ZIMMER BIOMET HOLDINGS, INC.
ANNUAL REPORT
ZIMMER BIOMET HOLDINGS, INC.,
345 EAST MAIN STREET, P.O. BOX 708,
WARSAW, IN 46580, U.S.A.
Financial Highlights (Dollars in millions except per share amounts)
Financial Highlights (Dollars in millions except per share amounts)
Sales b y Geography
18%
18%
18%
2016
2017
2018
2019
2020
% Change 2019-2020
Constant
Reported Currency(1)
20%
20%
20%
18%
18%
20%
20%
62%
62%
62%
62%
62%
Americas
$4,787
$4,845
$4,837
$4,876
EMEA
Asia Pacific
1,730
1,151
1,745
1,213
1,802
1,294
1,747
1,359
$4,336
$1,391
$1,298
(11%)
(11%)
(20%)
(21%)
(5%)
(6%)
Consolidated
$7,668
$7,803
$7,933
$7,982
$7,025
(12%)
(12%)
Sales b y Product Category
7%
7%
7%
7%
7%
15%
15%
15%
19%
15%
15%
19%
19%
19%
19%
34%
34%
34%
34%
34%
25%
25%
25%
25%
25%
% Change 2019-2020
Constant
2016
2017
2018
2019
2020
Reported Currency(1)
$2,751
$2,734
$2,774
$2,810
$2,390
(15%)
(15%)
1,862
1,344
1,089
1,872
1,370
1,177
1,919
1,401
1,175
1,932
1,444
1,161
1,751
1,322
1,044
(9%)
(8%)
(10%)
(9%)
(10%)
(11%)
Knees
Hips
S.E.T.
Dental, Spine
& CMF
Other
622
650
664
635
518
(18%)
(19%)
Consolidated
$7,668
$7,803
$7,933
$7,982
$7,025
(12%)
(12%)
Net Sales
Operating (Loss) Profit
Operating Cash Flow
Diluted (Loss) Earnings per Share
Zimmer Biomet recorded net
sales of $7.025 billion in 2020, our
net sales decreased by 12.0%
compared to 2019 due to the
deferral of elective surgical
procedures from the COVID-19
pandemic.
Our 2020 operating profit was
adversely affected by the COVID-19
pandemic, including goodwill
impairment charges resulting from
decreased expected future cash flows
due to the pandemic.
The decline in cash flow from
operating activities in 2020 from
2019 was primarily the result of
lower net sales due to COVID-19.
Diluted (loss) earnings per share was
negatively impacted by COVID-19.
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GRAPH KEY
Reported
Adjusted(2)
(1) “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 91.
(2) “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, as applicable; quality remediation expenses; restructuring and other cost reduction initiatives; acquisition, integration and related expenses; certain litigation
gains and charges; expenses to establish initial compliance with the European Union Medical Device Regulation; other charges; any related effects on our income tax provision associated with these items; the effect of
Switzerland tax reform; the effect of U.S. tax reform; other certain tax adjustments; and, with respect to earnings per share information, 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 88-90.
To Our Shareholders,
I want to open this letter by acknowledging and thanking Zimmer Biomet’s more than 20,000 global team
members, our dedicated and engaged Board of Directors, and you, our shareholders, for your support as we
have executed on our plans.
I said early on in the COVID-19 pandemic that there isn’t a playbook of historical actions that an executive
team could reference to know how to navigate 2020. The year genuinely has no direct precedent. And so we,
at Zimmer Biomet, looked within and focused on our Mission and Guiding Principles to move forward. In a
year when health and safety was top of mind for all of us, we worked hard to keep our people safe, supported
our communities, provided the products and solutions to help our patients live better lives, and continued to
reshape our company for the future.
Despite the challenges posed by the global pandemic, Zimmer Biomet made steady progress during 2020
toward the continued transformation of our business. Over the last year, we have taken steps to accelerate
innovation, execute on our strategy for sustained growth and deliver value to all of our stakeholders.
Key Achievements in 2020
Zimmer Biomet’s headline numbers for 2020 may indicate a year of challenge. However, by many other
measures, 2020 was a remarkable year. We delivered above market growth in our core large joint reconstruction
businesses, launched new innovative products, executed against our restructuring plan and completed several
strategic acquisitions that we project will be accretive to our top line growth.
Highlights of our accomplishments in 2020 include:
•
Innovative, Enabling Technologies and Solutions: We added to our portfolio of innovative products
and suite of integrated digital and robotic technologies that leverage data, data analytics and artificial
intelligence. We had 21 product launches in 2020, including the Signature ONETM Surgical Planner, the
Persona® Revision Knee and the Avenir Complete® Hip System. In order to further build our product
ecosystem, we are investing in additional technology and innovations that support informatics and
operating room efficiency. In 2021, we expect to add partial knee and hip indications to the ROSA® Robotics
platform as well as launch a first-to-market “smart” implant.
• Active Portfolio Management: As part of the ongoing transformation of our business, we completed
several strategic tuck-in acquisitions, including Incisive LLC and Relign Corp. in our Sports, Extremities
and Trauma segment and A&E Medical Corp. in our Dental, Spine and CMFT segment. We also signed key
partnerships and began the process of spinning out our Spine and Dental businesses into a new independent,
publicly traded company. For Zimmer Biomet, the spin transaction – which will be a focus for the Company in
2021 and is expected to be completed in mid-2022 – is an important step toward shifting our portfolio mix to
higher-growth markets where we have a clear path to leadership and right to win.
• Commitment to Diversity, Equity and Inclusion: Consistent with our Guiding Principles, we committed
our voices and our resources to community groups, business platforms and other organizations united to
driving meaningful change and sustained social justice. In that spirit, we launched several initiatives to drive
and accelerate change both within Zimmer Biomet and around the globe, including continuing our support
of Movement is Life, a multidisciplinary coalition seeking to eliminate racial, ethnic and gender disparities in
muscle and joint health, committing at least $5 million over five years through the Zimmer Biomet Foundation
to nonprofit organizations dedicated to combating racism and supporting diversity, equality and justice, and
engaging our 20,000 global team members in cultural awareness and inclusion programming.
•
Team Member Engagement: Acceleration of our virtual work strategies for greater efficiency, streamlined
operations, and continued team member engagement remained a top priority, and we strived to ensure
every member of our global organization had a direct personal connection to our Mission regardless of their
work setting.
• COVID-19 Response: Our preparations for a global pandemic began before COVID-19 even hit. We
had developed comprehensive readiness and contingency plans, which we immediately put into action,
allowing us to protect our global supply chain and operate without compromising quality. Zimmer Biomet
quickly secured the transportation of raw and finished goods materials, as well as personal protective
equipment, for our manufacturing sites and distribution centers and enhanced safety protocols and
regional health contacts prior to the pandemic spreading across all regions. Our enhanced safety protocols
were shared with our suppliers to ensure as secure a supply chain as possible. Team members not directly
tied to manufacturing and supply chain shifted to work from home as an added safety measure to reduce
the risk of infection among supply chain personnel. All of these measures resulted in minimal impact to our
operations, manufacturing and strategy and no negative impact on product quality.
Our progress during the year was recognized with Zimmer Biomet being named one of America’s Most
Responsible Companies by Newsweek in December 2020, along with several other awards that highlight our
company as a leader in the industry.
Dear Zimmer Biomet Shareholders,
I want to take a moment to reflect on my tenure on the Board of Zimmer Biomet.
Since joining as a director nearly two decades ago, and serving as Chairman since 2013, the company has gone through
significant transformation and experienced tremendous growth. Our journey has not been without its challenges, but
we have remained focused on alleviating pain and improving the quality of life for people around the world.
This past year has been perhaps our most challenging, but also presented Zimmer Biomet with many new opportunities.
Throughout the pandemic, heightened social justice concerns, and geo-political tensions around the globe, Zimmer
Biomet continued to execute and deliver in 2020. With Bryan Hanson at the helm as President and CEO, we were able to
navigate unprecedented circumstances, and I believe we are stronger as an organization as a result.
It has been a great privilege for me to help advise and lead this wonderful company, and I am immensely proud of all
that we have accomplished. Our leadership team and our team members are the most talented in the industry, and
The Year Ahead: Moving Forward Our Mission in 2021
The past year was unpredictable and challenging, and tested us in ways we couldn’t have imagined. We came
together as one team, which has made Zimmer Biomet stronger as we enter 2021. We have demonstrated our
ability to execute in the most challenging market environments and believe we are ready to face any potential
road blocks that may lay ahead. We proved that our strategy is working, and we will continue to transform our
business and invest in our Mission to alleviate pain and improve the quality of life for people around the world.
We are entering 2021 with increased confidence in our team, our core business and our long-term strategic plan
to drive sustainable growth and deliver shareholder value.
Once again, on behalf of all of us at Zimmer Biomet, I thank you for your support. I look forward to updating you
on our progress.
Sincerely,
Bryan Hanson
President and CEO, Zimmer Biomet
exhibit passion and dedication on a daily basis that enable us to help
millions of people live better lives. As I retire and Bryan moves into
the Chairman role in May, I know I leave the company in great hands
and that the best is yet to come.
Many thanks to all of you for your support of Zimmer Biomet. I look
forward to the company continuing to build on its success for years
to come.
Larry C. Glasscock
Chairman of the Board, Zimmer Biomet
Leadership (As of March 15, 2021)
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
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
Consultant, Blackstone
Healthcare Partners
Maria Teresa Hilado
Retired Executive Vice President
and Chief Financial Officer,
Allergan plc
Syed Jafry
Senior Vice President and
President, Regions,
Thermo Fisher Scientific, Inc.
Sreelakshmi Kolli
Senior Vice President,
Chief Digital Officer,
Align Technology, Inc.
Michael W. Michelson
Retired Senior Advisory Partner,
KKR Management LLC, the
general partner of KKR & Co. L.P.
Bryan Hanson
President and Chief Executive Officer
Vafa Jamali
Chief Executive Officer, "NewCo"
Carrie Nichol
Vice President, Controller and Chief
Accounting Officer
Kenneth Tripp
Senior Vice President,
Global Operations and Logistics
Didier Deltort
President, Europe, Middle East
and Africa
David Kunz
Senior Vice President, Global Quality
and Regulatory Affairs
Chad Phipps
Senior Vice President, General
Counsel and Secretary
Suketu Upadhyay
Executive Vice President and Chief
Financial Officer
Rachel Ellingson
Senior Vice President,
Chief Strategy Officer
Ellie Humphrey
Senior Vice President and Chief
Transformation Officer
Forward-Looking Statements
Angela Main
Senior Vice President, Global Chief
Compliance Officer and Associate
General Counsel, Asia Pacific
Zeeshan Tariq
Senior Vice President and Chief
Information Officer
Sang Yi
President, Asia Pacific
Keri Mattox
Senior Vice President, Investor Relations
and Chief Communications Officer
Ivan Tornos
Group President, Global Businesses
and the Americas
This 2020 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 Regarding Forward-Looking Statements” immediately following the cover page of
our Annual Report on Form 10-K included herein.
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, 2020
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, $0.01 par value
1.414% Notes due 2022
2.425% Notes due 2026
1.164% Notes due 2027
Trading Symbol(s)
ZBH
ZBH 22A
ZBH 26
ZBH 27
Name of each exchange on which registered
New York Stock Exchange
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
No ‘
the registrant was required to submit such files). Yes 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 in Rule 12b-2 of the Act). Yes ‘
No Í
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by
the registered public accounting firm that prepared or issued its audit report. Í
The aggregate market value of shares held by non-affiliates was$24,675,479,718 (based on the closing price of these shares on the
New York Stock Exchange on June 30, 2020 and assuming solely for the purpose of this calculation that all directors and executive
officers of the registrant are “affiliates”). As of February 8, 2021, 207,855,504 shares of the registrant’s $.01 par value common stock
were outstanding.
Documents Incorporated by Reference
Document
Portions of the Proxy Statement with respect to the 2021 Annual Meeting of Stockholders
Form 10-K
Part III
ZIMMER BIOMET HOLDINGS, INC.
ANNUAL REPORT
Cautionary Note Regarding Forward-Looking Statements
This Annual Report contains forward-looking statements within the meaning of federal securities laws, including, among
others, statements regarding sales and earnings guidance and any statements about our expectations, plans, intentions, strategies
or prospects. We generally use the words “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,”
“assumes,” “guides,” “targets,” “forecasts,” “sees,” “seeks,” “should,” “could,” “would,” “predicts,” “potential,” “strategy,” “future,”
“opportunity,” “work toward,” “intends,” “guidance,” “confidence,” “positioned,” “design,” “strive,” “continue,” “look forward to” 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
outcomes and results to differ materially from the forward-looking statements. These risks, uncertainties and changes in
circumstances include, but are not limited to: the effects of the COVID-19 global pandemic and other adverse public health
developments on the global economy, our business and operations and the business and operations of our suppliers and customers,
including the deferral of elective procedures and our ability to collect accounts receivable; the risks and uncertainties related to our
ability to successfully execute our restructuring plans; our ability to attract, retain and develop the highly skilled employees we
need to support our business; 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, suppliers and lenders and on our operating
results and businesses generally; the risks and uncertainties associated with the proposed spin-off of our Spine and Dental
businesses, including, without limitation, the significant expenses, time and efforts related to implementing such transaction, the
ability to complete the transaction on our expected timeline or at all, the tax-free nature of the transaction, possible disruptions in
our relationships with customers, suppliers and other business partners, and the possibility that the anticipated benefits and
synergies of the transaction, strategic and competitive advantages of each company, and future growth and other opportunities for
each company will not be realized within the expected time periods or at all; the success of our quality and operational excellence
initiatives, including ongoing quality remediation efforts at our Warsaw North Campus facility; the ability to remediate matters
identified in inspectional observations or warning letters issued by the U.S. Food and Drug Administration (FDA), while continuing
to satisfy the demand for our products; the impact of substantial indebtedness on our ability to service our debt obligations and/or
refinance amounts outstanding under our debt obligations at maturity on terms favorable to us, or at all; 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; challenges relating to changes in and compliance with governmental laws and regulations affecting
our U.S. and international businesses, including regulations of the FDA and foreign government regulators, such as more stringent
requirements for regulatory clearance of 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; 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; breaches or failures of our information
technology systems or products, including by cyberattack, unauthorized access or theft; 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, intellectual property and commercial litigation losses; 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. Forward-looking statements speak only as of the date they are made, and we expressly
disclaim any intention or 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. This cautionary note is applicable to all forward-looking
statements contained in this report.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
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. Form 10-K Summary
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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 (“CMFT”) 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. In 2015, we acquired
LVB Acquisition, Inc. (“LVB”), the parent company of Biomet,
Inc. (“Biomet”), and LVB and Biomet became our wholly-
owned subsidiaries. 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 market and sell products through three principal
channels: 1) direct to healthcare institutions, such as hospitals,
referred to as direct channel accounts; 2) through stocking
distributors and healthcare dealers; and 3) directly to dental
practices and dental laboratories. With direct channel accounts
and some healthcare dealers, inventory is generally consigned
to sales agents or customers. With sales to stocking
distributors, some healthcare dealers and hospitals, dental
practices and dental laboratories, title to product passes upon
shipment. Consignment sales represented approximately
80 percent of our net sales in 2020. No individual customer
accounted for more than 1 percent of our net sales for 2020.
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.
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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 three operating segments. Our operating segments are
comprised of Americas and Global Businesses, Europe, Middle
East and Africa (“EMEA”) and Asia Pacific. The following is a
summary of our operating segments. See Note 19 to our
consolidated financial statements for more information
regarding our segments.
Americas and Global Businesses. The Americas and
Global Businesses operating segment is our largest operating
segment. This segment is comprised principally of the U.S. and
includes other North, Central and South American markets for
all of our product categories as well as the global results for
our Dental products division. This segment also includes our
global manufacturing operations for all product categories and
research, development engineering, medical education, and
brand management for our global product category
headquarter locations. The U.S. accounts for 95 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 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 our Dental products division, 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.
EMEA. The EMEA operating segment is our second
largest operating segment. France, Germany, Italy, Spain and
the United Kingdom collectively account for 57 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. This operating
segment includes all product categories in these markets,
except for Dental. 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 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 50 percent of the region’s sales. This operating
segment includes all product categories in these markets,
except for Dental. 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.
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. Additionally, with sales to
customers where title to product passes upon shipment, these
customers may purchase items in large quantities if incentives
are offered or if there are new product offerings in a market,
which could cause period-to-period differences in sales. Due to
the COVID-19 global pandemic, the typical seasonal patterns
did not occur in 2020.
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 CMFT 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
compartment, of the knee with a unicompartmental knee
prosthesis. A developing trend in knee replacement surgeries
is the use of robotic technologies to assist a surgeon with
implant positioning. In 2019, we entered the robotic assistance
market with our ROSA® Knee System. In the future, we plan to
expand the use of our ROSA® Robot to other product
categories.
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.
Our significant hip brands include the following:
(cid:129) Taperloc® Hip System
(cid:129) Zimmer® M/L Taper Hip Prosthesis
(cid:129) Avenir Complete® Hip System
(cid:129) Arcos® Modular Hip System
(cid:129) Continuum® Acetabular System
(cid:129) G7® Acetabular System
S.E.T.
Our S.E.T. product category includes sports medicine,
biologics, foot and ankle, extremities and trauma products. 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.
5
Our significant S.E.T. brands include the following:
(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
DENTAL, SPINE and CMFT
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 spine products division designs,
manufactures and distributes medical devices and surgical
instruments to deliver comprehensive solutions for individuals
with back or neck pain caused by degenerative conditions,
deformities or traumatic injury of the spine. A developing
trend in spine surgeries is the use of robotic technologies to
assist a surgeon in performing minimally invasive procedures.
We have entered the robotic market with our ROSA ONE®
Spine. Our CMFT 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 dental, spine and CMFT brands include the
following:
(cid:129) Tapered Screw-Vent® Implant System
(cid:129) 3i T3® Implant
(cid:129) Polaris™ Spinal System
(cid:129) Mobi-C® Cervical Disc
(cid:129) The TetherTM
(cid:129) SternaLock® Blu Closure System
(cid:129) SternaLock® Rigid Sternal Fixation
OTHER
Our other product category primarily includes our
surgical, bone cement and office based technology products.
Research and Development
We have extensive research and development activities to
develop new surgical techniques, including robotic 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, including artificial
intelligence and machine learning, with possible applications in
multiple areas. Our primary research and development facility
is located in Warsaw, Indiana. We have other research and
1 Registered trademark of Seikagaku Corporation
6
development personnel based in, among other places, Canada,
China, France, Switzerland and other U.S. locations. As of
December 31, 2020, 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
Our operations, products and customers are subject to
extensive government regulation by numerous government
agencies, both within and outside the U.S. Our global
regulatory environment is increasingly stringent, unpredictable
and complex. There is a global trend toward increased
regulatory activity related to medical products.
In the U.S., numerous laws and regulations govern all the
processes by which our products are brought to market. These
include, among others, the Federal Food, Drug and Cosmetic
Act (“FDCA”) 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 classified by FDA regulation as exempt from
premarket clearance and approval or were in commercial
distribution prior to May 28, 1976.
In January 2021, the FDA announced a new “Action Plan”
to address software as a medical device (“SaMD”) and artificial
intelligence and machine learning (“AI/ML”). Certain of our
new products will likely incorporate innovations related to AI/
ML, and therefore we will monitor developments in this area
closely to determine our compliance obligations and risks.
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 requirements for advertising
and promotion of our devices. 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 and
is also necessary for distributing in the U.S. certain devices
exempt from FDA clearance and approval requirements. 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 FDA-483 (“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 products,
seizure of products, and assessing civil or criminal penalties
against our officers, employees or us. The FDA could also issue
a corporate warning letter or a recidivist warning letter or
negotiate the entry of a consent decree of permanent
injunction with us. 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 Form 483
inspectional observations that we are addressing, see Note 21
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. and can prevent the importation
of products the FDA deems to violate the FDCA or its
implementing regulations. 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”). In addition, exported medical products are subject
to the regulatory requirements of each country to which the
medical product is exported.
There are also requirements of state and local
governments that we must comply with in the manufacture
and marketing of our products.
In many of the countries in which our products are sold,
we are subject to supranational, national, regional and local
regulations affecting, among other things, the development,
design, manufacturing, product standards, packaging,
advertising, promotion, labeling, marketing and postmarket
surveillance of medical products, including medical devices.
The member countries of the European Union (the “EU”) have
adopted the European Medical Device Directive (the “MDD”),
which creates a single set of medical device regulations for
products marketed in all member countries. Compliance with
the MDD 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 MDD. We are subject to inspection by
the Notified Bodies for compliance with these requirements. In
May 2017, a new EU Medical Device Regulation (“MDR”) was
published that will replace the MDD and will impose significant
additional premarket and postmarket requirements. The
effective date for the MDR has been extended due to the
COVID-19 pandemic, with it currently scheduled to become
effective in May 2021. Under a corrigendum to the MDR
finalized in December 2019, some low-risk medical devices
being up-classified as a result of the MDR, including low-risk
instruments, may now receive a transitional period to comply
by May 2024.
Our quality management system is based upon the
requirements of ISO 13485, the QSR, the MDD and other
applicable regulations for the markets in which we sell. Our
principal manufacturing sites are certified to ISO 13485 and
audited at regular intervals. Additionally, our principal sites are
certified under the Medical Device Single Audit Program
(“MDSAP”), which is a voluntary audit program developed by
regulatory authorities in five countries (i.e., Australia, Brazil,
Canada, Japan, and the United States) to assess compliance
with the quality management system regulatory requirements
of those countries. MDSAP audits are conducted by an
MDSAP-recognized auditing organization and can fulfill the
needs of the participating regulatory jurisdictions, replacing
standard surveillance audits by the regulatory authorities in
those countries.
Further, we are subject to other supranational, national,
regional, federal, state and local 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
7
attorneys general and various foreign government agencies.
Many of these agencies have increased their enforcement
activities with respect to medical products 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, which
concluded on February 9, 2021, six months following
certification to the DOJ and the U.S. Securities and Exchange
Commission (“SEC”) by an independent compliance monitor
that our compliance program, including its policies and
procedures, is reasonably designed and implemented to
prevent and detect violations of the FCPA and is functioning
effectively.
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, transfer, storage,
disposal 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. The FDA
and the Department of Homeland Security (“DHS”) have
issued urgent safety communications regarding cybersecurity
vulnerabilities of certain medical devices.
In addition, certain of our affiliates are subject to privacy,
security and breach notification 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 plans, health care clearinghouses
and health care providers that engage in specific types of
electronic transactions. 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
8
against covered entities and business associates with regard to
compliance with HIPAA regulations. On December 10, 2020,
HHS issued a notice of proposed rulemaking (“NPR”) to
modify the HIPAA privacy rule. The proposed modifications
would remove communication barriers between providers and
health plans, allow individuals more access to their health
information and impose new requirements on entities that
receive patient data requests. Separately, HHS (through the
National Coordinator for Health Information Technology)
issued a new rule, to be effective April 5, 2021, that seeks to
limit “blocking” of electronic health information by imposing
data access, software licensing and inter-operability
requirements on healthcare providers and information
technology vendors. We intend to monitor both the NPR and
the “information blocking” rule and assess their impact on the
use of data in 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
collection, use, disclosure, transfer, storage, disposal and
protection of personal information, such as social security
numbers, medical and financial information and other
information. These laws and regulations may be more
restrictive and not preempted by U.S. federal laws. For
example, several U.S. territories and all 50 states now have
data breach laws that require timely notification to individuals,
and at times regulators, the media or credit reporting agencies,
if a company has experienced the unauthorized access or
acquisition of personal information. Other state laws include
the California Consumer Privacy Act (“CCPA”), which was
signed into law on June 28, 2018 and took effect on 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
numerous rights relating to their personal information that
may affect our ability to use personal information or share it
with our business partners. A second law called the California
Privacy Rights Act (“CPRA”) passed via a ballot referendum in
November 2020. The CPRA expands the scope of the CCPA,
imposes new restrictions on behavioral advertising and
establishes a new California Privacy Protection Agency which
will enforce the law and issue regulations. Other states have
considered and/or enacted similar privacy laws. We will
continue to monitor and assess the impact of these state laws,
which may impose substantial penalties for violations, impose
significant costs for investigation and compliance, allow private
class-action litigation and carry significant potential liability for
our business.
Outside of the U.S., data protection laws, including the EU
General Data Protection Regulation (the “GDPR”) and member
state implementing legislation, and the Brazil Lei Geral de
Proteção de Dados (the “LGPD”), 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, which became effective on
May 25, 2018, imposes 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 the greater of 20 million Euros or 4%
of total worldwide annual turnover of the preceding financial
year).
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
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 CMFT 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
The Straumann Group, Dentsply Sirona Inc. and Nobel Biocare
Services AG (part of Envista Holdings Corporation).
Competition within the industry is primarily based on
technology, innovation, quality, reputation, customer service
and pricing. A key factor in our continuing success in the
future will be our ability to develop new products and
technologies 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.
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
suppliers, employees, consultants and others who may have
access to proprietary information. We own or control through
licensing arrangements over 9,000 issued patents and patent
applications throughout the world that relate to aspects of the
technology incorporated in many of our products.
