the
processing of protected health information. We will monitor
this process and assess the impact of changes to the HIPAA
regulations to our business.

In addition to the FDA guidance and HIPAA regulations

described above, a number of U.S. states have also enacted
data privacy and security laws and regulations that govern the
confidentiality, security, use and disclosure of sensitive
personal information, such as social security numbers,
medical and financial information and other personal
information. These laws and regulations may be more
restrictive and not preempted by U.S. federal laws. These
state laws include the CCPA, which was signed into law on
June 28, 2018 and largely takes effect January 1, 2020. The
CCPA, among other things, contains new disclosure
obligations for businesses that collect personal information
about California residents and affords those individuals new
rights relating to their personal information that may affect
our ability to use personal information. We will continue to
monitor and assess the impact of the CCPA, which has

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substantial penalties for non-compliance and carries
significant potential liability, on our business.

(cid:129) adversely affect the market price of our common stock; and
(cid:129) limit our ability to apply proceeds from a future offering or

Outside of the U.S., data protection laws, including the
GDPR, also apply to some of our operations in the countries in
which we provide services to our customers. Legal
requirements in these countries relating to the collection,
storage, processing and transfer of personal data continue to
evolve. The GDPR imposes, among other things, data
protection requirements that include strict obligations and
restrictions on the ability to collect, analyze and transfer EU
personal data, a requirement for prompt notice of data
breaches to data subjects and supervisory authorities in
certain circumstances, and possible substantial fines for any
violations (including possible fines for certain violations of up
to 4% of total company revenue). Other governmental
authorities around the world are considering similar types of
legislative and regulatory proposals concerning data
protection.

The interpretation and enforcement of the laws and
regulations described above are uncertain and subject to
change, and may require substantial costs to monitor and
implement compliance with any additional requirements.
Failure to comply with U.S. and international data protection
laws and regulations could result in government enforcement
actions (which could include substantial civil and/or criminal
penalties), private litigation and/or adverse publicity and could
negatively affect our operating results and business.

We incurred substantial additional indebtedness in
connection with previous mergers and acquisitions and
may not be able to meet all of our debt obligations.

We incurred substantial additional indebtedness in
connection with previous mergers and acquisitions. At
December 31, 2018, our total indebtedness was $8.9 billion, as
compared to $1.4 billion at December 31, 2014. As of
December 31, 2018, our debt service obligations, comprised of
principal and interest (excluding leases and equipment notes),
during the next 12 months are expected to be $776.9 million.
As a result of the increase in our debt, demands on our cash
resources have increased. The increased level of debt could,
among other things:
(cid:129) require us to dedicate a large portion of our cash flow from
operations to the servicing and repayment of our debt,
thereby reducing funds available for working capital, capital
expenditures, research and development expenditures and
other general corporate requirements;

asset sale to purposes other than the servicing and
repayment of debt.

We are increasingly dependent on sophisticated
information technology and if we fail to effectively
maintain or protect our information systems or data,
including from data breaches, 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.
We also have outsourced elements of our operations to third
parties, and, as a result, we manage a number of third-party
vendors who may or could have access to our confidential
information. Our information systems, and those of third-party
vendors with whom we contract, 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,
given their size and complexity, these systems could be
vulnerable to service interruptions or to security breaches
from inadvertent or intentional actions by our employees,
third-party vendors and/or business partners, or from cyber-
attacks by malicious third parties attempting to gain
unauthorized access to our products, systems or confidential
information (including, but not limited to, intellectual
property, proprietary business information and personal
information). Cyber-attacks, such as those involving the
deployment of malware, are increasing in their frequency,
sophistication and intensity and have become increasingly
difficult to detect. If we fail to maintain or protect our
information systems and data integrity effectively, we could:
(cid:129) lose existing customers;
(cid:129) have difficulty attracting new customers;
(cid:129) have problems in determining product cost estimates and

establishing appropriate pricing;

(cid:129) have difficulty preventing, detecting, and controlling fraud;
(cid:129) have disputes with customers, physicians, and other healthcare

(cid:129) limit our ability to obtain additional financing to fund future

professionals;

working capital, capital expenditures, research and
development expenditures and other general corporate
requirements;

(cid:129) have regulatory sanctions or penalties imposed;
(cid:129) incur increased operating expenses;
(cid:129) incur expenses or lose revenues as a result of a data privacy

(cid:129) limit our flexibility in planning for, or reacting to, changes in

breach; or

our business and the industry in which we operate;
(cid:129) restrict our ability to make strategic acquisitions or
dispositions or to exploit business opportunities;

(cid:129) place us at a competitive disadvantage compared to our

competitors that have less debt;

(cid:129) adversely affect our credit rating, with the result that the
cost of servicing our indebtedness might increase and our
ability to obtain surety bonds could be impaired;

(cid:129) suffer other adverse consequences.

While we have invested heavily in the protection of our
data and information technology, there can be no assurance
that our activities related to consolidating the number of
systems we operate, upgrading and expanding our information
systems capabilities, protecting and enhancing our systems
and implementing new systems will be successful. Despite our
efforts, we cannot assure you that cyber-attacks or data

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breaches will not occur or that systems issues will not arise in
the future. Any significant breakdown, intrusion, breach,
interruption, corruption or destruction of these systems could
have a material adverse effect on our business and reputation.
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) pricing;
(cid:129) technology;
(cid:129) innovation;
(cid:129) quality;
(cid:129) reputation; and
(cid:129) customer service.

(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

In markets outside of the U.S., other factors influence

products.

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 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
our agents could have a material adverse effect on our
business and results of operations.

If we do not introduce new products in a timely
manner, our products may become obsolete over time,
customers may not buy our products and our revenue
and profitability may decline.

Demand for our products may change, in certain cases, in

ways we may not anticipate because of:
(cid:129) evolving customer needs;
(cid:129) changing demographics;
(cid:129) slowing industry growth rates;
(cid:129) declines in the musculoskeletal implant market;

In addition, new materials, product designs and surgical
techniques that we develop may not be accepted quickly, in
some or all markets, because of, among other factors:
(cid:129) entrenched patterns of clinical practice;
(cid:129) the need for regulatory clearance; and
(cid:129) uncertainty with respect to third-party reimbursement.
Moreover, innovations generally require a substantial

investment in research and development before we can
determine their commercial viability and we may not have the
financial resources necessary to fund the production. In
addition, even if we are able to successfully develop
enhancements or new generations of our products, these
enhancements or new generations of products may not
produce revenue in excess of the costs of development and
they may be quickly rendered obsolete by changing customer
preferences or the introduction by our competitors of products
embodying new technologies or features.

If third-party payors decline to reimburse our
customers for our products or reduce reimbursement
levels, the demand for our products may decline and our
ability to sell our products profitably may be harmed.
We sell our products and services to hospitals, doctors,
dentists and other healthcare providers, all of which receive
reimbursement for the healthcare services provided to their
patients from third-party payors, such as domestic and
international government programs, private insurance plans
and managed care programs. These third-party payors may
deny reimbursement if they determine that a device used in a
procedure was not in accordance with cost-effective treatment
methods, as determined by the third-party payor, or was used
for an unapproved indication. Third-party payors may also
decline to reimburse for experimental procedures and devices.
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

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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 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 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 approximately 40 percent of our net sales in 2018 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) changes in foreign regulatory requirements, such as more

stringent requirements for regulatory clearance of products;

(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, import or export requirements
and increased tariffs 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 FCPA;
(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 are regularly 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.

The Tax Cuts and Jobs Act of 2017 was signed into law on

December 22, 2017 (the “2017 Tax Act”), with significant
changes to the U.S. corporate income tax system, including a
federal corporate income tax rate reduction from 35 percent to
21 percent, limitations on the deductibility of interest expense,
and the transition of U.S. international taxation from a
worldwide tax system to a territorial tax system. Although the
U.S. Treasury has provided guidance on aspects of the 2017
Tax Act, there still remains further guidance to be provided in
the future. On December 22, 2017, the SEC issued Staff
Accounting Bulletin No. 118 (“SAB 118”), expressing its views
on the application of Financial Accounting Standards Board
Accounting Standards Codification Topic 740, Income Taxes,
in the reporting period that includes December 22, 2017. For
the financial statements that include the reporting period in
which the 2017 Tax Act was enacted, SAB 118 provides a
provisional approach to reflect the income tax effects of the
2017 Tax Act. We finalized our provisional amounts for the
effects of the 2017 Tax Act in our 2018 Annual Report on Form
10-K. However, our tax expense and cash flow could be
impacted in the event of adverse future regulatory guidance
provided by the U.S. Treasury clarifying certain aspects of the
2017 Tax Act.

If the medical device excise tax is not repealed or
further suspended, our business, results of operations
and cash flows may be adversely affected.

As part of 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 or ACA), in January 2013 we began paying
a 2.3 percent medical device excise tax on the vast majority of
our U.S sales. A two-year moratorium was placed on the tax

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effective January 1, 2016, and that moratorium was extended
for an additional two years effective January 1, 2018. Absent
further legislative action, the tax will be automatically
reinstated for U.S. medical device sales beginning January 1,
2020. If the medical device excise tax is reinstated, we will
again be forced to identify ways to reduce spending in other
areas to offset the earnings impact due to the tax. We do not
expect to be able to pass along the cost of the tax to hospitals,
which continue to face cuts to their Medicare reimbursement
under the Affordable Care Act and other legislation. Nor do we
expect to be able to offset the cost of the tax through higher
sales volumes resulting from any further expansion of health
insurance coverage through ACA exchanges or Medicaid
expansion because of the demographics of the current
uninsured population. Accordingly, reinstatement of the
medical device excise tax could have a material adverse effect
on our business, results of operations and cash flows.

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 discussed further in Note 19 to our consolidated
financial statements, we are defending product liability
lawsuits relating to the Durom® Acetabular Component
(“Durom Cup”), certain products within the M/L Taper and M/
L Taper with Kinectiv® Technology hip stems and Versys®
Femoral Head implants, and the M2a-MagnumTM hip system.
The majority of the Durom Cup cases are pending in a federal
Multidistrict Litigation (“MDL”) in the District of New Jersey
(In Re: Zimmer Durom Hip Cup Products Liability
Litigation); the majority of the M/L Taper and M/L Taper with
Kinectiv Technology hip stem cases and Versys Femoral Head
implant cases are pending in a federal MDL in the Southern
District of New York (In Re: Zimmer M/L Taper
Hip Prosthesis or M/L Taper Hip Prosthesis with Kinectiv
Technology and Versys Femoral Head Products Liability
Litigation); and the majority of the M2a-Magnum hip system

cases are pending in a federal MDL in the Northern District of
Indiana (In Re: Biomet M2a Magnum Hip Implant Products
Liability Litigation). 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 pay for defense costs, or 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
defense costs, 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. As discussed further in
Note 19 to our consolidated financial statements, in 2015 we
paid a compensatory damages award of approximately
$90 million and in December 2018 we accrued an estimated
loss of approximately $168 million related to an award of treble
damages and attorneys’ fees in a patent infringement lawsuit.
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,

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

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
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.

In addition, intellectual property rights may be unavailable

or of limited effect in some foreign countries. If we do not
obtain sufficient international protection for our intellectual
property, our competitiveness in international markets could
be impaired, which could limit our growth and revenue.

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. As
discussed further in Note 9 to our consolidated financial
statements, we recorded goodwill impairment charges of
$975.9 million in 2018. 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 to record
additional goodwill impairment charges. Any write-off of a
material portion of our goodwill or unamortized intangible
assets would negatively affect our results of operations.

We also attempt to protect our trade secrets, proprietary

Developments relating to the UK’s referendum vote

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 and
securities litigation and claims and other legal proceedings that
arise from time to time in the ordinary course of our business.
For example, as discussed further in Note 19 to our
consolidated financial statements, we are defending a
purported class action lawsuit, Shah v. Zimmer Biomet
Holdings, Inc. et al., filed against us, certain of our current
and former officers, certain current and former members of
our Board of Directors, and certain former stockholders of ours
who sold shares of our common stock in secondary public
offerings in 2016, alleging that we and other defendants
violated federal securities laws by making materially false and/
or misleading statements and/or omissions about our
compliance with FDA regulations and our ability to continue to
accelerate our organic revenue growth rate in the second half
of 2016. 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.

Future material impairments in the carrying value

of our intangible assets, including goodwill, would
negatively affect our operating results.

Our assets include intangible assets, including goodwill. At

December 31, 2018, we had $9.6 billion in goodwill. The
goodwill results from our acquisition activity and represents
the excess of the consideration transferred over the fair value

in favor of leaving the EU could adversely affect us.

The UK held a referendum in June 2016 in which voters

approved the UK’s voluntary exit from the EU, commonly
referred to as “Brexit”. In March 2017, the UK formally notified
the EU of its intention to withdraw, which commenced a
period of up to two years for negotiating the UK’s withdrawal
terms. The UK and the EU have been negotiating the terms of
the UK’s exit from the EU, which is scheduled for March 29,
2019. Although the UK and the EU agreed upon a draft
withdrawal agreement in November 2018, the UK Parliament
rejected the withdrawal agreement in January 2019, creating
significant uncertainty as to the terms under which the UK will
leave the EU. If the UK leaves the EU with no agreement, it
will likely have an adverse impact on labor and trade and will
create further short-term currency volatility. Brexit and the
perceptions as to its impact have and may continue to
adversely affect business activity and economic conditions in
Europe and globally and could contribute to instability in
global financial and foreign exchange markets. Brexit could
also have the effect of disrupting the free movement of goods,
services and people between the UK and the EU. The future
relationship for medical device products regulation and trade
between the UK and the EU is currently uncertain and any
adjustments we make to our business and operations as a
result of Brexit could result in significant expense and take
significant time to complete. Also, as a result of Brexit, other
European countries may seek to conduct referenda with
respect to their continuing membership with the EU.

Given these possibilities and others we may not anticipate,

as well as the lack of comparable precedent, the full extent to
which we will be affected by Brexit is uncertain. Any of the
potential negative effects of Brexit could adversely affect our
business, results of operations and financial condition.

Anti-takeover provisions in our organizational
documents could delay or prevent a change of control.

Certain provisions of our Restated Certificate of
Incorporation, our Restated By-Laws and the Delaware
General Corporation Law may have an anti-takeover effect and
may delay, defer or prevent a merger, acquisition, tender offer,
takeover attempt or other change of control transaction that a
stockholder might consider in its best interest, including those
attempts that might result in a premium over the market price
for the shares held by our stockholders.

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

These provisions provide for, among other things:
(cid:129) the ability of our board of directors to issue one or more

series of preferred stock without further stockholder action;
(cid:129) advance notice for nominations of directors by stockholders
and for stockholders to include matters to be considered at
our annual meetings;

(cid:129) certain limitations on convening special stockholder

meetings; and

(cid:129) the prohibition on engaging in a “business combination” with
an “interested stockholder” for three years after the time at
which a person became an interested stockholder unless
certain conditions are met, as set forth in Section 203 of the
Delaware General Corporation Law.

These anti-takeover provisions could make it more

difficult for a third party to acquire us, even if the third party’s
offer may be considered beneficial by many of our
stockholders. As a result, our stockholders may be limited in
their ability to obtain a premium for their shares.

Our Restated By-Laws designate certain Delaware

courts as the sole and exclusive forum for certain types
of actions and proceedings that may be initiated by our
stockholders, which could limit our stockholders’ ability
to obtain a favorable judicial forum for disputes with us
or our directors, officers or other employees.

Our Restated By-Laws provide that, unless we consent in

writing to the selection of an alternative forum, a state court
located within the State of Delaware (or, if no state court
located in the State of Delaware has jurisdiction, the federal
district court for the District of Delaware) will be the sole and
exclusive forum for any stockholder (including any beneficial
owner) to bring (i) any derivative action or proceeding brought
on our behalf, (ii) any action asserting a claim of breach of
fiduciary duty owed by any of our directors, officers or other
employees to us or our stockholders, (iii) any action asserting
a claim against us or any of our directors, officers or other
employees arising pursuant to any provision of the Delaware
General Corporation Law or our Restated Certificate of
Incorporation or our Restated By-Laws, as either may be
amended from time to time, or (iv) any action asserting a claim
against us or any of our directors, officers or other employees
governed by the internal affairs doctrine. Any person or entity
purchasing or otherwise acquiring any interest in shares of our
common stock is deemed to have received notice of and
consented to the foregoing provisions. This choice of forum
provision may limit a stockholder’s ability to bring a claim in a
judicial forum that it finds favorable for disputes with us or our
directors, officers or other employees, which may discourage
such lawsuits against us and our directors, officers and
employees. Alternatively, if a court were to find this choice of
forum provision inapplicable to, or unenforceable in respect of,
one or more of the specified types of actions or proceedings,
we may incur additional costs associated with resolving such
matters in other jurisdictions, which could adversely affect our
business, financial condition or results of operations.

Item 1B. Unresolved Staff Comments

Not Applicable.

Z I M M E R BI OM E T HOL D I NG S , I NC .

Item 2. Properties

The following are our principal properties:

Location

Use

Warsaw, Indiana

Research & Development, Manufacturing, Warehousing, Marketing &
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Headquarters & The Zimmer Institute . . . . . . . . . . . . . . . . . . . .
Warsaw, Indiana
Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warsaw, Indiana
Spine Business Unit Headquarters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Westminster, Colorado
CMF Business Unit Headquarters & Manufacturing . . . . . . . . . . . . . . . . . . .
Jacksonville, Florida
Palm Beach Gardens, Florida Dental Business Unit Headquarters & Manufacturing . . . . . . . . . . . . . . . . .
Palm Beach Gardens, Florida Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office, Manufacturing, Warehousing, Laboratory . . . . . . . . . . . . . . . . . . . . .
Braintree, Massachusetts
Distribution Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southaven, Mississippi
Office, Research & Development, Manufacturing, Warehousing & The
Parsippany, New Jersey
Zimmer Institute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regional Headquarters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regional Headquarters, Offices, Research & Development &
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dover, Ohio
Dover, Ohio
Austin, Texas
Beijing, China
Changzhou, China
Jinhua, China
Valence, France
Berlin, Germany
Eschbach, Germany
Galway, Ireland
Shannon, Ireland
Tokyo, Japan
Hazeldonk, The Netherlands
Ponce, Puerto Rico
Singapore
Bridgend, South Wales
Bridgend, South Wales
Valencia, Spain
Valencia, Spain
Winterthur, Switzerland

2 0 1 8 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
Owned
Leased
Leased
Leased

Leased
Owned
Leased
Leased
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Owned
Leased
Owned
Leased
Owned
Leased

1,900,000
115,000
170,000
105,000
85,000
190,000
45,000
50,000
190,000

235,000
140,000
60,000
90,000
95,000
160,000
125,000
120,000
50,000
100,000
125,000
125,000
180,000
295,000
225,000
30,000
185,000
100,000
70,000
10,000

Leased

420,000

In addition to the above, we maintain sales and administrative offices and warehouse and distribution facilities in more than 40

countries around the world. We believe that all of the facilities and equipment are in good condition, well maintained and able to
operate at present levels. We believe the current facilities, including manufacturing, warehousing, research and development and
office space, provide sufficient capacity to meet ongoing demands.

Item 3. Legal Proceedings

Information pertaining to certain legal proceedings in which we are involved can be found in Note 19 to our consolidated

financial statements included in Part II, Item 8 of this report and is incorporated herein by reference.

Item 4. Mine Safety Disclosures

Not Applicable.

Z I M M E R BI OM E T HOL D I NG S , I NC .

PART II

2 0 1 8 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 “ZBH.” As of
February 15, 2019, there were approximately 20,000 holders of record of our common stock. A substantially greater number of
holders of our common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers and other
financial institutions.

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. As further discussed in Note 11 to our
consolidated financial statements, our debt facilities restrict the payment of dividends in certain circumstances.

The information required by this Item concerning equity compensation plans is incorporated herein by reference to Item 12 of

this report.

Z I M M E R BI OM E T HOL D I NG S , I NC .

Item 6. Selected Financial Data

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

The financial information for each of the past five years ended December 31 is set forth below (in millions, except per share

amounts):

STATEMENT OF EARNINGS DATA
Net sales
Net (loss) earnings of Zimmer Biomet Holdings, Inc.
(Loss) 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

2018

2017

2016

2015 (1)(2)

2014 (1)

$ 7,932.9
(379.2)

$ 7,803.3
1,813.8

$ 7,668.4
305.9

$ 5,997.8
147.0

$4,673.3
720.3

(1.86) $
(1.86)
–

8.98
8.90
–

1.53
1.51
–

0.78
0.77
0.88

4.26
4.20
0.88

203.5
203.5

201.9
203.7

200.0
202.4

187.4
189.8

169.0
171.7

$24,126.8
8,413.7
2,015.7
11,276.1

$26,014.0
8,917.5
2,291.3
11,735.5

$26,684.4
10,665.8
3,967.2
9,669.9

$27,160.6
11,497.4
4,155.9
9,889.4

$9,658.0
1,425.5
656.8
6,551.7

(1) Effective January 1, 2018 we adopted Accounting Standards Update 2014-09 – Revenue from Contracts with Customers (Topic 606). We adopted
this new standard using the retrospective method, which resulted in us restating the 2017 and 2016 periods. The 2015 and 2014 periods have not
been restated. See Note 2 to our consolidated financial statements for additional information.
(2) Includes the results of Biomet starting on June 24, 2015 and Biomet balance sheet data as of December 31, 2015.

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 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 Annual Report
on 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 2017 and 2016 consolidated financial
statements have been reclassified to conform to the 2018
presentation.

EXECUTIVE LEVEL OVERVIEW

2018 Results

In December 2017, we announced the appointment of a

new Chief Executive Officer (“CEO”). After evaluating the
state of our business, our CEO expects it will be a two-year
(consisting of 2018 and 2019) effort to get the Company
operating at market level or above in terms of sales growth
rates. One of his first priorities was to improve our supply
chain. Starting in 2016 and continuing into 2017, production
delays at our Warsaw North Campus facility directly impacted
our ability to fully meet demand in our Knees, Hips and S.E.T.
product categories. We successfully reduced backorders and
increased safety stock levels in 2018 and no longer consider
supply to be a barrier to delivering our financial commitments.
This resulted in improved sales growth in 2018 in our largest
product categories of Knees and Hips. Knees and Hips sales
growth in 2018 was 1.5 percent and 2.6 percent, respectively,
compared to a sales decline in Knees of 0.6 percent and sales
growth of 0.5 percent in Hips in 2017. Additionally, this sales
growth improved in the second half of 2018 compared to the
first half of 2018. Overall, net sales increased by 1.7 percent in
2018 compared to 2017, primarily due to the improved
product supply and completion of key research and
development (“R&D”) projects in our Knees product category.
Our net earnings (loss) decreased significantly in 2018

compared to 2017 primarily due to $979.7 million of goodwill
and intangible asset impairments and $186.0 million of
litigation-related charges in 2018 compared to a
$1,272.4 million income tax benefit recognized in 2017 related
to the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). Net

Net Sales by Geography

earnings (loss) also decreased in 2018 due to increased excess
and obsolescence charges and continued investments in R&D
and selling, general and administrative (“SG&A”).

2019 Outlook

2019 will mark the second year of our two-year

turnaround effort. In late 2018 and early 2019, we had various
product launches in our Knees product category, which we
anticipate will drive improving commercial momentum,
especially in the second half of 2019. We estimate the change
in sales in 2019 compared to 2018 will be in a range of negative
0.5 percent to positive 0.5 percent. This range includes
estimated negative effects of changes in foreign currency
exchange rates of 1.0 percent to 1.5 percent. We anticipate
that most of the negative effects of foreign currency exchange
rates will occur in the first half of the year.

Assuming we have no significant goodwill and intangible
asset impairments or litigation charges in 2019, we expect our
net earnings to increase significantly compared to the net loss
recognized in 2018. We expect our costs of products sold will
continue to reflect costs associated with our quality
remediation efforts. We anticipate continuing to make
investments in operating expenses to support our new product
launches. However, we expect expenses related to our
acquisition and integration activities and quality remediation
will decline as we complete these projects during 2019. We
believe that our interest expense, net, will continue to decline
throughout the year due to lower anticipated debt levels.

RESULTS OF OPERATIONS

We analyze sales by three geographies, the Americas,

EMEA and Asia Pacific, and by the following product
categories: Knees, Hips, S.E.T., Dental, Spine & CMF and
Other. This sales analysis differs from our reportable operating
segments, which are based upon our senior management
organizational structure and how we allocate resources
towards achieving operating profit goals. We analyze sales by
geography because the underlying market trends in any
particular geography tend to be similar across product
categories and because we primarily sell the same products in
all geographies.

The following tables present net sales by geography and the components of the percentage changes (dollars in millions):

Americas

EMEA

Asia Pacific

Total

Year Ended December 31,

2018

2017 % Inc/(Dec)

Volume/
Mix

Foreign
Exchange

Price

$4,837.2

$4,844.8

(0.2)% 2.3% (2.4)% (0.1)%

1,801.9

1,745.2

1,293.8

1,213.3

$7,932.9

$7,803.3

3.2

6.6

1.7

9.2

(1.6)

(3.5)

3.1

0.9

3.2

(2.4)

0.9

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

Americas

EMEA

Asia Pacific

Total

Year Ended December 31,

2017

2016

% Inc

Volume/
Mix

Foreign
Exchange

Price

$4,844.8

$4,786.7

1.2%

3.7% (2.6)% 0.1%

1,745.2

1,730.4

1,213.3

1,151.3

$7,803.3

$7,668.4

0.9

5.4

1.8

2.1

9.4

(1.9)

(3.1)

0.7

(0.9)

4.2

(2.5)

0.1

“Foreign Exchange” used in the tables in this report represents the effect of changes in foreign currency exchange rates on

sales.

Net Sales by Product Category

The following tables present net sales by product category and the components of the percentage changes (dollars in millions):

Knees

Hips

S.E.T.

Dental

Spine & CMF

Other

Total

Knees

Hips

S.E.T.