Human Capital
As of December 31, 2020, we employed approximately
20,000 employees worldwide, including approximately 2,000
employees dedicated to research and development.
Approximately 10,000 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 and China. We
have approximately 8,500 employees dedicated to
manufacturing our products worldwide.
Our mission is to alleviate pain and improve the quality of
life for people around the world. Our commitment to patients
shapes all day-to-day decisions at Zimmer Biomet. To be able
to accomplish our mission we have established guiding
principles. These guiding principles are central to our human
capital management policies and practices. The guiding
principles are:
(cid:129) Respect the contributions and perspectives of all employees
(cid:129) Commit to the highest standards of patient safety, quality
and integrity
(cid:129) Focus our resources in areas where we will make a
difference
(cid:129) Ensure the company’s return is equivalent to the value we
provide our customers and patients
(cid:129) Give back to our communities and people in need.
Diversity, Equity and Inclusion
We believe that each of us as individuals can drive change
every day. We remain wholly committed to creating,
supporting and celebrating diverse and equal workplaces and
communities. Together, we will continue to foster and embrace
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diversity and inclusion within our team and our communities,
and commit our voices and our resources to community
groups, business platforms and other organizations united to
driving meaningful change and sustained improvement.
We believe that representation matters. As of
December 31, 2020, women made up approximately
36 percent of our total employee population, and
approximately 23 percent of positions at Director level and
above. People of Color (“POC”) made up approximately
24 percent of our total employee population in the U.S., and
comprise approximately 14 percent of positions at Director
level and above. We recently made a statement about standing
together united against hatred, discrimination and injustice.
However, we understand that words are not enough; we must
act and be held accountable. With this in mind, we are
committing to the following initiatives to drive and accelerate
change both within our own organization and around the
globe. We have shared these commitments publicly and are
tracking our progress against them:
(cid:129) Engage our 20,000 global employees in cultural awareness
and inclusion programming.
(cid:129) Invest $1 million and provide executive sponsorship to
support ongoing programs and elevate the impact of our
employee resource groups.
(cid:129) Commit at least $5 million over five years through the
Zimmer Biomet Foundation to non-profit organizations
dedicated to combating racism and supporting diversity,
equality and justice. The Zimmer Biomet Foundation is an
independent, non-profit organization established in 2018 to
address the needs of our global community.
(cid:129) Match, through the Zimmer Biomet Foundation, employee
financial contributions to non-profit organizations, including
those dedicated to combating racism and supporting
diversity, equality and justice.
(cid:129) Expand our student and early career internship programs to
attract and develop more Black leaders.
(cid:129) Continue our financial support of Movement is Life, a
multidisciplinary coalition seeking to eliminate racial, ethnic
and gender disparities in muscle and joint health.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Employee Engagement
We value our employees’ input and to that end, from
time-to-time, we conduct comprehensive employee
engagement surveys that ultimately inform our actions
towards improving employee engagement. Surveys attempt to
assess five drivers of engagement including purpose, culture,
leadership, personal growth and belonging. The key results of
surveys, and commensurate action plans, are shared with our
Board of Directors and with our employee base. Employee
engagement is the degree to which employees invest their
cognitive, emotional, and behavioral energies toward positive
organizational outcomes. While we strive for engagement
scores to sequentially improve, the outcomes of the surveys
can be influenced by many factors that are internal and
external to the company.
We believe it is critical to keep our employees engaged
through frequent and transparent communication. This is
accomplished through town halls, video and written messages,
news and recognition on our intranet site, and various other
methods. To stay connected through the COVID-19 pandemic,
our Chief Executive Officer has kept employees informed of
our priorities, financial results, management response and
employee health and safety through frequent video messages
and written communications.
Health, Safety and Wellness
The physical and mental health, financial wellbeing, and
work/life balance of our employees is vital to accomplishing
our mission. We sponsor wellness programs designed to
enhance physical, financial and mental wellbeing for our
employees. We encourage participation in these programs
through regular communications, educational sessions and
other incentives.
We are also acutely focused on the health and safety of
our employees in the workplace. Our environmental, health
and safety team monitors various metrics to ensure we are
providing a safe environment to work. These results are
shared with relevant regulatory agencies as required and
presented to our Board of Directors.
The following table sets forth certain information with respect to our executive officers as of February 15, 2021.
Age
Position
54
54
51
41
49
45
51
58
President and Chief Executive Officer
President, Europe, Middle East and Africa
Senior Vice President and Chief Strategy Officer
Vice President, Controller and Chief Accounting Officer
Senior Vice President, General Counsel and Secretary
Group President, Global Businesses and the Americas
Executive Vice President and Chief Financial Officer
President, Asia Pacific
Name
Bryan Hanson
Didier Deltort
Rachel Ellingson
Carrie Nichol
Chad Phipps
Ivan Tornos
Suketu Upadhyay
Sang Yi
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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. 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.
Ms. Ellingson was appointed Senior Vice President and
Chief Strategy Officer in April 2018 and was designated as an
executive officer in January 2021. Prior to joining Zimmer
Biomet, Ms. Ellingson served as a member of the executive
leadership team of St. Jude Medical in positions of increasing
responsibility from 2012 until 2017, most recently as Vice
President, Corporate Strategy from 2015 until 2017. Before
joining St. Jude Medical, Ms. Ellingson served as Vice
President, Business Development and Investor Relations at
AGA Medical Corporation. Prior to joining AGA Medical,
Ms. Ellingson had more than 15 years of experience in
investment banking, most recently with Bank of America as a
Managing Director, Medical Technology Investment Banking.
Ms. Nichol was appointed Vice President, Controller and
Chief Accounting Officer in October 2019. Prior to joining
Zimmer Biomet, Ms. Nichol served as Senior Vice President,
Controller and Chief Accounting Officer of Endo International
plc (“Endo International”) from April 2018 to September 2019,
having served in roles of increasing responsibility from March
2015 to April 2018. Prior to her tenure at Endo International,
Ms. Nichol served as Senior Vice President and Controller of
Haas Group Inc. (now part of Wesco Aircraft Holdings, Inc.),
where she led the global accounting and finance teams from
June 2011 until March 2015. Prior to her employment with
Haas Group Inc., Ms. Nichol was with IKON Office Solutions
(now part of Ricoh Company, Ltd.) for a total of five years
from June 2008 until June 2011 and from June 2003 until July
2005, having served most recently as the Director of Financial
Reporting and Corporate Accounting. From December 2005
until June 2008, Ms. Nichol was with Advanced Metallurgical
Group NV serving as Assistant Controller. Ms. Nichol began her
career in public accounting with KPMG.
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 joined Zimmer Biomet in November 2018 as
Group President, Orthopedics, and in December 2019 was
appointed Group President, Global Businesses and the
Americas. 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, EMEA of Bard, a position to which he was
appointed in September 2013. Mr. Tornos joined Bard in
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. Upadhyay was appointed Executive Vice President and
Chief Financial Officer in July 2019. Prior to joining Zimmer
Biomet, Mr. Upadhyay served as Senior Vice President, Global
Financial Operations at Bristol-Myers Squibb from November
2016 until June 2019. Before joining Bristol-Myers Squibb, he
served as Executive Vice President and Chief Financial Officer
of Endo International from September 2013 to November 2016.
Prior to his tenure at Endo International, Mr. Upadhyay served
as Interim Chief Financial Officer as well as Senior Vice
President of Finance, Corporate Controller and Principal
Accounting Officer of BD. Prior to his role as BD’s Interim
Chief Financial Officer and Corporate Controller,
Mr. Upadhyay was the Senior Vice President of Global
11
Financial Planning and Analysis and also held the role of Vice
President and Chief Financial Officer of BD’s international
business. Before joining BD in 2010, Mr. Upadhyay held a
number of leadership roles across AstraZeneca and Johnson &
Johnson. Mr. Upadhyay spent the early part of his career in
public accounting with KPMG.
Mr. Yi was appointed President, Asia Pacific in June 2015.
He is responsible for the sales, marketing and distribution of
products, services and solutions 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 https://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, 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
12
(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.
Risks Related to our Business, Operations and Strategy
The COVID-19 pandemic has adversely impacted,
and continues to pose risks to, our business, results of
operations and financial condition, the nature and
extent of which are highly uncertain and unpredictable.
Our global operations expose us to risks associated with
public health crises and outbreaks of epidemic, pandemic, or
contagious diseases, such as COVID-19. The global spread of
COVID-19 has had, and we expect it to continue to have, an
adverse impact on demand for our products, our sales, our
operations, our supply chains and distribution systems, and
our expenses, including as a result of preventive and
precautionary measures that we, other businesses, and
governments have taken and may continue to take. Due to
these impacts and measures, we have experienced and expect
to continue to experience significant and unpredictable
reductions in the demand for our products as healthcare
customers divert medical resources and priorities towards the
treatment of COVID-19. During 2020, we experienced a
significant decline in procedure volumes globally as healthcare
systems diverted resources to meet the increasing demands of
managing COVID-19, and that decline has continued.
Additionally, public health bodies around the globe have at
times recommended delaying elective surgeries during the
COVID-19 pandemic, and patients, surgeons and medical
societies are evaluating the risks of elective surgeries in the
presence of infectious diseases, which we expect will continue
to negatively impact demand for our products and the number
of procedures performed.
As a result of the COVID-19 outbreak, we have
experienced significant business disruptions, including
restrictions on our ability to travel and to distribute our
products, temporary closures of, or limited operations at,
certain of our facilities and the facilities of our suppliers and
contract manufacturers, as well as reduction in access to our
customers due to diverted resources and priorities and the
business hours of hospitals as governments institute prolonged
shelter-in-place and/or self-quarantine mandates. The
unprecedented measures to slow the spread of the virus taken
by local governments and healthcare authorities globally,
including the deferral of elective surgical procedures and social
distancing measures, have had, and we expect them to
continue to have, a significant adverse effect on our financial
position, results of operations and cash flows. These
disruptions have resulted in the following among other
unfavorable outcomes:
(cid:129) lower revenues, profits and cash flows compared to historic
trends, including a net loss recognized in 2020 and negative
operating cash flows in the second quarter of 2020;
(cid:129) bad debt charges as a result of being unable to collect on our
accounts receivable;
(cid:129) additional charges from operating our manufacturing
facilities at less than normal capacity;
(cid:129) goodwill impairment charges; and
(cid:129) delays in certain strategic projects and investments,
including our restructuring plans, which will delay or may
eliminate the effectiveness of these strategic initiatives.
If preventative and precautionary measures and/or the
distribution of vaccines do not curb the spread of COVID-19,
our financial position, results of operations and cash flows may
continue to be adversely affected. Prolonged disruptions that
cause deferral of elective surgical procedures may result in the
following among other potential negative outcomes:
(cid:129) net losses and negative operating cash flows;
(cid:129) excess inventory we cannot sell, which would result in
increased inventory charges;
(cid:129) our customers returning inventory to us, which would result
in a reduction to our net sales;
(cid:129) additional charges from operating our manufacturing
facilities at less than normal capacity;
(cid:129) additional goodwill impairment charges;
(cid:129) failing to satisfy the covenants in our credit facilities, which
may cause any outstanding amounts to be payable
immediately and could affect our access to capital to fund
our business; and
(cid:129) downgrades to our credit ratings, which could result in
increased interest expense.
In addition, the COVID-19 pandemic has adversely
affected, and we expect it to continue to adversely affect, the
economies and financial markets of many countries, which may
result in a period of regional, national, and global economic
slowdown or regional, national, or global recessions that could
further negatively affect demand for our products as hospitals
curtail or delay spending and individuals experiencing
unemployment and/or a loss of healthcare benefits cancel or
delay elective procedures, and could also increase the risk of
customer defaults or delays in payments. Our customers may
terminate or amend their agreements for the purchase of our
products due to bankruptcy, lack of liquidity, lack of funding,
operational failures or other reasons. COVID-19 and the
current financial, economic and capital markets environment,
and future developments in these and other areas, present
material uncertainty and risk with respect to our performance,
financial condition, volume of business, results of operations
and cash flows. Due to the uncertain scope and duration of the
pandemic and uncertain timing of global recovery and
economic normalization, we are unable to estimate the impacts
on our operations and financial results.
Our restructuring program may not be successful or
we may not fully realize the expected cost savings and/
or operating efficiencies from our restructuring
initiatives.
In December 2019, our Board of Directors approved, and
we initiated, a global restructuring program (the “2019
Restructuring Plan”) with an objective of reducing costs to
allow us to further invest in higher priority growth
opportunities, which program is ongoing. Restructuring
initiatives involve complex plans and actions that may include,
or result in, workforce reductions, global plant closures and/or
consolidations, product portfolio rationalizations and asset
impairments. Additionally, as a result of restructuring
initiatives, we may experience a loss of continuity, loss of
accumulated knowledge and/or inefficiencies during
transitional periods. Restructuring initiatives present
significant risks that may impair our ability to achieve
anticipated operating enhancements and/or cost reductions, or
otherwise harm our business, including higher than anticipated
costs in implementing our restructuring program, as well as
management distraction. For more information on our
restructuring program, see Note 4 to our consolidated financial
statements. If we fail to achieve some or all of the expected
benefits of restructuring, it could have a material adverse
effect on our competitive position, business, financial
condition, results of operations and cash flows.
Our success largely depends on key personnel,
including our senior management, and having adequate
succession plans in place. We may not be able to attract,
retain and develop the highly skilled employees we need
to support our business, which could harm our business.
Our future performance depends, in large part, on the
continued services of our senior management and other key
personnel, including our ability to attract, retain and motivate
key personnel. Competition for key personnel in the various
localities and business segments in which we operate is
intense. Our ability to attract and retain key personnel, in
particular senior management, will be dependent on a number
of factors, including prevailing market conditions and
compensation packages offered by companies competing for
the same talent. There is no guarantee that we will have the
continued service of key employees who we rely upon to
execute our business strategy and identify and pursue
strategic opportunities and initiatives. The loss of the services
of any of our senior management or other key personnel, or
our inability to attract highly qualified senior management and
other key personnel, could harm our business. In particular, we
may have to incur costs to replace senior officers or other key
employees who leave, and our ability to execute our business
strategy could be impaired if we are unable to replace such
persons in a timely manner.
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Effective succession planning is also important to our
long-term success. Failure to ensure effective transfer of
knowledge and smooth transitions involving key employees
could hinder our strategic planning and execution. Further,
changes in our management team may be disruptive to our
business, and any failure to successfully integrate key new
hires or promoted employees could adversely affect our
business and results of operations.
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
development, information technology, compliance, vendor
management, 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
We will incur significant expenses in connection with the
spin-off. In addition, completion of the proposed spin-off will
require significant amounts of management’s time and effort
which may divert management’s attention from other aspects
of our business operations. The spin-off will also require
modifications to our systems and processes used to operate
our business. We may experience delays, increased costs and
other difficulties related to these modifications which could
adversely affect our business, financial condition and results of
operations. Following the spin-off, we will be a smaller, less
diversified company with a narrower business focus and may
be more vulnerable to changing market conditions, which
could adversely affect our operating results. We may also
experience increased difficulties in attracting, retaining and
motivating employees during the pendency of the spin-off and
following its completion, which could harm our business.
Further, if the spin-off is completed, the anticipated
benefits and synergies of the transaction, strategic and
competitive advantages of each company, and future growth
and other opportunities for each company may not be realized
within the expected time periods or at all. Failure to
implement the spin-off effectively could also result in a lower
value to our company and our stockholders.
regions where we do not have prior experience;
The proposed spin-off may result in disruptions to,
(cid:129) potential loss of key employees;
(cid:129) unforeseen risks and liabilities associated with businesses
and negatively impact our relationships with, our
customers and other business partners.
acquired, including any unknown vulnerabilities in acquired
technology or compromises of acquired data; 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.
The proposed spin-off of our Spine and Dental
businesses may not be completed on the terms or
timeline currently contemplated, if at all, and may not
achieve the intended results.
On February 5, 2021, we announced our intention to
pursue a plan to spin off our Spine and Dental businesses to
form a new and independent, publicly traded company
(“NewCo”) through a tax-free distribution to our stockholders
of publicly traded stock in NewCo. We are targeting
completion of the spin-off in mid-2022. Unanticipated
developments could delay, prevent or otherwise adversely
affect this proposed spin-off, including but not limited to
disruptions in general market conditions or potential problems
or delays in obtaining various regulatory, tax and works council
approvals or clearances. In addition, consummation of the
proposed spin-off is subject to certain conditions, including,
among others, final approval of our Board of Directors, the
receipt of a favorable opinion and Internal Revenue Service
(“IRS”) ruling with respect to the tax-free nature of the
transaction, and the effectiveness of a Form 10 registration
statement with the SEC. Therefore, we cannot provide
assurance that we will be able to complete the spin-off on the
terms or on the timeline that we announced, or at all.
14
Parties with which we do business may experience
uncertainty associated with the spin-off, including with respect
to current or future business relationships with us. Our
business relationships may be subject to disruption as
customers, vendors and others may attempt to negotiate
changes in existing business relationships or consider entering
into business relationships with parties other than us. These
disruptions could adversely affect our business, including
adversely affecting our ability to realize the anticipated
benefits of the spin-off.
The spin-off could result in substantial tax liability.
We intend to obtain an opinion and an IRS ruling as to the
tax-free nature of the spin-off under the U.S. Internal Revenue
Code of 1986, as amended. The opinion and ruling will be
based, among other things, on various factual assumptions and
representations we will make. If any of these assumptions or
representations are, or become, inaccurate or incomplete,
reliance on the opinion and ruling may be jeopardized. If the
spin-off does not qualify for tax-free treatment for U.S. federal
income tax purposes, the resulting tax liability to us and to
NewCo stockholders could be substantial.
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, vulnerabilities in our
technology, cyber-attacks against our information systems or
the information systems of our business partners (such as
ransomware attacks), 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, reductions in operations and/or
worker absences due to the COVID-19 pandemic or other
health epidemics, 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 or the
sterilization of our products by third-party suppliers
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 suppliers 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 suppliers 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
materials and components prior to their use in our products
and the complex nature of our and many of our suppliers’
manufacturing processes. A reduction or interruption in the
supply of materials or components used in manufacturing our
products, such as due to one or more suppliers experiencing
reductions in operations and/or worker absences due to the
COVID-19 pandemic or other health epidemics; 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.
In addition, many of our products require sterilization
prior to sale and we utilize a mix of internal resources and
contract sterilizers to perform this service. To the extent we or
our contract sterilizers are unable to sterilize our products,
whether due to capacity, availability of materials for
sterilization, regulatory or other constraints, including federal
and state regulations on the use of ethylene oxide, or
reductions in operations and/or worker absences due to the
COVID-19 pandemic or other health epidemics, we may be
unable to transition to other contract sterilizers, sterilizer
locations or sterilization methods in a timely or cost effective
manner or at all, which could have a material impact on our
results of operations and financial condition.
Moreover, we are subject to the SEC’s rule regarding
disclosure of the use of certain minerals, known as “conflict
minerals” (tantalum, tin and tungsten (or their ores) and
gold), which are mined from the Democratic Republic of the
Congo and adjoining countries. 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 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, expanding privacy and
cybersecurity laws, 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. In addition, some of our products and
services incorporate software or information technology that
collects data regarding patients and patient therapy, and some
products or software we provide to customers connect to our
systems for maintenance and other purposes. We also have
outsourced elements of our operations to third parties, and, as
a result, we manage a number of third-party suppliers who may
or could have access to our confidential information, including,
but not limited to, intellectual property, proprietary business
information and personal information of patients, employees
and customers (collectively “Confidential Information”).
Our information systems, and those of third-party
suppliers 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, changing threats
and vulnerabilities, 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.
Like other large multi-national corporations, we have
experienced instances of successful phishing attacks on our
email systems and expect to be subject to similar attacks in the
future. We also are subject to other cyber-attacks, including
state-sponsored cyber-attacks, industrial espionage, insider
threats, computer denial-of-service attacks, computer viruses,
ransomware and other malware, payment fraud or other cyber
incidents. In addition, as a result of the COVID-19 pandemic, a
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significant number of our employees who are able to work
remotely are doing so, and malicious cyber actors may increase
malware campaigns and phishing emails targeting teleworkers,
preying on the uncertainties surrounding COVID-19, which
exposes us to additional cybersecurity risks. Our incident
response efforts, business continuity procedures and disaster
recovery planning may not be sufficient for all eventualities. If
we fail to maintain or protect our information systems and data
integrity effectively, we could:
(cid:129) lose existing customers, vendors and business partners;
(cid:129) have difficulty attracting new customers;
(cid:129) have problems in determining product cost estimates and
In markets outside of the U.S., other factors influence
competition as well, including:
(cid:129) local distribution systems;
(cid:129) complex regulatory environments; and
(cid:129) differing medical philosophies and product preferences.
Our competitors may:
(cid:129) have greater financial, marketing and other resources than
us;
(cid:129) respond more quickly to new or emerging technologies;
(cid:129) undertake more extensive marketing campaigns;
(cid:129) adopt more aggressive pricing policies; or
(cid:129) be more successful in attracting potential customers,
establishing appropriate pricing;
employees and strategic partners.
(cid:129) suffer outages or disruptions in our operations or supply
Any of these factors, alone or in combination, could cause
chain;
(cid:129) have difficulty preventing, detecting, and controlling fraud;
(cid:129) have disputes with customers, physicians, and other
healthcare professionals;
(cid:129) have regulatory sanctions or penalties imposed;
(cid:129) incur increased operating expenses;
(cid:129) be subject to issues with product functionality that may
result in a loss of data, risk to patient safety, field actions
and/or product recalls;
(cid:129) incur expenses or lose revenues as a result of a data privacy
breach; or
(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. We will
continue to dedicate significant resources to protect against
unauthorized access to our systems and work with government
authorities to detect and reduce the risk of future cyber
incidents; however, cyber-attacks are becoming more
sophisticated, frequent and adaptive. Therefore, despite our
efforts, we cannot assure that cyber-attacks or data 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 and
improve existing products and technologies. Competition is
primarily on the basis of:
(cid:129) technology;
(cid:129) innovation;
(cid:129) quality;
(cid:129) reputation;
(cid:129) customer service; and
(cid:129) pricing.
16
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;
(cid:129) the introduction of new products and technologies;
(cid:129) evolving surgical philosophies; and
(cid:129) evolving industry standards.
Without the timely introduction of new products and
enhancements, our products may become obsolete over time.
If that happens, our revenue and operating results would
suffer. The success of our new product offerings will depend
on several factors, including our ability to:
(cid:129) properly identify and anticipate customer needs;
(cid:129) commercialize new products in a timely manner;
(cid:129) manufacture and deliver instruments and products in
sufficient volumes on time;
(cid:129) differentiate our offerings from competitors’ offerings;
(cid:129) achieve positive clinical outcomes for new products;
(cid:129) satisfy the increased demands by healthcare payors,
providers and patients for shorter hospital stays, faster post-
operative recovery and lower-cost procedures;
(cid:129) innovate and develop new materials, product designs and
surgical techniques; and
(cid:129) provide adequate medical education relating to new
products.
In addition, new materials, product designs and surgical
techniques that we develop may not be accepted quickly, in
some or all markets, because of, among other factors:
(cid:129) entrenched patterns of clinical practice;
(cid:129) the need for regulatory clearance; and
(cid:129) uncertainty with respect to third-party reimbursement.
Moreover, innovations generally require a substantial
investment in research and development before we can
determine their commercial viability and we may not have the
financial resources necessary to fund the production. In
addition, even if we are able to successfully develop
enhancements or new generations of our products, these
enhancements or new generations of products may not
produce revenue in excess of the costs of development and
they may be quickly rendered obsolete by changing customer
preferences or the introduction by our competitors of products
embodying new technologies or features.
If third-party payors decline to reimburse our
customers for our products or reduce reimbursement
levels, the demand for our products may decline and
our ability to sell our products profitably may be
harmed.
We sell our products and services to hospitals, doctors,
dentists and other healthcare providers, 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 product or
service 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 products.
In addition, third-party payors are increasingly attempting
to contain healthcare costs by limiting both coverage and the
level of reimbursement for medical products and services. If
third-party payors reduce reimbursement levels or change
reimbursement models for hospitals and other healthcare
providers for our products, demand for our products may
decline, or we may experience increased pressure to reduce
the prices of our products, which could have a material
adverse effect on our sales and results of operations.
We have also experienced downward pressure on product
pricing and other effects of healthcare reform in our
international markets. If key participants in government
healthcare systems reduce the reimbursement levels for our
products, including through political changes or transitions,
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.
Financial, Credit and Liquidity Risks
We incurred substantial additional indebtedness
in connection with previous mergers and acquisitions
and may not be able to meet all of our debt obligations,
and the phase-out, replacement or unavailability of
LIBOR and/or other interest rate benchmarks could
adversely affect our indebtedness.