Dental

Spine & CMF

Other

Total

Year Ended December 31,

2018

2017 % Inc/(Dec)

Volume/
Mix

Foreign
Exchange

Price

$2,773.7

$2,734.0

1.5%

3.6% (2.9)% 0.8%

1,921.4

1,871.8

1,751.8

1,701.8

2.6

2.9

4.3

3.9

(2.8)

(1.8)

411.2

763.9

310.9

418.6

757.9

319.2

(1.8)

(1.7)

(1.5)

0.8

2.1

(1.7)

(2.6)

(1.7)

(1.5)

1.1

0.8

1.4

0.4

0.6

$7,932.9

$7,803.3

1.7

3.2

(2.4)

0.9

Year Ended December 31,

2017

2016 % Inc/(Dec)

Volume/
Mix

Foreign
Exchange

Price

$2,734.0

$2,751.2

(0.6)% 2.1% (2.8)% 0.1%

1,871.8

1,861.8

1,701.8

1,639.1

418.6

757.9

319.2

427.9

660.7

327.7

0.5

3.8

(2.2)

14.7

(2.6)

3.5

5.9

(3.0)

(2.0)

–

(0.1)

(0.3)

(2.3)

15.8

(1.4)

(0.9)

(1.8)

0.4

0.3

0.1

$7,803.3

$7,668.4

1.8

4.2

(2.5)

0.1

The following table presents net sales by product category by geography for our Knees and Hips product categories, which

represent our most significant product categories (dollars in millions):

Knees

Americas
EMEA
Asia Pacific

Total

Hips

Americas
EMEA
Asia Pacific

Total

Year Ended December 31,

2018

2017

2016

2018 vs. 2017
% Inc/(Dec)

2017 vs. 2016
% Inc/(Dec)

$1,642.7
672.3
458.7

$1,656.5
644.4
433.1

$1,686.5
638.1
426.6

(0.8)%
4.4
5.9

$2,773.7

$2,734.0

$2,751.2

1.5

$ 996.3
519.9
405.2

$ 968.9
518.4
384.5

$ 982.1
522.1
357.6

$1,921.4

$1,871.8

$1,861.8

2.8%
0.3
5.4

2.6

(1.8)%
1.0
1.5

(0.6)

(1.3)%
(0.7)
7.5

0.5

Z I M M E R BI OM E T HOL D I NG S , I NC .

Demand (Volume/Mix) Trends

Increased volume and changes in the mix of product sales

contributed 3.2 percentage points of year-over-year sales
growth during 2018. Volume/mix growth was driven by recent
product introductions, sales in key emerging markets and an
aging population. 2017 year-over-year volume/mix growth of
4.2 percent benefited from acquisitions made in 2016 that
resulted in a full year of the sales of acquired companies
reflected in the 2017 results.

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 are expected to continue to positively affect
sales growth in markets that recognize the value of these
advanced technologies.

Pricing Trends

Global selling prices had a negative effect of 2.4

percentage points on year-over-year sales during 2018. In the
majority of countries in which we operate, we continue to
experience pricing pressure from governmental healthcare
cost containment efforts and from local hospitals and health
systems.

Foreign Currency Exchange Rates

In 2018, changes in foreign currency exchange rates had a

positive effect of 0.9 percent on sales. We address currency
risk through regular operating and financing activities and
through the use of forward contracts solely to manage foreign
currency volatility and risk. Changes in foreign currency
exchange rates affect sales growth, but due to offsetting gains/
losses on hedge contracts, which are recorded in cost of
products sold, the effect on net earnings in the near term is
reduced. If foreign currency exchange rates remain at levels
consistent with recent rates, we estimate 2019 sales will be
negatively affected by 1.0 percent to 1.5 percent.

Sales by Product Category

Knees

Knee sales increased in 2018 compared to a year-over-

year decline in 2017. Knee sales have improved due to recent
product launches and improved supply. Knee sales volume/mix
growth was led by Persona The Personalized Knee System and
the Oxford Partial Knee.

Hips

Hip sales continued to experience year-over-year sales
growth driven primarily by volume/mix growth, which principally
resulted from strong performance in our Asia Pacific and
Americas operating segments. Improved supply contributed
positively to our results in the Hips product category. Hip sales
volume/mix growth was led by our Taperloc Hip System, Arcos
Modular Hip System and G7 Acetabular System.

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

S.E.T.

Our S.E.T. sales continued to increase in 2018, driven
primarily by strong performance in key surgical and upper
extremity brands.

Dental

Dental sales continued to decline in 2018. In the past few

years, our Dental business has been affected by ongoing
competitive challenges in the U.S. and EMEA and
restructuring of our dental organization in certain European
markets.

Spine & CMF

Spine and CMF sales continued to increase in 2018,
primarily due to continuing strong sales of our Thoracic
products, partially offset by a decline in Spine sales driven by
continuing U.S. distributor integration issues. Year-over-year
sales growth in 2017 benefited significantly from the full year
impact of an acquisition made in 2016.

The following table presents estimated* 2018 global
market size and market share information (dollars in billions):

Global
Market
Size

Global Market
% Growth**

Zimmer
Biomet
Market
Share

Zimmer
Biomet
Market
Position

$ 7.9

35%

6.1

16.6

5.0

10.5

Knees

Hips

S.E.T.

Dental

Spine & CMF

* 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

Expenses as a Percent of Net Sales

Cost of products sold,
excluding intangible
asset amortization

Intangible asset
amortization

Research and

development

Selling, general and
administrative

Goodwill and intangible
asset impairment

Acquisition, integration

and related

Quality remediation

Operating Profit

Year Ended December 31,

2018

2017

2016

2018 vs. 2017
Inc/(Dec)

2017 vs. 2016
Inc/(Dec)

28.6% 27.3% 31.1%

1.3%

(3.8)%

7.5

7.7

7.4

(0.2)

0.3

4.9

4.7

4.8

42.6

39.8

38.4

12.3

4.2

0.4

1.7

1.9

0.4

3.6

2.3

6.6

0.7

10.2

10.7

0.2

2.8

8.1

(1.9)

(0.4)

(9.8)

(0.1)

1.4

3.8

(3.0)

1.6

(0.5)

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

Cost of Products Sold and Intangible Asset Amortization

The following table sets forth the factors that contributed

to the gross margin changes in each of 2018 and 2017
compared to the prior year:

Prior year gross margin

Lower average selling prices

Average cost per unit

Excess and obsolete inventory

Discontinued products inventory charges

Foreign currency hedges

Inventory step-up

U.S. medical device excise tax

Intangible asset amortization

Year Ended December 31,

2018

2017

64.9%

61.5%

(0.6)

0.8

(1.0)

(0.1)

(0.4)

0.4

(0.3)

0.2

(0.6)

(0.1)

–

1.0

(1.1)

3.8

0.7

(0.3)

Current year gross margin

63.9%

64.9%

The decrease in gross margin percentage in 2018 compared

to 2017 was primarily due to higher excess and obsolete
inventory charges, lower average selling prices and the effect of
our hedging program. We incurred hedge losses of $26.2 million
in 2018 compared to hedge gains of $5.1 million in 2017. 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 items affect earnings.

The increase in gross margin percentage in 2017

compared to 2016 was primarily due to a decrease in inventory
step-up charges. The reduction in inventory step-up charges
resulted from the Biomet inventory that was stepped-up to fair
value having been fully recognized by June 30, 2016. In 2016,
we recognized significant excess and obsolete inventory
charges for certain product lines we intend to discontinue, but
did not recognize significant charges in 2017, resulting in
improvement to our gross margin percentage. Additional
favorability was driven by lower medical device excise tax
expense due to the two year moratorium on the U.S. medical
device excise tax and a favorable resolution on past excise
taxes that were paid. Under the applicable accounting rules
that we apply to the U.S. medical device excise tax, we had a
portion of the tax paid prior to the moratorium included in the
cost of inventory and recognized expense through the fourth
quarter of 2016. In January 2018, the moratorium on this tax
was extended through December 31, 2019. These favorable
items were partially offset by lower hedge gains of $5.1 million
in 2017 compared to $87.7 million in 2016 and the effect of
lower average selling prices.

Operating Expenses

R&D spending has remained generally consistent as a

percentage of sales, as we continue to invest in new
technologies to address unmet clinical needs. In 2018, with tax
savings resulting from the 2017 Tax Act, we were able to invest
in R&D at a higher rate on projects such as our recent Knee
product launches.

SG&A expenses and SG&A expenses as a percentage of
sales increased significantly in 2018 compared to 2017 due to
higher litigation-related charges, increased expenses related to
our compliance with the DPA, increased incentive
compensation due to better performance versus our operating
budgets and various spending on other special business
transformation initiatives. Our 2017 SG&A expenses and SG&A
expenses as a percentage of sales increased in 2017 compared
to 2016 due to higher litigation-related charges, increased
freight costs due to expedited product shipments and
increased investments in our specialized sales forces.

In 2018, we recognized goodwill impairment charges
primarily related to our EMEA and Spine reporting units. In
2017, we recognized goodwill impairment charges related to
our Spine and Office Based Technologies reporting units. For
more information regarding these charges, see Note 9 to our
consolidated financial statements.

Acquisition, integration and related expenses declined in

both 2017 and 2018 due to the natural regression of integration
activities related to the 2015 Biomet merger and other various
acquisitions that were consummated in 2016. We are nearing
completion of our integration plans for these businesses.

Our quality enhancement and remediation efforts began in

late 2016, accelerated throughout 2017 and continued
throughout 2018. These costs primarily relate to fees paid to
temporary external consultants engaged to assist in the quality
remediation at our Warsaw North Campus facility. We have
completed many of our remediation milestones and expect
quality remediation costs to continue to decline in 2019.

Other Expense, net, Interest Expense, net, and Income Taxes

In 2018, other expense, net, was primarily related to
certain components of pension expense and remeasuring
monetary assets and liabilities denominated in a foreign
currency other than an entity’s functional currency, partially
offset by foreign currency forward exchange contracts we
entered into to mitigate any gain or loss. In 2017, other
expense, net, primarily related to certain components of
pension expense and remeasuring monetary assets and
liabilities denominated in a foreign currency other than an
entity’s functional currency, partially offset by foreign
currency forward exchange contracts we entered into to
mitigate any gain or loss. In 2016, other expense, net, primarily
included a $53.3 million loss on debt extinguishment. It also
included certain components of pension expense and losses on
the sale of certain assets and the net expense related to
remeasuring monetary assets and liabilities denominated in a
foreign currency other than an entity’s functional currency,
offset by foreign currency forward exchange contracts we
entered into to mitigate any gain or loss.

Interest expense, net, declined in 2018 and 2017 when

compared to the same prior year periods primarily due to
continued debt repayments. Additionally, we implemented
hedging strategies that have lowered our interest expense, net,
and we extinguished higher-rate debt by issuing notes with
lower interest rates.

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

Our effective tax rate (“ETR”) on earnings before income

taxes was negative 39.9 percent, negative 290.3 percent and
positive 23.8 percent for the years ended December 31, 2018,
2017 and 2016, respectively. In 2018, our negative ETR was
primarily due to goodwill impairment that resulted in us
having a net loss before income taxes with no associated tax
benefit recognized for this charge. In 2018, we also recognized
an additional $8.3 million of income tax provision as we
completed our estimate of the effects of the 2017 Tax Act. In
2017, the negative ETR was driven by the provisional income
tax benefit we recorded of $1,272.4 million from the 2017 Tax
Act, as well as $111.3 million of tax benefit we recorded from
lower tax rates unrelated to the impact of the 2017 Tax Act. In
2016, we recognized $40.6 million of tax benefit from the
favorable resolution of certain tax matters with taxing

Segment Operating Profit

authorities, which was partially offset by $27.6 million of
additional tax provision related to finalizing the tax accounts
related to the Biomet merger.

Absent additional discrete tax events, we expect our
future ETR will be lower than the U.S. corporate income tax
rate of 21.0 percent, due to our mix of earnings between U.S.
and foreign locations which have lower corporate income tax
rates. Our ETR in future periods could also potentially be
impacted by changes in tax rates, tax laws or their
interpretation, including the European Union rules on state
aid; the outcome of various federal, state and foreign audits;
and the expiration of certain statutes of limitations. Currently,
we cannot reasonably estimate the impact of these items on
our financial results.

(dollars in millions)

Americas

EMEA

Asia Pacific

Net Sales

Operating Profit

Operating Profit as a
Percentage of Net Sales

Year Ended December 31,

2018

2017

2016

2018

2017

2016

2018

2017

2016

$3,932.6

$3,928.9

$3,927.9

$2,055.9

$2,126.8

$2,133.3

52.3% 54.1% 54.3%

1,576.1

1,523.4

1,512.7

1,236.9

1,158.3

1,095.6

478.4

427.3

478.3

417.6

498.2

431.8

30.4

34.5

31.4

36.1

32.9

39.4

In the Americas, operating profit as a percentage of net
sales decreased in 2018, primarily due to price declines and
higher excess and obsolete inventory charges. In 2017, the
Americas segment was unfavorably impacted by price
declines, higher contribution of sales from products with lower
gross profit margins and higher freight costs. These
unfavorable impacts were offset by lower U.S. medical device
excise tax expense.

In EMEA, operating profit as a percentage of net sales
decreased in 2018 due to price declines and higher excess and
obsolete inventory charges. In 2017, operating profit as a
percentage of sales decreased primarily due to price declines
and a reduced impact of hedge gains.

In Asia Pacific, operating profit as a percentage of net
sales decreased in 2018 primarily due to price declines and
higher excess and obsolete inventory charges. In 2017,
operating profit as a percentage of sales decreased primarily
due to price declines and a reduced impact of hedge gains.

Non-GAAP Operating Performance Measures

We use financial measures that differ from financial
measures determined in accordance with U.S. Generally
Accepted Accounting Principles (“GAAP”) to evaluate our
operating performance. These non-GAAP financial measures
exclude the impact of inventory step-up; certain inventory and
manufacturing-related charges including charges to
discontinue certain product lines; intangible asset
amortization; goodwill and intangible asset impairment;
acquisition, integration and related expenses; quality

remediation expenses; certain litigation gains and charges;
expenses to comply with the new European Union Medical
Device Regulation; other charges; any related effects on our
income tax provision associated with these items; the effect
from finalizing the tax accounts for the Biomet merger; the
effect of the 2017 Tax Act; other certain tax adjustments; and,
with respect to earnings per share information, provide for the
effect of dilutive shares assuming net earnings in a period of a
reported net loss. We use these non-GAAP financial measures
internally to evaluate the performance of the business.
Additionally, we believe these non-GAAP measures provide
meaningful incremental information to investors to consider
when evaluating our performance. We believe these measures
offer the ability to make period-to-period comparisons that are
not impacted by certain items that can cause dramatic
changes in reported income but that do not impact the
fundamentals of our operations. The non-GAAP measures
enable the evaluation of operating results and trend analysis
by allowing a reader to better identify operating trends that
may otherwise be masked or distorted by these types of items
that are excluded from the non-GAAP measures. In addition,
adjusted diluted earnings per share is used as a performance
metric in our incentive compensation programs.

Our non-GAAP adjusted net earnings used for internal

management purposes for the years ended December 31,
2018, 2017 and 2016 were $1,565.4 million, $1,636.4 million,
and $1,610.8 million, respectively, and our non-GAAP adjusted
diluted earnings per share were $7.64, $8.03, and $7.96,
respectively.

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

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):

Net (Loss) Earnings of Zimmer

Biomet Holdings, Inc.
Inventory step-up and other

inventory and manufacturing
related charges(1)

Intangible asset amortization(2)
Goodwill and intangible asset

impairment(3)

Acquisition, integration and

related(4)

Quality remediation(5)
Litigation(6)
European Union Medical Device

Regulation(7)
Other charges(8)
Taxes on above items(9)
Biomet merger-related

measurement period tax
adjustments(10)
U.S. tax reform(11)
Other certain tax adjustments(12)

Year ended December 31,

2018

2017

2016

$ (379.2) $ 1,813.8

$ 305.9

32.5
595.9

70.8
603.9

468.3
565.9

979.7

331.5

31.1

133.7
165.4
186.0

279.8
195.1
104.0

504.9
54.3
33.3

3.7
82.8
(239.6)

–
43.8
(421.5)

–
45.9
(449.0)

–
8.3
(3.8)

–
(1,272.4)
(112.4)

52.7
–
(2.5)

Adjusted Net Earnings

$1,565.4

$ 1,636.4

$1,610.8

Diluted (Loss) Earnings per share
Inventory step-up and other

inventory and manufacturing
related charges(1)

Intangible asset amortization(2)
Goodwill and intangible asset

impairment(3)

Acquisition, integration and

related(4)

Quality remediation(5)
Litigation(6)
European Union Medical Device

Regulation(7)
Other charges(8)
Taxes on above items(9)
Biomet merger-related

measurement period tax
adjustments(10)
U.S. tax reform(11)
Other certain tax adjustments(12)
Effect of dilutive shares assuming

net earnings(13)

$ (1.86) $

8.90

1.51

0.16
2.93

4.81

0.66
0.81
0.91

0.02
0.41
(1.18)

–
0.04
(0.02)

(0.05)

0.35
2.96

1.63

1.37
0.96
0.51

–
0.22
(2.07)

–
(6.25)
(0.55)

2.32
2.80

0.15

2.49
0.27
0.16

–
0.23
(2.22)

0.26
–
(0.01)

–

Adjusted Diluted EPS

7.64

8.03

7.96

(1) Inventory step-up and other inventory and manufacturing-related
charges relate to inventory step-up expense, excess and obsolete inventory
charges on certain product lines we intend to discontinue and other
inventory and manufacturing-related charges. Inventory step-up expense
represents the incremental expense of inventory sold recognized at its fair
value after business combination accounting is applied versus the expense
that would have been recognized if sold at its cost to manufacture. Since
only the inventory that existed at the business combination date was
stepped-up to fair value, we believe excluding the incremental expense
provides investors useful information as to what our costs may have been if
we had not been required to increase the inventory’s book value to fair

value. The excess and obsolete inventory charges on certain product lines
are driven by acquisitions where there are competing product lines and we
have plans to discontinue one of the competing product lines.
(2) We exclude intangible asset amortization from our non-GAAP financial
measures because we internally assess our performance against our peers
without this amortization. Due to various levels of acquisitions among our
peers, intangible asset amortization can vary significantly from company to
company.
(3) In 2018, we recognized $3.8 million of intangible asset impairment from
merger-related in-process research and development (“IPR&D) intangible
assets and a goodwill impairment charge of $975.9 million. The impairment
was comprised of $401.2 million in our Spine reporting unit, $567.0 million
in our EMEA reporting unit and $7.7 million in an insignificant reporting
unit. In 2017, we recognized $18.8 million and $8.0 million of intangible
asset impairment from Biomet merger-related IPR&D and trademark
intangible assets, respectively. Also in 2017, we recognized goodwill
impairment charges of $32.7 million and $272.0 million on our Office Based
Technologies and Spine reporting units, respectively. In 2016, we
recognized $31.1 million of intangible asset impairment primarily from
Biomet merger-related IPR&D intangible assets.
(4) The acquisition, integration and related expenses we have excluded from
our non-GAAP financial measures resulted from our merger with Biomet in
2015 and various acquisitions we consummated in 2016. For Biomet, we
have detailed integration roadmaps that cover a three year period from the
merger date to accomplish the tasks we feel are necessary to integrate the
businesses. For the various 2016 acquisitions, we also have integration
plans that are necessary to integrate the businesses. The acquisition,
integration and related expenses include the following types of expenses:
(cid:129) Consulting and professional fees related to third-party integration consulting
performed in a variety of areas, such as tax, compliance, logistics and human
resources, and legal fees related to the consummation of mergers and
acquisitions.

(cid:129) Employee termination benefits related to terminating employees with

overlapping responsibilities in various areas of our business.

(cid:129) Dedicated project personnel expenses which include the salary, benefits, travel

expenses and other costs directly associated with employees who are
100 percent dedicated to our integration of acquired businesses and employees
who have been notified of termination, but are continuing to work on
transferring their responsibilities.

(cid:129) Contract termination expenses related to terminated contracts, primarily with

sales agents and distribution agreements.

(cid:129) Other various expenses to relocate facilities, integrate information technology,
losses incurred on assets resulting from the applicable acquisition, and other
various expenses.

(5) We are addressing inspectional observations on Form 483 and a Warning
Letter issued by the U.S. Food and Drug Administration (“FDA”) following
its inspections of our Warsaw North Campus facility, among other matters.
This quality remediation has required us to devote significant financial
resources and is for a discrete period of time. The majority of the expenses
are related to consultants who are helping us to update previous documents
and redesign certain processes.
(6) We are involved in routine patent litigation, product liability litigation,
commercial litigation and other various litigation matters. We review
litigation matters from both a qualitative and quantitative perspective to
determine if excluding the losses or gains will provide our investors with
useful incremental information. Litigation matters can vary in their
characteristics, frequency and significance to our operating results. The
litigation charges and gains excluded from our non-GAAP financial
measures in the periods presented relate to product liability matters where
we have received numerous claims on specific products and intellectual
property litigation. In regards to the product liability matters, due to the
complexities involved and claims filed in multiple districts, the expenses
associated with these matters are significant to our operating results. Once
the litigation matter has been excluded from our non-GAAP financial
measures in a particular period, any additional expenses or gains from
changes in estimates are also excluded, even if they are not significant, to
ensure consistency in our non-GAAP financial measures from
period-to-period.
(7) The new European Union Medical Device Regulation imposes significant
additional premarket and postmarket requirements. The new regulations
will require currently-approved medical devices a transition period until
May 2020 to meet the additional requirements. For certain devices, this
transition period can be extended until May 2024. We are excluding from
our non-GAAP financial measures the incremental costs incurred to comply
with the regulations related to our currently-approved medical devices. The
incremental costs primarily include third-party consulting necessary to
supplement our internal resources.

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

(8) We have incurred other various expenses from specific events or projects
that we consider highly variable or have a significant impact to our
operating results that we have excluded from our non-GAAP financial
measures. This includes legal entity and operational restructuring as well as
our costs of complying with our DPA with the U.S. government related to
certain FCPA matters involving Biomet and certain of its subsidiaries.
Under the DPA, which has a three-year term, we are subject to oversight by
an independent compliance monitor, which monitorship commenced in July
2017. The excluded costs include the fees paid to the independent
compliance monitor and to external legal counsel assisting in the matter.
(9) Represents the tax effects on the previously specified items. The tax
effect for the U.S. jurisdiction is calculated based on an effective rate
considering federal and state taxes, as well as permanent items. For
jurisdictions outside the U.S., the tax effect is calculated based upon the
statutory rates where the items were incurred.
(10) The 2016 period includes negative effects from finalizing the tax
accounts for the Biomet merger. Under the applicable U.S. GAAP rules,
these measurement period adjustments are recognized on a prospective
basis in the period of change.
(11) The 2017 Tax Act resulted in a net favorable provisional adjustment due
to the reduction of deferred tax liabilities for unremitted earnings and
revaluation of deferred tax liabilities to a 21 percent rate, which was
partially offset by provisional tax charges related to the toll charge
provision of the 2017 Tax Act. In 2018, we finalized our estimates of the
effects of the 2017 Tax Act based upon final guidance issued by U.S. tax
authorities.
(12) Other certain tax adjustments in 2018 primarily related to changes in
tax rates on deferred tax liabilities recorded on intangible assets recognized
in acquisition-related accounting and adjustments from internal
restructuring transactions that provide us access to offshore funds in a tax
efficient manner. In 2017, other certain tax adjustments relate to tax
benefits from lower tax rates unrelated to the impact of the 2017 Tax Act,
net favorable resolutions of various tax matters and net favorable
adjustments from internal restructuring transactions. The 2016 adjustment
primarily related to a favorable adjustment to certain deferred tax liabilities
recognized as part of acquisition-related accounting and favorable
resolution of certain tax matters with taxing authorities offset by internal
restructuring transactions that provide us access to offshore funds in a tax
efficient manner.
(13) Diluted share count used in Adjusted Diluted EPS:

Diluted shares

Dilutive shares assuming net earnings

Adjusted diluted shares

LIQUIDITY AND CAPITAL RESOURCES

Year ended
December 31, 2018

203.5

1.5

205.0

Cash flows provided by operating activities were
$1,747.4 million in 2018 compared to $1,582.3 million and
$1,632.2 million in 2017 and 2016, respectively. The increase in
operating cash flows in 2018 compared to 2017 was driven by
additional cash flows from our sale of accounts receivable in
certain countries, lower acquisition and integration expenses
and lower quality remediation expenses, as well as certain
significant payments made in the 2017 period. In the 2017
period, we made payments related to the U.S. Durom Cup
Settlement Program, and we paid $30.5 million in Settlement
Payments to resolve previously-disclosed FCPA matters
involving Biomet and certain of its subsidiaries as discussed in
Note 19 to our consolidated financial statements included in
Item 8 of this report. The decline in operating cash flows in
2017 compared to 2016 was driven by additional investments
in inventory, additional expenses for quality remediation and
the significant payments made in the 2017 period as discussed
in the previous sentence. These unfavorable items were

partially offset by $174.0 million of incremental cash flows in
2017 from our sale of accounts receivable in certain countries.
Cash flows used in investing activities were $416.6 million

in 2018 compared to $510.8 million and $1,691.5 million in
2017 and 2016, respectively. Instrument and property, plant
and equipment additions reflected ongoing investments in our
product portfolio and optimization of our manufacturing and
logistics network. In 2018, we entered into receive-fixed-rate,
pay-fixed-rate cross-currency interest rate swaps. Our
investing cash flows reflect the net cash inflows from the fixed-
rate interest rate receipts/payments, as well as the termination
of certain of these swaps that were in a gain position in the
year. The 2016 period included cash outflows for the
acquisition of LDR Holding Corporation (“LDR”) and other
business acquisitions. Additionally, the 2016 period reflects the
maturity of available-for-sale debt securities. As these
investments matured, we used the cash to pay off debt and
have not reinvested in any additional debt securities.
Cash flows used in financing activities were

$1,302.2 million in 2018. Our primary use of available cash in
2018 was for debt repayment. We received net proceeds of
$749.5 million from the issuance of additional senior notes and
borrowed $400.0 million from our Multicurrency Revolving
Facility to repay $1,150.0 million of senior notes that became
due on April 2, 2018. We subsequently repaid the
$400.0 million of Multicurrency Revolving Facility borrowings.
Also in 2018, we borrowed another $675.0 million under a new
U.S. Term Loan C and used the cash proceeds along with cash
generated from operations throughout the year to repay an
aggregate of $835.0 million on U.S. Term Loan A,
$450.0 million on U.S. Term Loan B, and we subsequently
repaid $140.0 million on U.S. Term Loan C. Overall, we had
approximately $1,150 million of net principal repayments on
our senior notes and term loans in 2018. In 2017, our primary
use of available cash was also for debt repayment compared to
2016 when we were not able to repay as much debt due to
financing requirements to complete the LDR and other
business acquisitions. Additionally in 2017, we had net cash
inflows of $103.5 million on factoring programs that had not
been remitted to the third party. In 2018, we had net cash
outflows related to these factoring programs as we remitted
the $103.5 million and collected only $66.8 million which had
not yet been remitted by the end of the year. Since our
factoring programs started at the end of 2016, we did not have
similar cash flows in that year.

In January 2019, we borrowed an additional $200.0 million

under U.S. Term Loan C and used those proceeds, along with
cash on hand, to repay the remaining $225.0 million
outstanding under U.S. Term Loan B.

In February, May, August and December 2018, our Board

of Directors declared cash dividends of $0.24 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. As further discussed in Note 11 to our
consolidated financial statements, our debt facilities restrict
the payment of dividends in certain circumstances.

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

In February 2016, our Board of Directors authorized a
$1.0 billion share repurchase program effective March 1, 2016,
with no expiration date. As of December 31, 2018, all $1.0 billion
remained authorized for repurchase under the program.

We will continue to exercise disciplined capital allocation
designed to drive stockholder value creation. We intend to use
available cash for reinvestment in the business, debt
repayment and dividends. If the right opportunities arise, we
may also use available cash to pursue business development
opportunities.

As discussed in Note 15 to our consolidated financial
statements, the Internal Revenue Service (“IRS”) has issued
proposed adjustments for years 2005 through 2012 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, future
payments may be significant to our operating cash flows.
As discussed in Note 19 to our consolidated financial
statements, as of December 31, 2018, a short-term liability of
$19.5 million and a long-term liability of $72.1 million related
to Durom Cup product liability claims were recorded on our
consolidated balance sheet. We expect to continue paying
these claims over the next few years. We maintain insurance
for product liability claims, subject to self-insurance retention
requirements. We have recovered insurance proceeds from
certain of our insurance carriers for Durom Cup-related claims.
While we may recover additional insurance proceeds in the
future for Durom Cup-related claims, we do not have a
receivable recorded on our consolidated balance sheet as of
December 31, 2018 for any possible future insurance
recoveries for these claims. We also had a liability of
$70.4 million recorded on our consolidated balance sheet as of
December 31, 2018 related to Biomet metal-on-metal hip
implant claims. Additionally, we have a liability of
approximately $168 million related to the Stryker patent
infringement lawsuit that we may be required to pay in 2019.

At December 31, 2018, we had 12 tranches of senior notes

outstanding as follows (dollars in millions):

We also had four term loans with total principal of
$1,057.0 million outstanding as of December 31, 2018.

We have a five-year unsecured multicurrency revolving

facility of $1.5 billion (the “Multicurrency Revolving Facility”)
that will mature on September 30, 2021. There were no
outstanding borrowings on this facility as of December 31,
2018. We also have other available uncommitted credit
facilities totaling $55.0 million.

For additional information on our debt, see Note 11 to our

consolidated financial statements.

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, 2018, $386.1 million of our cash and
cash equivalents were held in jurisdictions outside of the U.S.
Of this amount, $89.8 million 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 intend to repatriate at
least $5.1 billion of unremitted earnings in future years.

Management believes that cash flows from operations and

available borrowings under the Multicurrency Revolving
Facility are sufficient to meet our working capital, capital
expenditure and debt service needs, as well as to return cash
to stockholders in the form of dividends and share
repurchases. Should additional 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 and certain other commitments (in millions):

Contractual
Obligations

Total

2019

2020
and
2021

2022
and
2023

2024
and
Thereafter

Long-term debt

$ 8,966.8

$ 525.0

$2,985.0

$1,918.6

$3,538.2

Principal

$500.0

1,500.0

Interest
Rate

4.625%

2.700

450.0 Floating

300.0

750.0

571.6*

300.0

2,000.0

571.6*

253.4

317.8

395.4

3.375

3.150

1.414

3.700

3.550

2.425

4.250

5.750

4.450

* Euro denominated debt securities

Maturity Date

Interest

payments

1,869.5

251.9

374.5

286.4

956.7

November 30, 2019

April 1, 2020

March 19, 2021

November 30, 2021

Operating
leases

Purchase

309.6

67.1

101.0

59.9

81.6

obligations

385.6

197.5

148.0

29.7

10.4

Toll charge tax

April 1, 2022

liability

302.4

26.3

52.6

75.6

147.9

December 13, 2022

March 19, 2023

April 1, 2025

December 13, 2026

August 15, 2035

November 30, 2039

August 15, 2045

Other long-
term
liabilities

Total

contractual
obligations

276.3

–

193.3

16.9

66.1

$12,110.2

$1,067.8

$3,854.4

$2,387.1

$4,800.9

$67.1 million of the other long-term liabilities on our
balance sheet as of December 31, 2018 are liabilities related to
defined benefit pension plans. Defined benefit plan liabilities
are based upon the underfunded status of the respective plans;

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

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 2019. 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.

Under the 2017 Tax Act, we have a $302.4 million toll

charge liability for the one-time deemed repatriation of
unremitted foreign earnings. This amount was recorded in
current and non-current income tax liabilities on our
consolidated balance sheet as of December 31, 2018. We have
elected to pay the toll charge in installments over eight years.
Also included in long-term liabilities on our consolidated

balance sheets are liabilities related to unrecognized tax
benefits and corresponding interest and penalties thereon. Due
to the uncertainties inherent in these liabilities, such as the
ultimate timing and resolution of tax audits, we are unable to
reasonably estimate the amount or period in which potential
tax payments related to these positions will be made.
Therefore, this table does not include any obligations related
to unrecognized tax benefits. See Note 15 to our consolidated
financial statements for further information on these
tax-related accounts.

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, maintenance of 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 $58 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 the net realizable values of inventory
and instruments 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.

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 FASB’s
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.

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 and risk-
adjusted discount rates. As such, these fair value
measurements use significant unobservable inputs. Changes to
these assumptions could require us to record impairment
charges on these assets.

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

Prior to our annual impairment test in the fourth quarter
of 2018, we had six reporting units with goodwill assigned to
them. Our annual impairment test determined our EMEA and
Spine reporting units’ carrying values were in excess of their
estimated fair values. Fair value was determined using 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 units. 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 EMEA and Spine
reporting units. As a result of its carrying value being in excess
of its estimated fair value, we recorded a goodwill impairment
charge for the EMEA reporting unit of $567.0 million. As of
December 31, 2018, $755.2 million of goodwill remains for this
reporting unit. The goodwill impairment charge for the Spine
reporting unit was $401.2 million in 2018. No goodwill balance
remains for this reporting unit.

See Note 9 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.

Since the carrying value of the EMEA reporting unit was

written down to its estimated fair value, future impairment
could occur if the estimates used in the income and market
approaches change. If our estimates of profitability in the
reporting unit decline, the fair value estimate under the
income approach will decline. Additionally, changes in the
broader economic environment could cause changes to our
estimated discount rates, foreign currency exchange rates
used to translate cash flows and comparable company
valuation indicators, which may impact our estimated fair
values.

Additionally, in our annual impairment test in the fourth

quarter of 2018, our Dental reporting unit’s fair value exceeded
its carrying value by less than 5 percent. The goodwill balance
of our Dental reporting unit was $387.2 million at
December 31, 2018. If our future operating results are below
the estimations used for our impairment assessment, or there
are negative impacts from the broader economic environment,
then we may have to recognize goodwill impairment charges
on this reporting unit in the future.

For our other three reporting units that have goodwill
assigned to them, their estimated fair value exceeded their
carrying value by more than 25 percent. We estimated the fair
value of those reporting units using the income and market
approaches. If we do not achieve our forecasted operating
results or if market valuation indicators decline, we could be
required to recognize additional goodwill impairment charges
in the future.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 to our consolidated financial statements for

information on 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.

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, Indian Rupees,
Turkish Lira, Polish Zloty, Danish Krone, and Norwegian
Krone. 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 with major financial institutions. These
forward contracts are designed to hedge anticipated foreign
currency transactions, primarily intercompany sale and
purchase transactions, for periods consistent with
commitments. Realized and unrealized gains and losses on
these contracts that qualify as cash flow hedges are
temporarily recorded in accumulated other comprehensive
income, then recognized in cost of products sold when the
hedged item affects net earnings.

For contracts outstanding at December 31, 2018, 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, Indian Rupees,
Turkish Lira, Polish Zloty, Danish Krone, and Norwegian Krone
and purchase Swiss Francs and sell U.S. Dollars at set maturity
dates ranging from January 2019 through June 2021. The
notional amounts of outstanding forward contracts entered
into with third parties to purchase U.S. Dollars at
December 31, 2018 were $1,547.7 million. The notional
amounts of outstanding forward contracts entered into with
third parties to purchase Swiss Francs at December 31, 2018
were $267.6 million. The weighted average contract rates

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

outstanding at December 31, 2018 were Euro:USD 1.23,
USD:Swiss Franc 0.93, USD:Japanese Yen 105.55, British
Pound:USD 1.35, USD:Canadian Dollar 1.28, Australian
Dollar:USD 0.76, USD:Korean Won 1,096, USD:Swedish Krona
8.26, USD:Czech Koruna 21.61, USD:Thai Baht 33.21,
USD:Taiwan Dollar 29.36, USD:South African Rand 13.82,
USD:Russian Ruble 64.53, USD:Indian Ruppee 71.64,
USD:Turkish Lira 5.11, USD:Polish Zloty 3.64, USD:Danish
Krone 6.09, and USD:Norwegian Krone 7.99.

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 offset by changes in
the fair value of hedge instruments. As part of our risk
management program, we also perform sensitivity analyses to
assess potential changes in revenue, operating results, cash
flows and financial position relating to hypothetical movements
in currency exchange rates. A sensitivity analysis of changes in
the fair value of foreign currency exchange forward contracts
outstanding at December 31, 2018 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
2021, 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
Turkish Lira
Polish Zloty
Danish Krone
Norwegian Krone

Average
Amount

$22.3
7.8
3.9
1.5
7.1
10.8
0.2
0.9
0.4
0.2
0.7
0.7
1.7
–
–
0.7
1.2
1.2

Any change in the fair value of foreign currency exchange

forward contracts as a result of a fluctuation in a currency
exchange rate is expected to be largely offset by a change in
the value of the hedged transaction. Consequently, foreign
currency exchange contracts would not subject us to material
risk due to exchange rate movements because gains and losses

on these contracts offset gains and losses on the assets,
liabilities and transactions being hedged.

We had net assets, excluding goodwill and intangible

assets, in legal entities with non-U.S. Dollar functional
currencies of $1,138.5 million at December 31, 2018, primarily
in Euros, Japanese Yen and Australian Dollars.

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.

For details about these and other financial instruments,

including fair value methodologies, see Note 13 to our
consolidated financial statements.

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.
The primary investment objective is to ensure capital
preservation. Currently, we do not use derivative financial
instruments in our investment portfolio.

The majority of our debt is fixed-rate debt and therefore is

not exposed to changes in interest rates. Based upon our
overall interest rate exposure as of December 31, 2018, a
change of 10 percent in interest rates, assuming the principal
amount outstanding remains constant, would not have a
material effect on interest expense, net. This analysis does not
consider the effect of the change in the level of overall
economic activity that could exist in such an environment.

CREDIT RISK

Financial instruments, which potentially subject us to

concentrations of credit risk, are primarily cash and cash
equivalents, derivative instruments and accounts receivable.

We place our cash and cash equivalents and enter into
derivative transactions with highly-rated financial institutions

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

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 or derivative instruments.

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. 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.

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 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 Biomet 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, 2018, 2017 and 2016

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2018, 2017 and 2016

Consolidated Balance Sheets as of December 31, 2018 and 2017

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016

Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016

Notes to Consolidated Financial Statements

Page

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 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 Board of Directors and Stockholders of Zimmer Biomet Holdings, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Zimmer Biomet Holdings, Inc. and its subsidiaries (the
“Company”) as of December 31, 2018 and 2017 and the related consolidated statements of earnings, comprehensive income (loss),
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes
and financial statement schedule of valuation and qualifying accounts for each of the three years in the period ended December 31,
2018 appearing under item 15(a)(2), (collectively referred to as the “consolidated financial statements”). We also have audited the
Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in
Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to
express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the

audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material

misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.

Definition and Limitations of Internal Control over Financial Reporting

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.

/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 26, 2019

We have served as the Company’s auditor since 2000.

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

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CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except per share amounts)

Net Sales
Cost of products sold, excluding intangible asset amortization
Intangible asset amortization
Research and development
Selling, general and administrative
Goodwill and intangible asset impairment
Acquisition, integration and related
Quality remediation

Operating expenses

Operating Profit
Other expense, net
Interest expense, net

(Loss) earnings before income taxes
Provision (benefit) for income taxes

Net (Loss) Earnings
Less: Net loss attributable to noncontrolling interest

Net (Loss) Earnings of Zimmer Biomet Holdings, Inc.

(Loss) Earnings Per Common Share – Basic
(Loss) Earnings Per Common Share – Diluted
Weighted Average Common Shares Outstanding

Basic
Diluted

The accompanying notes are an integral part of these consolidated financial statements.

For the Years Ended December 31,

2018

2017

2016

$7,932.9
2,271.9
595.9
391.7
3,379.3
979.7
133.7
146.9

$ 7,803.3
2,132.9
603.9
369.9
3,104.7
331.5
279.8
181.3

$7,668.4
2,381.8
565.9
365.6
2,944.6
31.1
504.9
53.4

7,899.1

7,004.0

6,847.3

33.8
(15.6)
(289.3)

(271.1)
108.2

(379.3)
(0.1)

799.3
(9.4)
(325.3)

464.6
(1,348.8)

1,813.4
(0.4)

821.1
(66.5)
(355.0)

399.6
95.0

304.6
(1.3)

$ (379.2) $ 1,813.8

$ 305.9

$ (1.86) $
$ (1.86) $

8.98
8.90

$
$

1.53
1.51

203.5
203.5

201.9
203.7

200.0
202.4

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)

Net (Loss) Earnings

Other Comprehensive (Loss) Income:

Foreign currency cumulative translation adjustments, net of tax

Unrealized cash flow hedge gains/(losses), net of tax

Reclassification adjustments on cash flow hedges, net of tax

Unrealized gains on securities, net of tax

Adjustments to prior service cost and unrecognized actuarial assumptions, net of tax

Total Other Comprehensive (Loss) Income

Comprehensive (Loss) Income

Comprehensive Loss Attributable to Noncontrolling Interest

For the Years Ended December 31,

2018

2017

2016

$(379.3) $1,813.4

$ 304.6

(135.4)

445.0

(130.0)

68.2

23.6

–

(17.7)

(95.0)

28.3

(3.8)

(25.8)

–

4.6

0.5

22.0

(61.3)

350.8

(105.0)

(440.6)

2,164.2

199.6

(0.1)

(1.3)

(0.5)

Comprehensive (Loss) Income Attributable to Zimmer Biomet Holdings, Inc.

$(440.5) $2,165.5

$ 200.1

The accompanying notes are an integral part of these consolidated financial statements.

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

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CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)

ASSETS

Current Assets:

Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts
Inventories
Prepaid expenses and other current assets

Total Current Assets

Property, plant and equipment, net
Goodwill
Intangible assets, net
Other assets

Total Assets

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Income taxes payable
Other current liabilities
Current portion of long-term debt

Total Current Liabilities

Deferred income taxes, net

Long-term income tax payable

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,

307.9 million (306.5 million in 2017) issued

Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock, 103.9 million shares (103.9 million shares in 2017)

Total Zimmer Biomet 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.

As of December 31,

2018

2017

542.8
1,275.8
2,256.5
352.3

4,427.4
2,015.4
9,594.4
7,684.6
405.0

524.4
1,544.1
2,068.3
428.0

4,564.8
2,038.6
10,668.4
8,353.4
388.8

$24,126.8

$26,014.0

362.6
142.4
1,391.3
525.0

2,421.3

999.5

666.2

350.0

330.2
165.2
1,349.3
1,225.0

3,069.7

1,101.5

744.0

445.8

8,413.7

8,917.5

12,850.7

14,278.5

3.1
8,686.1
9,491.2
(187.4)
(6,721.7)

11,271.3
4.8

3.1
8,514.9
10,022.8
(83.2)
(6,721.8)

11,735.8
(0.3)

11,276.1

11,735.5

$24,126.8

$26,014.0

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)

Zimmer Biomet Holdings, Inc. Stockholders

Common Shares

Number

Amount

Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
(Loss) Income

Treasury Shares

Number

Amount

Noncontrolling
Interest

Total
Stockholders’
Equity

302.7
–
–

$3.0
–
–

$8,195.3
–
–

$ 8,347.7
305.9
–

$(329.0)
–
(105.0)

(100.0) $(6,329.1)
–
–

–
–

$ 1.5
(1.3)
0.8

$ 9,889.4
304.6
(104.2)

–
2.0
–

304.7
–
–

–

–
1.8

306.5
–
–

–

–
1.4

–
0.1
–

3.1
–
–

–

–
–

3.1
–
–

–

–
–

–
173.2
–

8,368.5
–
–

(191.9)
5.4
–

8,467.1
1,813.8
–

–

(194.1)

–
146.4

8,514.9
–
–

(77.8)
13.8

10,022.8
(379.2)
–

–
–
–

–
0.1
(4.2)

–
8.8
(415.5)

(434.0)
–
350.8

(104.1)
–
–

(6,735.8)
–
–

–

–
–

–

–
0.2

–

–
14.0

–
–
–

1.0
(0.4)
(0.9)

–

–
–

(191.9)
187.5
(415.5)

9,669.9
1,813.4
349.9

(194.1)

(77.8)
174.2

(83.2)
–
(61.3)

(103.9)
–
–

(6,721.8)
–
–

(0.3)
(0.1)
–

11,735.5
(379.3)
(61.3)

–

(195.5)

–

42.9

(42.9)

–
171.2

–
0.2

–
–

–

–
–

–

–
0.1

–

5.2
–

(195.5)

–

5.2
171.5

Balance January 1, 2016
Net earnings
Other comprehensive loss
Cash dividends declared
($0.96 per share)

Stock compensation plans
Share repurchases

Balance December 31, 2016
Net earnings
Other comprehensive income
Cash dividends declared
($0.96 per share)

Retrospective adoption of new

accounting standard
Stock compensation plans

Balance December 31, 2017
Net loss
Other comprehensive loss
Cash dividends declared
($0.96 per share)

Adoption of new accounting

standard

Sale of shares in a subsidiary
without loss of control
Stock compensation plans

Balance December 31, 2018

307.9

$3.1

$8,686.1

$ 9,491.2

$(187.4)

(103.9) $(6,721.7)

$ 4.8

$11,276.1

The accompanying notes are an integral part of these consolidated financial statements.

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)

Cash flows provided by (used in) operating activities:

Net (loss) earnings

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization

Share-based compensation

Goodwill and intangible asset impairment

Inventory step-up

Debt extinguishment

Deferred income tax benefit (provision)

Changes in operating assets and liabilities, net of acquired assets and liabilities

Income taxes
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

Net investment hedge settlements

LDR acquisition, net of acquired cash

Business combination investments, net of acquired cash

Investments in other assets

Net cash used in investing activities

Cash flows provided by (used in) financing activities:

Proceeds from senior notes

Proceeds from multicurrency revolving facility

Payments on multicurrency revolving facility

Redemption of senior notes

Proceeds from term loans

Payments on term loans

Net payments on other debt

Dividends paid to stockholders

Proceeds from employee stock compensation plans

Net cash flows from unremitted collections from factoring programs

Business combination contingent consideration payments

Other financing activities

Repurchase of common stock

Net cash used in financing activities

Effect of exchange rates on cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of period

The accompanying notes are an integral part of these consolidated financial statements.

For the Years Ended December 31,

2018

2017

2016

$ (379.3) $ 1,813.4

304.6

1,040.5

1,062.7

1,039.3

65.5

979.7

–

53.7

331.5

32.8

–

57.3

31.1

323.3

53.3

13.4

(1,776.0)

(153.2)

(150.8)
213.6
(199.5)
155.9
8.4

150.2
161.7
(120.1)
(133.3)
5.7

(10.9)
(141.6)
77.9
32.6
18.5

1,747.4

1,582.3

1,632.2

(276.3)

(162.7)

(337.0)

(156.0)

(345.5)

(184.7)

(1.5)

286.2

–

(1,021.1)

–

(4.0)

(421.9)

(13.8)

(3.0)

–

69.2

–

(15.3)

(31.5)

(416.6)

(510.8)

(1,691.5)

–

1,073.5

749.5

400.0

(400.0)

–

(1,150.0)

(500.0)

(1,250.0)

675.0

192.7

750.0

(1,425.0)

(940.0)

(800.0)

(3.9)

(0.9)

(33.1)

(195.2)

(193.6)

(188.4)

107.9

(36.7)

(19.8)

(4.0)

–

145.5

103.5

(9.1)

(8.6)

–

136.6

–

(16.3)

(415.5)

(1,302.2)

(1,210.5)

(743.2)

(10.2)

18.4
524.4

29.3

(22.7)

(109.7)
634.1

(825.2)
1,459.3

542.8

524.4

634.1

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business

We design, manufacture and market orthopedic
reconstructive products; sports medicine, biologics,
extremities and trauma products; office based technologies;
spine, craniomaxillofacial and thoracic products; dental
implants; and related surgical products. We collaborate with
healthcare professionals around the globe to advance the pace
of innovation. Our products and solutions help treat patients
suffering from disorders of, or injuries to, bones, joints or
supporting soft tissues. Together with healthcare
professionals, we help millions of people live better lives.
We have reclassified expenses that were previously

recognized in a financial statement line item labeled
“Acquisition, quality remediation and other” (and prior to that,
labeled “Special items”) to the financial statement line items of
“Research and development,” “Selling, general and
administrative,” “Goodwill and intangible asset impairment,”
“Acquisition, integration and related” and “Quality
remediation”. Prior periods have been reclassified to conform
to the current year presentation. Please refer to Note 2 for
additional details on the reclassified items, “Acquisition,
integration and related” and “Quality remediation”. We made
this change to provide additional transparency and better
reflect the nature of these expenses.

The words “Zimmer Biomet,” “we,” “us,” “our,” “the
Company” and similar words refer to Zimmer Biomet Holdings,
Inc. and its subsidiaries. “Zimmer Biomet Holdings” refers to
the parent company only. In 2015, we completed our merger
with LVB Acquisition, Inc. (“LVB”), the parent company of
Biomet, Inc. (“Biomet”) (which merger is sometimes referred
to herein as the “Biomet merger”). In 2016, we acquired LDR
Holding Corporation (“LDR”) and other individually immaterial
companies.

Significant Accounting Policies

Basis of Presentation – The consolidated financial
statements include the accounts of Zimmer Biomet Holdings
and its subsidiaries in which it holds a controlling financial
interest. All significant intercompany accounts and
transactions are eliminated.

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 loss 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, 2018, 2017 and
2016 were not significant.

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 SG&A expenses and
were $290.2 million, $263.6 million and $231.7 million for the
years ended December 31, 2018, 2017 and 2016, respectively.

Research and Development – We expense all research

and development (“R&D”) costs as incurred except when
there is alternative future use for the R&D. R&D costs include
salaries, prototypes, depreciation of equipment used in R&D,
consultant fees and service fees paid to collaborative partners.
Where contingent milestone payments are due to third parties
under R&D 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.

Acquisition, integration and related – We use the

financial statement line item, “Acquisition, integration and
related” to recognize expenses resulting from the
consummation of business mergers and acquisitions and the
related integration of those businesses. Acquisition, integration
and related expenses are primarily composed of:
(cid:129) Consulting and professional fees related to third-party

integration consulting performed in a variety of areas, such
as tax, compliance, logistics and human resources, and legal
fees related to the consummation of mergers and
acquisitions.

(cid:129) Employee termination benefits related to terminating

employees with overlapping responsibilities in various areas
of our business.

(cid:129) Dedicated project personnel expenses which include the
salary, benefits, travel expenses and other costs directly
associated with employees who are 100 percent dedicated to
our integration of acquired businesses and employees who
have been notified of termination, but are continuing to
work on transferring their responsibilities.

(cid:129) Contract termination expenses related to terminated
contracts, primarily with sales agents and distribution
agreements.

(cid:129) Other various expenses to relocate facilities, integrate

information technology, losses incurred on assets resulting
from the applicable acquisition, and other various expenses.

Quality remediation – We use the financial statement line
item “Quality remediation” to recognize expenses related to
addressing inspectional observations on Form 483 and a
warning letter issued by the FDA following its inspections of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

our Warsaw North Campus facility, among other matters. See
Note 19 for additional information about the Form 483 and
warning letter. The majority of these expenses are related to
consultants who are helping us to update previous documents
and redesign certain processes.

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.

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
$65.7 million and $60.2 million as of December 31, 2018 and
2017, respectively.

We also have receivables purchase arrangements with

unrelated third parties to transfer portions of our trade
accounts receivable balance. Funds received from the transfers
are recorded as an increase to cash and a reduction to
accounts receivable outstanding in our consolidated balance
sheets. We report the cash flows attributable to the sale of
receivables to third parties in cash flows from operating
activities in our consolidated statements of cash flows. Net
expenses resulting from the sales of receivables are recognized
in SG&A expense. Net expenses include any resulting gains or
losses from the sales of receivables, credit insurance and
factoring fees. Any collections that we make that are
unremitted to the third parties are recognized on our
consolidated balance sheets under other current liabilities and
in our consolidated statements of cash flows in financing
activities.