We incurred substantial additional indebtedness in
connection with previous mergers and acquisitions. At
December 31, 2020, our total indebtedness was $8.1 billion, as
compared to $1.4 billion at December 31, 2014. As of
December 31, 2020, our debt service obligations, comprised of
principal and interest (excluding leases and equipment notes),
during the next 12 months are expected to be $0.7 billion. 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;
(cid:129) limit our ability to obtain additional financing to fund future
working capital, capital expenditures, research and
development expenditures and other general corporate
requirements;
(cid:129) limit our flexibility in planning for, or reacting to, changes in
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) adversely affect the market price of our common stock; and
(cid:129) limit our ability to apply proceeds from a future offering or
asset sale to purposes other than the servicing and
repayment of debt.
In addition, the interest rates applicable to certain of our
debt obligations are based on a fluctuating rate of interest
determined by reference to the London Interbank Offered Rate
(“LIBOR”), Euro Interbank Offered Rate (“EURIBOR”) and/or
Tokyo Interbank Offered Rate (“TIBOR”). Any increase in
interest rates applicable to our debt obligations would increase
our cost of borrowing and could adversely affect our financial
position, results of operations or cash flows. Further, in July
2017, the U.K.’s Financial Conduct Authority, which regulates
17
LIBOR, announced that it intends to stop persuading or
compelling banks to submit rates to the ICE Benchmark
Administration Limited (together with any successor, “IBA”).
In response to concerns regarding the future of LIBOR, the
Board of Governors of the Federal Reserve System and the
Federal Reserve Bank of New York convened the Alternative
Reference Rates Committee (“ARRC”) to identify alternatives
to LIBOR. The ARRC has recommended a benchmark
replacement waterfall to assist issuers in continued capital
market entry while safeguarding against LIBOR’s
discontinuation. The initial steps in the ARRC’s recommended
provision reference variations of the Secured Overnight
Financing Rate (“SOFR”). In November 2020, the IBA
announced a proposal that the cessation date for the
submission and publication of certain tenors of U.S. dollar
denominated LIBOR (including one-, three-, six- and twelve-
month LIBOR) be extended to June 30, 2023. At this time, it is
not possible to predict whether SOFR will attain market
traction as a LIBOR replacement, and it remains uncertain if
LIBOR in applicable tenors and applicable currencies will
cease to exist after calendar year 2021, or whether additional
reforms to LIBOR may be enacted, or whether alternative
reference rates will gain market acceptance as a replacement
for LIBOR. Further, other central banks have convened
working groups to determine replacements or reforms of other
interest rate benchmarks, such as EURIBOR, and it is
expected, although not known, that a transition away from the
use of certain of these other interest rate benchmarks will
occur over the course of the next few years and alternative
reference rates (such as the euro short-term rate (€STR)) will
be established or gain market acceptance.
Certain of our debt obligations that are based on LIBOR
will mature before the end of 2021. However, the revolving
credit agreement that we entered into on November 1, 2019
(the “2019 Credit Agreement”) has an initial maturity date of
November 1, 2024. In anticipation of LIBOR’s phase out, the
2019 Credit Agreement provides for alternative base rates as
well as a transition mechanism for selecting a benchmark
replacement rate for LIBOR, with such benchmark
replacement rate to be mutually agreed with the general
administrative agent and our lenders. There can be no
assurance that we will be able to reach an agreement with our
lenders on any such replacement benchmark before
experiencing adverse effects due to changes in interest rates, if
at all. We will continue to monitor the situation and address
the potential reference rate changes in future debt obligations
that we may incur. Accordingly, the potential effect of the
phase-out, replacement or unavailability of LIBOR, or the
unavailability of any other interest rate benchmark such as
EURIBOR or TIBOR, on our cost of capital cannot yet be
determined. Further, the use of an alternative base rate or a
benchmark replacement rate as a basis for calculating interest
with respect to any outstanding variable rate indebtedness
could lead to an increase in the interest we pay and a
corresponding increase in our costs of capital or otherwise
have a material adverse impact on our business, financial
condition or results of operations.
18
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.
Changes in the tax laws of the jurisdictions where we do
business, including an increase in tax rates or an adverse
change in the treatment of an item of income or expense,
could result in a material increase in our tax expense. For
example, changes in the tax laws of foreign jurisdictions could
arise as a result of the “base erosion and profit shifting” project
undertaken by the Organisation for Economic Co-operation
and Development (“OECD”). The OECD, which represents a
coalition of member countries, has recommended changes to
numerous long-standing tax principles. These changes, as
adopted by countries, could increase tax uncertainty and may
have a material adverse impact on our business, financial
condition or results of operations.
The results of the U.S. presidential election could
lead to changes in tax laws that could negatively
impact our effective tax rate.
Prior to the recent U.S. presidential election, President
Biden proposed an increase in the U.S. corporate income tax
rate from 21% to 28%, increasing the rate of tax on certain
earnings of foreign subsidiaries, imposition of an offshoring tax
penalty, and a 15% minimum tax on worldwide book income. If
any or all of these (or similar) proposals are ultimately enacted
into law, in whole or in part, they could have a material
adverse impact on our business, financial condition or results
of operations.
If our independent agents and distributors are
characterized as employees, we would be subject to
additional tax and other liabilities.
We structure our relationships with independent agents
and distributors in a manner that we believe results in an
independent contractor relationship, not an employee
relationship. Although we believe that our independent agents
and distributors are properly characterized as independent
contractors, tax or other regulatory authorities may in the
future challenge our characterization of these relationships.
Further, we have been subject to lawsuits challenging the
characterization of these relationships in recent years.
Changes in classification from independent contractor to
employee can result in a change to various requirements
associated with the payment of wages, tax withholding, and
the provision of unemployment, health, and other traditional
employer-employee related benefits. If regulatory authorities
or state, federal or foreign courts were to determine that our
independent agents or distributors are employees, and not
independent contractors, we would be required to withhold
income taxes, to withhold and pay social security, Medicare
and similar taxes and to pay unemployment and other related
payroll taxes. We would also be liable for unpaid past taxes and
subject to penalties. As a result, any determination that our
independent agents and distributors are our employees could
have a material adverse effect on our business, financial
condition and results of operations.
Future material impairments in the carrying value
of our intangible assets, including goodwill, would
negatively affect our operating results.
Goodwill and intangible assets represent a significant
portion of our assets. At December 31, 2020, we had
$9.3 billion in goodwill and $7.1 billion of intangible assets. The
goodwill results from our acquisition activity and represents
the excess of the consideration transferred over the fair value
of the net assets acquired. We assess at least annually whether
events or changes in circumstances indicate that the carrying
value of our intangible assets may not be recoverable. As
discussed further in Note 11 to our consolidated financial
statements, in the first quarter of 2020, we recorded goodwill
impairment charges of $612.0 million as a result of the adverse
impacts from the COVID-19 pandemic and a change in our
reportable segments, and in the second quarter of 2020, we
recorded $33.0 million of in-process research and development
(“IPR&D”) intangible asset impairments on certain IPR&D
projects. If the operating performance at one or more of our
reporting units falls significantly below current levels,
including if elective surgical procedures are deferred longer
than our current expectations due to the COVID-19 pandemic,
if competing or alternative technologies emerge, if market
conditions or future cash flow estimates for one or more of our
businesses decline, or as a result of restructuring initiatives
pursuant to which we reorganize our reporting units, we could
be required to record additional impairment charges. Any
write-off of a material portion of our goodwill or unamortized
intangible assets would negatively affect our results of
operations.
Global Operational Risks
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 2020 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,
new or increased tariffs, trade embargoes and sanctions and
other trade barriers, which 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 and cybersecurity 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, social and economic instability and uncertainty,
including sovereign debt issues.
Violations of foreign laws or regulations could result in
fines, criminal sanctions against us, our officers or our
employees, prohibitions on the conduct of our business and
damage to our reputation.
We are subject to risks arising from currency
exchange rate fluctuations, which can increase our
costs, cause our profitability to decline and expose us
to counterparty risks.
A substantial portion of our foreign revenues 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, the Japanese Yen, the Swiss
Franc or 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 or may create additional financial obligations for us.
Further, if the counterparties to the derivative financial
instrument transactions fail to honor their obligations due to
financial distress or otherwise, we would be exposed to
potential losses or the inability to recover anticipated gains
from those transactions.
Developments relating to the UK’s exit from the EU
could adversely affect us.
The UK ceased to be a member of the EU on January 31,
2020, commonly referred to as “Brexit,” and entered into a
transition period which ended on December 31, 2020 (the
“Transition Period”), during which terms for the future trading
relationship between the EU and UK were negotiated. On
December 30, 2020, the UK and the EU signed the UK-EU
Trade and Cooperation Agreement, which applies provisionally
(pending ratification by the Council of the European Union)
with effect from the end of the Transition Period. As of the end
of the Transition Period, the UK and the EU became separate
and distinct legal and regulatory jurisdictions.
Brexit has resulted in certain new restrictions on the free
movement of goods, services and people between the UK and
the EU, through technical barriers to trade, rules of origin
requirements, custom inspections, and/or migration
19
restrictions. In terms of medical products regulation and trade,
the now separate UK and EU approval and regulatory regimes
may, in the near term or over time, require us to make
adjustments to our business and operations that could result in
significant expense and take significant time to complete. Over
time, Brexit could also result in increasing regulatory and/or
standards divergence between the UK and the EU, which could
affect the clearance and approval of medical products in each
or either jurisdiction.
Despite the UK-EU Trade and Cooperation Agreement,
Brexit and the perceptions as to its potential impact have
adversely affected, and may continue to adversely affect,
business activity and economic conditions in the UK, Europe
and globally, and could continue to contribute to instability in
global financial and foreign exchange markets.
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 remains uncertain. Any of
the potential negative effects of Brexit could adversely affect
our business, results of operations and financial condition.
Legal, Regulatory and Compliance Risks
We are subject to costly and complex laws and
governmental regulations relating to the development,
design, product standards, packaging, advertising,
promotion, postmarket surveillance, manufacturing,
labeling and marketing of our products,
non-compliance with which could adversely affect our
business, financial condition and results of operations.
Our global regulatory environment is increasingly
stringent, unpredictable and complex. The products we design,
develop, manufacture and market are subject to rigorous
regulation by the FDA and numerous other supranational,
national, federal, regional, state and local governmental
authorities. The process of obtaining regulatory approvals and
clearances 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 supranational, national, federal, regional, state and local
requirements globally. 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
20
exports, and/or require us to notify healthcare professionals
and others that 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, seizure of 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 or
a recidivist warning letter or negotiate the entry of a consent
decree of permanent injunction with us, 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 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 14, 2021, this warning letter 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 21 to our consolidated financial
statements.
Governmental regulations outside the U.S. continue to
become increasingly stringent and complex. In the EU, for
example, the MDR is expected to become effective in May
2021 and will include significant additional premarket and
post-market requirements. Complying with the requirements
of this regulation requires us to incur significant expense.
Additionally, the availability of EU notified body services
certified to the new requirements is limited, which may delay
the marketing approval for some of our products under the
MDR. 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.
The sales, marketing and pricing of products and
relationships that medical products companies have with
healthcare providers are under increased scrutiny around the
world. Our industry is subject to various laws and regulations
pertaining to healthcare fraud and abuse, including the False
Claims Act, the Anti-Kickback Statute, the Stark law, the
Physician Payments Sunshine Act, the Food, Drug, and
Cosmetic Act and similar laws and regulations in the U.S. and
around the world. In addition, we are subject to various laws
concerning anti-corruption and anti-bribery matters (including
the FCPA), 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, transfer, storage, disposal 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. The FDA and the
DHS have also issued urgent safety communications regarding
cybersecurity vulnerabilities of certain medical devices, which
vulnerabilities may apply to some of our current or future
devices.
In addition, certain of our affiliates are subject to privacy,
security and breach notification 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 plans,
health care clearinghouses and health care providers that
engage in specific types of electronic transactions. 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 10, 2020, HHS issued an NPR to
modify the HIPAA privacy rule. Separately, HHS (through the
National Coordinator for Health Information Technology)
issued a new rule, to be effective April 5, 2021, that will limit
“blocking” of electronic health information. We intend to
monitor both the NPR and the “information blocking” rule and
assess their impact on the use of data in our business.
businesses that collect personal information about California
residents and affords those individuals numerous rights
relating to their personal information that may affect our
ability to use personal information or share it with our business
partners. A second law in California, the CPRA, passed via a
ballot referendum in November 2020. The CPRA expands the
scope of the CCPA and establishes a new California Privacy
Protection Agency that will enforce the law and issue
regulations. The CPRA is scheduled to take effect on
January 1, 2023, with a lookback to January 1, 2022. Other
states have considered and/or enacted similar privacy laws. We
will continue to monitor and assess the impact of these state
laws, which may impose substantial penalties for violations,
impose significant costs for investigations and compliance,
allow private class-action litigation and carry significant
potential liability for our business.
Outside of the U.S., data protection laws, including the
GDPR in Europe and the LGPD in Brazil, also apply to our
operations in those 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 the greater of 20 million Euros or 4% of total
worldwide annual turnover of the preceding financial year).
Governmental authorities around the world have enacted
similar types of legislative and regulatory requirements
concerning data protection, and additional governments are
considering similar legal frameworks.
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
have a material adverse impact on our business, financial
condition or results of operations.
In addition to the FDA guidance and HIPAA regulations
Pending and future product liability claims and
described above, a number of U.S. states have also enacted
data privacy and security laws and regulations that govern the
collection, use, disclosure, transfer, storage, disposal, and
protection of 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. For
example, several U.S. territories and all 50 states now have
data breach laws that require timely notification to individuals,
and at times regulators, the media or credit reporting agencies,
if a company has experienced the unauthorized access or
acquisition of personal information. Other state laws include
the CCPA, which took effect on January 1, 2020. The CCPA,
among other things, contains new disclosure obligations for
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 21 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/
21
L Taper with Kinectiv® Technology hip stems and Versys®
Femoral Head implants, and the M2a-MagnumTM hip system.
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.
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 previously disclosed,
in March 2019 we paid approximately $168 million related to
an award of treble damages and attorneys’ fees in a patent
infringement lawsuit.
Our success depends in part on our proprietary
technology, processes, methodologies and information. We rely
on a combination of patent, copyright, trademark, trade secret
and other intellectual property laws and nondisclosure, license,
assignment and confidentiality arrangements to establish,
maintain and protect our proprietary rights, as well as the
intellectual property rights of third parties whose assets we
license. However, the steps we have taken to protect our
intellectual property rights, and the rights of those from whom
we license intellectual property, may not be adequate to
prevent unauthorized use, misappropriation or theft of our
intellectual property. Further, our currently pending or future
patent applications may not result in patents being issued to
us, patents issued to or licensed by us in the past or in the
future may be challenged or circumvented by competitors, and
such patents may be found invalid, unenforceable or
insufficiently 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. We also cannot be certain that
others will not independently develop substantially equivalent
proprietary information.
22
In addition, intellectual property laws differ in various
jurisdictions in which we operate and are subject to change at
any time, which could further restrict our ability to protect our
intellectual property and proprietary rights. In particular, a
portion of our revenues is derived from jurisdictions where
adequately protecting intellectual property rights may prove
more challenging or impossible. We may also not be able to
detect unauthorized uses or take timely and effective steps to
remedy unauthorized conduct. To prevent or respond to
unauthorized uses of our intellectual property, we might be
required to engage in costly and time-consuming litigation or
other proceedings and we may not ultimately prevail. Any
failure to establish, maintain or protect our intellectual
property or proprietary rights could have a material adverse
effect on our business, financial condition, or results of
operations.
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 21 to our
consolidated financial statements, there have been four
shareholder derivative actions filed purportedly on our behalf
against certain of our current and former directors and officers
and certain former stockholders of ours who sold shares of our
common stock in secondary public offerings in 2016, alleging
breaches of fiduciary duties and insider trading, based on
allegations that we made 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 there are 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.
Risks Related to Our Organizational Documents and Jurisdiction of
Incorporation
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.
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.
23
Item 2. Properties
We own or lease approximately 350 different facilities around the world, of which approximately half are in the U.S. Our
corporate headquarters is in Warsaw, Indiana. Warsaw, Indiana is also home to our most significant manufacturing, research and
development (“R&D”), and other business activities for our Knees, Hips and S.E.T. product divisions. Our Spine, CMFT, Office
Based Technologies and Dental products divisions also have business unit headquarters located in the U.S. that are the primary
facilities for these product divisions’ manufacturing, R&D and other business activities. Internationally, our EMEA regional
headquarters is in Switzerland and our Asia Pacific regional headquarters is in Singapore.
We have approximately 30 manufacturing locations in the U.S. and internationally. Our most significant locations outside of the
U.S. are in Switzerland, Ireland, the U.K., China, and Puerto Rico. We primarily own our manufacturing facilities in the U.S.;
internationally, we occupy both owned and leased manufacturing facilities.
We maintain sales and administrative offices and warehouse and distribution facilities in more than 40 countries around the
world. These local market facilities are primarily leased due to common businesses practices and to allow us to be more adaptable
to changing needs in the market.
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 the Netherlands to be able to
efficiently distribute our products to customers in the U.S. and EMEA.
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, R&D 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 21 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.
24
PART II
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 3, 2021, there were approximately 16,700 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.
The information required by this Item concerning equity compensation plans is incorporated herein by reference to Item 12 of
this report.
25
Item 6. Selected Financial Data
The financial information for each of the past five years ended December 31 is set forth below (in millions, except per share
amounts):
STATEMENT OF EARNINGS DATA
Net sales
Net (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
2020
2019
2018
2017
2016
$ 7,024.5
(138.9)
$ 7,982.2
1,131.6
$ 7,932.9
(379.2)
$ 7,803.3
1,813.8
$ 7,668.4
305.9
$
$
(0.67) $
(0.67)
0.96
$
5.52
5.47
0.96
$
$
(1.86) $
(1.86)
0.96
$
8.98
8.90
0.96
$
$
207.0
207.0
205.1
206.7
203.5
203.5
201.9
203.7
1.53
1.51
0.96
200.0
202.4
$24,417.7
7,626.5
2,034.9
12,199.4
$24,638.7
6,721.4
2,083.0
12,392.8
$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
26
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. The
following discussion, analysis and comparisons generally focus
on the operating results for the years ended December 31,
2020 and 2019. Discussion, analysis and comparisons of the
years ended December 31, 2019 and 2018 that are not
included in this Form 10-K can be found in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” in Part II, Item 7 of the Company’s Annual Report
on Form 10-K for the year ended December 31, 2019.
EXECUTIVE LEVEL OVERVIEW
Impact of the COVID-19 Global Pandemic
Our results have been significantly impacted by the
COVID-19 global pandemic. The vast majority of our net sales
are derived from products used in elective surgical
procedures. As COVID-19 rapidly started to spread throughout
the world in early 2020, our net sales decreased dramatically
as countries took precautions to prevent the spread of the
virus with lockdowns and stay-at-home measures and as
hospitals deferred elective surgical procedures. This resulted
in net sales declines of 9.7 percent and 38.3 percent in the first
and second quarters of 2020, respectively, when compared to
the same prior year periods. In the third quarter of 2020,
various levels of recovery in elective surgical procedures
occurred resulting in net sales growth of 2.0 percent when
compared to the same prior year period. However, in the
fourth quarter of 2020 we saw the pandemic worsen and
elective surgical procedures were deferred again, especially
late in the quarter. This was particularly prevalent in EMEA.
As a result, our net sales declined in the fourth quarter of 2020
by 1.9 percent when compared to the same prior year period.
With the deferral of elective surgical procedures, we have
taken prudent measures in an effort to maintain an adequate
financial profile to have access to capital to fund the business
during these unprecedented times. In response to the
COVID-19 pandemic, we have temporarily reduced
discretionary spending such as travel, meetings and other
project spend that can be delayed with limited long-term
detriment to the business, and we have temporarily suspended
or limited production at certain manufacturing facilities.
However, to date we have not experienced significant
disruptions in our supply chain, or in our ability to meet our
customer demands.
2020 Financial Highlights
In 2020, our net sales decreased by 12.0 percent
compared to 2019 due to the deferral of elective surgical
procedures from the COVID-19 pandemic. We recognized a
net loss of $138.9 million in the year ended December 31,
2020. The loss was largely attributable to the impacts of
COVID-19, which caused lower net sales and was the primary
driver behind $645.0 million of goodwill and intangible asset
impairment charges. The temporarily suspended or limited
production at certain manufacturing facilities resulted in
higher costs of products sold that relate to certain fixed
overhead costs and hourly production worker labor expenses
that are included in the cost of inventory when these facilities
are operating at normal capacity. Pursuant to our 2019
Restructuring Plan, we also incurred higher restructuring and
other cost reduction initiative expenses in 2020 when
compared to 2019. Lastly, in 2020 we recognized net litigation-
related charges of $159.8 million compared to net litigation-
related charges of $41.5 million in 2019. These unfavorable
items were partially offset by savings from our 2019
Restructuring Plan and lower costs for travel, meetings and
other projects due to COVID-19.
2021 Outlook
We believe the COVID-19 surges that occurred late in
2020 will continue to negatively impact our net sales in 2021.
However, at this time we are optimistic the rollout of vaccines
around the world will change those dynamics and elective
surgical procedures will be able to return to pre-pandemic
levels at some point during 2021. Additionally, since the
clinical need for many of our products does not go away, it is
possible once patients and hospitals have confidence to return
to elective surgical procedures the patient backlog from
deferred procedures may have a positive effect on the
underlying market growth. However, the consequences of
COVID-19 continue to be fluid, and it is difficult to predict its
ongoing impacts to our business and broader economic and
market environments.
If the negative impacts of COVID-19 on our net sales
subsides, we believe we can improve our operating profit
margin since our fixed costs would not increase proportionally
to net sales.
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 & CMFT; 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.
27
Net Sales by Geography
The following tables present net sales by geography and the components of the percentage changes (dollars in millions):
Americas
EMEA
Asia Pacific
Total
Americas
EMEA
Asia Pacific
Total
Year Ended December 31,
2020
2019
% (Dec)
Volume/
Mix
Foreign
Exchange
Price
$4,335.4
$4,875.8
(11.1)%
(7.9)% (3.1)% (0.1)%
1,391.3
1,746.9
(20.4)
(20.5)
(0.8)
1,297.8
1,359.5
(4.5)
(4.5)
(1.5)
0.9
1.5
$7,024.5
$7,982.2
(12.0)
(10.0)
(2.4)
0.4
Year Ended December 31,
2019
2018 % Inc/(Dec)
Volume/
Mix
Foreign
Exchange
Price
$4,875.8
$4,837.2
1,746.9
1,359.5
1,801.9
1,293.8
$7,982.2
$7,932.9
0.8%
(3.1)
5.1
0.6
4.0% (3.0)% (0.2)%
4.3
9.1
4.9
(2.1)
(2.2)
(5.3)
(1.8)
(2.7)
(1.6)
“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):
Year Ended December 31,
2020
2019
% (Dec)
Volume/
Mix
Foreign
Exchange
Price
$2,389.8
$2,810.1
(15.0)% (12.6)%(2.7)% 0.3%
1,750.5
1,931.5
1,322.0
1,444.1
(9.4)
(8.4)
(7.1) (2.8)
(6.5) (2.3)
1,043.7
1,161.3
(10.1)
(9.4) (1.2)
518.5
635.2
(18.4)
(16.9) (1.9)
0.5
0.4
0.5
0.4
$7,024.5
$7,982.2
(12.0)
(10.0) (2.4)
0.4
Year Ended December 31,
2019
2018 % Inc/(Dec)
Volume/
Mix
Foreign
Exchange
Price
$2,810.1
$2,773.7
1.3%
6.2% (3.0)% (1.9)%
1,931.5
1,918.9
1,444.1
1,401.2
1,161.3
1,175.1
635.2
664.0
0.7
3.1
(1.2)
(4.3)
5.6
6.0
2.1
0.8
(3.1)
(1.6)
(2.0)
(4.0)
(1.8)
(1.3)
(1.3)
(1.1)
$7,982.2
$7,932.9
0.6
4.9
(2.7)
(1.6)
Knees
Hips
S.E.T.
Dental, Spine & CMFT
Other
Total
Knees
Hips
S.E.T.
Dental, Spine & CMFT
Other
Total
28
2.1%
(2.7)
4.5
1.3
2.0%
(3.9)
3.2
0.7
Zimmer
Biomet
Market
Position**
1
1
5
3
6
5
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):
Year Ended December 31,
2020
2019
2018
2020 vs. 2019
% (Dec)
2019 vs. 2018
% Inc/(Dec)
Knees
Americas
EMEA
Asia Pacific
Total
Hips
Americas
EMEA
Asia Pacific
Total
$1,461.1
487.0
441.7
$1,676.6
654.1
479.4
$1,642.7
672.3
458.7
(12.9)%
(25.6)
(7.8)
$2,389.8
$2,810.1
$2,773.7
(15.0)
$ 941.5
407.8
401.2
$1,016.3
499.8
415.4
$ 996.3
519.9
402.7
$1,750.5
$1,931.5
$1,918.9
(7.4)%
(18.4)
(3.4)
(9.4)
Demand (Volume/Mix) Trends
Estimated Market Trends
Changes in volume and mix of product sales had a negative
The following table presents estimated* 2020 global
effect of 10.0 percent on year-over-year sales during the year
ended December 31, 2020. Volume trends were negative in the
first and second quarters of 2020 as the COVID-19 pandemic
resulted in the deferral of elective surgical procedures. In the
third quarter of 2020, we experienced various levels of recovery
in elective surgical procedures, resulting in positive volume and
mix compared to the same prior year period. However, in the
fourth quarter of 2020 as the pandemic surged, volume trends
again were negative compared to the same prior year period in
many regions and we expect this trend to continue into 2021
until vaccines or other preventative measures lessen the spread
of infection and patient reluctance.