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 that have been deployed to be used in surgeries
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 SG&A 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 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 in the amount that the
carrying value of the business unit exceeds the fair value. See
Note 9 for more information regarding goodwill.

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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
and in-process research and development (“IPR&D”) projects,
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 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 or contractual life, which
may range from less than one year to twenty 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
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 the new tax rate is enacted.

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.

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 risk management
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.

Accumulated Other Comprehensive (Loss)

Income – Accumulated other comprehensive (loss) income
(“AOCI”) 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. Our AOCI is comprised of foreign

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

currency translation adjustments, including unrealized gains
and losses on net investments hedges, unrealized gains and
losses on cash flow hedges 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 – We have investments in other

companies in which we have a controlling financial interest,
but not 100 percent of the equity. Further information related
to the noncontrolling interests of those investments have not
been provided as it is not significant to our consolidated
financial statements.

Accounting Pronouncements Recently Adopted

In August 2017, the Financial Accounting Standards Board

(“FASB”) issued Accounting Standard Update (“ASU”)
2017-12 – Targeted Improvements to Accounting for Hedging
Activities. This ASU amends the hedge accounting guidance to
simplify the application of hedge accounting, makes more
financial and nonfinancial hedging strategies eligible for hedge
accounting treatment, changes how companies assess
effectiveness and updates presentation and disclosure
requirements. We early adopted this ASU in the first quarter of
2018. Based upon our hedging portfolio that existed prior to
adoption, the adoption of this ASU did not have any impact on
our financial position, results of operations or cash
flows. However, after adoption we entered into cross-currency
interest rate swaps that we designated as net investment
hedges. Under this ASU, we have made a policy election for
changes in the fair value of the cross-currency component of
the cross-currency interest rate swaps to be recorded in
AOCI. Therefore, all changes in the fair value of the cross-
currency interest rate swaps are recorded as a component of
AOCI in our consolidated balance sheet. The portion of this
change related to the excluded component will be amortized
into earnings over the life of the derivative while the remainder
will be recorded in AOCI until the hedged net investment is
sold or substantially liquidated. Under previous guidance, the
fair value change related to the cross-currency component was
recognized in earnings. See Note 13 for additional information.

In February 2018, the FASB issued ASU 2018-02 –
Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income. Under GAAP, when there is a
change in tax rates, it requires remeasurement of deferred tax
assets and liabilities to be recognized as part of income, even if
the deferred tax asset or liability had been recorded and
recognized in AOCI. As a result, a portion of the amount
recognized in AOCI at the previous tax rate would remain
stranded in AOCI permanently. ASU 2018-02 allows the
stranded tax effects in AOCI related only to the Tax Cuts and
Jobs Act of 2017 (“2017 Tax Act”) to be reclassified from AOCI

to retained earnings. The only stranded tax effects in AOCI we
had related to the 2017 Tax Act were due to changes in the
U.S. federal corporate income tax rate. We early adopted this
ASU in the first quarter of 2018 and elected to use the
beginning of period transition method, which means we
recognized the reclassification as of January 1, 2018. As a
result, we reclassified $42.9 million from AOCI to retained
earnings.

In March 2017, the FASB issued ASU 2017-07 – Improving
the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost. This ASU requires us to report
the service cost component of pensions in the same location as
other compensation costs arising from services rendered by
the pertinent employees during the period. We are required to
report the other components of net benefit costs in other
income (expense) in the statements of earnings. This ASU was
effective for us as of January 1, 2018. This ASU must be
applied retrospectively for the presentation of the service cost
component and the other components of net periodic pension
cost in the statements of earnings and prospectively, on and
after the effective date, for the capitalization of the service
cost component of net periodic pension cost in assets. This
ASU provides a practical expedient that allows companies to
use the amounts disclosed in prior financial statements as the
basis for the retrospective application. We elected to use this
practical expedient. The impacts of this ASU on our
consolidated financial statements for the years ended
December 31, 2017 and 2016 are included in the tables
below. See Note 14 for further information on the components
of our net benefit cost.

In May 2014, the FASB issued ASU 2014-09 – Revenue

from Contracts with Customers (Topic 606). This ASU
provides a five-step model for revenue recognition that all
industries will apply to recognize revenue when a customer
obtains control of a good or service. This ASU was effective for
us as of January 1, 2018. Entities were permitted to apply the
standard and related amendments either retrospectively to
each prior reporting period presented or retrospectively with
the cumulative effect of initially applying the ASU recognized
at the date of initial application. We adopted this new standard
using the retrospective method, which resulted in us restating
prior reporting periods presented. This ASU did not result in a
change to the timing of our revenue recognition. Accordingly,
we did not recognize a cumulative adjustment to retained
earnings upon adoption. However, we were required to
reclassify certain immaterial costs from SG&A expense to net
sales, which resulted in a reduction of net sales, but had no
impact on operating profit. This ASU also required us to
reclassify our estimated refund liability for products expected
to be returned from a reduction of accounts receivable to other
current liabilities and the related right to receive products
from the return from inventories to prepaid expenses and
other current assets. The impacts of this ASU on our

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

consolidated financial statements for the years ended December 31, 2017 and 2016 and as of December 31, 2017 are included in
the tables below.

(in millions)

Statement of Earnings

Year Ended December 31, 2017

Net Sales

Research and development

Selling, general and administrative

Goodwill and intangible asset impairment

Acquisition, integration and related

Quality remediation

Special items

Operating expenses

Operating Profit

Other expense, net

(in millions)

Statement of Earnings

Year Ended December 31, 2016

Net Sales

Selling, general and administrative

Goodwill and intangible asset impairment

Acquisition, integration and related

Quality remediation

Special items

Operating expenses

Operating Profit

Other expense, net

(in millions)

Balance Sheet

December 31, 2017

Accounts receivable, less allowance for doubtful accounts

Inventories

Prepaid expenses and other current assets

Other current liabilities

Accounting Pronouncements Not Yet Adopted

As
Previously
Reported

New
Revenue
Standard
Adjustment

New
Pension
Standard
Adjustment

Reclassifications

As
Restated

$7,824.1

$(20.8)

367.4

–

2,973.9

(20.8)

8.9

304.7

–

633.1

–

7,015.9

(20.8)

808.2

(18.3)

–

8.9

(8.9)

8.9

As
Previously
Reported

New
Revenue
Standard
Adjustment

New
Pension
Standard
Adjustment

–

2.5

142.7

26.8

279.8

181.3

(633.1)

–

$7,803.3

369.9

3,104.7

331.5

279.8

181.3

–

7,004.0

799.3

(9.4)

Reclassifications

As
Restated

$7,683.9

$(15.5)

–

$7,668.4

2,932.9

(15.5)

4.8

–

611.8

–

6,858.0

(15.5)

825.9

(71.3)

–

4.8

(4.8)

4.8

22.4

31.1

504.9

53.4

(611.8)

–

2,944.6

31.1

504.9

53.4

–

6,847.3

821.1

(66.5)

As
Previously
Reported

New
Revenue
Standard
Adjustment

As
Restated

$1,494.6

$ 49.5

$1,544.1

2,081.8

(13.5)

2,068.3

414.5

1,299.8

13.5

49.5

428.0

1,349.3

In February 2016, the FASB issued ASU 2016-02 –
Leases. This ASU requires lessees to recognize right-of-use
assets and lease liabilities on the balance sheet. This ASU will
be effective for us beginning January 1, 2019. This ASU
requires a modified retrospective transition method that can
either be applied at the earliest comparative period in the

financial statements or the period of adoption. We plan to use
the period of adoption (January 1, 2019) transition method
and therefore will not restate prior periods. This ASU allows
for certain practical expedients to make the adoption of the
ASU less burdensome. We have elected the practical
expedients upon transition which permits us to not reassess

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

lease identification, classification, and initial direct costs under
the new standard for leases that commenced prior to the
effective date. We have also elected not to recognize a
right-of-use asset nor a lease liability for leases with an initial
term of twelve months or less. Finally, we have elected not to
separate non-lease components from the leased components in
the valuation of our right-of-use asset and lease liability.

We own most of our manufacturing facilities, but lease

various office space, vehicles and other less significant assets
throughout the world. We have collected all of our lease
agreements from across the organization that were entered
into as of December 31, 2018 and completed our analysis of the
key terms of these lease agreements to determine the
appropriate accounting treatment. We have also reviewed
other various agreements for potential embedded leases. We
are in our final reviews of this implementation. We expect the
right-of-use asset and corresponding lease liability that we
recognize as of January 1, 2019 will be in a range of
$265 million to $295 million. We do not expect the adoption of
this ASU will require us to recognize a significant cumulative-
effect adjustment in retained earnings. Since substantially all
of our leases are considered operating leases, we do not expect
this ASU will have a material effect on our consolidated
statements of earnings.

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.

Revenue Recognition

We recognize revenue when our performance obligations
under the terms of a contract with our customer are satisfied.
This happens when we transfer control of our products to the
customer, which generally occurs upon implantation or when
title passes upon shipment. Revenue is measured as the
amount of consideration we expect to receive in exchange for
transferring our product. Taxes collected from customers and
remitted to governmental authorities are excluded from
revenues.

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. In direct channel accounts and with some
healthcare dealers, 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 the
ability to control the inventory. Upon implantation, we issue an
invoice and revenue is recognized. Consignment sales
represented approximately 80 percent of our net sales in 2018.
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. Payment terms vary by customer, but are
typically less than 90 days.

With sales to stocking distributors, some healthcare
dealers, dental practices and dental laboratories, revenue is
generally recognized when control of our product passes to the
customer, which is typically upon shipment of the product. We
estimate sales recognized in this manner represented
approximately 20 percent of our net sales in 2018. It is our
accounting policy to account for shipping and handling
activities as a fulfillment cost rather than as an additional
promised service. We have contracts with these customers or
orders may be placed from available price lists. Payment terms
vary by customer, but are typically less than 90 days.

We offer standard warranties to our customers that our

products are not defective. These standard warranties are not
considered separate performance obligations. In limited
circumstances, we offer extended warranties that are separate
performance obligations. We have very few contracts that have
multiple performance obligations. Since we do not have
significant multiple element arrangements and essentially all of
our sales are recognized upon implantation of a product or
when title passes, very little judgment is required to allocate
the transaction price of a contract or determine when control
has passed to a customer. Our costs to obtain contracts consist
primarily of sales commissions to employees or third party
agents that are earned when control of our product passes to
the customer. Therefore, sales commissions are expensed as
part of SG&A expenses at the same time revenue is
recognized. Accordingly, we do not have significant contract
assets, liabilities or future performance obligations.

We offer volume-based discounts, rebates, prompt pay

discounts, right of return and other various incentives which
we account for under the variable consideration model. If sales
incentives may be earned by a customer for purchasing a
specified amount of our product, we estimate whether such
incentives will be achieved and recognize these incentives as a
reduction in revenue in the same period the underlying
revenue transaction is recognized. We primarily use the
expected value method to estimate incentives. Under the
expected value method, we consider the historical experience
of similar programs as well as review sales trends on a
customer-by-customer basis to estimate what levels of
incentives will be earned. Occasionally, products are returned
and, accordingly, we maintain an estimated refund liability
based upon the expected value method that is recorded as a
reduction in revenue.

We analyze sales by three geographies, the Americas,

Europe, Middle East and Africa (“EMEA”) and Asia Pacific,
and by the following product categories: Knees; Hips; Surgical,
Sports Medicine, Biologics, Foot and Ankle, Extremities and
Trauma (“S.E.T.”); Dental; Spine & Craniomaxillofacial and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We had two equity compensation plans in effect at
December 31, 2018: 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”). No further awards have been granted under the 2006
Plan since 2009, and shares remaining available for grant under
those plans have been merged into the 2009 Plan. Vested stock
options previously granted under the 2006 Plan remained
outstanding as of December 31, 2018. 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 71.6 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, 2018, an aggregate of 9.8 million
shares were available for future grants and awards under these
plans.

Stock options granted to date under our plans vest over
two or four years and 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.

Thoracic (“CMF”); and Other. As discussed in Note 17, we
have seven operating segments that are based upon geography
and product categories. The geographic segments include sales
of all product categories exclusive of the specific product
category operating segments. The geographic operating
segments are the Americas, EMEA and Asia Pacific. These
three operating segments are our reporting segments. The
product category operating segments are Spine, less Asia
Pacific; Office Based Technologies; CMF; and Dental. The
product operating segments do not constitute a reporting
segment because they are, individually and on a combined
basis, insignificant to our consolidated results.

Our sales analysis differs from our reporting operating

segments because the underlying market trends in any
particular geography tend to be similar across product
categories, we primarily sell the same products in all
geographies and the product category operating segments are
not individually significant to our consolidated results.

Net sales by geography are as follows (in millions):

Americas

EMEA

Asia Pacific

Total

For the Years Ended December 31,

2018

2017

2016

$4,837.2

$4,844.8

$4,786.7

1,801.9

1,745.2

1,730.4

1,293.8

1,213.3

1,151.3

$7,932.9

$7,803.3

$7,668.4

Net sales by product category are as follows (in millions):

Knees

Hips

S.E.T

Dental

Spine & CMF

Other

Total

1,921.4

1,871.8

1,861.8

Stock Options

For the Years Ended December 31,

2018

2017

2016

$2,773.7

$2,734.0

$2,751.2

1,751.8

1,701.8

1,639.1

411.2

763.9

310.9

418.6

757.9

319.2

427.9

660.7

327.7

$7,932.9

$7,803.3

$7,668.4

Share-Based Compensation

Our share-based payments primarily consist of stock
options and restricted stock units (“RSUs”). Share-based
compensation expense was as follows (in millions):

For
the Years Ended December 31,

2018

$65.5
14.6

$50.9

2017

$53.7
12.5

$41.2

2016

$57.3
31.5

$25.8

Total expense, pre-tax
Tax benefit related to awards

Total expense, net of tax

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2 0 1 8 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, 2018 is as follows (options in thousands):

Outstanding at January 1, 2018

Options granted

Options exercised

Options forfeited

Options expired

Outstanding at December 31, 2018

Vested or expected to vest as of December 31, 2018

Exercisable at December 31, 2018

We use a Black-Scholes option-pricing model to
determine the fair value of our stock options. Expected
volatility was derived from a combination of historical volatility
and implied volatility because the 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. 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.

The following table presents information regarding the

weighted average fair value of stock options granted, the
assumptions used to determine fair value, the intrinsic value of
options exercised and the tax benefit of options exercised in
the indicated year:

Dividend yield

Volatility

Risk-free interest rate

Expected life (years)

For the Years Ended December 31,

2018

2017

2016

0.8%

0.9%

22.1% 21.6% 21.9%

2.7%

2.0%

1.4%

5.2

5.3

Weighted average fair value of options

granted

$26.66

$26.09

$21.30

Intrinsic value of options exercised

(in millions)

$ 46.6

$ 67.6

$ 73.0

Tax benefit of options exercised

(in millions)

$ 6.8

$ 27.7

$ 30.1

As of December 31, 2018, there was $53.6 million of

unrecognized share-based payment expense related to
nonvested stock options granted under our plans. That
expense is expected to be recognized over a weighted average
period of 2.3 years.

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Life

Intrinsic
Value
(in millions)

Stock
Options

7,257

$ 93.83

2,027

116.23

(1,136)

82.80

(326)

115.11

(59)

108.97

7,763

$100.29

7,503

$ 99.76

4,159

$ 87.57

6.6

6.5

5.0

$82.0

$81.9

$80.9

RSUs

We have awarded RSUs to certain of our employees. The
terms of the awards have been from five months to four years.
Some of the awards have only service conditions while some
have performance and market conditions in addition to service
conditions. 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 five months to four
years.

A summary of nonvested RSU activity for the year ended

December 31, 2018 is as follows (RSUs in thousands):

Outstanding at January 1, 2018

Granted

Vested

Forfeited

Weighted Average
Grant Date
Fair Value

$107.56

120.85

102.71

110.28

RSUs

1,361

542

(160)

(396)

Outstanding at December 31, 2018

1,347

112.81

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, 2018, we estimate that approximately 672,307
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

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In the U.S. and Japan, our programs are executed on a

revolving basis with a maximum funding limit as of
December 31, 2018 of $400 million combined. We act as the
collection agent on behalf of the third party, but have no
significant retained interests or servicing liabilities related to
the accounts receivable sold. In order to mitigate credit risk,
we purchased credit insurance for the factored accounts
receivable. As a result, our risk of loss is limited to the factored
accounts receivable not covered by the insurance.
Additionally, we have provided guarantees for the factored
accounts receivable. The maximum exposures to loss
associated with these arrangements were $33.0 million and
$22.9 million as of December 31, 2018 and 2017, respectively.
In Europe, we sell to a third party and have no continuing

involvement or significant risk with the factored accounts
receivable.

For the years ended December 31, 2018, 2017 and 2016,

we sold receivables having an aggregate face value of
$2,706.4 million, $1,456.9 million and $103.1 million to third
parties in exchange for cash proceeds of $2,704.9 million,
$1,455.6 million and $103.1 million, respectively. Expenses
recognized on these sales during the years ended
December 31, 2018, 2017 and 2016 were not significant. For
the years ended December 31, 2018 and 2017, under the U.S.
and Japan programs, we collected $2,273.5 million and
$1,031.2 million, respectively, from our customers and
remitted that amount to the third party, and we effectively
repurchased $208.9 million and $96.3 million, respectively, of
previously sold accounts receivable from the third party due to
the programs’ revolving nature. In the year ended
December 31, 2016, we did not collect any amounts from our
customers or repurchase any accounts receivable from the
third party as we executed the program at the end of the year.
At December 31, 2018 and 2017, we had collected $66.8 million
and $103.5 million, respectively, that were unremitted to the
third party. We estimate the incremental operating cash
inflows related to all of our programs were approximately
$33 million, $174 million and $103 million for the years ended
December 31, 2018, 2017 and 2016, respectively.

At December 31, 2018 and 2017, the outstanding principal

amount of receivables that has been derecognized under the
U.S. and Japan revolving arrangements combined amounted to
$365.9 million and $261.2 million, respectively.

that we expect to vest, the unrecognized share-based payment
expense as of December 31, 2018 was $47.7 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, 2018, 2017 and 2016 based upon our
stock price on the date of vesting was $18.7 million,
$31.2 million, and $25.5 million, respectively.

Inventories

Inventories consisted of the following (in millions):

Finished goods

Work in progress

Raw materials

Inventories

As of December 31,

2018

2017

$1,797.7

$1,618.7

230.4

228.4

200.0

249.6

$2,256.5

$2,068.3

Amounts charged to the consolidated statements of
earnings for excess and obsolete inventory, including certain
product lines we intend to discontinue, in the years ended
December 31, 2018, 2017 and 2016 were $226.1 million,
$128.4 million and $195.4 million, respectively.

Property, Plant and Equipment

Property, plant and equipment consisted of the following

(in millions):

Land

Building and equipment

Capitalized software costs

Instruments

Construction in progress

Accumulated depreciation

As of December 31,

2018

2017

28.0

29.0

1,885.6

1,838.5

425.8

421.6

2,950.5

2,683.9

147.2

110.7

5,437.1

5,083.7

(3,421.7)

(3,045.1)

Property, plant and equipment, net

$ 2,015.4

$ 2,038.6

Depreciation expense was $442.6 million, $454.1 million

and $466.7 million for the years ended December 31, 2018,
2017 and 2016, respectively.

Transfers of Financial Assets

In the fourth quarter of 2016, we executed receivables

purchase arrangements with unrelated third parties to
liquidate portions of our trade accounts receivable balance.
The receivables relate to products sold to customers and are
short-term in nature. The factorings were treated as sales of
our accounts receivable. Proceeds from the transfers reflect
either the face value of the accounts receivable or the face
value less factoring fees.

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value Measurements of Assets and Liabilities

We value our foreign currency forward contracts using a

The following financial assets and liabilities are recorded

at fair value on a recurring basis (in millions):

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, foreign
currency exchange rates and the terms of our swaps, and we
perform ongoing assessments of counterparty credit risk.

Contingent payments related to acquisitions consist of
commercial milestone, cost savings and sales-based payments,
and are valued using discounted cash flow techniques. The fair
value of commercial milestone payments reflects
management’s expectations of probability of payment, and
increases as the probability of payment increases or
expectation of timing of payments is accelerated. The fair
value of cost savings and sales-based payments is based upon
probability-weighted future cost savings and revenue
estimates, and increases as cost savings and revenue estimates
increase, probability weighting of higher cost savings and
revenue scenarios increase or expectation of timing of
payment is accelerated.

The following table provides a reconciliation of the
beginning and ending balances of items measured at fair value
on a recurring basis in the 2018 table above that used
significant unobservable inputs (Level 3) (in millions):

Contingent payments related to acquisitions

Beginning balance December 31, 2017

Changes in estimates

Settlements

Ending balance December 31, 2018

Level 3 -
Liabilities

$ 41.0

(2.9)

(20.9)

$ 17.2

Changes in estimates are recognized in Acquisition,

integration and related on our consolidated statements of
earnings.

Description

Assets

Derivatives, current and

long-term

Foreign currency

forward contracts

Interest rate swaps

Liabilities

Derivatives, current and

long-term

Foreign currency

forward contracts

$ 0.5

Interest rate swaps

2.5

Contingent payments

related to acquisitions

17.2

$20.2

As of December 31, 2018

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)

$45.7

17.9

$63.6

–

$45.7

17.9

$63.6

$ 0.5

2.5

–

17.2

$ 3.0

$17.2

As of December 31, 2017

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

Derivatives, current and

long-term

Foreign currency

forward contracts

Interest rate swaps

Liabilities

Derivatives, current and

long-term

Foreign currency

forward contracts

$50.9

Contingent payments

related to acquisitions

41.0

$91.9

$ 1.6

4.5

$ 6.1

–

$ 1.6

4.5

$ 6.1

–

$50.9

–

41.0

$50.9

$41.0

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Goodwill and Other Intangible Assets

The following table summarizes the changes in the carrying amount of goodwill (in millions):

Balance at January 1, 2017

Goodwill

Accumulated impairment losses

LDR purchase accounting

Other acquisitions

Currency translation

Impairment

Balance at December 31, 2017

Goodwill

Accumulated impairment losses

Currency translation

Impairment

Balance at December 31, 2018

Goodwill

Accumulated impairment losses

Immaterial
Product Category
Operating
Segments

Asia
Pacific

Total

Americas

EMEA

$7,634.5

$1,263.7

$487.3

$ 1,631.4

$11,016.9

–

(373.0)

7,634.5

1,263.7

487.3

1,258.4

10,643.9

–

(0.5)

90.8

–

(33.2)

149.3

–

13.2

–

24.5

27.6

57.5

24.5

(6.1)

310.8

(304.7)

7,724.8

1,379.8

500.5

1,741.0

11,346.1

–

(677.7)

7,724.8

1,379.8

500.5

1,063.3

10,668.4

(12.4)

(57.6)

–

(567.0)

6.7

–

(34.8)

(408.9)

(98.1)

(975.9)

7,712.4

1,322.2

507.2

1,706.2

11,248.0

–

(567.0)

–

(1,086.6)

(1,653.6)

$7,712.4

$ 755.2

$507.2

619.6

$ 9,594.4

During the year ended December 31, 2018, we recorded

goodwill impairment charges related to our Spine reporting
unit, our EMEA reporting unit and an insignificant reporting
unit of $401.2 million, $567.0 million and $7.7 million,
respectively. During the year ended December 31, 2017, we
recorded goodwill impairment charges related to our Office
Based Technologies and Spine reporting units of $32.7 million
and $272.0 million, respectively.

forecasts we estimated it would take longer than originally
anticipated to realize the benefits of the mergers of the Biomet
and LDR spine product categories. In 2018, our Spine
reporting unit’s performance did not significantly improve as
we continued to work through integration and supply issues.
We estimate our Spine sales are currently growing below
overall market growth. Consequently, we lowered our
expectations of future sales growth.

In our annual impairment tests, we determined our Spine

The impairment charge of $567.0 million in our EMEA

reporting unit’s carrying value was in excess of its estimated
fair value in each of the last two years. This resulted in
impairment charges of $401.2 million and $272.0 million in the
years ended December 31, 2018 and 2017, respectively. There
is no goodwill balance remaining in this reporting unit as of
December 31, 2018. This reporting unit included goodwill from
both the Biomet merger in 2015 and the LDR merger in 2016,
as well as goodwill that existed prior to those mergers. The
forecasts used to recognize the goodwill related to the spine
product categories of Biomet and LDR assumed cross sale
opportunities of the combined businesses would enable the
reporting unit to grow faster than the overall spine market. In
2017, the primary drivers of impairment were lower than
expected sales due to sales force integration issues and
additional complexities of combining the Zimmer, Biomet and
LDR spine product supply chains. As a result, in our 2017

reporting unit in 2018 was driven by a combination of
operational and non-operational factors. We believe sales
growth in the EMEA knees and hips overall market has
softened in the past two years to low single digits.
Accordingly, we have tempered our sales growth estimates for
this reporting unit. Also, higher interest rates as well as
increased volatility in our stock price compared to the overall
market resulted in us utilizing a higher risk-adjusted discount
rate compared to prior year tests to discount our future
estimated cash flows to present value. In addition, our
anticipated costs in the near term to comply with the
European Union Medical Device Regulation (“MDR”) will be
higher than previously anticipated. MDR, which will be
effective beginning in 2020, will require us to update clinical
data, technical documentation and labelling on our products
that we sell in EMEA. As a result, in the next few years we
expect to incur incremental costs to comply with the

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

standards to update previously approved products.
Additionally, in the future we expect to incur increased costs
on new product development to comply with the standard.
Lastly, the weakening of European foreign currencies against
the U.S. Dollar and other factors has contributed to the
impairment charge.

We estimated the fair value of the Spine and EMEA
reporting units based on 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 Spine and EMEA reporting units and considers
differences between our reporting unit and the comparable
companies.

In estimating the future cash flows of the reporting units,

we utilized a combination of market and company specific
inputs that a market participant would use in assessing the fair
value of the reporting units. 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 units could leverage operating
expenses as revenue grows and the impact any of our
differentiated products or new products will have on revenues.
Under the guideline public company methodology, we

took into consideration specific risk differences between our
reporting unit and the comparable companies, such as recent
financial performance, size risks and product portfolios, among
other considerations.

In 2018, we also recognized an impairment charge of
$7.7 million for an insignificant reporting unit that we acquired
in 2016. The $7.7 million represented the entire goodwill
balance of this reporting unit.

In the third quarter of 2017, we performed a goodwill

impairment test on our Office Based Technologies reporting
unit due to continued revenue declines. As a result, we
recognized a $32.7 million impairment charge. The

$32.7 million impairment represented the entire goodwill
balance of the reporting unit and therefore no goodwill
remains. This reporting unit was acquired as part of the
Biomet merger in 2015 and therefore its assets and liabilities
were recognized at their estimated fair values at the merger
date. Since the merger date valuation, operating performance
had been lower than expected due to integration issues,
management turnover and poor execution of its operating
plans.

We estimated the fair value of the Office Based

Technologies reporting unit using a market approach. GAAP
defines fair value as “the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.” We
used market indicators based upon the reporting unit’s
operating performance to estimate what price would be paid
for the assets in an orderly transaction.

We have four other reporting units with goodwill assigned
to them. The estimated fair value of our Dental reporting unit
only exceeded its carrying value by less than 5 percent. The
estimated fair value of each of the other three reporting units
exceeded its carrying value by more than 25 percent. We
estimated the fair value of those reporting units using the
income and market approaches.

We will continue to monitor the fair value of our EMEA
and Dental reporting units as well as our other three reporting
units in our interim and annual reporting periods. If our
estimated cash flows for these reporting units decrease, we
may have to record further impairment charges in the future.
Factors that could result in our cash flows being lower than
our current estimates include: 1) decreased revenues caused
by unforeseen changes in the healthcare market, or our
inability to generate new product revenue from our research
and development activities, and 2) our inability to achieve the
estimated operating margins in our forecasts due to
unforeseen factors. Additionally, changes in the broader
economic environment could cause changes to our estimated
discount rates, foreign currency exchange rates used to
translate cash flows and comparable company valuation
indicators, which may impact our estimated fair values.

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 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 identifiable intangible assets were as follows (in millions):

As of December 31, 2018:

Intangible assets subject to amortization:

Gross carrying amount

Accumulated amortization

Intangible assets not subject to amortization:

Gross carrying amount

Intellectual
Property
Rights

Trademarks
and Trade
Names

Customer
Relationships

Technology

IPR&D

Other

Total

$ 3,638.5

$ 180.7

$ 664.2

$ 5,384.4

(1,282.7)

(177.6)

(169.3)

(1,194.5)

–

$128.3

$ 9,996.1

(80.0)

(2,904.1)

–

457.1

–

135.5

–

592.6

Total identifiable intangible assets

$ 2,355.8

3.1

$ 952.0

$ 4,189.9

$135.5

$ 48.3

$ 7,684.6

As of December 31, 2017:

Intangible assets subject to amortization:

Gross carrying amount

Accumulated amortization

Intangible assets not subject to amortization:

Gross carrying amount

$ 3,669.8

$ 180.7

$ 671.1

$ 5,409.5

(1,061.4)

(176.1)

(132.1)

(890.4)

–

$160.0

$10,091.1

(84.1)

(2,344.1)

–

460.0

–

146.4

–

606.4

Total identifiable intangible assets

$ 2,608.4

4.6

$ 999.0

$ 4,519.1

$146.4

$ 75.9

$ 8,353.4

We recognized intangible asset impairment charges of
$3.8 million, $26.8 million and $31.1 million in the years ended
December 31, 2018, 2017 and 2016, respectively, in Acquisition,
integration and related on our consolidated statements of
earnings. The impairment charges were primarily related to the
abandonment of IPR&D projects that were recognized as part of
the Biomet merger purchase accounting.

Estimated annual amortization expense based upon
intangible assets recognized as of December 31, 2018 for the
years ending December 31, 2019 through 2023 is (in millions):

For the Years Ending December 31,

2019

2020

2021

2022

2023

$604.5

598.3

595.0

589.3

584.0

10. Other Current Liabilities

Other current liabilities consisted of the following (in

millions):

As of December 31,

2018

2017

Other current liabilities:

License and service agreements

$ 181.8

$ 171.4

Salaries, wages and benefits

Litigation and product liability

Accrued liabilities

260.3

278.6

670.6

255.2

147.7

775.0

11. Debt

Our debt consisted of the following (in millions):

Current portion of long-term debt
2.000% Senior Notes due 2018
4.625% Senior Notes due 2019
U.S. Term Loan B

Total short-term debt

Long-term debt

4.625% Senior Notes due 2019
2.700% Senior Notes due 2020
Floating Rate Notes due 2021
3.375% Senior Notes due 2021
3.150% Senior Notes due 2022
3.700% Senior Notes due 2023
3.550% Senior Notes due 2025
4.250% Senior Notes due 2035
5.750% Senior Notes due 2039
4.450% Senior Notes due 2045
1.414% Euro Notes due 2022
2.425% Euro Notes due 2026
U.S. Term Loan A
U.S. Term Loan B
U.S. Term Loan C
Japan Term Loan A
Japan Term Loan B
Other long-term debt
Debt discount and issuance costs
Adjustment related to interest rate swaps

As of December 31,

2018

2017

–
500.0
25.0

$1,150.0
–
75.0

$ 525.0

$1,225.0

–
1,500.0
450.0
300.0
750.0
300.0
2,000.0
253.4
317.8
395.4
571.6
571.6
–
200.0
535.0
105.3
191.7
–
(42.7)
14.6

$ 500.0
1,500.0
–
300.0
750.0
–
2,000.0
253.4
317.8
395.4
600.4
600.4
835.0
600.0
–
103.2
187.9
4.1
(53.2)
23.1

Total other current liabilities

$1,391.3

$1,349.3

Total long-term debt

$8,413.7

$8,917.5

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At December 31, 2018, our total debt balance consisted of
$7.9 billion aggregate principal amount of senior notes, which
included $1.1 billion of Euro-denominated senior notes (“Euro
notes”), $225.0 million outstanding under a U.S. term loan
(“U.S. Term Loan B”) that will mature on September 30, 2019,
$535.0 million outstanding under a U.S. term loan (“U.S. Term
Loan C”) that will mature on December 14, 2020, an
11.7 billion Japanese Yen term loan agreement (“Japan Term
Loan A”) and a 21.3 billion Japanese Yen term loan agreement
(“Japan Term Loan B”) that each will mature on
September 27, 2022, and other debt and fair value adjustments
totaling $14.6 million, partially offset by debt discount and
issuance costs of $42.7 million.

On December 14, 2018, we entered into a credit

agreement (the “2018 Credit Agreement”) that provides for
U.S. Term Loan C, which is a two-year unsecured multi-draw
term loan facility for the Company in the principal amount of
$900.0 million, with a maturity date of December 14, 2020. On
December 14, 2018, we borrowed $675.0 million under U.S.
Term Loan C and utilized those borrowings: (i) to repay the
full $295.0 million balance of a U.S. term loan (“U.S. Term
Loan A”), (ii) to repay $375.0 million of the $600.0 million
balance of U.S. Term Loan B; and (iii) for general corporate
purposes and transaction costs. In January 2019, we borrowed
an additional $200.0 million under U.S. Term Loan C and used
those proceeds, along with cash on hand, to repay the
remaining $225.0 million outstanding under U.S. Term Loan B.
Under the applicable accounting rules, since $200.0 million of
U.S. Term Loan B was refinanced on a long-term basis before
the issuance of these consolidated financial statements, we
classified the refinanced portion of U.S. Term Loan B as long-
term as of December 31, 2018.

On March 19, 2018, we completed the offering of

$450.0 million aggregate principal amount of our floating rate
senior notes due March 19, 2021 and $300.0 million aggregate
principal amount of our 3.700% senior notes due March 19,
2023. Interest on the floating rate senior notes is equal to
three-month LIBOR plus 0.750% and is payable quarterly,
commencing on June 19, 2018, until maturity. Interest is
payable on the 3.700% senior notes semi-annually,
commencing on September 19, 2018, until maturity. We
received net proceeds of $749.5 million from this offering. On
April 2, 2018, these proceeds, together with borrowings under
the Multicurrency Revolving Facility (as defined below) and
cash on hand, were used to repay the 2.000% Senior Notes due
2018.

On September 22, 2017, we entered into a term loan
agreement for the Japan Term Loan B, and an amended and
restated term loan agreement, which amended and restated
the Japan Term Loan A loan agreement dated as of May 24,
2012, as amended as of October 31, 2014. As described above,
the term loans under both of these agreements will mature on
September 27, 2022. Each of these term loans bears interest at
a fixed rate of 0.635 percent per annum.

On December 13, 2016, we completed the offering of
€500 million aggregate principal amount of our 1.414% Euro
notes due December 13, 2022 and €500 million aggregate
principal amount of our 2.425% Euro notes due December 13,
2026. Interest is payable on each series of Euro notes on
December 13 of each year until maturity.

In 2016, we also entered into U.S. Term Loan B and

borrowed $750.0 million thereunder to repay outstanding
borrowings under a previous multicurrency revolving facility
incurred in connection with the acquisition of LDR.

In 2016, we used a portion of the funds received from the
above-described note issuances and borrowings to repay other
outstanding debt. The repayments resulted in debt
extinguishment charges of $53.3 million recorded as part of
other expense, net.

We have a revolving credit and term loan agreement (the
“2016 Credit Agreement”) and a first amendment to our credit
agreement executed in 2014 (the “2014 Credit Agreement”).
The 2016 Credit Agreement contains the U.S. Term Loan B
and a five-year unsecured multicurrency revolving facility of
$1.5 billion (the “Multicurrency Revolving Facility”). The
Multicurrency Revolving Facility replaced the previous
multicurrency revolving facility under the 2014 Credit
Agreement and will mature on September 30, 2021, with two
available one-year extensions at our discretion. The 2014
Credit Agreement provided for U.S. Term Loan A, which was
repaid in full with borrowings under U.S. Term Loan C in
December 2018.

Borrowings under the 2018 Credit Agreement bear
interest at floating rates based upon, for Eurodollar-indexed
loans, LIBOR for the applicable interest period plus a margin of
0.875% per annum, or for non-Eurodollar-indexed loans, an
alternate base rate plus a margin of 0.0%. Under the terms of
U.S. Term Loan C, the remaining balance is due on the
maturity date of December 14, 2020. We have paid
$140.0 million in principal under U.S. Term Loan C, resulting in
$535.0 million outstanding on the U.S. Term Loan C as of
December 31, 2018. The interest rate at December 31, 2018
was 3.4 percent on U.S. Term Loan C. We borrowed an
additional $200.0 million under U.S. Term Loan C in January
2019.

Borrowings under the 2014 and 2016 Credit Agreements

generally bear interest at floating rates based upon indices
determined by the currency of the borrowing, or at an
alternate base rate, in each case, plus an applicable margin
determined by reference to our senior unsecured long-term
credit rating, or, in the case of borrowings under the
Multicurrency Revolving Facility only, at a fixed rate
determined through a competitive bid process. We pay a
facility fee on the aggregate amount of the Multicurrency
Revolving Facility at a rate determined by reference to our
senior unsecured long-term credit rating.

The 2018 Credit Agreement, the 2016 Credit Agreement

and the 2014 Credit Agreement, as amended, contain
customary affirmative and negative covenants and events of

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2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

default for unsecured financing arrangements, including,
among other things, limitations on consolidations, mergers and
sales of assets. Financial covenants under the 2018, 2016 and
2014 Credit Agreements include a consolidated indebtedness
to consolidated EBITDA ratio of no greater than 5.0 to 1.0
through June 30, 2017, and no greater than 4.5 to 1.0
thereafter. If our credit rating falls below investment grade,
additional restrictions would result, including restrictions on
investments and payment of dividends. We were in compliance
with all covenants under the 2018, 2016 and 2014 Credit
Agreements as of December 31, 2018. As of December 31,
2018, there were no borrowings outstanding under the
Multicurrency Revolving Facility.

We may, at our option, redeem our senior notes, in whole

or in part, at any time upon payment of the principal, any
applicable make-whole premium, and accrued and unpaid
interest to the date of redemption, except that the Floating
Rate Notes due 2021 may not be redeemed until on or after
March 20, 2019 and such notes do not have any applicable
make-whole premium. In addition, we may redeem, at our
option, the 2.700% Senior Notes due 2020, the 3.375% Senior
Notes due 2021, the 3.150% Senior Notes due 2022, the
3.700% Senior Notes due 2023, the 3.550% Senior Notes due
2025, the 4.250% Senior Notes due 2035 and the 4.450%
Senior Notes due 2045 without any make-whole premium at
specified dates ranging from one month to six months in
advance of the scheduled maturity date.

The estimated fair value of our senior notes as of
December 31, 2018, based on quoted prices for the specific
securities from transactions in over-the-counter markets
(Level 2), was $7,798.9 million. The estimated fair value of
Japan Term Loan A and Japan Term Loan B, in the aggregate,
as of December 31, 2018, based upon publicly available market
yield curves and the terms of the debt (Level 2), was
$294.7 million. The carrying values of U.S. Term Loan B and
U.S. Term Loan C approximate fair value as they bear interest
at short-term variable market rates.

We 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. These fair
value hedges were settled in 2016. In 2016, we entered into
various variable-to-fixed interest rate swap agreements that
were accounted for as cash flow hedges of U.S. Term Loan B.
In 2018, we entered into cross-currency interest rate swaps
that we designated as net investment hedges. The excluded
component of these net investment hedges is recorded in
interest expense, net. See Note 13 for additional information
regarding our interest rate swap agreements.

We also have available uncommitted credit facilities

totaling $55.0 million.

At December 31, 2018 and 2017, the weighted average

interest rate for our borrowings was 3.1 percent and
2.9 percent, respectively. We paid $282.8 million,
$317.5 million, and $363.1 million in interest during 2018,
2017, and 2016, respectively.

12. Accumulated Other Comprehensive (Loss) Income

AOCI 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 AOCI may be
reclassified to net earnings upon the occurrence of certain
events.

Our AOCI is comprised of foreign currency translation

adjustments, including unrealized gains and losses on net
investment hedges, unrealized gains and losses on cash flow
hedges, 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. Amounts related to defined
benefit plans that are in AOCI are reclassified over the service
periods of employees in the plan. See Note 14 for more
information on our defined benefit plans.

The following table shows the changes in the components of AOCI, net of tax (in millions):

Foreign
Currency
Translation

Cash
Flow
Hedges

Defined
Benefit
Plan Items

Total
AOCI

$ 121.5
(135.4)
(17.4)
–

$(66.5) $(138.2) $ (83.2)
(96.9)
(29.7)
(42.9)
(21.1)
35.6
12.0

68.2
(4.4)
23.6

$ (31.3) $ 20.9

$(177.0) $(187.4)

Balance December 31, 2017
AOCI before reclassifications
Reclassifications to retained earnings (Note 2)
Reclassifications

Balance December 31, 2018

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 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 AOCI (in millions):

Component of AOCI

Cash flow hedges

Foreign exchange forward contracts
Forward starting interest rate swaps
Forward starting interest rate swaps

Defined benefit plans
Prior service cost
Unrecognized actuarial (loss)

Total reclassifications

Amount of Gain / (Loss)
Reclassified from AOCI

For the Years Ended December 31,

2018

2017

2016

Location on Statement of Earnings

$(26.2)
–
(0.6)

(26.8)
(3.2)

$ 5.1
–
(0.5)

$ 87.7
(66.4)
(1.7)

4.6
0.8

19.6
(6.2)

$(23.6)

$ 3.8

$ 25.8

$ 9.9
(26.2)

$ 10.3
(22.1)

$ 7.8
(22.9)

(16.3)
(4.3)

(11.8)
(4.5)

(15.1)
(5.2)

$(12.0)

$ (7.3)

$ (9.9)

$(35.6)

$ (3.5)

$ 15.9

Cost of products sold
Other expense, net
Interest expense, net

Total before tax
Provision (benefit) for income taxes

Net of tax

Other expense, net
Other expense, net

Total before tax
Benefit for income taxes

Net of tax

The following table shows the tax effects on each component of AOCI recognized in our consolidated statements of

comprehensive income (loss) (in millions):

For the Years Ended December 31,

Before Tax

Tax

Net of Tax

2018

2017

2016

2018

2017

2016

2018

2017

2016

Foreign currency cumulative translation adjustments
Unrealized cash flow hedge gains
Reclassification adjustments on foreign currency hedges
Unrealized gains on securities
Adjustments to prior service cost and unrecognized

$(148.7) $ 396.8
(116.0)
(4.6)
–

81.1
26.8
–

$(128.2) $(13.3) $(48.2) $ 1.8
1.4
6.2
–

(21.0)
(0.8)
–

29.7
(19.6)
0.5

12.9
3.2
–

$(135.4) $445.0
(95.0)
(3.8)
–

68.2
23.6
–

$(130.0)
28.3
(25.8)
0.5

actuarial assumptions

(22.7)

6.6

27.3

(5.0)

2.0

5.3

(17.7)

4.6

22.0

Total Other Comprehensive Income (Loss)

$ (63.5) $ 282.8

$ (90.3) $ (2.2) $(68.0) $14.7

$ (61.3) $350.8

$(105.0)

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

In prior years, we entered into various fixed-to-variable interest rate swap agreements that were accounted for as fair value

hedges of a portion of our 4.625% Senior Notes due 2019 and all of our 3.375% Senior Notes due 2021. In August 2016, we
received cash for these interest rate swap assets by terminating the hedging instruments with the counterparties. The remaining
unamortized balance as of December 31, 2018 was $14.6 million, which will be recognized using the effective interest rate method
over the remaining maturity period of the hedged notes. As of December 31, 2018 and 2017, the following amounts were recorded
on our consolidated balance sheets related to cumulative basis adjustments for fair value hedges (in millions):

Balance Sheet Line Item

Long-term debt

Carrying Amount of the Hedged Liabilities

Cumulative Amount of Fair Value Hedging
Adjustment Included in the Carrying Amount
of the Hedged Liabilities

December 31, 2018

December 31, 2017

December 31, 2018

December 31, 2017

$564.4

$572.8

$14.6

$23.1

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Derivatives Designated as Cash Flow Hedges

In 2018, we initiated receive-fixed-rate, pay-fixed-rate

In 2014, we entered into forward starting interest rate
swaps that were designated as cash flow hedges of the thirty-
year tranche of senior notes (the 4.450% Senior Notes due
2045) we expected to issue in 2015. The forward starting
interest rate swaps mitigated the risk of changes in interest
rates prior to the completion of the notes offering. The interest
rate swaps were settled, and the remaining loss to be
recognized at December 31, 2018 was $27.1 million, which will
be recognized using the effective interest rate method over the
remaining maturity period of the hedged notes.
In September 2016, we entered into various

variable-to-fixed interest rate swap agreements with a notional
amount of $375 million that were accounted for as cash flow
hedges of Term Loan B. The interest rate swaps minimize the
exposure to changes in the LIBOR interest rates while the
variable-rate debt is outstanding. The weighted average fixed
interest rate for all of the outstanding interest rate swap
agreements is approximately 0.89 percent through
September 30, 2019.

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 with major
financial institutions. We also designated our Euro notes and
other foreign currency exchange forward contracts as net
investment hedges of investments in foreign subsidiaries. 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, Indian Rupees, Turkish Lira, Polish Zloty,
Danish Krone, and Norwegian Krone. We do not use derivative
financial instruments for trading or speculative purposes.

Derivatives Designated as Net Investment Hedges

We are exposed to the impact of foreign exchange rate
fluctuations in the investments in our wholly-owned foreign
subsidiaries that are denominated in currencies other than the
U.S. Dollar. In order to mitigate the volatility in foreign
exchange rates, we issued Euro notes in December 2016, as
discussed in Note 11, and designated 100 percent of the Euro
notes to hedge our net investment in certain wholly-owned
foreign subsidiaries that have a functional currency of Euro. All
changes in the fair value of the hedging instrument designated
as a net investment hedge are recorded as a component of
AOCI in our consolidated balance sheets.

cross-currency interest rate swaps with a notional amount of
€1,250.0 million. These transactions further hedged our net
investment in certain wholly-owned foreign subsidiaries that
have a functional currency of Euro. All changes in the fair
value of a derivative instrument designated as a net investment
hedge are recorded as a component of AOCI in our
consolidated balance sheets. The portion of this change related
to the excluded component will be amortized into earnings
over the life of the derivative while the remainder will be
recorded in AOCI until the hedged net investment is sold or
substantially liquidated. We recognize the excluded component
in interest expense, net on our consolidated statements of
earnings. The net cash received related to the receive-fixed-
rate, pay-fixed-rate component of the cross-currency interest
rate swap is reflected in investing cash flows in our
consolidated statements of cash flows. In 2018, we terminated
certain of these cross-currency interest rate swaps with a
notional amount of €675.0 million and replaced them with new
cross-currency interest rate swaps for the same notional
amount at the current market rates. We received proceeds of
$50.2 million related to the terminated swaps, which are
reflected in investing activities in our consolidated statements
of cash flows. Accordingly, cross-currency interest rate swaps
with a notional amount of €1,250.0 million remained
outstanding as of December 31, 2018.

In 2016, we also entered into a foreign currency exchange
forward contract in anticipation of the Euro notes issuance and
designated it as a net investment hedge.

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. 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 AOCI and then recognized in
cost of products sold when the hedged item affects net
earnings. On our consolidated statements of cash flows, the
settlements of these cash flow hedges are recognized in
operating cash flows.

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For foreign currency exchange forward contracts
outstanding at December 31, 2018, 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, Indian Rupees, Turkish
Lira, Polish Zloty, Danish Krone, and Norwegian Krone and
obligations to purchase Swiss Francs and sell U.S. Dollars.
These derivatives mature at dates ranging from January 2019
through June 2021. As of December 31, 2018, the notional
amounts of outstanding forward contracts entered into with
third parties to purchase U.S. Dollars were $1,547.7 million. As
of December 31, 2018, the notional amounts of outstanding
forward contracts entered into with third parties to purchase
Swiss Francs were $267.6 million.

Income Statement Presentation

Derivatives Designated as Cash Flow Hedges

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 re-measurement gains/losses
recognized in earnings are generally offset with gains/losses on
the foreign currency forward exchange contracts in the same
reporting period. The net amount of these offsetting gains/
losses is recorded in Other expense, net. 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 $1.5 billion to $2.0 billion per quarter.

Derivative instruments designated as cash flow hedges had the following effects, before taxes, on AOCI and net earnings on our

consolidated statements of earnings, consolidated statements of comprehensive income (loss) and consolidated balance sheets (in
millions):

Derivative Instrument

Amount of Gain / (Loss)
Recognized in AOCI

Years Ended December 31,

2018

2017

2016

Amount of Gain / (Loss)
Reclassified from AOCI

Years Ended December 31,

Location on Statement of Earnings

2018

2017

2016

Foreign exchange forward contracts

$82.8

$(116.5) $25.7

Cost of products sold

$(26.2) $ 5.1

$ 87.7

Interest rate swaps

Forward starting interest rate swaps

(1.7)

0.5

4.0

–

$81.1

$(116.0) $29.7

Interest expense, net

–

Interest expense, net

(0.6)

(0.5)

(1.7)

Other expense, net

–

(66.4)

$(26.8) $ 4.6

$ 19.6

The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on the balance sheet at

December 31, 2018, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized
gain of $23.4 million, or $20.9 million after taxes, which is deferred in AOCI. A gain of $24.7 million, or $21.0 million after taxes, is
expected to be reclassified to earnings in cost of products sold and a loss of $0.6 million, or $0.5 million after taxes, is expected to
be reclassified to earnings in interest expense, net over the next twelve months.

The following table presents the effects of fair value, cash flow and net investment hedge accounting on our consolidated

statements of earnings (in millions):

Total amounts of income and expense line items presented in the
statements of earnings in which the effects of fair value, cash
flow and net investment hedges are recorded
The effects of fair value, cash flow and net investment hedging:

Gain on fair value hedging relationships

Discontinued interest rate swaps

Gain (loss) on cash flow hedging relationships

Forward starting interest rate swaps
Foreign exchange forward contracts

Gain on net investment hedging relationships

Cross-currency interest rate swaps

Years Ended December 31,

2018

2017

Cost of
Goods
Sold

Interest
Expense,
Net

Cost of
Goods
Sold

Interest
Expense,
Net

Cost of
Goods
Sold

2016

Other
Expense,
Net

Interest
Expense,
Net

$2,271.9

$(289.3) $2,132.9

$(325.3) $2,381.8

$(66.5) $(355.0)

–

8.5

–
(26.2)

(0.6)
–

–

25.5

–

–
5.1

–

8.3

–

10.7

(0.5)
–

–
87.7

(66.4)
–

(1.7)
–

–

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Derivatives 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

Years Ended December 31,

Statement of Earnings

2018

2017

2016

Other expense, net

$24.7

$(62.3)

$2.5

These gains/(losses) do not reflect offsetting losses of $41.2 million and $15.5 million in 2018 and 2016, respectively, and

offsetting gains of $45.5 million in 2017 recognized in Other expense, net as a result of foreign currency re-measurement of
monetary assets and liabilities denominated in a currency other than an entity’s functional currency.