Based upon country dynamics, volume changes varied by
region in 2020. In the Americas, the U.S. volume trends varied
from state-to-state depending on local infection rates and
preventative measures. In EMEA, stay-at-home measures were
far more prevalent than other geographies, especially in the
second and fourth quarters, resulting in EMEA volume and mix
trends being the worst among our geographic regions for the full
year. In Asia Pacific, containment of the COVID-19 virus varied
from country-to-country, but overall volume and mix trends were
positive in Asia Pacific in the second half of 2020 as our three
largest markets of Japan, China and Australia/New Zealand all
had sales growth in the fourth quarter of 2020.
Pricing Trends
Global selling prices had a negative effect of 2.4 percent on
year-over-year sales during 2020. 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 2020, changes in foreign currency exchange rates had a
positive effect of 0.4 percent on year-over-year sales. If foreign
currency exchange rates remain at levels consistent with
recent rates, we estimate they will have a less than 1 percent
positive effect on sales in 2021 for the full year.
market information (dollars in billions):
Global
Market
Size**
Global Historic
Market % Growth***
$ 9
Low-Single Digit
8
24
3
11
10
Low-Single Digit
Mid-Single Digit
Mid-Single Digit
Low-Single Digit
Mid-Single Digit
Knees
Hips
S.E.T.
CMFT
Spine
Dental
* Estimates are not precise and are based on competitor annual filings,
Wall Street equity research and Company estimates
** Only includes the subsegments in these markets in which we compete
*** Represents historic growth in recent years, absent the effects of the
COVID-19 pandemic, and 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
Restructuring and other
cost reduction
initiatives
Quality remediation
Acquisition, integration
and related
0.3
0.2
Operating (Loss) Profit
(1.2) 14.2
Year Ended December 31,
2020
2019
2018
2020 vs. 2019
Inc/(Dec)
2019 vs. 2018
Inc/(Dec)
30.3% 28.2% 28.6%
2.1%
(0.4)%
8.5
7.3
7.5
1.2
(0.2)
5.3
5.6
4.9
(0.3)
0.7
45.2
41.9
42.6
9.2
0.9
12.3
3.3
8.3
(0.7)
(11.4)
1.7
0.7
0.6
1.0
0.4
1.9
1.3
0.4
1.1
(0.3)
0.1
(15.4)
0.2
(0.9)
(1.1)
13.8
29
Cost of Products Sold and Intangible Asset Amortization
We calculate gross profit as net sales minus cost of
products sold and intangible asset amortization. Our gross
margin percentage is gross profit divided by net sales. The
following table sets forth the factors that contributed to the
gross margin changes in each of 2020 and 2019 compared to
the prior year:
Prior year gross margin
Lower average selling prices
Average cost per unit
Excess and obsolete inventory charges
Discontinued products inventory charges
Royalties
Impact of foreign currency hedges
Temporarily suspended or limited production
Intangible asset amortization
Other
Year Ended December 31,
2020
2019
64.5% 63.9%
(0.7)
0.4
(0.5)
(0.4)
0.1
0.2
(1.2)
(1.2)
–
(0.7)
(0.4)
0.1
–
0.4
0.8
–
0.2
0.2
Current year gross margin
61.2% 64.5%
The decrease in gross margin percentage in 2020
compared to 2019 was primarily due to temporarily suspended
or limited production at certain facilities, intangible asset
amortization, lower average selling prices, excess and obsolete
inventory charges and charges related to products we intend
to discontinue. The temporary suspension or limited
production at certain manufacturing facilities resulted in us
immediately expensing certain fixed overhead costs and hourly
production worker labor expenses that are included in the cost
of inventory when these facilities are operating at normal
capacity. Intangible asset amortization and excess and obsolete
inventory charges did not decline ratably with the significant
decline in our net sales and therefore were a significant impact
to our gross margin percentage. The inventory charges on
discontinued products are driven by overlapping product lines
in our portfolio and we have plans to discontinue one of the
product lines, or from decisions not to spend additional funds
to keep certain products up-to-date with the latest quality
standards or requirements, such as the European Union
Medical Device Regulation (“EU MDR”), and so we have
decided to discontinue those products.
Operating Expenses
Research & development (“R&D”) expenses decreased in
both amount and as a percentage of net sales in 2020
compared to 2019 primarily due to savings as a result of the
2019 Restructuring Plan and lower spending on travel and
lower spending on certain project costs, including the EU
MDR, due to COVID-19.
Selling, general & administrative (“SG&A”) expenses
decreased in 2020 compared to 2019, but increased as a
percentage of net sales. SG&A expenses decreased due to
lower variable selling and distribution expenses from the
decline in our net sales, COVID-19 cost reductions for travel,
consulting and other projects, savings from our 2019
30
Restructuring Plan and lower charges related to our
compliance with the DPA. These favorable items were partially
offset by higher litigation-related charges in 2020 compared to
2019. See Note 21 to our consolidated financial statements for
additional information on these litigation matters. The increase
in SG&A expenses as a percentage of net sales is due to
various fixed expenses that did not decline ratably with the
significant decline in our net sales.
In 2020, we recognized goodwill and intangible asset
impairment charges of $645.0 million, including charges of
$470.0 million and $142.0 million related to our EMEA and
Dental reporting units, respectively, and $33.0 million of
intangible asset impairment charges. In 2019, we recognized
intangible asset impairment charges of $70.1 million. For more
information regarding these charges, see Note 11 to our
consolidated financial statements.
In December 2019, our Board of Directors approved, and
we initiated, the 2019 Restructuring Plan with an overall
objective of reducing costs to allow us to invest in higher
priority growth opportunities. We recognized expenses of
$116.9 million and $50.0 million in the years ended
December 31, 2020 and 2019, respectively, attributable to
restructuring and other cost reduction initiatives, primarily
related to employee termination benefits, distributor contract
terminations, and consulting and project management
expenses associated with the 2019 Restructuring Plan. For
more information regarding these expenses, see Note 4 to our
consolidated financial statements.
Our quality remediation expenses declined in 2020
compared to 2019 due to the natural regression of completing
our remediation milestones. Acquisition, integration and
related expenses increased in 2020 compared to 2019 due to
the various acquisitions we made in 2020.
On February 5, 2021, we announced our intention to
pursue a plan to spin off our Spine and Dental businesses to
form NewCo. We expect to incur significant expenses in 2021
to execute this plan. The significant expenses primarily include
third party consulting and project management to help us
separate the legacy Zimmer Biomet and NewCo businesses and
to comply with all the necessary actions needed for NewCo to
become an independent, publicly-traded company.
Consummation of the proposed spin-off is subject to certain
conditions, including final approval of our Board of Directors,
the receipt of a favorable opinion and IRS ruling with respect
to the tax-free nature of the transaction, and the effectiveness
of a Form 10 registration statement with the SEC. Therefore,
we cannot provide assurance that we will be able to complete
the spin-off on the terms or on the timeline that we
announced, or at all.
Other Income (Expense), net, Interest Expense, net, and Income Taxes
In 2020, we recognized income in other income
(expense), net, compared to net expenses in 2019, primarily
due to gains recognized from changes to the fair value of our
equity investments and higher gains from certain components
of pension expense in 2020.
Interest expense, net, declined in 2020 compared to 2019
due to lower average outstanding debt balances during 2020
resulting from debt repayments throughout 2019 and Euro
notes issued in the fourth quarter of 2019 that were used to
refinance debt with higher interest rates. Despite continued
debt repayments, our interest expense, net, may increase in
2021 due to cross-currency interest rate swaps that will
mature in 2021. Based upon current market conditions, if we
decide to enter into new swaps when the previous swaps
mature in 2021, the new swaps would not be as favorable to us
compared to the maturing swaps.
Our effective tax rate (“ETR”) on (loss) earnings before
income taxes was 49.9 percent and negative 24.9 percent (a
tax benefit was recognized on earnings before income taxes)
for the years ended December 31, 2020 and 2019, respectively.
In 2020, the income tax benefit was driven by changes in
estimates to uncertain tax positions, favorable tax audit
settlements, jurisdictional mix of earnings and losses, and a
$43.0 million tax benefit from Switzerland’s Federal Act on
Tax Reform and AHV Financing (“TRAF”). Other significant
impacts to the ETR in 2020 included the $612.0 million
goodwill impairment charge, which resulted in a loss before
taxes, but had no corresponding tax benefit.
Segment Operating Profit
In 2019, we recognized an overall tax benefit in the year
due to a $315.0 million benefit from Switzerland’s TRAF in
addition to the tax impact of certain restructuring transactions
in Switzerland. The TRAF was effective January 1, 2020 and
includes the abolishment of various favorable federal and
cantonal tax regimes. The TRAF provided transitional relief
measures for companies that are losing the tax benefit of a
ruling, including a “step-up” for amortizable goodwill, equal to
the amount of future tax benefit they would have received
under their existing ruling, subject to certain limitations.
Absent 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 our mix of pre-tax earnings; 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.
Net Sales
Operating Profit
Operating Profit as a
Percentage of Net Sales
Year Ended December 31,
Year Ended December 31,
Year Ended December 31,
(dollars in millions)
2020
2019
2018
2020
2019
2018
2020
2019
2018
Americas and Global Businesses
$4,479.0
$5,035.3
$5,000.4
$1,316.9
$1,689.7
$1,706.9
29.4% 33.6% 34.1%
EMEA
Asia Pacific
1,288.6
1,623.1
1,669.5
1,256.9
1,323.8
1,263.0
308.9
420.5
484.0
472.7
480.7
431.9
24.0
33.5
29.8
35.7
28.8
34.2
In 2020, the net sales and operating profit of all of our
operating segments were adversely affected by the COVID-19
pandemic. In 2020, the operating profit as a percentage of net
sales for each of our segments declined compared to prior
years due to the effect of fixed operating expenses that did
not decline proportionally with lower net sales from the
impact of COVID-19.
Non-GAAP Operating Performance Measures
We use financial measures that differ from financial
measures determined in accordance with GAAP to evaluate
our operating performance. These non-GAAP financial
measures exclude, as applicable, certain inventory and
manufacturing-related charges including charges to
discontinue certain product lines; intangible asset
amortization; goodwill and intangible asset impairment;
restructuring and other cost reduction initiative expenses;
quality remediation expenses; acquisition, integration and
related expenses; certain litigation gains and charges;
expenses to establish initial compliance with the EU MDR;
other charges; any related effects on our income tax provision
associated with these items; the impact of The Tax Cuts and
Jobs Act of 2017 (the “2017 Tax Act”); the effect of
Switzerland tax reform; 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.
31
The following are reconciliations from our GAAP net
earnings and diluted earnings per share to our non-GAAP
adjusted net earnings and non-GAAP adjusted diluted earnings
per share used for internal management purposes (in millions,
except per share amounts):
Year ended December 31,
2020
2019
2018
Net (Loss) Earnings of Zimmer
Biomet Holdings, Inc.
$ (138.9) $1,131.6
$ (379.2)
Inventory and manufacturing related
charges(1)
Intangible asset amortization(2)
Goodwill and intangible asset
impairment(3)
Restructuring and other cost
reduction initiatives(4)
Quality remediation(5)
Acquisition, integration and
related(6)
Litigation(7)
Litigation settlement gain(8)
European Union Medical Device
Regulation(9)
Other charges(10)
Taxes on above items (11)
U.S. tax reform (12)
Swiss tax reform (13)
Other certain tax adjustments (14)
54.2
597.6
53.9
584.3
32.5
595.9
645.0
70.1
979.7
116.9
49.8
23.8
159.8
–
25.3
10.7
(253.4)
–
(5.0)
(104.2)
50.0
87.6
12.2
65.0
(23.5)
30.9
119.2
(226.2)
–
(315.0)
(13.7)
34.2
165.4
99.5
186.0
–
3.7
82.8
(239.6)
8.3
–
(3.8)
Adjusted Net Earnings
$1,181.6
$1,626.4
$1,565.4
Diluted (Loss) Earnings per share
$(0.67) $ 5.47
$(1.86)
Year ended December 31,
2020
2019
2018
Inventory and manufacturing related
charges(1)
Intangible asset amortization(2)
Goodwill and intangible asset
impairment(3)
Restructuring and other cost reduction
initiatives(4)
Quality remediation(5)
Acquisition, integration and related(6)
Litigation(7)
European Union Medical Device
Regulation(9)
Other charges(10)
Taxes on above items (11)
U.S. tax reform (12)
Swiss tax reform (13)
0.26
2.89
0.26
2.83
0.16
2.93
3.12
0.34
4.81
0.56
0.24
0.12
0.77
0.24
0.42
0.06
0.31
0.17
0.81
0.49
0.91
–
0.02
0.41
0.12
0.05
0.15
0.58
(1.22)
(1.09)
(1.18)
–
–
(0.03)
(1.52)
0.04
–
Litigation settlement gain(8)
–
(0.11)
Other certain tax adjustments (14)
(0.50)
(0.07)
(0.02)
Effect of dilutive shares assuming net
earnings(15)
(0.04)
–
(0.05)
Adjusted Diluted EPS
$ 5.67
$ 7.87
$ 7.64
(1) Inventory and manufacturing-related charges in 2020 and 2019 were
primarily related to excess and obsolete inventory charges on certain
product lines we intend to discontinue and other charges. The year ended
December 31, 2019 also included a $20.8 million charge incurred to
terminate a raw material supply agreement. The excess and obsolete
32
inventory charges on certain product lines are driven by overlapping
product lines in our portfolio and we have plans to discontinue one of the
product lines, or from decisions not to spend additional funds to keep
certain products up-to-date on the latest quality standards or requirements,
such as the EU MDR, and so we have decided to discontinue such products.
In 2018, the charges primarily related to inventory step-up. 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.
(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 2020 we recognized goodwill impairment charges of $470.0 million and
$142.0 million related to our EMEA and Dental reporting units,
respectively. In 2018, we recognized 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 2020, 2019 and 2018, we
recognized $33.0 million, $70.1 million and $3.8 million, respectively, of
intangible asset impairments from merger-related IPR&D intangible assets.
(4) In December 2019, our Board of Directors approved, and we initiated, a
new global restructuring program with an objective of reducing costs to
allow us to further invest in higher priority growth opportunities.
Restructuring and other cost reduction initiatives also include other cost
reduction initiatives that have the goal of reducing costs across the
organization.
(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 previous 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 exclude certain acquisition, integration and related gains and
expenses from our non-GAAP results.
(7) 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, patent litigation
and commercial litigation related to a common matter in multiple
jurisdictions. 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.
(8) In the first quarter of 2019, we settled a patent infringement lawsuit out
of court, and the other party agreed to pay us an upfront, lump-sum amount
for a non-exclusive license to the patent.
(9) The EU MDR imposes significant additional premarket and postmarket
requirements. The new regulations provide a transition period until May
2021 for currently-approved medical devices 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 establish initial compliance with the
regulations related to our currently-approved medical devices. The
incremental costs primarily include third-party consulting necessary to
supplement our internal resources.
(10) We have incurred other various expenses from specific events or
projects that we consider highly variable or that have a significant impact to
our operating results that we have excluded from our non-GAAP measures.
These include costs related to legal entity, distribution and manufacturing
optimization, including contract terminations, gains and losses from
changes in fair value on our equity investments, as well as our costs of
complying with our DPA with the U.S. government related to certain
Foreign Corrupt Practices Act matters involving Biomet and certain of its
subsidiaries. Under the DPA, we were subject to oversight by an
independent compliance monitor, which monitorship concluded in August
2020. On February 9, 2021, the one-count criminal information filed against
us in 2017 was dismissed with prejudice and the DPA concluded. The
excluded costs include the fees paid to the independent compliance
monitor and to external legal counsel assisting in the matter.
(11) 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.
(12) 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.
(13) We recognized a tax benefit related to TRAF in addition to an impact
from certain restructuring transactions in Switzerland. Also included are
tax adjustments relating to the ongoing impacts of tax only amortization
resulting from TRAF as well as certain restructuring transactions in
Switzerland.
(14) Other certain tax adjustments relate to various discrete tax period
adjustments. In 2020, the adjustments were primarily related to the
resolution of or changes in estimates of significant uncertain tax positions
as a result of settlements or favorable rulings. In 2019 and 2018, the
adjustments were 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.
(15) Due to the reported net loss for 2020 and 2018, the effect of dilutive
shares assuming net earnings is shown as an adjustment. Diluted share
count used in Adjusted Diluted EPS is (in millions):
Year ended
December 31, 2020
Year ended
December 31, 2018
Diluted shares
Dilutive shares assuming net earnings
Adjusted diluted shares
207.0
1.4
208.4
203.5
1.5
205.0
LIQUIDITY AND CAPITAL RESOURCES
The COVID-19 pandemic has had an adverse effect on our
liquidity and capital resource needs, primarily driven by the
reduction in net sales due to elective surgical procedure
deferrals. We have taken prudent measures in an effort to
maintain an adequate financial profile and to have access to
capital to fund the business during these unprecedented times.
These measures included reductions to discretionary spending
such as travel, meetings and other project spend that can be
delayed with limited long-term detriment to the business.
However, we continued to incur fixed expenses that resulted
in lower operating cash flows in 2020 when compared to 2019.
As of December 31, 2020, we had $802.1 million in cash
and cash equivalents. In addition, we had $1.0 billion available
to borrow under our revolving credit agreement entered into
on September 18, 2020 (the “September 2020 Credit
Agreement”) that contains a $1.0 billion 364-day unsecured
revolving credit facility (the “September 2020 Revolving
Facility”) and matures on September 17, 2021, and $1.5 billion
available under our five-year unsecured multicurrency
revolving facility of $1.5 billion (the “2019 Multicurrency
Revolving Facility”) under the revolving credit agreement we
entered into on November 1, 2019 (the “2019 Credit
Agreement”) that will mature on November 1, 2024. The terms
of the 2019 Multicurrency Revolving Facility and the
September 2020 Revolving Facility (collectively, the “Revolving
Facilities”) are described further below and in Note 13 to our
consolidated financial statements.
Based on the actions described above, we believe that
cash flows from operations, our cash and cash equivalents on
hand, and available borrowings under our Revolving Facilities
will be sufficient to meet our ongoing liquidity requirements
for at least the next twelve months. At this time, we do not
anticipate needing to borrow against our Revolving Facilities to
fund our operations. However, due to the significant
uncertainties of the COVID-19 pandemic, it is possible our
needs may change. Further, there can be no assurance that, if
needed, we will be able to secure additional financing on terms
favorable to us, if at all.
Sources of Liquidity
Cash flows provided by operating activities were
$1,204.5 million in 2020 compared to $1,585.8 million and
$1,747.4 million in 2019 and 2018, respectively. The decline in
cash flow from operating activities in 2020 from 2019 was
primarily the result of COVID-19 reducing our cash inflows due
to lower net sales while we continued to pay many fixed
operating costs. Additionally, in 2020 we terminated our
accounts receivable purchase arrangements in the U.S. and
Japan which we estimate negatively impacted operating cash
flows by approximately $300 million. The 2019 period included
a payment of approximately $168 million on a patent
infringement lawsuit.
Cash flows used in investing activities were $613.8 million
in 2020 compared to $729.3 million and $416.6 million in 2019
and 2018, respectively. Instrument and property, plant and
equipment additions reflected ongoing investments in our
product portfolio and optimization of our manufacturing and
logistics network. In order to preserve cash, we prioritized
investments in 2020 which resulted in lower investments in
property, plant and equipment, totaling $117.5 million when
compared to $207.1 million in 2019. As further discussed in
Note 10 to our consolidated financial statements, we made
various acquisitions in 2020 requiring initial cash outlays of
$235.5 million, net of acquired cash. In 2019, we paid
$197.6 million to buy out certain licensing arrangements from
third parties.
Cash flows used in financing activities were $421.8 million
in 2020. In 2020, we issued senior notes and received
$1,497.1 million in proceeds, which were used to pay our
$1,500.0 million senior notes at maturity on April 1, 2020.
Additionally, with cash flows generated from operations, in
2020 we prepaid $250.0 million of our floating rate senior notes
that mature March 19, 2021. Further, the termination of
certain accounts receivable purchase arrangements in 2020
resulted in $54.6 million of financing cash outflows to the
purchasing financial institutions. These outflows represent the
amount of unremitted cash that we had collected on sold
accounts receivable as of December 31, 2019 that was repaid
in 2020. Cash flows used in financing activities were
$779.9 million in 2019. Our primary use of available cash in
2019 was for debt repayment. We received net proceeds of
$549.2 million from the issuance of additional Euro-
denominated senior notes which we used to repay
$500.0 million of senior notes that became due on
November 30, 2019. In January 2019, we borrowed an
additional $200.0 million under a U.S. term loan (“U.S. Term
33
Loan C”) and used those proceeds, along with cash on hand, to
repay the remaining $225.0 million outstanding under the U.S.
term loan (“U.S. Term Loan B”) provided for under our 2016
credit agreement. During 2019 we also repaid the
$735.0 million outstanding balance under U.S. Term Loan C,
with the remainder of the proceeds from the Euro-
denominated senior notes issuance and cash from operations.
Overall, we had approximately $710 million of net principal
repayments on our senior notes and term loans in 2019.
At December 31, 2020, we had outstanding debt of
$8,126.5 million, of which $500.0 million was classified as
current debt. As it relates to our current debt, following
December 31, 2020, we prepaid the remaining $200.0 million
principal amount outstanding on our floating rate senior notes
due March 19, 2021. The remaining current debt consists of
our $300.0 million senior notes due November 30, 2021. We
believe we can satisfy this debt obligation with cash generated
from our operations, by issuing new debt, and/or by borrowing
on our revolving credit facilities.
For additional information on our debt, including types of
debt, maturity dates, interest rates, debt covenants and
available revolving credit facilities, see Note 13 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, 2020, $390.1 million of our cash and
cash equivalents were held in jurisdictions outside of the U.S.
Of this amount, $90.8 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 $5.5 billion of unremitted earnings in future years.
In February, June, September and December 2020, 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.
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, 2020, all
$1.0 billion remained authorized.
As discussed in Note 4 to our consolidated financial
statements, in December 2019, our Board of Directors
approved, and we initiated, the 2019 Restructuring Plan with
an objective of reducing costs to allow us to further invest in
higher priority growth opportunities. The 2019 Restructuring
Plan is expected to result in total pre-tax restructuring charges
of approximately $350 million to $400 million, $145 million of
which was incurred through December 31, 2020. We expect to
reduce gross annual pre-tax operating expenses by
approximately $200 million to $300 million by the end of 2023
as program benefits under the 2019 Restructuring Plan are
realized.
As discussed in Note 10 to our consolidated financial
statements, we completed the acquisitions of A&E Medical
Corporation and Relign Corp. in 2020. These acquisitions
34
included guaranteed deferred payments totaling $145.0 million
that we are obligated to make in 2021.
As discussed in Note 17 to our consolidated financial
statements, the IRS has issued proposed adjustments for years
2010 through 2012, as well as proposed adjustments for years
2013 through 2015, reallocating profits between certain of our
U.S. and foreign subsidiaries. We have disputed these proposed
adjustments and intend to continue to vigorously defend our
positions. 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 21 to our consolidated financial
statements, we are involved in various litigation matters with
respect to which we expect to continue paying settlements over
the next few years.
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):
Total
2021
2022
and
2023
2024 and
2025
2026 and
Thereafter
$ 8,171.6
500.0
1,981.4
2,000.0
3,690.2
Contractual
Obligations
Long-term
debt
Interest
payments
1,846.8
207.8
396.7
344.9
897.4
Operating
leases
Purchase
313.9
80.2
105.0
65.0
63.7
obligations
518.4
253.4
171.4
93.2
0.4
Toll charge tax
liability
Other long-
term
liabilities
Total
contractual
obligations
279.2
310.7
–
–
56.7
136.6
85.9
223.3
22.4
65.0
$11,440.6
$1,041.4
$2,934.5
$2,662.1
$4,802.6
$124.4 million of the other long-term liabilities on our
balance sheet as of December 31, 2020 are liabilities related to
defined benefit pension plans. Defined benefit plan liabilities are
based upon the underfunded status of the respective plans; they
are not based upon future contributions. Due to uncertainties
regarding future plan asset performance, changes in interest
rates and our intentions with respect to voluntary contributions,
we are unable to reasonably estimate future contributions beyond
2021. Therefore, this table does not include any amounts related
to future contributions to our plans. See Note 16 to our
consolidated financial statements for further information on our
defined benefit plans.
Under the 2017 Tax Act, we have a $279.2 million liability
remaining from a one-time tax on the mandatory deemed
repatriation of post-1986 untaxed foreign earnings and profits
(“toll charge”) for the deemed repatriation of unremitted foreign
earnings. This amount was recorded in non-current income tax
liabilities on our consolidated balance sheet as of
December 31, 2020. We have elected to pay the toll charge in
installments over eight years.