Balance Sheet Presentation

As of December 31, 2018 and December 31, 2017, 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 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):

Asset Derivatives

Foreign exchange forward contracts

Interest rate swaps

Cross-currency interest rate swaps

Total asset derivatives

Liability Derivatives

Foreign exchange forward contracts

Cross-currency interest rate swaps

Total liability derivatives

As of December 31, 2018

As of December 31, 2017

Balance Sheet Location

Fair
Value

Balance Sheet Location

Fair
Value

Other current assets

$37.9

Other current assets

$14.5

Other assets

20.9

2.8

15.1

$76.7

Other assets

4.8

4.5

–

$23.8

Other current liabilities

$ 9.9

Other current liabilities

$45.8

Other long-term liabilities

3.7

2.5

$16.1

Other long-term liabilities

22.8

Other long-term liabilities

–

$68.6

The table below presents the effects of our master netting agreements on our consolidated balance sheets (in millions):

As of December 31, 2018

As of December 31, 2017

Location

Gross
Amount

Offset

Net Amount
in Balance
Sheet

Gross
Amount

Offset

Net Amount
in Balance
Sheet

Other current assets

$37.9

$9.6

Other assets

20.9

3.5

$28.3

17.4

$14.5

$13.4

$ 1.1

4.8

4.3

0.5

Other current liabilities

Other long-term liabilities

9.9

3.7

9.6

3.5

0.3

0.2

45.8

22.8

13.4

4.3

32.4

18.5

Description

Asset Derivatives

Cash flow hedges

Liability Derivatives

Cash flow hedges

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 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 net investment hedge gains (losses) were recognized on our consolidated statements of comprehensive income

(loss) (in millions):

Derivative Instrument

Euro Notes

Cross-currency interest rate swaps

Foreign exchange forward contracts

14. Retirement Benefit Plans

Amount of Gain / (Loss)
Recognized in AOCI

Years Ended December 31,

2018

2017

2016

$ 57.6

$(146.0) $ 9.4

62.8

–

9.4

$120.4

$(146.0) $18.8

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.

Defined Benefit Plans

The components of net pension expense for our defined benefit retirement plans were as follows (in millions):

Service cost

Interest cost

Expected return on plan assets

Curtailment gain

Settlements

Amortization of prior service cost

Amortization of unrecognized actuarial loss

Net periodic benefit cost

For the Years Ended December 31,

U.S. and Puerto Rico

Foreign

2018

2017

2016

2018

2017

2016

$ 8.0

$ 8.7

$ 9.6

$ 20.0

$ 17.7

$ 19.0

14.2

14.0

13.8

8.1

8.4

10.0

(32.9)

(32.4)

(32.2)

(14.0)

(12.2)

(13.7)

–

1.2

–

0.4

–

2.6

–

0.2

–

1.1

(0.5)

–

(5.7)

(5.9)

(4.2)

(4.4)

(1.9)

23.7

17.9

16.5

2.5

4.2

6.4

$ 8.5

$ 2.7

$ 4.4

$ 12.6

$ 14.8

$ 19.3

In our consolidated statements of earnings, service cost is reported in the same location as other compensation costs arising

from services rendered by the pertinent employees while the other components of net pension expense are reported in other
expense, net.

The weighted average actuarial assumptions used to determine net pension expense for our defined benefit retirement plans

were as follows:

Discount rate

Rate of compensation increase

Expected long-term rate of return on plan assets

For the Years Ended December 31,

U.S. and Puerto Rico

Foreign

2018

2017

2016

2018

2017

2016

3.79% 4.33% 4.32% 1.18% 1.38% 1.41%

3.29% 3.29% 3.29% 2.09% 2.20% 2.08%

7.75% 7.75% 7.75% 2.19% 2.30% 2.40%

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.

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Discount rates were determined for each of our defined benefit retirement plans at their measurement date to reflect the yield

of a portfolio of high quality bonds matched against the timing and amounts of projected future benefit payments.

Changes in projected benefit obligations and plan assets were (in millions):

Projected benefit obligation – beginning of year
Service cost
Interest cost
Plan amendments
Employee contributions
Benefits paid
Actuarial (gain) loss
Expenses paid
Settlement
Translation (loss) gain

Projected benefit obligation – end of year

Plan assets at fair market value – beginning of year
Actual return on plan assets
Employer contributions
Employee contributions
Settlements
Benefits paid
Expenses paid
Translation (loss) gain

Plan assets at fair market value – end of year

Funded status

Amounts recognized in consolidated balance sheet:

Prepaid pension
Short-term accrued benefit liability
Long-term accrued benefit liability

Net amount recognized

For the Years Ended December 31,

U.S. and Puerto Rico

Foreign

2018

2017

2018

2017

$420.7
8.0
14.2
–
–
(20.3)
(21.1)
–
(5.5)
–

$376.9
8.7
14.0
–
–
(14.9)
36.9
–
(0.9)
–

$623.6
20.0
8.1
2.2
18.1
(36.9)
6.0
(0.3)
–
(9.7)

$568.6
17.7
8.4
0.6
17.0
(34.5)
15.6
(0.2)
(0.8)
31.2

$396.0

$420.7

$631.1

$623.6

For the Years Ended December 31,

U.S. and Puerto Rico

Foreign

2018

2017

2018

2017

$433.6
(25.7)
6.4
–
(5.5)
(20.3)
–
–

$389.4
58.2
1.8
–
(0.9)
(14.9)
–
–

$574.9
7.5
31.7
18.1
–
(36.9)
(0.3)
(9.2)

$507.0
42.7
16.5
17.0
–
(34.5)
(0.2)
26.4

$388.5

$433.6

$585.8

$574.9

$ (7.5) $ 12.9

$(45.3) $(48.7)

For the Years Ended December 31,

U.S. and Puerto Rico

Foreign

2018

2017

2018

2017

–
(0.2)
(7.3)

$22.8
(5.6)
(4.3)

$ 15.3
(0.8)
(59.8)

$ 14.9
(0.8)
(62.8)

$(7.5)

$12.9

$(45.3) $(48.7)

We estimate the following amounts recorded as part of AOCI will be recognized as part of our net pension expense during 2019

(in millions):

Unrecognized prior service cost

Unrecognized actuarial loss

U.S. and
Puerto Rico

Foreign

$ (3.4)

$ (4.1)

17.9

2.5

$14.5

$(1.6)

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 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:

Discount rate

Rate of compensation increase

For the Years Ended December 31,

U.S. and Puerto Rico

Foreign

2018

2017

2016

2018

2017

2016

4.38% 3.78% 4.32% 1.41% 1.27% 1.41%

3.29% 3.29% 3.29% 2.13% 2.19% 2.08%

Plans with projected benefit obligations in excess of plan assets were as follows (in millions):

Projected benefit obligation

Plan assets at fair market value

As of December 31,

U.S. and Puerto Rico

Foreign

2018

2017

2018

2017

$396.0

$55.1

$451.4

$598.8

388.5

45.2

394.4

544.2

Total accumulated benefit obligations and plans with accumulated benefit obligations in excess of plan assets were as follows

(in millions):

Total accumulated benefit obligations
Plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligation
Plan assets at fair market value

As of December 31,

U.S. and Puerto Rico

Foreign

2018

2017

2018

2017

$392.0

$412.1

$618.0

$609.1

47.1
41.6

54.7
45.2

434.8
388.8

417.4
375.5

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,

2019
2020
2021
2022
2023
2024-2028

U.S. and
Puerto Rico

$ 18.8
19.7
20.8
21.9
23.3
126.1

Foreign

$ 25.0
25.5
25.4
25.8
26.5
140.8

The U.S. and Puerto Rico defined benefit retirement plans’ overall investment strategy is to balance total returns by

emphasizing long-term growth of capital while mitigating risk. We have established target ranges of assets held by the plans of 30 to
65 percent for equity securities, 30 to 50 percent for debt securities and 0 to 15 percent in non-traditional investments. The plans
strive to have sufficiently diversified assets so that adverse or unexpected results from one asset class will not have an unduly
detrimental impact on the entire portfolio. We regularly review the investments in the plans and we may rebalance them from
time-to-time based upon the target asset allocation of the plans.

For the U.S. and Puerto Rico plans, we maintain an investment policy statement that guides the investment 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.

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.

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The fair value of our U.S. and Puerto Rico pension plan

assets by asset category was as follows (in millions):

As of December 31, 2018

Fair Value Measurements at Reporting Date Using:

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

–

Asset Category

Total

Cash and cash
equivalents

Equity securities

Intermediate fixed

$ 3.1

231.7

income securities

153.7

$3.1

–

231.7

153.7

Total

$388.5

$3.1

$385.4

As of December 31, 2017

Fair Value Measurements at Reporting Date Using:

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Asset Category

Total

Cash and cash
equivalents

Equity securities

Intermediate fixed

$ 1.3

287.1

income securities

145.2

$1.3

–

287.1

145.2

Total

$433.6

$1.3

$432.3

The fair value of our foreign pension plan assets was as

follows (in millions):

As of December 31, 2018

Fair Value Measurements at Reporting Date Using:

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Asset Category

Total

Cash and cash
equivalents

$ 14.6

–

Equity securities

138.6

109.3

29.3

Fixed income
securities

Other types of
investments

Real estate

226.9

96.8

108.9

–

226.9

96.8

–

108.9

Total

$585.8

$123.9

$353.0

$108.9

As of December 31, 2017

Fair Value Measurements at Reporting Date Using:

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Asset Category

Total

Cash and cash
equivalents

$ 31.8

Equity securities

161.6

157.6

–

4.0

Fixed income
securities

Other types of
investments

Real estate

219.5

60.4

101.6

–

219.5

60.4

10.6

–

91.0

Total

$574.9

$189.4

$294.5

$91.0

As of December 31, 2018 and 2017, our defined benefit

pension plans’ assets did not hold any direct investment in
Zimmer Biomet 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. 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

Loss on assets sold
Change in fair value of assets
Net purchases and sales
Translation loss

Ending Balance

December 31, 2018

$ 91.0
(0.4)
6.9
11.7
(0.3)

$108.9

We expect that we will have minimal legally required
funding requirements in 2019 for the qualified U.S. and Puerto
Rico defined benefit retirement plans, and we do not expect to
voluntarily contribute to these plans during 2019.
Contributions to foreign defined benefit plans are estimated to
be $18.7 million in 2019. We do not expect the assets in any of
our plans to be returned to us in the next year.

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 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 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 $48.9 million,
$47.9 million and $42.5 million related to these plans for the
years ended December 31, 2018, 2017 and 2016, respectively.

15.

Income Taxes

The components of earnings (loss) before income taxes

consisted of the following (in millions):

For the Years Ended December 31,

2018

2017

2016

United States operations

$(382.8) $(114.0) $(251.8)

Foreign operations

111.7

578.6

651.4

Total

$(271.1) $ 464.6

$ 399.6

The provision/(benefit) for income taxes and the income

The 2017 Tax Act was enacted on December 22, 2017 and

taxes paid consisted of the following (in millions):

contained several key provisions including, among other
things:
(cid:129) a one-time tax on the mandatory deemed repatriation of
post-1986 untaxed foreign earnings and profits (“E&P”),
referred to as the toll charge;

(cid:129) a reduction in the corporate income tax rate from 35 percent

to 21 percent for tax years beginning after December 31, 2017;

(cid:129) the introduction of a new U.S. tax on certain off-shore

earnings referred to as global intangible low-taxed income
(“GILTI”) at an effective tax rate of 10.5 percent for tax
years beginning after December 31, 2017 (increasing to
13.125 percent for tax years beginning after December 31,
2025), with a partial offset by foreign tax credits; and

(cid:129) the introduction of a territorial tax system beginning in 2018
by providing a 100 percent dividend received deduction on
certain qualified dividends from foreign subsidiaries.

In March 2018, the FASB issued ASU 2018-05, “Income
Taxes - Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 118.” The guidance provided for a
provisional one-year measurement period for entities to finalize
their accounting for certain tax effects related to the 2017 Tax
Act. In 2017, we recorded a $1,272.4 million income tax benefit
related to provisional amounts for which the accounting had not
been finalized. In 2018, we completed our calculation of the
post-1986 E&P and related foreign taxes of our foreign
subsidiaries, as well as the classification of the E&P as cash or
non-cash and the finalization of all provisional items. Based on
the completed calculations related to the effects of the 2017 Tax
Act, and consideration of proposed regulations and other
guidance issued during 2018, we recorded additional income tax
expense of $8.3 million. The additional $8.3 million of tax
expense consists of an adjustment to the toll charge or
transition tax provision of $11.3 million and a benefit of
$3.0 million related to the remeasurement of our deferred tax
assets and liabilities.

The 2017 Tax Act created a provision known as GILTI that

imposes a U.S. tax on certain earnings of foreign subsidiaries
that are subject to foreign tax below a certain threshold. The
Company has made an accounting policy election to reflect
GILTI taxes, if any, as a current income tax expense in the
period incurred.

Current:

Federal

State

Foreign

Deferred:

Federal

State

Foreign

$(46.2) $

438.5

$ 134.2

24.4

116.6

2.4

12.4

(13.7)

101.6

94.8

427.2

248.2

37.9

(1,728.5)

(108.5)

(8.8)

(15.7)

(95.5)

2.3

48.0

(47.0)

13.4

(1,776.0)

(153.2)

Provision (benefit) for income taxes

$108.2

$(1,348.8) $ 95.0

Net income taxes paid

$237.1

266.9

$ 269.6

A reconciliation of the U.S. statutory income tax rate to

our effective tax rate is as follows:

For the Years Ended December 31,

2018

2017

2016

U.S. statutory income tax rate

21.0%

35.0% 35.0%

State taxes, net of federal deduction

(2.5)

1.8

2.0

Tax impact of foreign operations, including U.S.
taxes on international income and foreign tax

credits

Change in valuation allowance

Non-deductible expenses

Goodwill impairment

Tax rate change

(32.0) (11.0)

54.3

(4.9)

1.7

0.8

2.7

(75.2)

22.5

(12.2)

(24.0)

–

0.9

–

Tax impact of certain significant transactions

–

1.6

Tax benefit relating to foreign derived

intangible income and U.S. manufacturer’s
deduction

R&D tax credit

Share-based compensation

Net uncertain tax positions, including

interest
and penalties

U.S. tax reform

Other

(0.2)

(1.7)

(4.7)

6.0

0.1

(1.2)

(1.9)

(2.6)

(2.9)

(25.5)

(17.0)

(3.1)

(273.8)

0.6

(0.8)

4.2

–

0.6

Effective income tax rate

(39.9)% (290.3)% 23.8%

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 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 operations in Puerto Rico and Switzerland benefit
from various tax incentive grants. These grants expire between
fiscal years 2019 and 2029.

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.
The components of deferred taxes consisted of the

following (in millions):

As of December 31,

Deferred tax assets related to capital loss carryovers are
also available to reduce future federal and foreign capital gains.
At December 31, 2018, $1.5 million of these capital loss
carryovers expire within 1 year and $6.4 million of these
capital loss carryovers have an indefinite life. Valuation
allowances for certain capital loss carryovers have been
established in the amount of $7.9 million and $5.5 million at
December 31, 2018 and 2017, respectively. The remaining
valuation allowances booked against deferred tax assets of
$8.9 million and $11.6 million at December 31, 2018 and 2017,
respectively, relate primarily to accrued liabilities and
intangible assets that management believes, more likely than
not, will not be realized.

2018

2017

Many of our operations are conducted outside the United

Deferred tax assets:

Inventory

Net operating loss carryover

Tax credit carryover

Capital loss carryover

Product liability and litigation

Accrued liabilities

Share-based compensation

Accounts receivable

Other

Total deferred tax assets

Less: Valuation allowances

Total deferred tax assets after valuation

allowances

Deferred tax liabilities:

Fixed assets

Intangible assets

Other

Total deferred tax liabilities

$ 271.5

$ 246.8

374.3

29.2

7.9

92.6

35.3

27.3

15.2

48.8

165.1

163.8

6.9

55.9

46.6

26.8

17.3

84.9

902.1

814.1

(390.9)

(140.6)

511.2

673.5

94.4

85.6

1,301.3

1,423.0

14.1

18.2

1,409.8

1,526.8

Total net deferred income taxes

$ (898.6) $ (853.3)

Net operating loss carryovers are available to reduce

future federal, state and foreign taxable earnings. At
December 31, 2018, $240.3 million of these net operating loss
carryovers expire within a period of 1 to 20 years and
$134.0 million of these net operating loss carryovers have an
indefinite life. Valuation allowances for net operating loss
carryovers have been established in the amount of
$348.9 million and $105.0 million at December 31, 2018 and
2017, respectively.

Deferred tax assets related to tax credit carryovers are
available to offset future federal and state tax liabilities. At
December 31, 2018, $29.2 million of these tax credit carryovers
generally expire within a period of 2 to 16 years. Valuation
allowances for certain tax credit carryovers have been
established in the amount of $25.2 million and $18.5 million at
December 31, 2018 and 2017, respectively.

States. Under the 2017 Tax Act, a company’s post-1986
previously untaxed foreign E&P are mandatorily deemed to be
repatriated and taxed, which is also referred to as the toll
charge. We intend to repatriate at least $5.1 billion of
unremitted earnings and any tax cost related to the remittance
of these earnings has been accounted for in the financial
statements as of December 31, 2018. We have an estimated
$2.6 billion of cash and intercompany notes available to
repatriate and the remainder is invested in the operations of
our foreign entities. The remaining amounts earned overseas
are expected to be permanently reinvested outside of the
United States, and therefore, no accrual for U.S. taxes has
been recorded. It is not practical for us to determine the
additional tax related to remitting the earnings in excess of
$5.1 billion. A portion of these earnings has already been taxed
as toll tax or GILTI and is not subject to further U.S. federal
tax. Some of the additional tax would be offset by the
allowable foreign tax credits.

The following is a tabular reconciliation of the total

amounts of unrecognized tax benefits (in millions):

For the Years Ended December 31,

2018

2017

2016

Balance at January 1

$626.8

$ 649.3

$591.9

Increases related to business

combinations

Increases related to prior periods

4.5

34.6

70.2

172.8

70.2

36.7

Decreases related to prior periods

(14.4)

(262.2)

(94.7)

Increases related to current period

41.9

24.8

53.0

Decreases related to settlements with

taxing authorities

(3.8)

(21.7)

(3.2)

Decreases related to lapse of statute of

limitations

(4.1)

(6.4)

(4.6)

Balance at December 31

$685.5

$ 626.8

$649.3

Amounts impacting effective tax rate, if
recognized balance at December 31

$549.1

$ 499.6

$511.5

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 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 recognize accrued interest and penalties related to
unrecognized tax benefits as income tax expense. During 2018,
we accrued interest and penalties of $18.5 million, and as of
December 31, 2018, had a recognized liability for interest and
penalties of $94.2 million.

During 2017, we released interest and penalties of
$38.3 million, and as of December 31, 2017, had a recognized
liability for interest and penalties of $75.7 million, which
included $3.0 million of increase related to the Biomet merger.
During 2016, we accrued interest and penalties of
$19.3 million, and as of December 31, 2016, had a recognized
liability for interest and penalties of $110.8 million, which
included an $8.6 million increase from December 31, 2015
related to the Biomet merger.

We operate on a global basis and are subject to numerous

and complex tax laws and regulations. Additionally, tax laws
have and continue to undergo rapid changes in both
application and interpretation by various countries, including
state aid interpretations and the Organization for Economic
Cooperation and Development led initiatives. Our income tax
filings are subject to examinations by taxing authorities
throughout the world. 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. Although
ultimate timing is uncertain, the net amount of tax liability for
unrecognized tax benefits may change within the next twelve
months due to changes in audit status, expiration of statutes of
limitations, settlements of tax assessments and other events.
Management’s best estimate of such change is within the range
of a $125 million decrease to a $25 million increase.

Our U.S. Federal income tax returns have been audited
through 2012 and are currently under audit for years 2013-
2015. The IRS has proposed adjustments for years 2005-2012,
primarily related to reallocating profits between certain of our
U.S. and foreign subsidiaries. We have disputed these
adjustments and intend to continue to vigorously defend our
positions. For years 2005-2007, we have filed a petition with
the U.S. Tax Court. For years 2008-2009, we will be filing a
petition with the U.S. Tax Court. For years 2010-2012, we are
pursuing resolution through the IRS Administrative Appeals
Process.

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 return positions in
the process of examination, administrative appeals or
litigation.

In other major jurisdictions, open years are generally 2011

or later.

16. Capital Stock and Earnings per Share

We are authorized to issue 250.0 million shares of
preferred stock, none of which were issued or outstanding as
of December 31, 2018.

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,

2018

2017

2016

Weighted average shares outstanding for

basic net earnings per share

203.5

201.9

200.0

Effect of dilutive stock options and other

equity awards

–

1.8

2.4

Weighted average shares outstanding for

diluted net earnings per share

203.5

203.7

202.4

Since we incurred a net loss in the year ended

December 31, 2018, no dilutive stock options or other equity
awards were included as diluted shares. For the years ended
December 31, 2017 and 2016, an average of 1.0 million and
0.9 million options, respectively, 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.

During 2016, we repurchased 4.2 million shares of our
common stock at an average price of $98.50 per share for a
total cash outlay of $415.5 million, including commissions.

17. Segment Data

We design, manufacture and market orthopedic
reconstructive products; sports medicine, biologics,
extremities and trauma products; spine, craniomaxillofacial
and thoracic products (“CMF”); office based technologies;
dental implants; and related surgical products. Our chief
operating decision maker (“CODM”) allocates resources to
achieve our operating profit goals through seven operating
segments. Our operating segments are comprised of both
geographic and product category business units. The
geographic operating segments are the Americas, which is
comprised principally of the U.S. and includes other North,
Central and South American markets; EMEA, which is
comprised principally of Europe and includes the Middle East
and African markets; and Asia Pacific, which is comprised
primarily of Japan, China and Australia and includes other
Asian and Pacific markets. The product category operating

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

segments are Spine, Office Based Technologies, CMF and
Dental. The geographic operating segments include results
from all of our product categories except those in the product
category operating segments. The Office Based Technologies,
CMF and Dental product category operating segments reflect
those respective product category results from all regions,
whereas the Spine product category operating segment
includes all spine product results excluding those from Asia
Pacific.

As it relates to the geographic operating segments, our

CODM evaluates performance based upon segment operating
profit exclusive of operating expenses pertaining to inventory
and manufacturing-related charges, intangible asset
amortization, goodwill and intangible asset impairment,
acquisition, integration and related, quality remediation,
litigation, certain European Union Medical Device Regulation
expenses, other charges, 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, manufacturing operations and logistics and share-
based payment expense. As it relates to each product category
operating segment, research, development engineering,
medical education, brand management and other various costs
that are specific to the product category operating segment’s
operations are reflected in its operating profit results. Due to

these additional costs included in the product category
operating segments, profitability metrics among the geographic
operating segments and product category operating segments
are not comparable. Intercompany transactions have been
eliminated from segment operating profit.

Our CODM does not review asset information by operating

segment. Instead, our CODM reviews cash flow and other
financial ratios by operating segment.

These seven operating segments are the basis for our
reportable segment information provided below. The four
product category operating segments are individually
insignificant to our consolidated results and therefore do not
constitute a reporting segment either individually or combined.
For presentation purposes, these product category operating
segments have been aggregated. Prior period reportable
segment financial information has been restated to reflect the
impact of the adoption of ASU 2017-07 and ASU 2014-09, as
described in Note 2.

In November 2018 we hired a new Group President,
Orthopedics. This new position has different responsibilities
than any previous leadership team member. As of
December 31, 2018, our operating segments have not changed.
However, it is likely in 2019 that there will be changes in either
our operating segments or the composition of operating profit
in our current operating segments. We cannot determine at
this time what those changes may be.

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 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):

For the Year Ended December 31, 2018

Net sales

Depreciation and amortization

Segment operating profit

Inventory and manufacturing-related charges

Intangible asset amortization

Goodwill and intangible asset impairment

Acquisition, integration and related

Quality remediation

Litigation

European Union Medical Device Regulation

Other charges

Operating profit

For the Year Ended December 31, 2017

Net sales

Depreciation and amortization

Segment operating profit

Inventory and manufacturing-related charges

Intangible asset amortization

Goodwill and intangible asset impairment

Acquisition, integration and related

Quality remediation

Litigation

Other charges

Operating profit

For the Year Ended December 31, 2016

Net sales
Depreciation and amortization

Segment operating profit

Inventory and manufacturing-related charges

Intangible asset amortization

Intangible asset impairment

Acquisition, integration and related

Quality remediation

Litigation

Other charges

Operating profit

Americas

EMEA

Asia
Pacific

Immaterial
Product
Category
Operating
Segments

Global
Operations
and
Corporate
Functions

Total

$3,932.6

$1,576.1

$1,236.9

$1,187.3

–

$7,932.9

120.4

2,055.9

70.3

478.4

66.6

427.3

45.0

738.2

1,040.5

208.6

(959.9)

2,210.3

(32.5)

(595.9)

(979.7)

(133.7)

(165.4)

(186.0)

(3.7)

(79.6)

33.8

$3,928.9

$1,523.4

$1,158.3

$1,192.7

–

$7,803.3

127.6

2,126.8

71.7

478.3

60.2

417.6

45.7

757.5

1,062.7

262.9

(860.0)

2,425.6

(70.8)

(603.9)

(331.5)

(279.8)

(195.1)

(104.0)

(41.2)

799.3

$3,927.9
135.5

$1,512.7
69.6

$1,095.6
53.3

$1,132.2
38.1

–
742.8

$7,668.4
1,039.3

2,133.3

498.2

431.8

272.6

(811.1)

2,524.8
(468.3)

(565.9)

(31.1)

(504.9)

(54.3)

(33.3)

(45.9)

821.1

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We conduct business in the following countries that hold

10 percent or more of our total consolidated Property, plant
and equipment, net (in millions):

United States

Other countries

As of December 31,

2018

2017

$1,235.1

$1,151.6

780.3

887.0

Property, plant and equipment, net

$2,015.4

$2,038.6

U.S. sales were $4,560.0 million, $4,582.2 million, and
$4,525.8 million for the years ended December 31, 2018, 2017
and 2016, respectively. Sales within any other individual
country were less than 10 percent of our consolidated sales in
each of those years. Sales are attributable to a country based
upon the customer’s country of domicile.

18. Leases

Total rent expense for the years ended December 31,

2018, 2017 and 2016 aggregated $72.2 million, $87.2 million,
and $74.0 million, respectively.

Future minimum rental commitments under

non-cancelable operating leases in effect as of December 31,
2018 were (in millions):

For the Years Ending December 31,

2019

2020

2021

2022

2023

Thereafter

$67.1

56.9

44.1

32.2

27.7

81.6

19. Commitments and Contingencies

On a quarterly and annual basis, we review relevant
information with respect to loss contingencies and update our
accruals, disclosures and estimates of reasonably possible
losses or ranges of loss based on such reviews. We establish
liabilities for loss contingencies when it is probable that a loss
has been incurred and the amount of the loss can be
reasonably estimated. For matters where a loss is believed to
be reasonably possible, but not probable, no accrual has been
made.

Litigation

Durom Cup-related 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 were filed against us in various U.S. and
foreign jurisdictions. The plaintiffs seek damages for personal
injury, and they generally allege that the Durom Cup contains

defects that result in complications and premature revision of
the device. We have settled the majority of these claims and
others are still pending. The majority of the pending U.S.
lawsuits are currently in an MDL in the District of New Jersey
(In Re: Zimmer Durom Hip Cup Products Liability
Litigation). Litigation activity in the MDL is stayed pending
finalization of the U.S. Durom Cup Settlement Program, an
extrajudicial program created to resolve actions and claims of
eligible U.S. plaintiffs and claimants. Other lawsuits are
pending in various domestic and foreign jurisdictions, and
additional claims may be asserted in the future. The majority
of claims outside the U.S. are pending in Canada, Germany,
Netherlands, Italy and the UK. A Canadian class settlement
was approved in late 2016, and the period for class members to
submit a claim for compensation under the settlement closed
in September 2017. All claims under the Canadian class
settlement have been paid. The majority of claims in the UK,
which were consolidated in a Group Litigation Order, were
recently discontinued.

In 2018, we lowered our estimate of the number of Durom

Cup-related claims we expect to settle. Therefore, we
recognized a $37.2 million gain in SG&A expense in the year
ended December 31, 2018. We recognized $10.3 million in
expense for Durom Cup-related claims in 2017, with no
expense recorded in 2016. Since 2008, we have recognized net
expense of $452.5 million for Durom Cup-related claims.

We maintain insurance for product liability claims, subject

to self-insurance retention requirements. We have recovered
insurance proceeds from certain of our insurance carriers for
Durom Cup-related claims. While we may recover additional
insurance proceeds in the future for Durom Cup-related
claims, we do not have a receivable recorded on our
consolidated balance sheet as of December 31, 2018 for any
possible future insurance recoveries for these claims.

Our estimate as of December 31, 2018 of the remaining
liability for all Durom Cup-related claims is $91.6 million, of
which $19.5 million is classified as short-term in “Other current
liabilities” and $72.1 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 few 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 our estimate of the
number of claims that we will receive and the average amount
we will pay per claim. The actual number of claims and the
actual amount we pay per claim may differ from our estimates.
Among other factors, 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.
Although we are vigorously defending these lawsuits, their
ultimate resolution is uncertain.

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NexGen Knee System claims: 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, specifically the NexGen Flex Femoral
Components and MIS Stemmed Tibial Component, suffer from
defects that cause them to loosen prematurely. The majority of
the cases are currently pending in an MDL in the Northern
District of Illinois (In Re: Zimmer NexGen Knee Implant
Products Liability Litigation). Other cases are pending in
various state courts, and additional lawsuits may be filed. Thus
far, all cases decided by the MDL court or a jury on the merits
have involved NexGen Flex Femoral Components, which
represent the majority of cases in the MDL. The initial
bellwether trial took place in October 2015 and resulted in a
defense verdict. The next scheduled bellwether trial, which
was set to commence in November 2016, was dismissed
following the court’s grant of summary judgment in our favor in
October 2016. That decision was appealed by the plaintiff and
subsequently affirmed by the Seventh Circuit Court of Appeals
in March 2018. The second bellwether trial took place in
January 2017 and resulted in a defense verdict. The parties
attended a court-ordered mediation in January 2018, at which
a settlement in principle was reached that would resolve all
MDL cases and all state court cases that involved MDL
products. On February 11, 2019, we informed the MDL court of
our intention to consummate a confidential settlement that
resolves 273 of the remaining 279 cases.

Zimmer M/L Taper, M/L Taper with Kinectiv

Technology, and Versys Femoral Head-related claims: We
are a defendant in a number of product liability lawsuits
relating to our M/L Taper and M/L Taper with Kinectiv
Technology hip stems, and Versys Femoral Head implants. The
plaintiffs seek damages for personal injury, alleging that
defects in the products lead to corrosion at the head/stem
junction resulting in, among other things, pain, inflammation
and revision surgery. The majority of the cases are
consolidated in an MDL in the United States District Court for
the Southern District of New York (In Re: Zimmer M/L Taper
Hip Prosthesis or M/L Taper Hip Prosthesis with Kinectiv
Technology and Versys Femoral Head Products Liability
Litigation). Other related cases are pending in various state
courts, with the majority of state court cases pending in
Oregon, New Mexico, Indiana and Florida. Additional lawsuits
are likely to be filed. Although we are vigorously defending
these lawsuits, their ultimate resolution is uncertain.

Biomet metal-on-metal hip implant claims: Biomet is a
defendant in a number of product liability lawsuits relating to
metal-on-metal hip implants, most of which involve the
M2a-Magnum hip system. The majority of the cases are
currently consolidated in an MDL in the U.S. District Court for
the Northern District of Indiana (In Re: Biomet M2a Magnum
Hip Implant Product Liability Litigation). Other cases are
pending in various state and foreign courts, with the majority

of domestic state court cases pending in Indiana and Florida.

On February 3, 2014, Biomet announced the settlement of

the MDL. Lawsuits filed in the MDL by April 15, 2014 were
eligible to participate in the settlement. Those claims that did
not settle via the MDL settlement program have
re-commenced litigation in the MDL under a new case
management plan, or are in the process of being remanded to
their originating jurisdictions. The settlement does not affect
certain other claims relating to Biomet’s metal-on-metal hip
products that are pending in various state and foreign courts,
or other claims that may be filed in the future. In light of
recent litigation developments, our estimate as of
December 31, 2018 of the remaining liability for all Biomet
metal-on-metal hip implant claims has increased to
$70.4 million.

Biomet has exhausted the self-insured retention in its
insurance program and has been reimbursed for claims related
to its metal-on-metal products up to its policy limits in the
program. Zimmer Biomet is responsible for any amounts by
which the ultimate losses exceed the amount of Biomet’s third-
party insurance coverage. As of December 31, 2018, Biomet
had received all of the insurance proceeds it expects to
recover under the excess policies. Although we are vigorously
defending these lawsuits, their ultimate resolution is uncertain.
Heraeus trade secret misappropriation lawsuits: In

December 2008, Heraeus Kulzer GmbH (together with its
affiliates, “Heraeus”) initiated legal proceedings in Germany
against Biomet, Inc., Biomet Europe BV, certain other entities
and certain employees alleging that the defendants
misappropriated Heraeus trade secrets when developing
Biomet Europe’s Refobacin and Biomet Bone Cement line of
cements (“European Cements”). The lawsuit sought to
preclude the defendants from producing, marketing and
offering for sale their current line of European Cements and to
compensate Heraeus for any damages incurred.

Germany: On June 5, 2014, the German appeals court in

Frankfurt (i) enjoined Biomet, Inc., Biomet Europe BV and
Biomet Deutschland GmbH from manufacturing, selling or
offering the European Cements to the extent they contain
certain raw materials in particular specifications; (ii) held the
defendants jointly and severally liable to Heraeus for any
damages from the sale of European Cements since 2005; and
(iii) ruled that no further review may be sought (the
“Frankfurt Decision”). The Heraeus and Biomet parties both
sought appeal against the Frankfurt Decision. In a decision
dated June 16, 2016, the German Supreme Court dismissed the
parties’ appeals without reaching the merits, rendering that
decision final.

In December 2016, Heraeus filed papers to restart
proceedings against Biomet Orthopaedics Switzerland GmbH,
seeking to require that entity to relinquish its CE certificates
for the European Cements. In January 2017, Heraeus notified
Biomet it had filed a claim for damages in the amount of
€121.9 million for sales in Germany, which it later increased to
€125.9 million. In September 2017, Heraeus filed an

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

enforcement action in the Darmstadt court against Biomet
Europe, requesting that a fine be imposed against Biomet
Europe for failure to disclose the amount of the European
Cements which Biomet Orthopaedics Switzerland had ordered
to be manufactured in Germany (e.g., for the Chinese
market). In June 2018, the Darmstadt court dismissed
Heraeus’ request. Heraeus appealed the decision. Also in
September 2017, Heraeus filed suit against Zimmer Biomet
Deutschland in the court of first instance in Freiberg
concerning the sale of the European Cements with certain
changed raw materials. Heraeus seeks an injunction on the
basis that the continued use of the product names for the
European Cements is misleading for customers and thus an act
of unfair competition. On June 29, 2018, the court in Freiberg,
Germany dismissed Heraeus’ request for an injunction
prohibiting the marketing of the European Cements under
their current names on the grounds that the same request had
already been decided upon by the Frankfurt Decision which
became final and binding. Heraeus has appealed this decision
to the Court of Appeals in Karlsruhe, Germany.

United States: On September 8, 2014, Heraeus filed a

complaint against a Biomet supplier, Esschem, Inc.
(“Esschem”), in the U.S. District Court for the Eastern District
of Pennsylvania. The lawsuit contained allegations that focused
on two copolymer compounds that Esschem sells to Biomet,
which Biomet incorporates into certain bone cement products
that compete with Heraeus’ bone cement products. The
complaint alleged that Biomet helped Esschem to develop
these copolymers, using Heraeus trade secrets that Biomet
allegedly misappropriated. The complaint asserted a claim
under the Pennsylvania Uniform Trade Secrets Act, as well as
other various common law tort claims, all based upon the same
trade secret misappropriation theory. Heraeus sought to enjoin
Esschem from supplying the copolymers to any third party and
actual damages. The complaint also sought punitive damages,
costs and attorneys’ fees. Although Biomet was not a party to
this lawsuit, Biomet agreed, at Esschem’s request and subject
to certain limitations, to indemnify Esschem for any liability,
damages and legal costs related to this matter. On November 3,
2014, the court entered an order denying Heraeus’ motion for a
temporary restraining order. On June 30, 2016, the court
entered an order denying Heraeus’ request to give preclusive
effect to the factual findings in the Frankfurt Decision. On
June 6, 2017, the court entered an order denying Heraeus’
motion to add Biomet as a party to the lawsuit. On January 26,
2018, the court entered an order granting Esschem’s motion
for summary judgment and dismissed all of Heraeus’ claims
with prejudice. On February 21, 2018, Heraeus filed a notice of
appeal to the U.S. Court of Appeals for the Third Circuit, which
heard oral argument on the appeal on October 23, 2018.

On December 7, 2017, Heraeus filed a complaint against

Zimmer Biomet Holdings, Inc. and Biomet, Inc. in the U.S.
District Court for the Eastern District of Pennsylvania alleging
a single claim of trade secret misappropriation under the
Pennsylvania Uniform Trade Secrets Act based on the same

factual allegations as the Esschem litigation. On March 5, 2018,
Heraeus filed an amended complaint adding a second claim of
trade secret misappropriation under Pennsylvania common
law. Heraeus seeks to enjoin the Zimmer Biomet parties from
future use of the allegedly misappropriated trade secrets and
recovery of unspecified damages for alleged past use. On
April 18, 2018, the Zimmer Biomet parties filed a motion to
dismiss both claims.

Other European Countries: Heraeus continues to pursue

other related legal proceedings in Europe seeking various
forms of relief, including injunctive relief and damages, against
Biomet-related entities relating to the European Cements. On
October 2, 2018, the Belgian Court of Appeal of Mons issued a
judgment in favor of Heraeus relating to its request for past
damages caused by the alleged misappropriation of its trade
secrets, and an injunction preventing future sales of certain
European Cements in Belgium (the “Belgian Decision”). We
have appealed this judgment to the Belgian Supreme Court.
Heraeus subsequently filed a suit in Belgium concerning the
continued sale of the European Cements with certain changed
materials. Like its suit in Germany, Heraeus seeks an
injunction on the basis that the continued use of the product
names for the European Cements is misleading for customers
and thus an act of unfair competition.

On February 13, 2019, a Norwegian court of first instance

issued a judgment in favor of Heraeus on its claim for
misappropriation of trade secrets. The court awarded damages
of 19,500,000 NOK or approximately $2.3 million plus
attorneys’ fees, and issued an injunction, which is not final and
thus not currently being enforced, preventing Zimmer Biomet
Norway from marketing in Norway bone cements identified
with the current product names and bone cements making use
of the trade secrets which were acknowledged in the Frankfurt
Decision. We intend to appeal this judgment.

Heraeus is pursuing damages and injunctive relief in

France in an effort to prevent us from manufacturing,
marketing and selling the European Cements (the “France
Litigation”). The European Cements are manufactured at our
facility in Valence, France. On December 11, 2018, a hearing
was held in the France Litigation before the commercial court
in Romans-sur-Isère, and the court’s decision in this matter is
expected in the second quarter of 2019. Although we are
vigorously defending the France Litigation, the ultimate
outcome is uncertain. An adverse ruling in the France
Litigation could have a material adverse effect on our business,
financial condition and results of operations.

We have accrued an estimated loss relating to the

collective European trade secret litigation, including estimated
legal costs to defend. Damages relating to the Frankfurt
Decision are subject to separate proceedings, and the Belgian
court appointed an expert to determine the amount of
damages related to the Belgian Decision. Thus, it is reasonably
possible that our estimate of the loss we may incur may change
in the future. Although we are vigorously defending these
lawsuits, their ultimate resolution is uncertain.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stryker patent infringement lawsuit: 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. Oral argument before the Court of
Appeals for the Federal Circuit took place on September 8,
2014. On December 19, 2014, the Federal Circuit issued a
decision affirming the $70.0 million lost profits award but
reversed the willfulness finding, vacating the treble damages
award and vacating and remanding the attorneys’ fees award.
We accrued an estimated loss of $70.0 million related to this
matter in the three month period ended December 31, 2014.
On January 20, 2015, Stryker filed a motion with the Federal
Circuit for a rehearing en banc. On March 23, 2015, the
Federal Circuit denied Stryker’s petition. Stryker subsequently
filed a petition for certiorari to the U.S. Supreme Court. In July
2015, we paid the final lost profits award of $90.3 million,
which includes the original $70.0 million plus pre- and post-
judgment interest and damages for sales that occurred post-
trial but prior to our entry into a license agreement with
Stryker. On October 19, 2015, the U.S. Supreme Court granted
Stryker’s petition for certiorari. Oral argument took place on
February 23, 2016. On June 13, 2016, the U.S. Supreme Court
issued its decision, vacating the judgment of the Federal
Circuit and remanding the case for further proceedings related
to the willfulness issue. On September 12, 2016, the Federal
Circuit issued an opinion affirming the jury’s willfulness finding
and vacating and remanding the trial court’s award of treble
damages, its finding that this was an exceptional case and its
award of attorneys’ fees. The case was remanded back to the
trial court. Oral argument on Stryker’s renewed consolidated
motion for enhanced damages and attorneys’ fees took place
on June 28, 2017. On July 12, 2017, the trial court issued an
order reaffirming its award of treble damages, its finding that
this was an exceptional case and its award of attorneys’ fees.
On July 24, 2017, we appealed the ruling to the Federal Circuit
and obtained a supersedeas bond staying enforcement of the
judgment pending appeal. Oral argument before the Federal
Circuit took place on December 3, 2018 and the Federal
Circuit affirmed the trial court’s ruling in full on December 10,
2018. Although we filed a petition with the Federal Circuit for
a rehearing en banc which remains pending, it is probable that
we will be required to pay approximately $168 million related

to the award of treble damages and attorneys’ fees in 2019, and
we accrued an estimated loss of this amount in the three
month period ended December 31, 2018.

Putative Securities Class Action: On December 2, 2016,

a complaint was filed in the U.S. District Court for the
Northern District of Indiana (Shah v. Zimmer Biomet
Holdings, Inc. et al.), naming us, one of our officers and two
of our now former officers as defendants. On June 28, 2017,
the plaintiffs filed a corrected amended complaint, naming as
defendants, in addition to those previously named, current and
former members of our Board of Directors, one additional
officer, and the underwriters in connection with secondary
offerings of our common stock by certain selling stockholders
in 2016. On October 6, 2017, the plaintiffs voluntarily
dismissed the underwriters without prejudice. On October 8,
2017, the plaintiffs filed a second amended complaint, naming
as defendants, in addition to those current and former officers
and Board members previously named, certain former
stockholders of ours who sold shares of our common stock in
secondary public offerings in 2016. We and our current and
former officers and Board members named as defendants are
sometimes hereinafter referred to as the “Zimmer Biomet
Defendant group”. The former stockholders of ours who sold
shares of our common stock in secondary public offerings in
2016 are sometimes hereinafter referred to as the “Private
Equity Fund Defendant group”. The second amended
complaint relates to a putative class action on behalf of
persons who purchased our common stock between June 7,
2016 and November 7, 2016. The second amended complaint
generally alleges that the defendants violated federal securities
laws by making materially false and/or misleading statements
and/or omissions about our compliance with FDA regulations
and our ability to continue to accelerate our organic revenue
growth rate in the second half of 2016. The defendants filed
their respective motions to dismiss on December 20, 2017,
plaintiffs filed their omnibus response to the motions to
dismiss on March 13, 2018 and the defendants filed their
respective reply briefs on May 18, 2018. On September 27,
2018, the court denied the Zimmer Biomet Defendant group’s
motion to dismiss in its entirety. The court granted the Private
Equity Fund Defendant group’s motion to dismiss, without
prejudice. On October 9, 2018, the Zimmer Biomet Defendant
group filed a motion to amend the court’s order on the motion
to certify two issues for interlocutory appeal, and a motion to
stay proceedings pending appeal. That motion remains
pending. The plaintiffs seek unspecified damages and interest,
attorneys’ fees, costs and other relief. We believe this lawsuit is
without merit, and we and the individual defendants are
defending it vigorously.

Regulatory Matters, Government Investigations and Other Matters

FDA warning letters: In August 2018, we received a

warning letter from the FDA related to observed
non-conformities with current good manufacturing practice
requirements of the QSR at our Warsaw North Campus facility.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In May 2016, we received a warning letter from the FDA
related to observed non-conformities with current good
manufacturing practice requirements of the QSR at our facility
in Montreal, Quebec, Canada. In September 2012, we received
a warning letter from the FDA citing concerns relating to
certain processes pertaining to 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 Warsaw, Montreal
and Ponce. As of February 15, 2019, these warning letters
remained pending. Until the violations cited in the pending
warning letters are corrected, we may be subject to additional
regulatory action by the FDA, as described more fully below.
Additionally, requests for Certificates to Foreign Governments
related to products manufactured at certain of our facilities
may not be granted and premarket approval applications for
Class III devices to which the QSR deviations at these facilities
are reasonably related will not be approved until the violations
have been corrected. In addition to responding to the warning
letters described above, we are in the process of addressing
various FDA Form 483 inspectional observations at certain of
our manufacturing facilities, including at both the legacy
Zimmer and the legacy Biomet manufacturing facilities in
Warsaw, Indiana. The ultimate outcome of these matters is
presently uncertain. Among other available regulatory actions,
the FDA may impose operating restrictions, including a ceasing
of operations, at one or more facilities, enjoining and
restraining certain violations of applicable law pertaining to
medical devices and assessing civil or criminal penalties
against our officers, employees or us. The FDA could also issue
a corporate warning letter, a recidivist warning letter or a
consent decree of permanent injunction. The FDA may also
recommend prosecution by the DOJ. Any adverse regulatory
action, depending on its magnitude, may restrict us from
effectively manufacturing, marketing and selling our products
and could have a material adverse effect on our business,
financial condition and results of operations.

DPA relating to FCPA matters: On January 12, 2017, we
resolved previously-disclosed FCPA matters involving Biomet
and certain of its subsidiaries. As part of the settlement,
(i) Biomet resolved matters with the SEC through an
administrative cease-and-desist order (the “Order”); (ii) we
entered into a DPA with the DOJ; and (iii) JERDS Luxembourg
Holding S.à r.l. (“JERDS”), the direct parent company of
Biomet 3i Mexico SA de CV and an indirect, wholly-owned
subsidiary of Biomet, entered into a plea agreement (the “Plea
Agreement”) with the DOJ. The conduct underlying these
resolutions occurred prior to our acquisition of Biomet.

Pursuant to the terms of the Order, Biomet resolved
claims with the SEC related to violations of the books and
records, internal controls and anti-bribery provisions of the
FCPA by disgorging profits to the U.S. government in an
aggregate amount of approximately $6.5 million, inclusive of
pre-judgment interest, and paying a civil penalty in the amount
of $6.5 million (collectively, the “Civil Settlement Payments”).
We also agreed to pay a criminal penalty of approximately
$17.5 million (together with the Civil Settlement Payments, the
“Settlement Payments”) to the U.S. government pursuant to
the terms of the DPA. We made the Settlement Payments in
January 2017 and, as previously disclosed, had accrued, as of
June 24, 2015, the closing date of the Biomet merger, an
amount sufficient to cover this matter.

Under the DPA, which has a term of three years, the DOJ
agreed to defer criminal prosecution of us in connection with
the charged violation of the internal controls provision of the
FCPA as long as we comply with the terms of the DPA. In
addition, we are subject to oversight by an independent
compliance monitor. The monitor, who was appointed effective
as of July 2017, will focus on legacy Biomet operations as
integrated into our operations. If we remain in compliance with
the DPA during its term, the charges against us will be
dismissed with prejudice. The term of the DPA may be
extended for up to one additional year at the DOJ’s discretion.
In addition, under its Plea Agreement with the DOJ, JERDS
pleaded guilty on January 13, 2017 to aiding and abetting a
violation of the books and records provision of the FCPA. In
light of the DPA we entered into, JERDS paid only a nominal
assessment and no criminal penalty.

If we do not comply with the terms of the DPA, we could

OIG subpoena: In June 2017, we received a subpoena

from the OIG. The subpoena requests that we produce a
variety of records primarily related to our healthcare
professional consulting arrangements (including in the areas of
medical education, product development, and clinical
research) for the period spanning January 1, 2010 to the
present. The subpoena does not indicate the nature of the
OIG’s investigation beyond reference to possible false or
otherwise improper claims submitted for payment. We are in
the process of responding to the subpoena. We cannot
currently predict the outcome of this investigation.

Z I M M E R BI O M E T HO L D I N G S , I N C . A N D SU B S I D I A R I E S

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20. Quarterly Financial Information (Unaudited)

(in millions, except per share data)

Net sales
Gross profit
Net earnings (loss) of Zimmer Biomet

Holdings, Inc.

Earnings (loss) per common share

Basic
Diluted

2018 Quarter Ended

2017 Quarter Ended

Mar

Jun

Sep

Dec

Mar

Jun

Sep

Dec

$2,017.6
1,291.0

$2,007.6
1,274.4

$1,836.7
1,160.1

$2,071.0
1,339.6

$1,972.4
1,307.5

$1,949.5
1,274.1

$1,813.1
1,159.5

$2,068.3
1,325.4

174.7

185.0

162.2

(901.1)

299.4

184.2

98.8

1,231.4

0.86
0.85

0.91
0.90

0.80
0.79

(4.42)
(4.42)

1.49
1.47

0.91
0.90

0.49
0.48

6.08
6.03

In the three month period ended December 31, 2018, we recorded goodwill impairment charges of $975.9 million.
In the three month period ended December 31, 2017, we recognized a $1,272.4 million income tax benefit related to the 2017

Tax Act. The benefit was partially offset by a $272.0 million goodwill impairment charge related to our Spine reporting unit.

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 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

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-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 Securities and Exchange Commission’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 our disclosure controls and procedures as of
the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of December 31, 2018, the end of the
period covered by this report, our disclosure controls and
procedures were effective at a reasonable assurance level.

Management’s Annual Report on Internal Control over Financial
Reporting

The management of Zimmer Biomet 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) and 15d-15(f)
promulgated under the Exchange Act, as a process designed
by, or under the supervision of, the Company’s principal
executive and principal financial officers, or persons
performing similar functions, 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 generally accepted
accounting principles and includes those policies and
procedures that:

Item 9B. Other Information

(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 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, 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, 2018. 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 (2013).
Based on their assessment, management has concluded

that, as of December 31, 2018, the Company’s internal control
over financial reporting is effective based on those criteria.

The Company’s independent registered public accounting

firm, PricewaterhouseCoopers LLP, has audited the
effectiveness of the Company’s internal control over financial
reporting as of December 31, 2018, as stated in its report
which appears in Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over
financial reporting that occurred during the quarter ended
December 31, 2018 that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.

During the fourth quarter of 2018, the Audit Committee of our Board of Directors was not asked to, and did not, approve the

engagement of PricewaterhouseCoopers LLP, our independent registered public accounting firm, to perform any non-audit
services. This disclosure is made pursuant to Section 10A(i)(2) of the Exchange Act.

Z I M M E R BI OM E T HOL D I NG S , I NC .

PART III

2 0 1 8 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 10, 2019 (the “2019 Proxy Statement”).

We have adopted the Zimmer Biomet 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.zimmerbiomet.com or directly at
http://investor.zimmerbiomet.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 2019 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 2019 Proxy Statement.

Item 13. Certain Relationships and Related Transactions and Director Independence

Information required by this item is incorporated by reference from our 2019 Proxy Statement.

Item 14. Principal Accountant Fees and Services

Information required by this item is incorporated by reference from of our 2019 Proxy Statement.

Z I M M E R BI OM E T HOL D I NG S , I NC .

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) 1.