Also included in long-term liabilities on our consolidated
The calculation of our tax liabilities involves dealing with
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 17 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 estimated
payments could range from $0 to $380 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.
uncertainties in the application of complex tax laws and
regulations in a multitude of jurisdictions across our global
operations. We are subject to regulatory review or audit in
virtually all of those jurisdictions and those reviews and audits
may require extended periods of time to resolve. We record
our income tax provisions based on our knowledge of all
relevant facts and circumstances, including existing tax laws,
our experience with previous settlement agreements, the
status of current examinations and our understanding of how
the tax authorities view certain relevant industry and
commercial matters.
We recognize tax liabilities in accordance with the
Financial Accounting Standards Board (“FASB”) guidance on
income taxes and we adjust these liabilities when our judgment
changes as a result of the evaluation of new information not
previously available. Due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment
that is materially different from our current estimate of the tax
liabilities. These differences will be reflected as increases or
decreases to income tax expense in the period in which they
are determined.
Commitments and Contingencies—We are involved in
various ongoing proceedings, legal actions and claims arising in
the normal course of doing business, including litigation
related to product, labor and intellectual property. 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. 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.
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.
In our annual impairment test in the fourth quarter of
2020, all our reporting units exceeded their carrying values by
more than 10 percent. 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. Significant
assumptions are incorporated into the income approach, such
as estimated growth rates and risk-adjusted discount rates.
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
reporting units.
35
Future impairment in our reporting units 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 and comparable company valuation indicators, which
may impact our estimated fair values. Further, changes in
foreign currency exchange rates could increase the cost of
procuring inventory and services from foreign suppliers, which
could reduce reporting unit profitability.
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.
36
For contracts outstanding at December 31, 2020, 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 2021 through June 2023. The
notional amounts of outstanding forward contracts entered
into with third parties to purchase U.S. Dollars at
December 31, 2020 were $1,605.9 million. The notional
amounts of outstanding forward contracts entered into with
third parties to purchase Swiss Francs at December 31, 2020
were $283.8 million.
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, 2020 indicated that, if the
U.S. Dollar uniformly strengthened/weakened in value by
10 percent relative to all 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 2023 by approximately $55.0 million.
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 $1,369.0 million at December 31, 2020.
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 15 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, 2020, 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
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.
37
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, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
Page
39
42
43
44
45
46
47
38
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, 2020 and 2019, 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, 2020, including the related notes
and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2020 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2020 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, 2020, 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
39
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on
the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment – EMEA, Dental and Americas CMFT Reporting Units
As described in Notes 2 and 11 to the consolidated financial statements, the Company’s consolidated goodwill balance was
$9,261.8 million as of December 31, 2020, and the goodwill associated with the EMEA reporting unit, Dental reporting unit, and
Americas CMFT reporting unit, was $325.9 million, $273.7 million and $271 million, respectively. Management conducts an
impairment test in the fourth quarter of each year or whenever events or changes in circumstances indicate that the carrying value
of the reporting unit’s assets may not be recoverable. Potential impairment of a reporting unit is identified by comparing the
reporting unit’s estimated fair value to its carrying amount. The Company estimated the fair value of the EMEA, Dental and
Americas CMFT reporting units based on income and market approaches. As disclosed by management, 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 other businesses
that are similar to the EMEA, Dental and Americas CMFT reporting units. Significant assumptions are incorporated into the
discounted cash flow analysis such as revenue growth rates and risk-adjusted discount rates.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment
of the EMEA, Dental and Americas CMFT reporting units is a critical audit matter are the significant judgment by management
when developing the fair value measurement of the reporting units. This in turn led to a high degree of auditor judgment,
subjectivity, and effort in performing procedures and in evaluating management’s discounted cash flow analysis and significant
assumptions, related to revenue growth rates and risk-adjusted discount rates. In addition, the audit effort involved the use of
professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to
management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting units. These
procedures also included, among others, (i) testing management’s process for developing the fair value estimate, (ii) evaluating the
appropriateness of management’s fair value approaches, (iii) testing the completeness, accuracy and relevance of the underlying
data used in the approaches, and (iv) evaluating significant assumptions used by management in the discounted cash flow analysis,
including the revenue growth rates and the risk-adjusted discount rate. Evaluating management’s assumptions related to revenue
growth rates involved evaluating whether the assumptions used by management were reasonable considering the past performance
of the reporting units, the consistency with external data from other sources, and whether these assumptions were consistent with
evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the
evaluation of the Company’s discounted cash flow analysis and certain significant assumptions, including the risk-adjusted discount
rate.
Tax Liabilities for Unrecognized Tax Benefits
As described in Notes 2 and 17 to the consolidated financial statements, the Company has recorded tax liabilities for
unrecognized tax benefits of $619.4 million as of December 31, 2020. The calculation of the Company’s estimated tax liabilities
involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the
Company’s global operations. The Company’s income tax filings are regularly under audit in multiple federal, state and foreign
40
jurisdictions. Income tax audits may require an extended period of time to reach resolution and may result in significant income tax
adjustments when interpretation of tax laws or allocation of company profits is disputed.
The principal considerations for our determination that performing procedures relating to tax liabilities for unrecognized tax
benefits is a critical audit matter are the significant judgment by management when determining the tax liabilities, related to a high
degree of estimation uncertainty relative to the numerous and complex tax laws and regulations, frequency of income tax audits,
and potential for significant adjustments as a result of such audits. This in turn led to a high degree of auditor judgment,
subjectivity, and effort in performing procedures to evaluate the timely identification and accurate measurement of tax liabilities for
unrecognized tax benefits. Also, the evaluation of audit evidence available to support the estimates is complex and required
significant auditor judgment as the nature of the evidence is often highly subjective, and the audit effort involved the use of
professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
identification, accurate measurement, and recognition of tax liabilities for unrecognized tax benefits, including controls addressing
completeness of the tax liabilities. These procedures also included, among others, (i) testing certain information used in the
calculation of tax liabilities for unrecognized tax benefits by jurisdiction on a sample basis, (ii) assessing the completeness of the
Company’s identification of tax liabilities for unrecognized tax benefits and possible outcomes for each unrecognized tax benefit,
and (iii) evaluating the status and results of income tax audits with the relevant tax authorities. Professionals with specialized skill
and knowledge were used to assist in the evaluation of the Company’s interpretation and application of relevant tax laws and
regulations in various jurisdictions and assessing the reasonableness of the Company’s tax positions.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 22, 2021
We have served as the Company’s auditor since 2000.
41
ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES
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
Restructuring and other cost reduction initiatives
Quality remediation
Acquisition, integration and related
Operating expenses
Operating (Loss) Profit
Other income (expense), net
Interest expense, net
(Loss) Earnings before income taxes
(Benefit) provision for income taxes
Net (Loss) Earnings
Less: Net earnings (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,
2020
2019
2018
$7,024.5
2,128.3
597.6
372.0
3,177.8
645.0
116.9
50.9
23.8
$7,982.2
2,252.6
584.3
449.3
3,343.8
70.1
50.0
82.4
12.2
$7,932.9
2,271.9
595.9
391.7
3,379.3
979.7
34.2
146.9
99.5
7,112.3
6,844.7
7,899.1
(87.8)
25.4
(212.0)
(274.4)
(137.0)
(137.4)
1.5
1,137.5
(4.8)
(226.9)
905.8
(225.7)
1,131.5
(0.1)
33.8
(15.6)
(289.3)
(271.1)
108.2
(379.3)
(0.1)
$ (138.9) $1,131.6
$ (379.2)
$ (0.67) $
$ (0.67) $
5.52
5.47
$ (1.86)
$ (1.86)
207.0
207.0
205.1
206.7
203.5
203.5
42
ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Net (Loss) Earnings
Other Comprehensive Income (Loss):
Foreign currency cumulative translation adjustments, net of tax
Unrealized cash flow hedge (losses)/gains, net of tax
Reclassification adjustments on cash flow hedges, net of tax
Adjustments to prior service cost and unrecognized actuarial
assumptions, net of tax
Total Other Comprehensive Loss
Comprehensive (Loss) Income
Comprehensive Income (Loss) Attributable to Noncontrolling Interest
For the Years Ended December 31,
2020
2019
2018
$(137.4) $1,131.5
$(379.3)
25.6
(33.5)
(38.5)
(1.5)
(135.4)
30.6
(35.1)
68.2
23.6
(9.5)
(48.5)
(17.7)
(55.9)
(54.5)
(61.3)
(193.3)
1,077.0
(440.6)
1.5
(0.1)
(0.1)
Comprehensive (Loss) Income Attributable to Zimmer Biomet Holdings, Inc.
$(194.8) $1,077.1
$(440.5)
The accompanying notes are an integral part of these consolidated financial statements.
43
ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable, less allowance for credit losses
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 21)
Stockholders’ Equity:
Common stock, $0.01 par value, one billion shares authorized,
311.4 million (309.9 million in 2019) issued
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock, 103.8 million shares (103.9 million shares in 2019)
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.
44
As of December 31,
2020
2019
$
802.1
1,452.7
2,450.7
377.8
5,083.3
2,047.7
9,261.8
7,055.5
969.4
$
617.9
1,363.9
2,385.0
357.1
4,723.9
2,077.4
9,599.7
7,257.6
980.1
$24,417.7
$24,638.7
$
330.0
59.5
1,667.4
500.0
$
400.9
126.7
1,413.9
1,500.0
2,556.9
3,441.5
790.4
588.1
656.4
840.1
685.1
557.8
7,626.5
6,721.4
12,218.3
12,245.9
3.1
9,121.6
10,086.9
(297.8)
(6,719.6)
3.1
8,920.1
10,427.3
(241.9)
(6,720.5)
12,194.2
5.2
12,388.1
4.7
12,199.4
12,392.8
$24,417.7
$24,638.7
ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES
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
306.5
–
–
$3.1
–
–
$8,514.9
–
–
$10,022.8
(379.2)
–
$ (83.2)
–
(61.3)
(103.9) $(6,721.8)
–
–
–
–
$(0.3) $11,735.5
(379.3)
(61.3)
(0.1)
–
–
–
–
1.4
307.9
–
–
–
2.0
309.9
–
–
–
–
–
1.5
–
–
–
–
3.1
–
–
–
–
3.1
–
–
–
–
–
–
–
–
–
171.2
8,686.1
–
–
–
234.0
8,920.1
–
–
–
–
–
201.5
–
0.2
9,491.2
1,131.6
–
(197.2)
1.7
10,427.3
(138.9)
–
(198.9)
(3.1)
–
0.5
(195.5)
–
42.9
(42.9)
–
–
–
–
–
–
–
–
–
0.1
(187.4)
–
(54.5)
(103.9)
–
–
(6,721.7)
–
–
–
–
–
–
–
1.2
(241.9)
–
(55.9)
(103.9)
–
–
(6,720.5)
–
–
–
–
–
–
–
–
–
0.1
–
–
–
0.9
–
–
5.2
–
4.8
(0.1)
–
–
–
4.7
1.5
–
–
–
(1.0)
–
(195.5)
–
5.2
171.5
11,276.1
1,131.5
(54.5)
(197.2)
236.9
12,392.8
(137.4)
(55.9)
(198.9)
(3.1)
(1.0)
202.9
Balance January 1, 2018
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
Net earnings
Other comprehensive loss
Cash dividends declared
($0.96 per share)
Stock compensation plans
Balance December 31, 2019
Net loss
Other comprehensive loss
Cash dividends declared
($0.96 per share)
Adoption of new accounting
standard
Acquisition of noncontrolling
interest
Stock compensation plans
Balance December 31, 2020
311.4
$3.1
$9,121.6
$10,086.9
$(297.8)
(103.8) $(6,719.6)
$ 5.2
$12,199.4
The accompanying notes are an integral part of these consolidated financial statements.
45
ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Cash flows provided by (used in) operating activities:
Net (loss) earnings
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization
Share-based compensation
Goodwill and intangible asset impairment
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
Net investment hedge settlements
Acquisition of intellectual property rights
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
Debt issuance costs
Other financing activities
Net cash used in financing activities
Effect of exchange rates on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of period
The accompanying notes are an integral part of these consolidated financial statements.
46
For the Years Ended December 31,
2020
2019
2018
$ (137.4) $1,131.5
$ (379.3)
1,032.7
1,006.1
1,040.5
79.7
645.0
84.3
70.1
12.0
(538.7)
65.5
979.7
13.4
(291.1)
(70.0)
(40.8)
(95.1)
69.5
111.4
(93.8)
(125.2)
(42.0)
(17.9)
(150.8)
213.6
(199.5)
155.9
8.4
1,204.5
1,585.8
1,747.4
(291.7)
(315.9)
(276.3)
(117.5)
(207.1)
(162.7)
53.5
48.1
(0.4)
(197.6)
(235.5)
(22.2)
(37.1)
(19.7)
69.2
–
(15.3)
(31.5)
(613.8)
(729.3)
(416.6)
1,497.1
549.2
–
–
–
–
749.5
400.0
(400.0)
(1,750.0)
(500.0)
(1,150.0)
–
–
–
200.0
675.0
(960.0)
(1,425.0)
(5.3)
(3.9)
(198.5)
(196.7)
(195.2)
129.8
158.2
(54.6)
(15.0)
(22.3)
(8.3)
(12.2)
(2.9)
(3.5)
(6.7)
107.9
(36.7)
(19.8)
(4.9)
0.9
(421.8)
(779.9)
(1,302.2)
15.3
184.2
617.9
(1.5)
(10.2)
75.1
542.8
18.4
524.4
$
802.1
$ 617.9
$
542.8
ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
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.
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., the parent company of Biomet, Inc.
(“Biomet”).
Risks and Uncertainties - Our results have been and are
expected to continue to be impacted by the COVID-19 global
pandemic. The vast majority of our net sales are derived from
products used in elective surgical procedures which are being
deferred due to lockdowns, stay-at-home measures and other
precautions in certain markets. The consequences of
COVID-19 continue to be extremely fluid and there are many
market dynamics that are difficult to predict. The COVID-19
pandemic may have a significant unfavorable effect on our
financial position, results of operations and cash flows in the
near term.
2.
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 United States of America (“GAAP”),
which requires 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. We have made our best
estimates, as appropriate under GAAP, in the recognition of
our assets and liabilities. These estimates have considered the
impact the COVID-19 pandemic may have on our financial
position, results of operations and cash flows. Such estimates
included, but were not limited to, variable consideration to our
customers, our allowance for doubtful accounts for expected
credit losses, the net realizable value of our inventory, the fair
value of our goodwill and the recoverability of other long-lived
assets. Actual results could differ materially from these
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 remeasure the
transaction into the functional currency and recognize any
transactional gains or losses in earnings.
Shipping and Handling – Amounts billed to customers
for shipping and handling of products are reflected in net sales
and are not significant. Expenses incurred related to shipping
and handling of products are reflected in selling, general and
administrative (“SG&A”) expenses and were $269.9 million,
$292.7 million and $290.2 million for the years ended
December 31, 2020, 2019 and 2018, respectively.
Research and Development – We expense all research
and development (“R&D”) costs as incurred except when
there is an 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, we expense the
milestone payment obligations when it is probable that the
milestone results will be 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.
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
our Warsaw North Campus facility, among other matters. See
Note 21 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.
Restructuring and other cost reduction initiatives – A
restructuring is defined as a program that is planned and
controlled by management, and materially changes either the
scope of a business undertaken by an entity, or the manner in
which that business is conducted. Restructuring charges
include (i) employee termination benefits, (ii) contract
termination costs and (iii) other related costs associated with
exit or disposal activities.
In December 2019, our Board of Directors approved, and
we initiated, a new global restructuring program with an
objective of reducing costs to allow us to further invest in
higher priority growth opportunities. Restructuring charges for
the years ended December 31, 2020 and 2019 were primarily
attributable to this program. Restructuring charges for the year
ended December 31, 2018 were primarily attributable to
project costs related to our supply chain optimization initiative.
47
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 gains and 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.
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 expected credit losses. We determine the
allowance for credit losses 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 credit losses was $75.8 million and $65.0 million
as of December 31, 2020 and 2019, respectively.
We also have receivables purchase arrangements with
unrelated third parties to transfer portions of our trade
accounts receivable balance. We terminated our purchase
arrangements in the U.S. and Japan during the year ended
December 31, 2020, but continue to have arrangements in
Europe. 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. Under
the previous arrangement in the U.S. and Japan, any
collections that we made that were unremitted to the third
48
parties were recognized on our consolidated balance sheets
under other current liabilities and in our consolidated
statements of cash flows in financing activities. In Europe, we
have no continuing involvement with the factored receivable.
Inventories – Inventories are stated at the lower of cost
and net realizable value, 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.
For cloud computing arrangements that are considered a
service contract, our capitalization of implementation costs is
aligned with the internal use software requirements. However,
on our consolidated balance sheet these implementation costs
are recognized in other noncurrent assets. On our consolidated
statement of cash flows, these implementations costs are
recognized in operating cash flows. The implementation costs
are recognized on a straight-line basis over the expected term
of the related service contract.
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 11 for more information regarding goodwill.
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 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, 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 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
49
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 15 for more information regarding our derivative and
hedging activities.
Accumulated Other Comprehensive Income (Loss) –
Accumulated other comprehensive income (loss) (“AOCI”)
refers to 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 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 June 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standard Update (“ASU”)
2016-13, Financial Instruments – Credit Losses (Topic 326).
The new guidance describes the current expected credit loss
(“CECL”) model which requires an estimate of expected
impairment on financial instruments over the lifetime of the
assets at each reporting date. Financial instruments in scope of
the guidance include financial assets measured at amortized
cost. Previous accounting guidance required recognition of
impairment when it was probable the loss has been incurred.
Under the CECL model, lifetime expected credit losses are
measured and recognized at each reporting date based on
historical experience, current conditions and forecasted
information. We adopted this standard as of January 1, 2020.
Adoption of this standard required the modified retrospective
transition method, which resulted in a cumulative-effect
adjustment to retained earnings of $3.1 million. The adoption
primarily impacted our trade receivables. Our concentrations
of credit risks are limited due to the large number of customers
and their dispersion across a number of geographic areas.
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
50
operate in international markets. Our historical credit losses
have not been significant due to this dispersion and the
financial stability of our customers. We consider credit losses
immaterial to our business and, therefore, have not provided
all the disclosures otherwise required by the standard.
In August 2018, the FASB issued ASU 2018-15,
Intangibles-Goodwill and Other-Internal-Use Software. ASU
2018-15 aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is
a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain
internal-use software. Our policy for capitalizing
implementation costs in a hosting arrangement was already
aligned with the new guidance. ASU 2018-15 also provides
guidance on how these implementation costs are to be
recorded in the statement of earnings, balance sheet and
statement of cash flows. We adopted this standard on a
prospective basis as of January 1, 2020. The adoption of this
standard did not have a material impact on our financial
position, results of operations or cash flows.
Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12
Simplifying the Accounting for Income Taxes. ASU 2019-12
eliminates certain exceptions in the current rules regarding the
approach for intraperiod tax allocations and the methodology
for calculating income taxes in an interim period, and clarifies
the accounting for transactions that result in a step-up in the
tax basis of goodwill, among other things. The standard
becomes effective for us in the first quarter of 2021. We are
currently evaluating the impact the standard will have on our
consolidated financial statements, but at this time we do not
expect it to be significant.
There are no recently issued accounting pronouncements
that we have not yet adopted that are expected to have a
material effect on our financial position, results of operations
or cash flows.
3.
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 products 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 2020.
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 and hospitals, 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 2020.
These customers may purchase items in large quantities if
incentives are offered or if there are new product offerings in a
market, which could cause period-to-period differences in
sales. 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; Sports
Medicine, Biologics, Foot and Ankle, Extremities and Trauma
(“S.E.T.”); Dental, Spine & Craniomaxillofacial and Thoracic
(“CMFT”); and Other. As discussed in Note 19, we have three
operating segments which are Americas and Global Businesses,
EMEA and Asia Pacific. The net sales by geography includes
sales of all product categories including Dental which is
included as a global business in the Americas and Global
Businesses operating segment.
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 and because we primarily sell the same products in
all geographies.
Net sales by geography are as follows (in millions):
Americas
EMEA
Asia Pacific
Total
For the Years Ended December 31,
2020
2019
2018
$4,335.4
$4,875.8
$4,837.2
1,391.3
1,746.9
1,801.9
1,297.8
1,359.5
1,293.8
$7,024.5
$7,982.2
$7,932.9
Net sales by product category are as follows (in millions):
Knees
Hips
S.E.T
Dental, Spine & CMFT
Other
Total
For the Years Ended December 31,
2020
2019
2018
$2,389.8
$2,810.1
$2,773.7
1,750.5
1,931.5
1,918.9
1,322.0
1,444.1
1,401.2
1,043.7
1,161.3
1,175.1
518.5
635.2
664.0
$7,024.5
$7,982.2
$7,932.9
In the first quarter of 2020, we updated our product
category revenue reporting format to further align with our
announced reorganization. Product category sales include the
following changes:
(cid:129) Surgical products, previously reported in the S.E.T. (Sports
Medicine, Extremities and Trauma) product category, are
included in the Other product category;
(cid:129) Dental products are combined with Spine and CMF
(Craniomaxillofacial) products into one product category;
(cid:129) The CMF product category name has been changed to CMFT
(Craniomaxillofacial and Thoracic), to reflect the Thoracic
business, which is included in that category; and
(cid:129) Other immaterial adjustments related to brand alignment
within product categories in the Asia Pacific region have
been made
Prior period product category sales have been reclassified
to conform to the current presentation.
51
4.
Restructuring
5.
Share-Based Compensation
In December 2019, our Board of Directors approved, and
we initiated, a new global restructuring program (the “2019
Restructuring Plan”) with an objective of reducing costs to
allow us to further invest in higher priority growth
opportunities. The 2019 Restructuring Plan is expected to
result in total pre-tax restructuring charges of approximately
$350 million to $400 million and reduce gross annual pre-tax
operating expenses by approximately $200 million to
$300 million by the end of 2023 as program benefits are
realized. The pre-tax restructuring charges consist of
employee termination benefits; contract terminations for
facilities and sales agents; and other charges, such as
consulting fees, project management and relocation costs. The
restructuring charges incurred in the year ended December 31,
2020 primarily related to employee termination benefits,
distributor contract terminations, consulting and project
management. The restructuring charges incurred in the year
ended December 31, 2019, primarily related to employee
termination benefits, consulting and project management. The
following table summarizes the liabilities recognized related to
the 2019 Restructuring Plan (in millions):
Employee
Termination
Benefits
Contract
Terminations
Balance, December 31, 2018
$
–
$
Additions
Cash payments
Balance, December 31, 2019
Additions
Cash payments
Foreign currency exchange
23.2
–
23.2
55.3
(41.2)
Other
Total
$
– $
–
13.1
36.3
(9.0)
(9.0)
4.1
27.3
–
–
–
–
15.8
(4.9)
37.1
108.2
(26.1)
(72.2)
rate changes
1.4
–
–
1.4
Balance, December 31, 2020
$ 38.7
$10.9
$ 15.1 $ 64.7
Our share-based payments primarily consist of stock
options and restricted stock units (“RSUs”). Share-based
compensation expense was as follows (in millions):
Total expense, pre-tax
Tax benefit related to awards
Total expense, net of tax
For
the Years Ended December 31,
2020
2019
2018
$79.7
16.9
$62.8
$84.3
21.8
$62.5
$65.5
14.6
$50.9
We had two equity compensation plans in effect at
December 31, 2020: the 2009 Stock Incentive Plan (“2009
Plan”) and the Stock Plan for Non-Employee Directors. We
have reserved the maximum number of shares of common
stock available for awards under the terms of each of these
plans. We have registered 44.1 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, 2020, an aggregate of 6.1 million
shares were available for future grants and awards under these
plans.
Expense incurred since the
start of the 2019
Restructuring Plan
Expense estimated to be
$ 78.5
$15.8
$ 50.2 $144.5
Stock Options
recognized for the 2019
Restructuring Plan
$150.0 $375.0
For the expense estimated to be recognized for the 2019
$200.0
$25.0
Restructuring Plan, we have disclosed the midpoint in our
estimated range of expenses. We do not include restructuring
charges in the operating profit of our reportable segments.
In our consolidated statement of earnings, we report
restructuring charges in our “Restructuring and other cost
reduction initiatives” financial statement line item. We report
the expenses for other cost reduction initiatives with
restructuring expenses because these activities also have the
goal of reducing costs across the organization. However, since
the cost reduction initiative expenses are not considered
restructuring, they have been excluded from the amounts
presented in this note.
52
Stock options granted to date under our plans generally
vest over 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.
A summary of stock option activity for the year ended December 31, 2020 is as follows (options in thousands):
Outstanding at January 1, 2020
Options granted
Options exercised
Options forfeited
Options expired
Outstanding at December 31, 2020
Vested or expected to vest as of December 31, 2020
Exercisable at December 31, 2020
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,
2020
2019
2018
0.6%
0.8%
0.8%
22.3% 22.1% 22.1%
1.3%
2.4%
2.7%
5.0
5.5
5.2
Weighted average fair value of options
granted
$31.65
$28.68
$26.66
Intrinsic value of options exercised (in
millions)
$ 50.1
$ 76.8
$ 46.6
Tax benefit of options exercised (in
millions)
$ 9.6
$ 15.8
$ 6.8
As of December 31, 2020, there was $49.9 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 2.4 years.
RSUs
We have awarded RSUs to certain of our employees. The
terms of the awards are generally three or four years. Some of
the awards have only service conditions while some have
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
Intrinsic
Value
(in millions)
Stock
Options
7,285
$107.53
1,370
155.68
(1,028)
100.69
(175)
135.54
(29)
113.53
7,423
$116.67
7,205
$115.92
4,581
$104.20
6.3
6.2
5.0
$282.0
$278.8
$228.5
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 one year to four
years.
A summary of nonvested RSU activity for the year ended
December 31, 2020 is as follows (RSUs in thousands):
Outstanding at January 1, 2020
Granted
Vested
Forfeited
Weighted Average
Grant Date Fair
Value
$118.11
148.10
114.35
132.42
RSUs
1,228
446
(281)
(323)
Outstanding at December 31, 2020
1,070
129.65
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, 2020, we estimate that approximately 646,553
outstanding RSUs will vest. If our estimate were to change in
the future, the cumulative effect of the change in estimate will
be recorded in that period. Based upon the number of RSUs
that we expect to vest, the unrecognized share-based payment
expense as of December 31, 2020 was $44.8 million and is
expected to be recognized over a weighted-average period of
2.1 years. The fair value of RSUs that vested during the years
ended December 31, 2020, 2019 and 2018 based upon our
stock price on the date of vesting was $33.2 million,
$26.3 million, and $18.7 million, respectively.
53
In Europe, we sell to a third party and have no continuing
involvement or significant risk with the factored accounts
receivable.
Funds received from the transfers are recorded as an
increase to cash and a reduction of accounts receivable
outstanding in the consolidated balance sheets. We report the
cash flows attributable to the sale of the 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 included any resulting gains or losses from the
sales of receivables, credit insurance and factoring fees.
For the years ended December 31, 2020, 2019 and 2018,
we sold receivables having an aggregate face value of
$1,323.0 million, $3,116.2 million and $2,706.4 million to third
parties in exchange for cash proceeds of $1,321.3 million,
$3,113.9 million and $2,704.9 million, respectively. Expenses
recognized on these sales during the years ended
December 31, 2020, 2019 and 2018 were not significant. For
the years ended December 31, 2020, 2019 and 2018 under the
U.S. and Japan programs, we collected $1,308.3 million,
$2,857.4 million and $2,273.5 million, respectively, from our
customers and remitted that amount to the third party, and we
effectively repurchased $146.5 million, $184.6 million and
$208.9 million, respectively, of previously sold accounts
receivable from the third party due to the programs’ revolving
nature. At December 31, 2019, we had collected $54.6 million
that were unremitted to the third party, which are reflected in
our consolidated balance sheets under other current liabilities.
We had no unremitted amounts at December 31, 2020. The
initial collection of cash from customers and its remittance to
the third party is reflected in net cash provided by/(used in)
financing activities in our consolidated statements of cash
flows.
At December 31, 2019, the outstanding principal amount
of receivables that had been derecognized under the U.S. and
Japan revolving arrangements combined amounted to
$270.2 million. There were no outstanding receivables
derecognized at December 31, 2020 due to the termination of
those arrangements in 2020.
6.
Inventories
Inventories consisted of the following (in millions):
Finished goods
Work in progress
Raw materials
Inventories
As of December 31,
2020
2019
$1,954.6
$1,875.4
223.7
272.4
231.0
278.6
$2,450.7
$2,385.0
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, 2020, 2019 and 2018 were $250.0 million,
$221.4 million and $226.1 million, respectively.
7.
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,
2020
2019
$
27.7
$
27.6
2,197.8
2,007.0
455.8
482.4
3,518.3
3,250.5
125.3
149.3
6,324.9
5,916.8
(4,277.2)
(3,839.4)
Property, plant and equipment, net
$ 2,047.7
$ 2,077.4
Depreciation expense was $435.1 million, $421.8 million
and $442.6 million for the years ended December 31, 2020,
2019 and 2018, respectively.
We had $24.4 million and $39.8 million of property, plant
and equipment included in accounts payable as of
December 31, 2020 and 2019, respectively.
8.
Transfers of Financial Assets
We have 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.
We terminated our programs in the U.S. and Japan in the
fourth quarter of 2020. Our programs were executed on a
revolving basis with a maximum funding limit of $450 million
combined before termination. We acted as the collection agent
on behalf of the third party, but had no significant retained
interests or servicing liabilities related to the accounts
receivable sold. As of December 31, 2020, we had collected
and remitted or repurchased all factored receivables at the
time of the termination of those programs in 2020.
54
9.
Fair Value Measurements of Assets and Liabilities
The following financial assets and liabilities are recorded
at fair value on a recurring basis (in millions):
As of December 31, 2020
Fair Value Measurements
at Reporting Date Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Recorded
Balance
Description
Liabilities
Derivatives designated as
hedges, current and long-
term
Foreign currency forward
As of December 31, 2019
Fair Value Measurements
at Reporting Date Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Recorded
Balance
Description
Assets
Derivatives designated as
hedges, current and long-
term
Foreign currency forward
contracts
$ 0.5
$
–
$ 0.5
$
–
Derivatives not designated as
hedges, current and long-
term
Foreign currency forward
contracts
0.9
Total Assets
$ 1.4
$
Liabilities
Derivatives designated as
hedges, current and long-
term
Foreign currency forward
contracts
Interest rate swaps
Derivatives not designated as
hedges, current and long-
term
Foreign currency forward
contracts
Contingent payments related to
acquisitions
$ 48.5
$
83.3
3.2
48.2
Total Liabilities
$183.2
$
–
–
–
–
–
–
–
0.9
$ 1.4
$
$ 48.5
$
83.3
3.2
–
–
–
–
–
–
48.2
$135.0
$ 48.2
contracts
$ 0.6
$
Contingent payments related to
acquisitions
28.8
Total Liabilities
$29.4
$
–
–
–
$0.6
$
–
–
28.8
$0.6
$28.8
We value our foreign currency forward contracts using a
market approach based on foreign currency exchange rates
obtained from active markets, and we perform ongoing
assessments of counterparty credit risk.
We value our interest rate swaps using a market approach
based on publicly available market yield curves, 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
sales-based payments, and are valued using discounted cash
flow techniques. The fair value of sales-based payments is
based upon probability-weighted future revenue estimates, and
increases as revenue estimates increase. See Note 10 for
additional information regarding contingent payments related
to acquisitions.
The following table provides a reconciliation of the
beginning and ending balances of items measured at fair value
on a recurring basis in the tables above that used significant
unobservable inputs (Level 3) (in millions):
Level 3 -
Liabilities
$ 28.8
31.3
2.8
(15.0)
0.3
$ 48.2
As of December 31, 2019
Beginning balance December 31, 2019
Contingent payments related to acquisitions
Fair Value Measurements
at Reporting Date Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Recorded
Balance
New contingent payments related to the 2020 acquisitions
Changes in estimates
Settlements
Foreign currency impact
Ending balance December 31, 2020
Changes in estimates for contingent payments related to
acquisitions are recognized in Acquisition, integration and
related expenses on our consolidated statements of earnings.
10. Acquisitions
$39.1
60.5
$99.6
$–
–
$–
$39.1
60.5
$99.6
$–
–
$–
In the fourth quarter of 2020, we completed the
acquisitions of A&E Medical Corporation (“A&E Medical”), a
sternal closure company, and Relign Corp. (“Relign”), an
arthroscopy equipment company (collectively referred to as
55
Description
Assets
Derivatives designated as
hedges, current and long-
term
Foreign currency forward
contracts
Interest rate swaps
Total Assets
the “2020 acquisitions”). The 2020 acquisitions were
completed primarily to expand our product offerings in the
CMFT and sports medicine markets. The total aggregate cash
consideration paid in 2020 related to the 2020 acquisitions was
$244.9 million, with an additional $145.0 million of guaranteed
deferred payments to be made in 2021. The Company has
assigned a fair value of $31.3 million for potential additional
payments related to these acquisitions that are contingent on
the respective acquired companies’ future product sales. The
estimated fair value of the aggregate contingent payment
liabilities was calculated based on the probability of achieving
the specified sales growth and discounting to present value
the estimated payments.
The goodwill related to the 2020 acquisitions represents
the excess of the consideration transferred over the fair value
of the net assets acquired. The goodwill related to the 2020
acquisitions is generated from the operational synergies and
cross-selling opportunities we expect to achieve from the
technologies acquired. None of the goodwill related to these
acquisitions is expected to be deductible for tax purposes.
The purchase price allocations as of December 31, 2020
are preliminary. We need additional time to analyze historical
purchasing patterns of the acquired customer bases, which
may affect the value of the customer relationships intangible
asset. Additionally, as we finalize the acquired companies’ tax
returns and evaluate their tax attributes, the recognized tax
assets and liabilities may change. There may be differences
between the preliminary estimates of fair value and the final
acquisition accounting. The final estimates of fair value are
expected to be completed as soon as possible, but no later
than one year after the respective acquisition dates.
The following table summarizes the aggregate preliminary
estimates of fair value of the assets acquired and liabilities
assumed related to the 2020 acquisitions (in millions):
Current assets
Intangible assets subject to amortization:
Technology
Trademarks and trade names
Customer relationships
Other
Goodwill
Other assets
Total assets acquired
Current liabilities
Deferred income taxes
Other long-term liabilities
Total liabilities assumed
Net assets acquired
$ 33.6
154.6
1.5
135.7
4.9
162.2
5.2
497.7
4.7
70.1
1.7
76.5
$421.2
The weighted average amortization period selected for
technology, trademarks and trade names, customer
relationships and other intangible assets were 13 years, 12
years, 15 years and 5 years, respectively.
We have not included pro forma information and certain
other information under GAAP for the 2020 acquisitions
because they did not have a material impact on our financial
position or results of operations.
11. Goodwill and Other Intangible Assets
The following table summarizes the changes in the carrying amount of goodwill (in millions):
Balance at January 1, 2019
Goodwill
Accumulated impairment losses
Other acquisitions
Currency translation
Balance at December 31, 2019
Goodwill
Accumulated impairment losses
Goodwill reportable segment change
Accumulated impairment losses reportable segment change
Other acquisitions
Currency translation
Impairment
Balance at December 31, 2020
Goodwill
Accumulated impairment losses
56
Americas
and Global
Businesses
EMEA
Asia
Pacific
Immaterial
Product Category
Operating
Segments
Total
$ 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
–
(12.6)
–
(5.4)
–
0.2
25.0
(1.9)
25.0
(19.7)
7,699.8
1,316.8
507.4
1,729.3
11,253.3
–
(567.0)
–
(1,086.6)
(1,653.6)
7,699.8
1,661.3
(1,086.6)
142.4
80.2
749.8
17.0
–
10.9
18.2
(142.0)
(470.0)
507.4
51.0
–
8.9
13.5
–
9,583.7
1,362.9
580.8
(1,228.6)
(1,037.0)
–
$ 8,355.1
$
325.9
$580.8
$
642.7
9,599.7
(1,729.3)
1,086.6
–
–
162.2
111.9
(612.0)
11,527.4
(2,265.6)
$ 9,261.8
–
–
–
–
–
–
As discussed further in Note 19, in connection with the 2019
Restructuring Plan, our operating segments and reportable
segments have changed. Goodwill has been reallocated from our
previous reportable segments to reflect the new structure. We
now have five reporting units with goodwill assigned to them.
As discussed further in Note 10, we purchased A&E
Medical, Relign and other immaterial companies, resulting in
additional goodwill.
As of March 31, 2020, we tested three of our reporting units
for impairment due to: i) the significant adverse effect the
COVID-19 pandemic was expected to have on our operating
results, and ii) the change in reportable segments, which
changed the cash flows and asset compositions of certain
reporting units. This resulted in goodwill impairment charges of
$470.0 million and $142.0 million recognized for
our EMEA reporting unit and Dental reporting unit,
respectively. The remaining two reporting units with goodwill
assigned to them were not tested for impairment as we
concluded it is more likely than not the fair value of these
reporting units exceeded their carrying value.
The impairment charge of $470.0 million in our EMEA
reporting unit was primarily due to the COVID-19 pandemic and
reportable segment change. The COVID-19 pandemic has had a
significant adverse effect on both the operational and
non-operational assumptions used to estimate the fair value of
our EMEA reporting unit. The significant decline in our share
price and that of most other publicly-traded companies resulted
in us utilizing a higher risk-adjusted discount rate compared to
the rate used in our previous annual goodwill impairment test to
discount our future estimated cash flows to present value. On an
operational basis, due to the deferral of elective surgical
procedures, at the time of March 31, 2020 impairment test, we
estimated that our cash flows in 2020 would be significantly lower
than previously estimated in our prior annual goodwill
impairment test. The change in reportable segments resulted in
additional impairment due to additional assets being allocated to
the EMEA reporting unit. As of December 31, 2020,
$325.9 million of goodwill remained in the EMEA reporting unit.
The impairment charge of $142.0 million in our Dental
reporting unit was primarily driven by the COVID-19
pandemic. Similar to our EMEA reporting unit, changes in the
market caused an increase to the risk-adjusted discount rates
utilized to discount our future estimated cash flows to present
value, and we expected that the deferral of elective dental
procedures would have an adverse effect on our cash flows. We
estimated the cash flows from our Dental reporting unit might
recover more slowly than our other reporting units because many
dental procedures are not covered by insurance. Therefore, we
estimated that economic uncertainty would likely result in
patients deferring dental procedures for a longer period of time
than procedures involving our other products. As of
December 31, 2020, $273.7 million of goodwill remained in the
Dental reporting unit.
The third reporting unit we tested for impairment, Americas
CMFT, had an estimated fair value that exceeded its carrying
value by less than 5 percent. The Americas CMFT reporting unit’s
estimated fair value was also adversely impacted by the
COVID-19 pandemic similar to our EMEA and Dental reporting
units.
We estimated the fair value of the EMEA, Dental and
Americas CMFT 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 EMEA, Dental and
Americas CMFT 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. In the
near term, the COVID-19 pandemic was expected to result in a
decline to our revenue when compared to the same prior year
periods. 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.
We perform our annual test of goodwill impairment in the
fourth quarter of every year. In connection with the 2020
annual goodwill impairment test in the fourth quarter of 2020,
we performed a qualitative test on our Asia Pacific reporting
unit and concluded it was more likely than not the fair value of
this reporting unit exceeded its carrying value. We estimated
the fair value of our Americas Orthopedics, Americas CMFT,
EMEA and Dental reporting units using the income and market
approaches. The estimated fair values of our reporting units
increased in the fourth quarter impairment test compared to
the March 31, 2020 test due to the negative effects on
discounted cash flows from the COVID-19 pandemic forecasted
for second and third quarters of 2020 no longer being in the
future cash flow estimates. As a result, the estimated fair value
of each reporting unit exceeded its carrying value by more
than 10 percent.
We will continue to monitor the fair value of our reporting
units in our interim and annual reporting periods. If our
estimated cash flows 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) the COVID-19 pandemic causes elective surgical procedures
to be deferred longer than our estimates, or additional
recurrence of the virus causes additional deferrals of elective
surgical procedures, 2) 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 3) our inability to achieve the
estimated operating margins in our forecasts due to
unforeseen factors. Additionally, changes in the broader
57
economic environment could cause changes to our estimated
discount rates and comparable company valuation indicators,
which may impact our estimated fair values.
the mergers. We estimated our Spine sales were currently
growing below overall market growth. Consequently, we
lowered our expectations of future sales growth.
During the year ended December 31, 2018, we recorded
The impairment charge of $567.0 million in our EMEA
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. After the impairment in our Spine reporting unit,
no goodwill balance remained.
The Spine reporting unit included goodwill from
significant mergers for that reporting unit in 2015 and 2016, as
well as goodwill that existed prior to those mergers. The
forecasts used to recognize the goodwill related to the 2015
and 2016 mergers assumed cross sale opportunities of the
combined businesses would enable the reporting unit to grow
faster than the overall spine market. The primary drivers of
impairment were lower than expected sales due to sales force
integration issues and additional complexities of combining
the spine product supply chains of the combined
companies. As a result, in our forecasts we estimated it would
take longer than originally anticipated to realize the benefits of
reporting unit in 2018 was driven by a combination of
operational and non-operational factors. Sales growth in the
EMEA knees and hips overall market had softened in the past
two years to low single digits. Accordingly, we 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 to comply with the EU
MDR was expected to be higher than previously
anticipated. Lastly, the weakening of European foreign
currencies against the U.S. Dollar and other factors
contributed to the impairment charge.
The fair values for the 2018 impairment charges were
estimated using income and market approaches similar to the
2020 tests.
The components of identifiable intangible assets were as follows (in millions):
As of December 31, 2020:
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
$ 3,902.0
$ 383.3
$ 677.0
$ 5,589.7
$
(1,746.2)
(211.6)
(251.5)
(1,820.9)
–
–
$ 152.4
$10,704.4
(110.9)
(4,141.1)
–
–
462.7
–
29.5
–
492.2
Total identifiable intangible assets
$ 2,155.8
$ 171.7
$ 888.2
$ 3,768.8
$29.5
$ 41.5
$ 7,055.5
As of December 31, 2019:
Intangible assets subject to amortization:
Gross carrying amount
Accumulated amortization
Intangible assets not subject to
amortization:
Gross carrying amount
$ 3,634.0
$ 378.3
$ 659.9
$ 5,375.0
$
(1,487.6)
(191.9)
(207.6)
(1,489.4)
–
–
$ 165.4
$10,212.6
(95.3)
(3,471.8)
–
–
454.9
–
61.9
–
516.8
Total identifiable intangible assets
$ 2,146.4
$ 186.4
$ 907.2
$ 3,885.6
$61.9
$ 70.1
$ 7,257.6
As discussed further in Note 10, the Company purchased
A&E Medical, Relign and 3DIEMME in 2020, resulting in
additional intangible assets.
In 2019, we entered into an agreement and paid
$192.5 million to buy out certain licensing arrangements from
an unrelated third party. This new agreement and the related
payment replaced the variable royalty payments that
otherwise would have been due under the terms of previous
licensing arrangements through 2029. Under the new
agreement, we maintain the rights to the counterparty’s
intellectual property provided under the previous licensing
arrangements. The $192.5 million payment was recognized as
an intangible asset and will be amortized through 2029, which
represents the useful life of the intellectual property.
We recognized IPR&D intangible asset impairment
charges of $33.0 million, $70.1 million and $3.8 million in the
years ended December 31, 2020, 2019 and 2018, respectively,
in “Goodwill and intangible asset impairment” on our
consolidated statements of earnings. The $33.0 million charge
in 2020 included a $19.0 million impairment related to a
project that requires additional research and development
costs to complete, which delays the cash inflows and results in
a decreased estimated fair value. The remaining $14.0 million
impairment charge in 2020, the $70.1 million charge from 2019
and the $3.8 million charge from 2018 are related to
58
terminated IPR&D projects. The termination of these projects
was the result of prioritizing our internal research and
development portfolio as a result of COVID-19 and to focus our
engineering resources on the opportunities that most closely
link to our mission. Since these projects were not a priority,
their terminations are not expected to have a significant
impact on our future cash flows.
Estimated annual amortization expense based upon
intangible assets recognized as of December 31, 2020 for the
years ending December 31, 2021 through 2025 is (in millions):
For the Years Ending December 31,
2021
2022
2023
2024
2025
$609.6
604.6
597.9
587.8
581.2
12. Other Current Liabilities
Other current liabilities consisted of the following (in
millions):
As of December 31,
2020
2019
Other current liabilities:
License and service agreements
$ 189.7
$ 179.3
Salaries, wages and benefits
Litigation and product liability
Deferred business combination payments
Accrued liabilities
319.5
123.2
145.0
890.0
314.1
142.4
–
778.1
Total other current liabilities
$1,667.4
$1,413.9
13. Debt
Our debt consisted of the following (in millions):
Current portion of long-term debt
2.700% Senior Notes due 2020
Floating Rate Notes due 2021
3.375% Senior Notes due 2021
Total short-term debt
Long-term debt
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
3.050% Senior Notes due 2026
3.550% Senior Notes due 2030
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
As of December 31,
2020
2019
$
–
200.0
300.0
$1,500.0
–
–
$ 500.0
$1,500.0
$
–
–
750.0
300.0
2,000.0
600.0
900.0
253.4
317.8
395.4
611.8
611.8
$ 450.0
300.0
750.0
300.0
2,000.0
–
–
253.4
317.8
395.4
561.3
561.3
1.164% Euro Notes due 2027
Japan Term Loan A
Japan Term Loan B
Debt discount and issuance costs
Adjustment related to interest rate swaps
As of December 31,
2020
2019
611.8
113.3
206.3
(48.2)
3.1
561.3
106.9
194.7
(37.1)
6.4
Total long-term debt
$7,626.5
$6,721.4
At December 31, 2020, our total current and non-current
debt of $8.1 billion consisted of $7.8 billion aggregate principal
amount of senior notes, which included 1.5 billion of Euro-
denominated senior notes (“Euro notes”), 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 $3.1 million, partially
offset by debt discount and issuance costs of $48.2 million.
On December 30, 2020, we repaid $250.0 million of the
$450.0 million aggregate principal amount of our floating rate
senior notes due March 19, 2021, with cash on hand. In
January and February 2021, we made $100.0 million payments
in each month with cash on hand to repay the remainder of the
principal balance.
On March 20, 2020, we completed the offering of
$600.0 million aggregate principal amount of our 3.050% senior
notes due on January 15, 2026 and $900.0 million aggregate
principal amount of our 3.550% senior notes due on March 20,
2030. Interest payable on the 3.050% senior notes is payable
semi-annually, commencing on July 15, 2020 until maturity.
Interest payable on the 3.550% senior notes is payable semi-
annually, commencing on September 20, 2020 until maturity.
The proceeds from the offering, together with cash on hand,
were used to repay at maturity the $1.5 billion principal
amount of 2.700% senior notes due on April 1, 2020.
On November 15, 2019, we completed the offering of
€500 million aggregate principal amount of our 1.164% Euro
notes due November 15, 2027. Interest is payable on the
1.164% Euro notes on November 15 of each year until
maturity. We received net proceeds of approximately
$549.2 million from this offering, which were primarily used to
repay the $500 million principal amount 4.625% Senior Notes
due 2019 at maturity, and the remainder of which were used to
repay a portion of a U.S. term loan (“U.S. Term Loan C”).
On November 1, 2019, we entered into a revolving credit
agreement (the “2019 Credit Agreement”), which contains a five-
year unsecured multicurrency revolving facility of $1.5 billion
(the “2019 Multicurrency Revolving Facility”), which replaced
the previous $1.5 billion multicurrency revolving credit facility
(the “2016 Multicurrency Revolving Facility”) and a U.S. term
loan (“U.S. Term Loan B”) under our credit agreement executed
in September 2016 (as amended, the “2016 Credit Agreement”).
U.S. Term Loan B was paid in full during the year ended
December 31, 2019. The 2019 Credit Agreement will mature on
November 1, 2024, with two one-year extensions exercisable at
our discretion and subject to required lender consent. As of
December 31, 2020, there were no outstanding borrowings under
the 2019 Multicurrency Revolving Facility.
59
Borrowings under the 2019 Credit Agreement generally
bear interest at floating rates. We pay a facility fee on the
aggregate amount of the 2019 Multicurrency Revolving
Facility. The 2019 Credit Agreement contains customary
affirmative and negative covenants and events of default for
unsecured financing arrangements, including, among other
things, limitations on consolidations, mergers, and sales of
assets. On April 23, 2020, we entered into an amendment to
the 2019 Credit Agreement to temporarily increase the
maximum permitted consolidated indebtedness to
consolidated EBITDA ratio (“Consolidated Leverage Ratio”),
temporarily increase the interest rate margin applicable to
revolving loans and the facility fee, and make other
administrative changes. Pursuant to the amendment, the
maximum permitted Consolidated Leverage Ratio as of the last
day of any period of four consecutive fiscal quarters under the
2019 Credit Agreement is (i) 5.75 to 1.00 for periods ending
between April 1, 2020 and including December 31, 2020, (ii)
5.00 to 1.00 for the period ending March 31, 2021, and (iii)
4.50 to 1.00 for periods ending after April 1, 2021 (with such
maximum permitted Consolidated Leverage Ratio subject to
increase to 5.00 to 1.00 for a period of time in connection with
a qualified material acquisition on or after July 1, 2021). We
were in compliance with all covenants under the 2019 Credit
Agreement as of December 31, 2020. The amendment also
increased the interest rate margin applicable to revolving loans
and the facility fee, each of which are determined by reference
to our senior unsecured long-term debt credit rating, through
March 31, 2021.