Financial Statements

2 0 1 8 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 Biomet 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, 2018, 2017 and 2016

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2018, 2017 and 2016

Consolidated Balance Sheets as of December 31, 2018 and 2017

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016

Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016

Notes to Consolidated Financial Statements

Financial Statement Schedule

Schedule II. Valuation and Qualifying Accounts

Description

Allowance for Doubtful Accounts:

Year Ended December 31, 2016

Year Ended December 31, 2017

Year Ended December 31, 2018

Deferred Tax Asset Valuation Allowances:

Year Ended December 31, 2016

Year Ended December 31, 2017

Year Ended December 31, 2018

Balance at
Beginning
of Period

Additions
Charged
(Credited)
to Expense

Deductions /
Other Additions
to Reserve

Effects of
Foreign
Currency

Acquired
Allowances

Balance at
End of
Period

$ 34.1

$22.3

$ (4.5)

$(0.3)

51.6

60.2

13.6

10.7

(5.1)

(3.6)

0.1

(1.6)

–

$ 51.6

60.2

65.7

$ 72.7

$24.8

$(12.4)

$(1.1)

$ 4.3

$ 88.3

88.3

140.6

41.3

48.2

(10.3)

2.8

18.5

206.2(1)

(4.1)

–

140.6

390.9

(1) Primarily relate to amounts generated by tax rate changes or current year activity which have offsetting changes to
the associated attribute and therefore there is no resulting impact on tax expense in the consolidated financial
statements.

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

Z I M M E R BI OM E T HOL D I NG S , I NC .

INDEX TO EXHIBITS

Exhibit No

Description†

2 0 1 8 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

4.9

4.10

4.11

4.12

4.13

4.14

4.15

4.16

4.17

4.18

4.19

4.20

4.21

10.1*

Restated Certificate of Incorporation of Zimmer Biomet Holdings, Inc., dated June 24, 2015 (incorporated by
reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed June 26, 2015)

Restated By-Laws of Zimmer Biomet Holdings, Inc., effective June 24, 2015 (incorporated by reference to Exhibit 3.3
to the Registrant’s Current Report on Form 8-K filed June 26, 2015)

Specimen Common Stock certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on
Form 10-Q filed August 10, 2015)

Indenture dated as of November 17, 2009 between Zimmer Holdings, Inc. (now known as Zimmer Biomet 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 December 13, 2016)

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 3.375% Note due 2021 (incorporated by reference to Exhibit 4.6 above)

Third Supplemental Indenture, dated as of March 19, 2015, 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 March 19, 2015)

Form of 2.700% Notes due 2020 (incorporated by reference to Exhibit 4.8 above)

Form of 3.150% Notes due 2022 (incorporated by reference to Exhibit 4.8 above)

Form of 3.550% Notes due 2025 (incorporated by reference to Exhibit 4.8 above)

Form of 4.250% Notes due 2035 (incorporated by reference to Exhibit 4.8 above)

Form of 4.450% Notes due 2045 (incorporated by reference to Exhibit 4.8 above)

Fourth Supplemental Indenture, dated as of December 13, 2016, between Zimmer Biomet 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 December 13, 2016)

Form of 1.414% Notes due 2022 (incorporated by reference to Exhibit 4.14 above)

Form of 2.425% Notes due 2026 (incorporated by reference to Exhibit 4.14 above)

Agency Agreement, dated as of December 13, 2016, by and among Zimmer Biomet Holdings, Inc., as issuer, Elavon
Financial Services DAC, UK Branch, as paying agent, Elavon Financial Services DAC, as registrar and transfer agent,
and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to the Registrant’s
Current Report on Form 8-K filed December 13, 2016)

Amendment No. 1, dated as of January 4, 2017, to the Agency Agreement dated as of December 13, 2016, by and
among Zimmer Biomet Holdings, Inc., as issuer, Elavon Financial Services DAC, UK Branch, as paying agent, Elavon
Financial Services DAC, as original registrar and original transfer agent, U.S. Bank National Association, as successor
registrar and successor transfer agent, and Wells Fargo Bank, National Association, as Trustee (incorporated by
reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form 8-A filed January 4, 2017)

Fifth Supplemental Indenture, dated as of March 19, 2018, between Zimmer Biomet 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 March 19, 2018)

Form of Floating Rate Notes due 2021 (incorporated by reference to Exhibit 4.19 above)

Form of 3.700% Notes due 2023 (incorporated by reference to Exhibit 4.19 above)

Zimmer Biomet Holdings, Inc. Executive Performance Incentive Plan, as amended May 7, 2013 and further amended
as of June 24, 2015 (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed
November 9, 2015)

Z I M M E R BI OM E T HOL D I NG S , I NC .

Exhibit No

Description†

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

Amendment to Zimmer Biomet Holdings, Inc. Executive Performance Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 7, 2016)

Zimmer Biomet Deferred Compensation Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Current
Report on Form 8-K filed January 7, 2016)

Restated Zimmer Biomet Holdings, Inc. Long Term Disability Income Plan for Highly Compensated Employees
(incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed January 7, 2016)

Restated Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating
in the Zimmer Holdings, Inc. Savings and Investment Program (incorporated by reference to Exhibit 10.16 to the
Registrant’s Annual Report on Form 10-K filed February 27, 2009)

First Amendment to the 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 10.2 to the Registrant’s Current Report on Form 8-K filed January 7, 2016)

Offer Letter, dated as of December 18, 2017, by and between Zimmer Biomet Holdings, Inc. and Bryan C. Hanson
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 21, 2017)

Change in Control Severance Agreement with Bryan C. Hanson (incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed December 21, 2017)

Chief Executive Officer Confidentiality, Intellectual Property, Non-Competition and Non-Solicitation Agreement with
Bryan C. Hanson (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed
December 21, 2017)

Offer Letter by and between Zimmer Biomet Holdings, Inc. and Ivan Tornos dated as of October 11, 2018

Form of Change in Control Severance Agreement with Ivan Tornos

Form of Confidentiality, Non-Competition and Non-Solicitation Agreement with Ivan Tornos

Swiss Employment Agreement by and between Zimmer GmbH and Didier Deltort dated as of June 28, 2018
(incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed November 1, 2018)

Offer Letter by and between Zimmer Biomet Holdings, Inc. and Didier Deltort dated as of June 28, 2018 (incorporated
by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed November 1, 2018)

Change in Control Severance Agreement by and between Zimmer GmbH and Didier Deltort dated as of October 9,
2018 (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed November 1, 2018)

Confidentiality, Non-Competition and Non-Solicitation Agreement by and between Zimmer GmbH and Didier Deltort
dated as of June 28, 2018 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed
November 1, 2018)

Form of Change in Control Severance Agreement with Daniel P. Florin (incorporated by reference to Exhibit 10.1 to
the Registrant’s Quarterly Report on Form 10-Q filed August 10, 2015)

Change in Control Severance Agreement with Sang Yi (incorporated by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q filed November 9, 2015)

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 27, 2009)

Form of Change in Control Severance Agreement with Aure Bruneau (incorporated by reference to Exhibit 10.11 to
the Registrant’s Annual Report on Form 10-K filed February 27, 2018)

Form of Confidentiality, Non-Competition and Non-Solicitation Agreement with Daniel P. Florin (incorporated by
reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed November 6, 2017)

Confidentiality, Non-Competition and Non-Solicitation Agreement with Sang Yi (incorporated by reference to
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed November 9, 2015)

Form of Confidentiality, Non-Competition and Non-Solicitation Agreement with Chad F. Phipps (incorporated by
reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed June 26, 2015)

Form of Confidentiality, Non-Competition and Non-Solicitation Agreement with Aure Bruneau (incorporated by
reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K filed February 27, 2018)

Zimmer Biomet Holdings, Inc. Amended Stock Plan for Non-Employee Directors, as amended May 5, 2015 and further
amended as of June 24, 2015 (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on
Form 10-Q filed November 9, 2015)

10.2*

10.3*

10.4*

10.5*

10.6*

10.7*

10.8*

10.9*

10.10*

10.11*

10.12*

10.13*

10.14*

10.15*

10.16*

10.17*

10.18*

10.19*

10.20*

10.21*

10.22*

10.23*

10.24*

10.25*

Z I M M E R BI OM E T HOL D I NG S , I NC .

Exhibit No

Description†

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

10.26*

10.27*

10.28*

10.29*

10.30*

10.31*

10.32*

10.33*

10.34*

10.35*

10.36*

10.37*

10.38*

10.39*

10.40*

10.41*

10.42*

10.43*

10.44*

10.45*

Form of Nonqualified Stock Option Award Letter under the Zimmer Biomet 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 Biomet Holdings, Inc. Stock Plan for Non-Employee
Directors (incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K filed
February 29, 2016)

Amended and Restated Zimmer Biomet Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors, as
amended May 5, 2015 and further amended as of June 24, 2015 (incorporated by reference to Exhibit 10.6 to the
Registrant’s Quarterly Report on Form 10-Q filed November 9, 2015)

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)

Restated Zimmer Biomet Holdings, Inc. Executive Severance Plan (incorporated by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q filed August 6, 2018)

Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan (As Amended on May 3, 2016) (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 9, 2016)

Form of Nonqualified Stock Option Award Agreement (four-year vesting) under the Zimmer Biomet Holdings, Inc.
2009 Stock Incentive Plan

Form of Nonqualified Stock Option Award Agreement (two-year vesting) under the Zimmer Biomet Holdings, Inc.
2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.37 to the Registrant’s Annual Report on
Form 10-K filed February 27, 2018)

Form of Performance-Based Restricted Stock Unit Award Agreement under the Zimmer Biomet Holdings, Inc. 2009
Stock Incentive Plan (incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K filed
February 29, 2016)

Form of Performance-Based Restricted Stock Unit Award Agreement (2018) under the Zimmer Biomet 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 8, 2018)

Form of Performance-Based Restricted Stock Unit Award Agreement (2019) under the Zimmer Biomet Holdings, Inc.
2009 Stock Incentive Plan

Form of Restricted Stock Unit Award Agreement (four-year vesting) under the Zimmer Biomet Holdings, Inc. 2009
Stock Incentive Plan

Form of Restricted Stock Unit Award Agreement (two-year cliff vesting) under the Zimmer Biomet Holdings, Inc.
2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed
August 6, 2018)

Form of Nonqualified Stock Option Award Agreement (Hanson one-time award) under the Zimmer Biomet Holdings,
Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on
Form 8-K filed December 21, 2017)

Form of Performance-Based Restricted Stock Unit Award Agreement (Hanson one-time award) under the
Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s
Current Report on Form 8-K filed December 21, 2017)

Form of Restricted Stock Unit Award Agreement (Hanson one-time award) under the Zimmer Biomet Holdings, Inc.
2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K
filed December 21, 2017)

Form of Restricted Stock Unit Award Agreement (Florin one-time award) under the Zimmer Biomet Holdings, Inc.
2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed July 11, 2017)

Form of Restricted Stock Unit Award Agreement (Tornos one-time award) under the Zimmer Biomet Holdings, Inc.
2009 Stock Incentive Plan

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)

Form of Nonqualified Stock Option Award Agreement 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)

Z I M M E R BI OM E T HOL D I NG S , I NC .

Exhibit No

Description†

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

10.46*

10.47*

10.48

10.49

10.50

10.51

10.52

10.53

10.54

10.55

10.56

10.57

10.58

31.1

31.2

Aircraft Time Sharing Agreement by and between Zimmer, Inc. and Bryan C. Hanson (incorporated by reference to
Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K filed February 27, 2018)

Zimmer Biomet Holdings, Inc. Executive Physical Sub Plan

Credit Agreement, dated as of September 30, 2016, among Zimmer Biomet Holdings, Inc., Zimmer Biomet G.K., ZB
Investment Luxembourg S.à r.l., the borrowing subsidiaries referred to therein, JPMorgan Chase Bank, N.A., as General
Administrative Agent, JPMorgan Chase Bank, N.A., Tokyo Branch, as Japanese Administrative Agent, J.P. Morgan
Europe Limited, as European Administrative Agent, and the lenders named therein (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 5, 2016)

Credit Agreement, dated as of May 29, 2014, among Zimmer Holdings, Inc., Zimmer K.K., Zimmer Investment
Luxembourg S.à r.l., the borrowing subsidiaries referred to therein, JPMorgan Chase Bank, N.A., as General
Administrative Agent, JPMorgan Chase Bank, N.A., Tokyo Branch, as Japanese Administrative Agent, J. P. Morgan
Europe Limited, as European Administrative Agent, and the lenders named therein (incorporated by reference to
Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed June 4, 2014)

First Amendment, dated as of September 30, 2016, to the Credit Agreement dated as of May 29, 2014 among
Zimmer Biomet Holdings, Inc., Zimmer Biomet G.K., ZB Investment Luxembourg S.à r.l., the borrowing subsidiaries
from time to time party thereto, JPMorgan Chase Bank, N.A., as General Administrative Agent, JPMorgan Chase Bank,
N.A., Tokyo Branch, as Japanese Administrative Agent, and J.P. Morgan Europe Limited, as European Administrative
Agent, and the lenders from time to time party thereto (incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K filed October 5, 2016)

Assumption Agreement, dated as of October 29, 2018, by and among Zimmer Biomet Holdings, Inc.,
Zimmer Luxembourg II S.à.r.l. and JPMorgan Chase Bank, N.A., as General Administrative Agents

Term Loan Agreement ¥21,300,000,000, dated as of September 22, 2017, between Zimmer Biomet G.K. and Sumitomo
Mitsui Banking Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed September 28, 2017)

Amended and Restated Term Loan Agreement ¥11,700,000,000, dated as of September 22, 2017, between
Zimmer Biomet G.K. and Sumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed September 28, 2017)

Amended and Restated Letter of Guarantee, dated as of September 22, 2017, made by Zimmer Biomet Holdings, Inc.
in favor of Sumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K filed September 28, 2017)

Credit Agreement, dated as of December 14, 2018, among Zimmer Biomet Holdings, Inc., Bank of America, N.A., as
Administrative Agent, and the lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K filed December 20, 2018)

Deferred Prosecution Agreement, dated as of January 12, 2017, between Zimmer Biomet Holdings, Inc. and the U.S.
Department of Justice, Criminal Division, Fraud Section (incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed January 18, 2017)

Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities and Exchange Act of 1934,
Making Findings and Imposing a Cease-and-Desist Order against Biomet, Inc., dated January 12, 2017 (incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed January 18, 2017)

Plea Agreement, dated as of January 12, 2017, between JERDS Luxembourg Holding S.à r.l. and the U.S. Department
of Justice, Criminal Division, Fraud Section (incorporated by reference to Exhibit 10.3 to the Registrant’s Current
Report on Form 8-K filed January 18, 2017)

List of Subsidiaries of Zimmer Biomet 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

Z I M M E R BI OM E T HOL D I NG S , I NC .

Exhibit No

Description†

101.CAL

101.LAB

101.PRE

101.DEF

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Extension Label Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

† Unless otherwise indicated, exhibits incorporated by reference herein were originally filed under SEC File No. 001-16407.

* Management contract or compensatory plan or arrangement.

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

Item 16. 10-K Summary

None

Z I M M E R BI OM E T HOL D I NG S , I NC .

SIGNATURES

2 0 1 8 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 BIOMET HOLDINGS, INC.

By: /s/ Bryan C. Hanson
Bryan C. Hanson
President and Chief Executive Officer

Dated: February 26, 2019

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/ Bryan C. Hanson

Bryan C. Hanson

/s/ Daniel P. Florin

Daniel P. Florin

/s/ Christopher B. Begley

Christopher B. Begley

/s/ Betsy J. Bernard

Betsy J. Bernard

/s/ Gail K. Boudreaux

Gail K. Boudreaux

/s/ Michael J. Farrell

Michael J. Farrell

/s/ Larry C. Glasscock

Larry C. Glasscock

/s/ Robert A. Hagemann

Robert A. Hagemann

/s/ Arthur J. Higgins

Arthur J. Higgins

/s/ Maria Teresa Hilado

Maria Teresa Hilado

/s/ Syed Jafry

Syed Jafry

/s/ Michael W. Michelson

Michael W. Michelson

President, Chief Executive Officer and Director (Principal
Executive Officer)

February 26, 2019

Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

February 26, 2019

Director

February 26, 2019

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

ZIMMER BIOMET HOLDINGS, INC.
RECONCILIATION OF OPERATING PROFIT TO ADJUSTED OPERATING PROFIT
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017, 2016, 2015 and 2014
(in millions, unaudited)

Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Inventory step-up and other inventory and manufacturing related charges(2) . . . . . . . . . . . . . .

Intangible asset amortization(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Goodwill and intangible asset impairment(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Acquisition, integration and related(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Quality remediation(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Litigation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

European Union Medical Device Regulation(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other charges(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Special items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

For the Years Ended December 31,

2017

2016

2015(1)

2014(1)

$ 799.3

$ 821.1

$ 467.3

$1,037.3

70.8

603.9

331.5

279.8

195.1

104.0

–

41.2

–

468.3

565.9

31.1

504.9

54.3

33.3

–

(11.0)

348.8

337.4

36.3

92.5

–

7.7

831.8

21.5

341.1

2018

33.8

32.5

595.9

979.7

133.7

165.4

186.0

3.7

79.6

–

Adjusted Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,210.3

$2,425.6

$2,467.9

$1,993.0

$1,528.7

(1)

In 2018, we reclassified expenses that were previously recognized in a financial statement line item labeled “Acquisition, quality remediation
and other” (and prior to that, labeled “Special items”) to the financial statement line items of “Research and development,” “Selling, general and
administrative,” “Goodwill and intangible asset impairment,” “Acquisition, integration and related” and “Quality remediation”. We reclassified
2017 and 2016 to conform to the current year presentation, however, 2015 and 2014 were not reclassified. We made this change to provide
additional transparency and better reflect the nature of these expenses.

(2) Please refer to pages 28 and 29 of this annual report for detailed explanations of each adjustment.

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

ZIMMER BIOMET HOLDINGS, INC.
RECONCILIATION OF OPERATING PROFIT MARGIN TO ADJUSTED OPERATING PROFIT MARGIN
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017, 2016, 2015 and 2014
(in millions, unaudited)

For the Years Ended December 31,

2018

2017

2016

2015(1)

2014(1)

Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.4% 10.2% 10.7% 7.8% 22.2%

Inventory step-up and other inventory and manufacturing related charges(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Intangible asset amortization(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.4

7.5

Goodwill and intangible asset impairment(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12.4

Acquisition, integration and related(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Quality remediation(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Litigation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

European Union Medical Device Regulation(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other charges(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Special items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.7

2.1

2.3

–

1.1

–

0.9

7.7

4.2

3.6

2.5

1.3

–

6.1

7.4

0.4

6.6

0.7

0.4

–

0.7

(0.1)

5.8

5.6

0.8

2.0

–

0.1

13.9

0.5

7.2

Adjusted Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27.9% 31.1% 32.2% 33.2% 32.7%

(1)

(2) Please refer to pages 28 and 29 of this annual report for detailed explanations of each adjustment.

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

ZIMMER BIOMET HOLDINGS, INC.
RECONCILIATION OF DILUTED EPS TO ADJUSTED DILUTED EPS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017, 2016, 2015 and 2014
(unaudited)

For the Years Ended December 31,

2018

2017

2016

2015(1)

2014(1)

Diluted (Loss) Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(1.86)

$ 8.90

$ 1.51

$ 0.77

$ 4.20

Inventory step-up and other inventory and manufacturing related charges(2) . . . . . . . . . . . . . . . . . . . . .

Intangible asset amortization(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Goodwill and intangible asset impairment(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Acquisition, integration and related(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Quality remediation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Litigation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

European Union Medical Device Regulation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other charges(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Special items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Merger-related and other expense in other (expense) income, net(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Debt extinguishment cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest expense on Biomet merger financing(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.16

2.93

4.81

0.66

0.81

0.91

0.02

0.41

–

0.35

2.96

1.63

1.37

0.96

0.51

–

2.32

2.80

0.15

2.49

0.27

0.16

–

0.22

(0.03)

–

0.26

–

1.84

1.78

0.21

0.54

–

0.04

4.38

–

0.12

0.37

–

0.13

1.99

0.23

–

Taxes on above items(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1.18)

(2.07)

(2.22)

(2.57)

(0.90)

Biomet merger-related measurement period tax adjustments(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–

0.26

U.S. tax reform(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.04

(6.25)

–

Other certain tax adjustments(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(0.02)

(0.55)

(0.01)

0.17

Effect of dilutive shares assuming net earnings(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(0.05)

–

Adjusted Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 7.64

$ 8.03

$ 7.96

$ 6.90

$ 6.40

(1)

(2) Please refer to pages 28 and 29 of this annual report for detailed explanations of each adjustment.

Z I M M E R BI OM E T HOL D I NG S , I NC .

2 0 1 8 F O R M 1 0 - K AN N U A L R E P O R T

ZIMMER BIOMET HOLDINGS, INC.
RECONCILIATION OF SALES GROWTH RATE TO CONSTANT CURRENCY SALES GROWTH RATE
FOR THE YEAR ENDED DECEMBER 31, 2018
(unaudited)

For the Year Ended December 31, 2018

Reported
% Growth

Foreign
Exchange
Impact

Constant
Currency
% Growth

Geographic Segment

Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–%

EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Product Category

Knees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

S.E.T.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Spine & CMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2)

(3)

–

(3)

–

(3)

Leadership (As of March 20, 2019)

Board of Directors

Christopher B. Begley
Retired Executive Chairman
and Chief Executive Officer,
Hospira, Inc.

Betsy J. Bernard
Retired President, AT&T Corp.

Gail K. Boudreaux
President and Chief Executive
Officer, Anthem, Inc.

Michael J. Farrell
Chief Executive Officer,
ResMed Inc.

Management Team

Michael W. Michelson
Senior Advisory Partner, KKR
Management LLC, the general
partner of KKR & Co. L.P.

Larry C. Glasscock
Chairman of the Board of
Zimmer Biomet Holdings, Inc.
and Retired Chairman,
President and Chief Executive
Officer, Anthem, Inc.

Robert A. Hagemann
Retired Senior Vice President
and Chief Financial Officer,
Quest Diagnostics Incorporated

Bryan C. Hanson
President and Chief Executive
Officer, Zimmer Biomet
Holdings, Inc.

Arthur J. Higgins
President and
Chief Executive Officer,
Assertio Therapeutics, Inc.

Maria Teresa Hilado
Retired Executive Vice
President and Chief Financial
Officer, Allergan plc

Syed Jafry
Senior Vice President and
President, Asia Pacific, EMEA
and Emerging Markets, Thermo
Fisher Scientific, Inc.

Bryan C. Hanson
President and Chief Executive Officer

Rachel Ellingson
Senior Vice President, Strategy

Aure Bruneau
Group President, Spine, CMF,
Thoracic and Surgery
Assisting Technology

Tony Collins
Group Chief Financial Officer,
Orthopedics

Derek Davis
Vice President, Global Integration

Daniel P. Florin
Executive Vice President and Chief
Financial Officer

Monica Kendrick
Vice President, External
Communications

David J. Kunz
Senior Vice President, Global Quality
and Regulatory Affairs

Didier Deltort
President, Europe, Middle East and Africa

Coleman (Cole) N. Lannum, CFA
Senior Vice President, Investor Relations

Angela Main
Senior Vice President, Global Chief
Compliance Officer and Associate
General Counsel, Asia Pacific

Pedro Malha
President, Dental

Chad Phipps
Senior Vice President, General
Counsel and Secretary

Pamela Puryear, PhD
Senior Vice President, Chief
Human Resources Officer

Zeeshan Tariq
Vice President and Chief
Information Officer

Ivan Tornos
Group President, Orthopedics

Kenneth R. Tripp
Senior Vice President,
Global Operations and Logistics

Sang Yi
President, Asia Pacific

Forward-Looking Statements

This 2018 Annual Report includes forward-looking statements that are subject to significant risks, uncertainties and changes in circumstances that could cause actual
results to differ materially from the forward-looking statements. See “Cautionary Note About Forward-Looking Statements” immediately following the cover page of our
Annual Report on Form 10-K included herein.

Corporate Information (As of March 20, 2019)

Shareholder Information

Headquarters
Zimmer Biomet Holdings, Inc.
345 East Main Street
Warsaw, IN 46580, U.S.A.
+1-574-267-6131
www.zimmerbiomet.com

Stock Listing
Zimmer Biomet is listed on the
New York Stock Exchange and the
SIX Swiss Exchange under the symbol ZBH.

Independent Auditors
PricewaterhouseCoopers LLP
Chicago, IL, U.S.A.

Transfer Agent
Communications concerning stock transfer
requirements, loss of certificates and change of
address should be directed to Zimmer Biomet’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@astfinancial.com
Website: http://www.astfinancial.com

Investor Relations
Zimmer Biomet invites shareholders, security
analysts, portfolio managers and other
interested parties to contact:

Coleman N. Lannum
Senior Vice President,
Investor Relations
+1-574-371-9480
cole.lannum@zimmerbiomet.com

Barbara Goslee
Director, Investor Relations
+1-574-371-9449
barb.goslee@zimmerbiomet.com

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 shareholders
to purchase additional shares of Zimmer Biomet common stock through the automatic investment of dividends. The plan also allows registered shareholders 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 Biomet 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, 2013 in Zimmer Biomet
common stock and each index and that
dividends were reinvested. Returns over the
indicated period should not be considered
indicative of future returns.

$250

$200

$150

$100

Zimmer Biomet Holdings, Inc.

S&P 500 Stock Index

S&P 500 Health Care Equipment Index

Baseline

$100

2014

$123

$114

$126

2015

$112

$115

$134

2016

$114

$129

$143

2017

$134

$157

$187

2018

$116

$150

$217

To obtain a free copy of Zimmer Biomet’s annual report on form 10-K, quarterly reports on form 10-Q, news releases, earnings releases, proxy statements, or to obtain
Zimmer Biomet’s financial calendar, access SEC filings, listen to earnings calls, or to look up Zimmer Biomet stock quotes, please visit http://investor.zimmerbiomet.com.

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Zimmer Biomet Holdings, Inc., 345 East Main Street, P.O. Box 708, Warsaw, IN 46580, U.S.A.