On April 23, 2020, we entered into a revolving credit
agreement which was an unsecured revolving credit facility of
$1.0 billion (the “April 2020 Revolving Facility”). In
conjunction with a new revolving credit agreement (the
“September 2020 Credit Agreement”) entered into on
September 18, 2020, the April 2020 Revolving Facility was
terminated. We never borrowed against the April 2020
Revolving Facility. The September 2020 Credit Agreement is a
$1.0 billion 364-day unsecured revolving credit facility (the
“September 2020 Revolving Facility”). The September 2020
Revolving Facility will be used for general corporate purposes.
The September 2020 Credit Agreement matures on
September 17, 2021. Borrowings under the September 2020
Credit Agreement generally bear interest at floating rates. We
pay a facility fee on the aggregate amount of the September
2020 Revolving Facility. The September 2020 Credit
Agreement contains customary affirmative and negative
covenants and events of default for an unsecured financing
arrangement including, among other things, limitations on
consolidations, mergers, and sales of assets. The September
2020 Credit Agreement requires us to maintain a Consolidated
Leverage Ratio as of the last day of any period of four
consecutive fiscal quarters of no greater than (i) 5.75 to 1.00
for periods ending during the period from September 18, 2020
to and including December 31, 2020, (ii) 5.00 to 1.00 for the
period ending March 31, 2021, and (iii) 4.50 to 1.00 for periods
ending after April 1, 2021 (with such permitted Consolidated
Leverage Ratio subject to increase to 5.00 to 1.00 for a period
of time in connection with a qualified material acquisition on or
after July 1, 2021). We were in compliance with all covenants
60
under the September 2020 Credit Agreement, as of
December 31, 2020. As of December 31, 2020, there were no
outstanding borrowings under the September 2020 Credit
Agreement.
On December 14, 2018, we entered into a credit
agreement (the “2018 Credit Agreement”) that provided for
U.S. Term Loan C, which was 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, and
borrowed $675.0 million under that facility. 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 issued under the 2016 Credit Agreement. We
repaid $735.0 million and $140.0 million in principal under U.S.
Term Loan C during the years ended December 31, 2019 and
2018, respectively, primarily with cash from operations, which
terminated the 2018 Credit Agreement and U.S Term Loan C.
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.
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. In addition, we may
redeem, at our option, the 3.375% Senior Notes due 2021, the
3.150% Senior Notes due 2022, the 1.414% Euro notes due
2022, the 3.700% Senior Notes due 2023, the 3.550% Senior
Notes due 2025, the 3.050% Senior Notes due 2026, the
2.425% Euro notes due 2026, the 1.164% Euro notes due 2027,
the 3.550% Senior Notes due 2030, 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, 2020, based on quoted prices for the specific
securities from transactions in over-the-counter markets
(Level 2), was $8,619.0 million. The estimated fair value of
Japan Term Loan A and Japan Term Loan B, in the aggregate,
as of December 31, 2020, based upon publicly available market
yield curves and the terms of the debt (Level 2), was
$318.3 million.
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.
These interest rate swaps were terminated concurrently with
the repayment of the remaining balance of U.S. Term Loan B in
2019. In 2018 and 2019, 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 15 for
additional information regarding our interest rate swap
agreements.
At December 31, 2020 and 2019, the weighted average
interest rate for our borrowings was 3.0 percent and
2.9 percent, respectively. We paid $193.1 million,
$226.9 million, and $282.8 million in interest during 2020,
2019, and 2018, respectively.
14. Accumulated Other Comprehensive 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, 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 16 for more information on our defined
benefit plans.
The following table shows the changes in the components of AOCI, net of tax (in millions):
Balance December 31, 2019
AOCI before reclassifications
Reclassifications to statements of earnings
Balance December 31, 2020
The following table shows the reclassification adjustments from AOCI (in millions):
Foreign
Currency
Translation
Cash
Flow
Hedges
Defined
Benefit
Plan Items
Total
AOCI
$(32.8)
25.6
–
$ 16.4
(33.5)
(38.5)
$(225.5) $(241.9)
(20.3)
(35.6)
(12.4)
2.9
$ (7.2)
$(55.6) $(235.0) $(297.8)
Component of AOCI
Cash flow hedges
Foreign exchange forward contracts
Interest rate swaps
Forward starting interest rate swaps
Defined benefit plans
Prior service cost
Curtailment gain
Unrecognized actuarial loss
Total reclassifications
Amount of Gain / (Loss)
Reclassified from AOCI
For the Years Ended December 31,
2020
2019
2018
Location on Statements of Earnings
$45.4
–
(0.6)
44.8
6.3
$ 38.4
2.8
(0.6)
40.6
5.5
$(26.2)
–
(0.6)
(26.8)
(3.2)
$38.5
$ 35.1
$(23.6)
$ 3.9
–
(8.5)
(4.6)
(1.7)
$ 7.3
7.2
(21.8)
(7.3)
(2.3)
$ 9.9
–
(26.2)
(16.3)
(4.3)
$(2.9)
$ (5.0)
$(12.0)
$35.6
$ 30.1
$(35.6)
Cost of products sold
Interest expense, net
Interest expense, net
Total before tax
(Benefit) provision for income taxes
Net of tax
Other income (expense), net
Other income (expense), net
Other income (expense), net
Total before tax
(Benefit) provision for income taxes
Net of tax
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,
Foreign currency cumulative translation adjustments
Unrealized cash flow hedge (losses) gains
Reclassification adjustments on cash flow hedges
Adjustments to prior service cost and unrecognized actuarial
$ (43.4) $ 12.1
34.6
(40.6)
(42.7)
(44.8)
$(148.7) $(69.0) $13.6
4.0
(5.5)
(9.2)
(6.3)
81.1
26.8
Before Tax
2020
2019
2018
2020
Tax
2019
Net of Tax
2018
2020
2019
2018
$(13.3) $ 25.6
(33.5)
(38.5)
12.9
3.2
$ (1.5) $(135.4)
68.2
23.6
30.6
(35.1)
assumptions
Total Other Comprehensive
(Loss) Income
(20.9)
(56.4)
(22.7)
(11.4)
(7.9)
(5.0)
(9.5)
(48.5)
(17.7)
$(151.8) $(50.3) $ (63.5) $(95.9) $ 4.2
$ (2.2) $(55.9) $(54.5) $ (61.3)
61
15. 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 in 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 4.625%
Senior Notes were repaid at maturity in 2019. The remaining unamortized balance related to the 3.375% Senior Notes as of
December 31, 2020 was $3.1 million, which will be recognized using the effective interest rate method over the remaining maturity
period of the 3.375% Senior Notes. As of December 31, 2020 and 2019, 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
Derivatives Designated as Cash Flow Hedges
In 2014, we entered into forward starting interest rate
swaps that were designated as cash flow hedges of our 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, 2020 was $25.9 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 U.S. Term Loan B. The interest rate swaps
minimized the exposure to changes in the LIBOR interest
rates while the variable-rate debt was outstanding. In the first
quarter of 2019, we terminated these interest rate swaps
concurrently with the repayment of the remaining balance of
U.S. Term Loan B, and we recognized proceeds and interest
income of $2.8 million related to the termination.
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
62
Carrying Amount of the Hedged Liabilities
Cumulative Amount of Fair Value Hedging
Adjustment Included in the Carrying Amount
of the Hedged Liabilities
December 31, 2020
December 31, 2019
December 31, 2020
December 31, 2019
$303.0
$306.2
$3.1
$6.4
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 and
November 2019, as discussed in Note 13, 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.
At December 31, 2020, we had receive-fixed-rate,
pay-fixed-rate cross-currency interest rate swaps with notional
amounts outstanding of Euro 1,450 million, Japanese Yen
7 billion and Swiss Franc 50 million. These transactions
further hedge our net investment in certain wholly-owned
foreign subsidiaries that have a functional currency of Euro,
Japanese Yen and Swiss Franc. All changes in the fair value of
a derivative instrument designated as a net investment hedge
are recorded as a component of AOCI in the 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
eliminated. 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 swaps is
reflected in investing cash flows in our consolidated
statements of cash flows.
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 confirming 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 gains and losses are
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.
Income Statement Presentation
Derivatives Designated as Cash Flow Hedges
For foreign currency exchange forward contracts
outstanding at December 31, 2020, 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, 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 2021 through June 2023.
As of December 31, 2020, the notional amounts of outstanding
forward contracts entered into with third parties to purchase
U.S. Dollars were $1,605.9 million. As of December 31, 2020,
the notional amounts of outstanding forward contracts entered
into with third parties to purchase Swiss Francs were
$283.8 million.
Derivatives Not Designated as Hedging Instruments
We enter into foreign currency forward exchange
contracts with terms of one to two months to manage currency
exposures for monetary assets and liabilities denominated in a
currency other than an entity’s functional currency. 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 amount of these gains/losses is recorded in other
income (expense), net. Outstanding contracts are recorded on
the balance sheet at fair value 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):
Amount of Gain / (Loss)
Recognized in AOCI
Years Ended December 31,
Amount of Gain / (Loss)
Reclassified from AOCI
Years Ended December 31,
Derivative Instrument
2020
2019
2018
Location on Statement of Earnings
2020
2019
2018
Foreign exchange forward contracts
$(42.7) $34.6
$82.8
Cost of products sold
$45.4
$38.4
$(26.2)
Interest rate swaps
Forward starting interest rate swaps
–
–
–
–
(1.7)
–
$(42.7) $34.6
$81.1
Interest expense, net
–
2.8
–
Interest expense, net
(0.6)
(0.6)
(0.6)
$44.8
$40.6
$(26.8)
The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on the consolidated balance
sheet at December 31, 2020, together with settled derivatives where the hedged item has not yet affected earnings, was a net
unrealized loss of $70.1 million, or $55.6 million after taxes, which is deferred in AOCI. A loss of $18.2 million, or $16.1 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.
63
The following table presents the effects of fair value, cash flow and net investment hedge accounting on our consolidated
statements of earnings (in millions):
Location and Amount of Gain/(Loss) Recognized in Income on Fair Value, Cash Flow
and Net Investment Hedging Relationships
Years Ended December 31,
2020
2019
2018
Cost of
Products
Sold
Interest
Expense,
Net
Cost of
Products
Sold
Interest
Expense,
Net
Cost of
Products
Sold
Interest
Expense,
Net
$2,128.3
$(212.0) $2,252.6
$(226.9) $2,271.9
$(289.3)
–
3.3
–
8.2
–
8.5
45.4
–
–
–
–
(0.6)
38.4
–
–
–
2.8
(0.6)
(26.2)
–
–
–
–
(0.6)
–
53.5
–
52.2
–
25.5
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
Foreign exchange forward contracts
Interest rate swaps
Forward starting interest rate swaps
Gain on net investment hedging relationships
Cross-currency interest rate swaps
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,
Statements of Earnings
2020
2019
2018
Other income (expense), net
$10.6
$(11.0) $24.7
These gains/(losses) do not reflect losses of $22.8 million, $3.4 million and $41.2 million in 2020, 2019 and 2018, respectively,
recognized in other income (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, 2020 and 2019, all derivative instruments are recorded at fair value on our consolidated balance sheets. 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 Designated as
Hedges
Foreign exchange forward contracts
Foreign exchange forward contracts
Cross-currency interest rate swaps
Total asset derivatives designated
as hedges
Asset Derivatives Not Designated as
Hedges
As of December 31, 2020
As of December 31, 2019
Balance Sheet Location
Fair
Value
Balance Sheet Location
Fair
Value
Other current assets
$12.2
Other current assets
$ 41.8
Other assets
Other assets
3.7
–
$15.9
Other assets
Other assets
9.8
60.5
$112.1
$
$
–
–
Foreign exchange forward contracts
Other current assets
$ 1.5
Other current assets
Total asset derivatives not
designated as hedges
64
$ 1.5
As of December 31, 2020
As of December 31, 2019
Balance Sheet Location
Fair
Value
Balance Sheet Location
Fair
Value
Liability Derivatives Designated as
Hedges
Foreign exchange forward contracts
Other current liabilities
$ 37.4
Other current liabilities
$ 7.9
Cross-currency interest rate swaps
Foreign exchange forward contracts
Cross-currency interest rate swaps
Total liability derivatives
designated as hedges
Liability Derivatives Not Designated
as Hedges
Other current liabilities
Other long-term liabilities
Other long-term liabilities
55.0
26.5
28.3
Other current liabilities
Other long-term liabilities
Other long-term liabilities
$147.2
Foreign exchange forward contracts
Other current liabilities
$ 3.8
Other current liabilities
Total liability derivatives not
designated as hedges
$ 3.8
The table below presents the effects of our master netting agreements on our consolidated balance sheets (in millions):
–
5.2
–
$13.1
$
$
–
–
Description
Asset Derivatives
Cash flow hedges
Cash flow hedges
Derivatives not designated as hedges
Liability Derivatives
Cash flow hedges
Cash flow hedges
Derivatives not designated as hedges
As of December 31, 2020
As of December 31, 2019
Location
Gross
Amount
Offset
Net Amount
in Balance
Sheet
Gross
Amount
Offset
Net Amount
in Balance
Sheet
Other current assets
$12.2
$11.7
$ 0.5
$41.8
$7.9
Other assets
Other current assets
Other current liabilities
Other long-term liabilities
Other current liabilities
3.7
1.5
37.4
26.5
3.8
3.7
0.6
11.7
3.7
0.6
–
0.9
25.7
22.8
3.2
9.8
–
7.9
5.2
–
4.6
–
7.9
4.6
–
$33.9
5.2
–
–
0.6
–
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
16. Retirement Benefit Plans
Amount of Gain / (Loss)
Recognized in AOCI
Years Ended December 31,
2020
2019
2018
$(151.5) $10.7
$ 57.6
(143.8)
47.9
62.8
$(295.3) $58.6
$120.4
We have defined benefit pension plans covering certain U.S. and Puerto Rico employees. Plan benefits are primarily based on
years of credited service and the participant’s average eligible compensation. The U.S. and Puerto Rico plans are frozen; meaning
there are no new participants that can join the plan and participants in the plan do not accrue additional years of service or
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.
65
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 (income) expense
For the Years Ended December 31,
U.S. and Puerto Rico
Foreign
2020
2019
2018
2020
2019
2018
$ 0.7
$ 7.1
$ 8.0
$ 24.7
$ 19.0
$ 20.0
13.9
16.2
14.2
5.4
9.0
8.1
(32.9)
(32.4)
(32.9)
(13.3)
(13.4)
(14.0)
–
0.5
0.3
7.2
(7.2)
0.8
–
1.2
(3.4)
(5.7)
19.3
23.7
–
(0.5)
(4.2)
1.3
–
–
–
0.2
(3.9)
(4.2)
2.5
2.5
$(10.3) $ 0.4
$ 8.5
$ 13.4
$ 13.2
$ 12.6
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
income (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
2020
2019
2018
2020
2019
2018
3.40% 4.38% 3.79% 0.73% 1.44% 1.18%
–
3.29% 3.29% 2.28% 2.50% 2.09%
7.75% 7.75% 7.75% 2.17% 2.14% 2.19%
The expected long-term rate of return on plan assets is based on the historical and estimated future rates of return on the
different asset classes held in the plans. The expected long-term rate of return is the weighted average of the target asset allocation
of each individual asset class. We believe that historical asset results approximate expected market returns applicable to the
funding of a long-term benefit obligation.
Discount rates were determined for each of our defined benefit retirement plans at their measurement date to reflect the yield
of a portfolio of high quality bonds matched against the timing and amounts of projected future benefit payments.
Changes in projected benefit obligations and plan assets were (in millions):
Projected benefit obligation - beginning of year
Service cost
Interest cost
Plan amendments
Employee contributions
Benefits paid
Actuarial loss
Expenses paid
Settlement
Translation loss
Projected benefit obligation – end of year
66
For the Years Ended December 31,
U.S. and Puerto Rico
Foreign
2020
2019
2020
2019
$472.0
0.7
13.9
–
–
(24.0)
55.6
–
(1.3)
–
$396.0
7.1
16.2
3.6
–
(16.9)
68.2
–
(2.2)
–
$740.4
24.7
5.4
0.2
22.1
(39.8)
12.5
(0.3)
(4.5)
58.6
$631.1
19.0
9.0
–
20.6
(36.5)
77.8
(0.3)
–
19.7
$516.9
$472.0
$819.3
$740.4
Plan assets at fair market value - beginning of year
Actual return on plan assets
Employer contributions
Employee contributions
Settlements
Benefits paid
Expenses paid
Translation gain
Plan assets at fair market value – end of year
Funded status
Amounts recognized in consolidated balance sheet:
Prepaid pension
Short-term accrued benefit liability
Long-term accrued benefit liability
Net amount recognized
For the Years Ended December 31,
U.S. and Puerto Rico
Foreign
2020
2019
2020
2019
$444.9
51.4
3.1
–
(1.3)
(24.0)
–
–
$388.5
73.5
2.0
–
(2.2)
(16.9)
–
–
$665.2
40.0
21.2
22.1
(4.5)
(39.8)
(0.3)
52.8
$585.8
57.8
20.1
20.6
–
(36.5)
(0.3)
17.7
$474.1
$444.9
$756.7
$665.2
$(42.8) $(27.1) $(62.6) $(75.2)
For the Years Ended December 31,
U.S. and Puerto Rico
Foreign
2020
2019
2020
2019
$
–
(0.1)
(42.7)
$
–
(0.2)
(26.9)
$ 20.4
(1.3)
(81.7)
$ 17.6
(1.1)
(91.7)
$(42.8) $(27.1) $(62.6) $(75.2)
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
2020
2019
2018
2020
2019
2018
2.70% 3.40% 4.38% 0.61% 0.74% 1.41%
–
3.29% 3.29% 2.36% 2.45% 2.13%
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
2020
2019
2020
2019
$516.9
$472.0
$778.4
$698.2
474.1
444.9
709.5
619.1
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
2020
2019
2020
2019
$516.9
$472.0
$801.3
$721.5
516.9
474.1
472.0
444.9
560.9
508.6
674.0
612.9
67
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,
2021
2022
2023
2024
2025
2026-2030
U.S. and
Puerto Rico
$ 22.2
23.1
24.1
24.4
25.4
130.5
Foreign
$ 32.6
32.9
32.9
32.9
34.8
174.5
The U.S. and Puerto Rico defined benefit retirement plans’
The fair value of our U.S. and Puerto Rico pension plan
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.
assets by asset category was as follows (in millions):
As of December 31, 2020
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
income securities
$ 7.3
304.1
162.7
$7.3
–
–
$
–
304.1
162.7
Total
$474.1
$7.3
$466.8
$
$
–
–
–
–
As of December 31, 2019
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
income securities
$ 4.7
282.5
157.7
$4.7
–
–
$
–
282.5
157.7
$
Total
$444.9
$4.7
$440.2
$
–
–
–
–
The fair value of our foreign pension plan assets was as
follows (in millions):
As of December 31, 2020
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
Fixed income
securities
Other types of
investments
Real estate
$ 42.7
163.9
$ 42.7
126.8
$
–
37.1
$
262.5
142.3
145.3
–
–
–
262.5
142.3
–
–
–
–
–
145.3
68
Total
$756.7
$169.5
$441.9
$145.3
As of December 31, 2019
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)
The benefits offered under these plans are reflective of
local customs and practices in the countries concerned. We
expensed $49.6 million, $52.6 million and $48.9 million related
to these plans for the years ended December 31, 2020, 2019
and 2018, respectively.
Asset Category
Total
Cash and cash
equivalents
$ 31.8
$ 31.8
$
–
$
Equity securities
140.9
116.0
24.9
Fixed income
securities
Other types of
investments
Real estate
245.2
123.6
123.7
–
–
–
–
–
–
–
245.2
123.6
–
123.7
Total
$665.2
$147.8
$393.7
$123.7
As of December 31, 2020 and 2019, 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):
17.
Income Taxes
A public referendum held in Switzerland passed the
Federal Act on Tax Reform and AHV Financing (“TRAF”),
effective January 1, 2020, and includes the abolishment of
various favorable federal and cantonal tax regimes. The TRAF
provides transitional relief measures for companies that are
losing the tax benefit of a ruling, including a “step-up” for
amortizable goodwill, equal to the amount of future tax benefit
they would have received under their existing ruling, subject to
certain limitations. Certain provisions of TRAF were enacted in
the third quarter of 2019, resulting in us recognizing a
provisional net tax benefit of $263.8 million. In the fourth
quarter of 2019 and third quarter of 2020, we recognized an
additional $51.2 million and $6.5 million tax benefit,
respectively, related to TRAF as well as the tax impact of
certain restructuring transactions in Switzerland. We received
notification from the Swiss authorities in October 2020
regarding our TRAF ruling and recorded a net tax benefit of
$36.5 million in the fourth quarter of 2020 based on this
notification, for an overall benefit of $358.0 million.
The components of earnings (loss) before income taxes
consisted of the following (in millions):
For the Years Ended December 31,
2020
2019
2018
United States operations
$(592.9) $ (125.9) $(382.8)
Foreign operations
318.5
1,031.7
111.7
Total
$(274.4) $ 905.8
$(271.1)
December 31, 2020
The (benefit)/provision for income taxes and the income
Beginning Balance
Gain on assets sold
Change in fair value of assets
Net purchases and sales
Translation gain
Ending Balance
$123.7
0.3
0.7
8.2
12.4
$145.3
We expect that we will have minimal legally required
funding requirements in 2021 for the qualified U.S. and Puerto
Rico defined benefit retirement plans, and we do not expect to
voluntarily contribute to these plans during 2021.
Contributions to foreign defined benefit plans are estimated to
be $21.0 million in 2021. We do not expect the assets in any of
our plans to be returned to us in the next year.
Defined Contribution Plans
We also sponsor defined contribution plans for
substantially all of the U.S. and Puerto Rico employees and
certain employees in other countries.
taxes paid consisted of the following (in millions):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
$ (96.1) $ 65.5
$(46.2)
4.6
9.8
24.4
(57.5)
237.7
116.6
(149.0)
313.0
94.8
(24.2)
(11.5)
(90.2)
37.9
(4.2)
(8.8)
47.7
(444.3)
(15.7)
12.0
(538.7)
13.4
(Benefit) provision for income taxes
$(137.0) $(225.7) $108.2
Net income taxes paid
$ 147.4
$ 192.5
$237.1
69
A reconciliation of the U.S. statutory income tax rate to
our effective tax rate is as follows:
For the Years Ended December 31,
2020
2019
2018
Deferred tax liabilities:
Fixed assets
Intangible assets
U.S. statutory income tax rate
21.0%
21.0%
State taxes, net of federal deduction
2.4
0.8
21.0%
(2.5)
Foreign currency hedges
Other
As of December 31,
2020
2019
$ 119.2
$ 77.6
787.6
772.3
–
39.8
13.8
23.0
946.6
886.7
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
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
Switzerland tax reform and certain
restructuring transactions
Other
14.9
1.5
(2.0)
(46.1)
3.8
5.8
2.1
0.1
31.4
–
15.7
(0.7)
(10.2)
1.5
0.4
–
0.6
(4.5)
(1.2)
(0.4)
1.9
0.1
54.3
(4.9)
1.7
(75.2)
(12.2)
(0.2)
6.0
0.1
(25.5)
(3.1)
(34.8)
(0.1)
–
0.6
Effective income tax rate
49.9%
(24.9)% (39.9)%
Our operations in Puerto Rico benefit from various tax
incentive grants. These grants expire between fiscal years 2026
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.
We reclassified certain prior period amounts to conform to the
current period presentation.
The components of deferred taxes consisted of the
following (in millions):
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
Foreign currency hedges
Other
Total deferred tax assets
Less: Valuation allowances
Total deferred tax assets after valuation
allowances
70
As of December 31,
2020
2019
$ 297.2
511.2
55.1
9.0
53.9
86.1
30.4
19.0
69.0
19.2
$ 295.6
514.4
33.8
8.3
40.4
101.6
28.6
24.6
–
16.8
1,150.1
(542.1)
1,064.1
(546.1)
608.0
518.0
Total deferred tax liabilities
Total net deferred income taxes
$(338.6) $(368.7)
Net operating loss carryovers are available to reduce
future federal, state and foreign taxable earnings. At
December 31, 2020, $388.2 million of these net operating loss
carryovers expire within a period of 1 to 20 years and
$123.0 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
$479.2 million and $493.4 million at December 31, 2020 and
2019, respectively.
Deferred tax assets related to tax credit carryovers are
available to offset future federal and state tax liabilities. At
December 31, 2020, $55.1 million of these tax credit carryovers
expire within a period of 1 to 15 years. Valuation allowances
for certain tax credit carryovers have been established in the
amount of $42.6 million and $32.3 million at December 31,
2020 and 2019, respectively.
Deferred tax assets related to capital loss carryovers are
also available to reduce future federal and foreign capital gains.
At December 31, 2020, $2.2 million of these capital loss
carryovers expire within a period of 1 year to 4 years and
$6.8 million of these capital loss carryovers have an indefinite
life. Valuation allowances for certain capital loss carryovers
have been established in the amount of $9.0 million and
$8.3 million at December 31, 2020 and 2019, respectively. The
remaining valuation allowances booked against deferred tax
assets of $11.3 million and $12.1 million at December 31, 2020
and 2019, respectively, relate primarily to accrued liabilities
and intangible assets that management believes, more likely
than not, will not be realized.
We intend to repatriate at least $5.5 billion of unremitted
earnings, of which the additional tax related to remitting
earnings is deemed immaterial as a portion of these earnings
has already been taxed as toll tax or GILTI and is not subject
to further U.S. federal tax. Portions of the additional tax would
also be offset by allowable foreign tax credits. Of the
$5.5 billion amount, we have an estimated $4.5 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. If the
Company decides at a later date to repatriate these earnings to
the U.S., the Company would be required to provide for the net
tax effects on these amounts. The Company estimates that the
total tax effect of this repatriation would not be significant
under current enacted tax laws and regulations and at current
currency exchange rates.
The following is a tabular reconciliation of the total
amounts of unrecognized tax benefits (in millions):
For the Years Ended December 31,
2020
2019
2018
condition. Our U.S. Federal income tax returns have been
audited through 2012 and are currently under audit for years
2013-2015 and 2016-2019. The IRS started a routine
examination of our 2016-2019 U.S. Federal income tax returns
in November 2020.
Balance at January 1
Increases related to business
combinations
Increases related to prior periods
$ 741.8
$685.5
$626.8
In October 2020, we reached agreement with the IRS for
–
–
75.3
24.7
4.5
34.6
tax years 2006-2012 related to the reallocation of profits
between the U.S. and Puerto Rico as well as other
miscellaneous adjustments.
Decreases related to prior periods
(158.3)
(35.6)
(14.4)
Increases related to current period
3.4
133.2
41.9
Decreases related to settlements with
taxing authorities
(14.6)
(60.2)
(3.8)
Decreases related to lapse of statute of
limitations
(28.2)
(5.8)
(4.1)
Balance at December 31
$ 619.4
$741.8
$685.5
Amounts impacting effective tax rate, if
recognized balance at December 31
$ 473.9
$599.2
$549.1
We recognize accrued interest and penalties related to
unrecognized tax benefits as income tax expense. During 2020,
we released interest and penalties of $1.7 million, and as of
December 31, 2020, had a recognized liability for interest and
penalties of $107.5 million, which does not include any
increase related to business combinations.
During 2019, we accrued interest and penalties of
$15.0 million, and as of December 31, 2019, had a recognized
liability for interest and penalties of $109.2 million, which does
not include any increase related to business combinations.
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, which does
not include any increase related to business combinations.
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 $260 million decrease to a $20 million increase.
We are under continuous audit by the Internal Revenue
Service (“IRS”) and other taxing authorities. During the course
of these audits, we receive proposed adjustments from taxing
authorities that may be material. Therefore, there is a
possibility that an adverse outcome in these audits could have
a material effect on our results of operations and financial
The IRS has proposed adjustments for tax years
2010-2012, primarily related to reallocating profits between
certain of our U.S. and foreign subsidiaries, which remain
unsettled. We have disputed these adjustments and intend to
continue to vigorously defend our positions as we pursue
resolution through the administrative process with the IRS
Independent Office of Appeals.
In December 2020, we received a revised Notice of
Proposed Adjustment (“NOPA”) from the IRS for 2013-2015
relating to transfer pricing involving our cost sharing
agreement between the U.S. and Switzerland affiliated
companies and reallocating profits between certain of our U.S.
and foreign subsidiaries. The revised NOPA related to the cost
sharing agreement proposes an increase to our U.S. Federal
taxable income, which would result in additional tax expense
related to 2013 of approximately $370 million, subject to
interest and penalties. We strongly believe that the position of
the IRS, with regard to this matter, is inconsistent with the
applicable U.S. Treasury regulations governing our cost sharing
agreement. We do not expect changes to our reserves relative
to these matters within the next twelve months. We intend to
vigorously contest the revised NOPA, and we will pursue all
available administrative and, if necessary, judicial remedies. If
we pursue judicial remedies in the U.S. Tax Court for years
2013-2015, a number of years will likely elapse before such
matters are finally resolved. No payment of any amount related
to the revised NOPA is required to be made, if at all, until all
applicable proceedings have been completed. We believe the
tax liability we have accrued is correct given the revised NOPA
received.
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 2012
or later.
18. 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, 2020.
71
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,
2020
2019
2018
Weighted average shares outstanding for
basic net earnings per share
207.0
205.1
203.5
Effect of dilutive stock options and other
equity awards
–
1.6
–
Weighted average shares outstanding for
diluted net earnings per share
207.0
206.7
203.5
Since we incurred a net loss in the years ended
December 31, 2020 and 2018, no dilutive stock options or
other equity awards were included as diluted shares. For the
year ended December 31, 2019, an average of 0.9 million
options to purchase shares of common stock were not
included in the computation of diluted earnings per share as
the exercise prices of these options were greater than the
average market price of the common stock.
19. Segment Data
We design, manufacture and market orthopedic
reconstructive products; sports medicine, biologics,
extremities and trauma products; spine, craniomaxillofacial
and thoracic products (“CMFT”); office based technologies;
dental implants; and related surgical products. Due to the
2019 Restructuring Plan that was initiated in late 2019, our
operating segments have changed beginning in the first
quarter of 2020. Our chief operating decision maker (“CODM”)
now allocates resources to achieve our operating profit goals
through three operating segments. These operating segments,
which also constitute our reportable segments, are Americas
and Global Businesses; EMEA; and Asia Pacific. Previously, we
had seven operating segments, which resulted in three
reportable segments and four individually insignificant
operating segments that were aggregated together and not
considered a reportable segment.
Our CODM evaluates performance based upon segment operating profit exclusive of operating expenses pertaining to certain
inventory and manufacturing-related charges, intangible asset amortization, goodwill and intangible asset impairment, restructuring
and other cost reduction initiatives, quality remediation, acquisition, integration and related, litigation, litigation settlement gain,
certain European Union Medical Device Regulation expenses, other charges and corporate functions. Corporate functions include
corporate legal, finance, information technology, human resources and other corporate departments as well as stock-based
compensation. Intercompany transactions have been eliminated from segment operating profit.
Our Americas and Global Businesses operating segment is comprised principally of the U.S. and includes other North, Central
and South American markets for all of our product categories as well as the global results for our Dental products division. This
segment also includes our global manufacturing operations for all product categories and research, development engineering,
medical education, and brand management for our global product category headquarter locations. Our EMEA operating segment is
comprised principally of Europe and includes the Middle East and African markets for all product categories except Dental. Our
Asia Pacific operating segment is comprised principally of Japan, China and Australia and includes other Asian and Pacific markets
for all product categories except Dental. The EMEA and Asia Pacific operating segments include the commercial operations as well
as regional headquarter expenses to operate in those markets.
Since the Americas and Global Businesses includes additional costs related to global manufacturing operations and other
centralized global product category headquarter expenses, profitability metrics in this operating segment are not comparable to the
EMEA and Asia Pacific operating segments.
Our CODM does not review asset information by operating segment. Instead, our CODM reviews cash flow and other financial
ratios by operating segment.
Prior period reportable segment financial information has been reclassified to conform to our new reportable segments.
72
Net sales and other information by segment is as follows (in millions):
Net Sales
Operating (Loss) Profit
Depreciation and Amortization
Year Ended December 31,
Year Ended December 31,
Year Ended December 31,
2020
2019
2018
2020
2019
2018
2020
2019
2018
Americas and Global Businesses
$4,479.0
$5,035.3
$5,000.4
$1,316.9
$1,689.7
$1,706.9
$ 168.1
$ 162.0
$ 175.0
EMEA
Asia Pacific
Total
1,288.6
1,623.1
1,669.5
1,256.9
1,323.8
1,263.0
308.9
420.5
484.0
472.7
480.7
431.9
77.5
71.3
77.0
65.3
75.5
66.8
$7,024.5
$7,982.2
$7,932.9
Corporate Functions
Inventory and manufacturing-related charges
Intangible asset amortization
Goodwill and intangible asset impairment
Restructuring and other cost reduction
initiatives
Quality remediation
Acquisition, integration and related
Litigation
Litigation settlement gain
European Union Medical Device Regulation
Other charges
Total
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,
2020
2019
$1,252.6
$1,295.0
795.1
782.4
Property, plant and equipment, net
$2,047.7
$2,077.4
U.S. sales were $4,123.5 million, $4,592.1 million, and
$4,560.0 million for the years ended December 31, 2020, 2019
and 2018, 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.
20. Leases
We own most of our manufacturing facilities, but lease
various office space, vehicles and other less significant assets
throughout the world. Our contracts contain a lease if they
convey a right to control the use of an identified asset, either
explicitly or implicitly, in exchange for consideration. As
allowed by GAAP, we have elected not to recognize a
right-of-use asset nor a lease liability for leases with an initial
term of twelve months or less. Additionally, 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 for all asset classes. Our lease contracts are a
necessary part of our business, but we do not believe they are
significant to our overall operations. We do not have any
significant finance leases. Additionally, we do not have
(437.2)
(457.9)
(409.2)
118.2
117.5
127.3
(54.2)
(53.9)
(32.5)
–
–
–
(597.6)
(584.3)
(595.9)
597.6
584.3
595.9
(645.0)
(70.1)
(979.7)
(116.9)
(50.0)
(34.2)
(49.8)
(23.8)
(87.6)
(165.4)
(12.2)
(99.5)
(159.8)
(65.0)
(186.0)
–
23.5
–
(25.3)
(30.9)
(3.7)
(24.5)
(120.5)
(79.6)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ (87.8) $1,137.5
$
33.8
$1,032.7
$1,006.1
$1,040.5
significant leases: where we are considered a lessor; where we
sublease our assets; with an initial term of twelve months or
less; with related parties; with residual value guarantees; that
impose restrictions or covenants on us; or that have not yet
commenced, but create significant rights and obligations
against us.
Our real estate leases generally have terms of between 5
to 10 years and contain lease extension options that can vary
from month-to-month extensions to up to 5 year extensions.
We include extension options in our lease term if we are
reasonably certain to exercise that option. In determining
whether an extension is reasonably certain, we consider the
uniqueness of the property for our needs, the availability of
similar properties, whether the extension period payments
remain the same or may change due to market rates or fixed
price increases in the contract, and other economic factors.
Our vehicle leases generally have terms of between 3 to 5
years and contain lease extension options on a
month-to-month basis. Our vehicle leases are generally not
reasonably certain to be extended.
Under GAAP, we are required to discount our lease
liabilities to present value using the rate implicit in the lease,
or our incremental borrowing rate for a similar term as the
lease term if the implicit rate is not readily available. We
generally do not have adequate information to know the
implicit rate in a lease and therefore use our incremental
borrowing rate. Under GAAP, the incremental borrowing rate
must be on a collateralized basis, but our debt arrangements
are unsecured. We have determined our incremental
borrowing rate by using our credit rating to estimate our
unsecured borrowing rate and applying reasonable
assumptions to reduce the unsecured rate for a risk
adjustment effect from collateral.
73
We adopted ASU 2016-02 – Leases (Topic 842) effective
Litigation
January 1, 2019. Since we adopted the new standard using the
period of adoption transition method, we are not required to
present 2018 comparative disclosures under the new standard.
However, we are required to present the required annual
disclosures under the previous GAAP lease accounting
standard.
Information on our leases is as follows ($ in millions):
Lease cost
For the Years Ended December 31,
2020
2019
2018
$83.7
$76.0
$72.2
Cash paid for leases recognized in operating
cash flows
Right-of-use assets obtained in exchange for
new lease liabilities
$81.4
$73.6
$83.5
$55.0
As of December 31,
2020
2019
Right-of-use assets recognized in Other
assets
Lease liabilities recognized in Other current
liabilities
Lease liabilities recognized in Other long-
term liabilities
$
$
$
274.5
75.0
217.8
$
$
$
266.7
64.2
215.5
Weighted-average remaining lease term
5.8 years
6.3 years
Weighted-average discount rate
2.3%
2.7%
Our variable lease costs are not significant.
Our future minimum lease payments as of December 31,
2020 were (in millions):
For the Years Ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total
Less imputed interest
Total
$ 80.2
59.1
45.9
37.0
28.0
63.7
313.9
21.1
$292.8
21. 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.
74
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 a federal Multidistrict Litigation
(“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 Germany, Netherlands and Italy.
Our estimate as of December 31, 2020 of the remaining
liability for all Durom Cup-related claims, including estimated
legal fees, is $51.2 million. 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.
Zimmer M/L Taper, M/L Taper with Kinectiv
Technology, and Versys Femoral Head-related claims
(“Metal Reaction” 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 that
was created on October 3, 2018 in the U.S. 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
and federal courts. Additional lawsuits are likely to be
filed. Following higher than expected filings and an extension
of the MDL schedule given the COVID-19 pandemic, we
increased our estimate of the number of Metal Reaction-
related claims that we expect to litigate in the future, resulting
in additional litigation-related expense in the year ended
December 31, 2020. Our estimate as of December 31, 2020 of
the remaining liability for all Metal Reaction-related claims,
including our estimated legal fees, is $55.7 million. 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. 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) and in various state, federal 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 have been 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. Trials have commenced, and other trials are currently
scheduled to occur in the future. Although each trial will be
tried on its particular facts, a verdict and subsequent final
judgment for the plaintiff in one or more of these cases could
have a substantial impact on our potential liability. We
continue to refine our estimates of the potential liability to
resolve the remaining claims and lawsuits and recognized
additional litigation-related expense in the year ended
December 31, 2020. Our estimate as of December 31, 2020 of
the remaining liability for all Biomet metal-on-metal hip
implant claims, including estimated legal fees, is
$99.0 million. 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 (now Zimmer Biomet
Nederland 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 then-
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
(now Zimmer 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 first increased to €125.9 million and with a filing in
June 2019 further increased to €146.7 million plus statutory
interest. In a court filing, Heraeus indicated that it might
further increase its claims in the course of the proceedings. As
of December 31, 2020, these two proceedings remained
pending in front of the Darmstadt court. In September 2017,
Heraeus filed an 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 Freiburg
concerning the sale of the European Cements with certain
changed raw materials. Heraeus sought an injunction on the
basis that the continued use of the product names for the
European Cements was misleading for customers and thus an
act of unfair competition. On June 29, 2018, the court in
Freiburg, 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 appealed
this decision to the Court of Appeals in Karlsruhe, Germany.
The appeals hearing occurred in December 2019 and on
June 19, 2020, the court dismissed the appeal on different
grounds, namely that the appeals court did not find any unfair
competition in the continued use of the product names.
Although the appeals court did not grant leave to appeal,
Heraeus had initially filed a request for appeal with the
German Supreme Court, but it withdrew that request in
November 2020.
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 sold to Biomet,
which Biomet incorporated into certain bone cement products
that compete with Heraeus’ bone cement products. The
complaint alleged that Biomet helped Esschem to develop
75
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
June 21, 2019, the Third Circuit partially reversed the decision
of the U.S. District Court for the Eastern District of
Pennsylvania granting Esschem summary judgment and
remanded the case back to the lower court. On July 5, 2019,
Esschem filed a petition in the Third Circuit for rehearing en
banc and a motion in the alternative to certify a question of
state law to the Supreme Court of Pennsylvania, which was
denied on August 1, 2019. On January 8, 2021, the court
entered a scheduling order for the completion of fact and
expert discovery and filing of dispositive motions but did not
set a trial date.
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. On March 8, 2019, the court stayed the
case pending the Third Circuit’s decision in the Esschem case
described above. In September 2019, the Zimmer Biomet
parties filed a motion to stay the proceedings pending (1) the
court’s decision on Esschem’s motion for summary judgment in
the Esschem case described above and (2) the outcome of the
U.S. International Trade Commission complaint filed by
Heraeus asserting similar claims, described below under
“Regulatory Matters, Government Investigations and Other
Matters.” On May 2, 2020, the court granted the Zimmer
Biomet parties’ motion to stay the proceedings pending the
outcome of the U.S. International Trade Commission complaint
filed by Heraeus.
76
Other European Countries: Heraeus continues to pursue
other related legal proceedings in Europe seeking various forms
of relief, including injunctive relief and damages, against various
Biomet-related and local Zimmer Biomet entities relating to the
European Cements, including those described herein. 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
appealed this judgment to the Belgian Supreme Court. The
Belgian Supreme Court dismissed our appeal in October 2019
and this decision is final. Proceedings to assess the amount of
damages potentially owed to Heraeus under the Belgian Decision
remain pending. Heraeus filed a suit in Belgium concerning the
continued sale of the European Cements with certain changed
materials. Like its former 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 May 7, 2019, the Liège
Commercial Court issued a judgment that Zimmer Biomet failed
to inform its hospital and surgeon customers of the changes
made to the composition of the cement with certain changed
materials and ordered, as a sole remedy, that Zimmer Biomet
send letters to those customers, which we have done. An appeals
hearing took place on January 13, 2021 and a decision is pending.
In November 2020, Heraeus also initiated proceedings in Belgium
seeking an injunction and damages related to the distribution of
the European Cements in its revised formulation. Heraeus claims
that the revised formulation still misappropriates its alleged trade
secrets. The proceedings are pending, and a decision is not
expected in 2021.
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 have appealed the Norwegian judgment to the court
of second instance. The appeals trial is scheduled for March 2021.
On October 29, 2019, an Italian court of first instance
issued a judgment in favor of Heraeus on its claim of
misappropriation of trade secrets, but did not yet order an
award of damages. We filed a timely appeal of the decision. As
of December 31, 2020, Heraeus had not initiated damages
proceedings but indicated that it might do so in the future
based on the non-final first instance decision.
On January 23, 2020, a Finnish Market Court issued a
judgment partly in favor of Heraeus on its claim of
misappropriation of certain trade secrets. Damage claims were
not raised in the proceedings. We appealed the decision to the
Finnish Supreme Court. On July 3, 2020, the Finnish Supreme
Court declined to review the case, rendering the Market Court
decision final. As of December 31, 2020, Heraeus had not yet
initiated damages proceedings against us but has indicated it
intends to do so.
Heraeus is pursuing damages and injunctive relief in
Regulatory Matters, Government Investigations and Other Matters
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. On May 23, 2019, the commercial court
ruled in our favor. On July 12, 2019, Heraeus filed an appeal to
the court of second instance in Grenoble, France. 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 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.
Shareholder Derivative Actions: On June 14, 2019 and
July 29, 2019, two shareholder derivative actions, Green v.
Begley et al. and Detectives Endowment Association
Annuity Fund v. Begley et al., were filed in the Court of
Chancery in the State of Delaware. On October 2, 2019 and
October 11, 2019, two additional shareholder derivative
actions, Karp v. Begley et al. and DiGaudio v. Begley et al.,
were filed in the U.S. District Court for the District of
Delaware. The plaintiff in each action seeks to maintain the
action purportedly on our behalf against certain of our current
and former directors and officers (the “individual defendants”)
and certain former stockholders of ours who sold shares of our
common stock in various secondary public offerings in 2016
(the “private equity fund defendants”). The plaintiff in each
action alleges, among other things, breaches of fiduciary duties
against the individual defendants and insider trading against
two individual defendants and the private equity fund
defendants based on factual allegations 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. On June 4, 2020, the plaintiffs in the Chancery Court
actions filed a consolidated amended complaint adding three
new counts and expanding the scope of the alleged material
false statements. On September 14, 2020, the defendants filed
motions to dismiss the Chancery Court actions. Also on
September 14, 2020, the plaintiffs in the U.S. District Court
actions filed a consolidated amended complaint adding certain
details to their allegations. On October 9, 2020, the U.S.
District Court granted the parties’ joint motion to stay the U.S.
District Court actions pending resolution of the motions to
dismiss the Chancery Court actions. The plaintiffs in the
Chancery Court and the U.S. District Court actions do not seek
damages from us, but instead request damages on our behalf
from the defendants of an unspecified amount, as well as
attorneys’ fees, costs and other relief.
U.S. International Trade Commission Investigation:
On March 5, 2019, Heraeus filed a complaint with the U.S.
International Trade Commission (“ITC”) against us and certain
of our subsidiaries. The complaint alleges that Biomet
misappropriated Heraeus’ trade secrets in the formulation and
manufacture of two bone cement products now sold by
Zimmer Biomet, both of which are imported from our Valence,
France facility. Heraeus requested that the ITC institute an
investigation and, after the investigation, issue a limited
exclusion order and cease and desist orders. On April 5, 2019,
the ITC ordered an investigation be instituted into whether we
have committed an “unfair act” in the importation, sale for
importation, or sale after importation of certain bone cement
products, the threat or effect of which is to destroy or
substantially injure an industry in the United States, in
violation of Section 337 of the Tariff Act of 1930, as amended
(“Section 337”). An evidentiary hearing in front of an
administrative law judge at the ITC was held in January 2020
and an Initial Determination was issued on May 6, 2020. In the
Initial Determination, the administrative law judge held that
we did not violate Section 337, and thus we are not restricted
from continuing to manufacture and sell the two challenged
bone cement products in the United States. On July 13, 2020,
the ITC issued notice of intent to review the Initial
Determination and on January 12, 2021 it issued a Final
Determination which affirmed the Initial Determination with
modifications and terminated the investigation with a finding
of no violation of Section 337. Heraeus has 60 days from the
date of issuance to appeal the Final Determination to the
United States Court of Appeals for the Federal Circuit. We
cannot currently predict the ultimate outcome of this
investigation after any appeals, but an adverse outcome in this
ITC proceeding could have a material adverse effect on our
business, financial condition and results of operations.
FDA warning letters: 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. In September 2020, the
FDA completed an inspection of the Ponce facility and issued
no inspectional observations, and in November 2020, the FDA
cleared the Ponce warning letter. 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 legacy Biomet manufacturing
facility in Warsaw, Indiana (this facility is sometimes referred
to in this report as the “Warsaw North Campus”). 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. As
of December 31, 2020, the Warsaw warning letter remained
pending. Until the violations cited in the pending warning
letter 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 may not be
granted and premarket approval applications for Class III
devices to which the QSR deviations are reasonably related will
not be approved until the violations have been corrected. In
77
addition to responding to the warning letter described above,
we are in the process of addressing various FDA Form 483
inspectional observations at certain of our manufacturing
facilities, including observations issued by the FDA following
an inspection of the Warsaw North Campus in January 2020,
which inspection the FDA has classified as Voluntary Action
Indicated (“VAI”). 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
products, seizure of products and assessing civil or criminal
penalties against our officers, employees or us. The FDA could
also issue a corporate warning letter or a recidivist warning
letter or negotiate the entry of a consent decree of permanent
injunction with us. 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.
22. Subsequent Event
DPA relating to FCPA matters: In January 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; (ii) we entered into a
DPA with the DOJ; and (iii) an indirect, wholly-owned
subsidiary of Biomet entered into a plea agreement with the
DOJ. The conduct underlying these resolutions occurred prior
to our acquisition of Biomet. Under the DPA, the DOJ agreed
to defer criminal prosecution of us in connection with a
charged violation of the internal controls provisions of the
FCPA as long as we complied with the terms of the DPA. In
addition, we were subject to oversight by an independent
compliance monitor. On July 17, 2020, the independent
compliance monitor submitted a letter to the SEC and DOJ
certifying that our compliance program, including its policies
and procedures, is reasonably designed and implemented to
prevent and detect violations of the FCPA and is functioning
effectively. The monitorship concluded in August 2020. On
February 9, 2021, the one-count criminal information filed
against us in 2017 was dismissed with prejudice and the DPA
concluded.
On February 5, 2021, we announced our intention to
pursue a plan to spin off our Spine and Dental businesses to
form NewCo. The planned transaction is intended to benefit
our stockholders by enhancing the focus of both Zimmer
Biomet and NewCo to meet the needs of patients and
customers and, therefore, achieve faster growth and deliver
greater value for all stakeholders. The transaction is intended
to qualify as a tax-free distribution, for U.S. federal income tax
purposes, to U.S. stockholders of new publicly traded stock in
NewCo. We are targeting completion of the spin-off in
mid-2022, subject to the satisfaction of certain conditions,
including, among others, final approval of our Board of
Directors, receipt of a favorable opinion and IRS ruling with
respect to the tax-free nature of the transaction, and the
effectiveness of a Form 10 registration statement with the
SEC. Therefore, we cannot provide assurance that we will be
able to complete the spin-off on the terms or on the timeline
that we announced, or at all.
23. Quarterly Financial Information (Unaudited)
(in millions, except per share data)
Net sales
Gross profit
Net (loss) earnings of Zimmer
Biomet Holdings, Inc.
(Loss) earnings per common
share
Basic
Diluted
2020 Quarter Ended
2019 Quarter Ended
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
$1,783.8
1,149.1
$1,226.1
653.9
$1,929.3
1,210.2
$2,085.3
1,285.4
$1,975.5
1,278.7
$1,988.6
1,260.4
$1,892.4
1,210.1
$2,125.7
1,396.1
(508.5)
(206.6)
242.5
333.7
246.1
133.7
431.1
320.7
(2.46)
(2.46)
(1.00)
(1.00)
1.17
1.16
1.61
1.59
1.20
1.20
0.65
0.65
2.10
2.08
1.56
1.54
In the three-month period ended March 31, 2020, we recorded goodwill impairment charges of $612.0 million.
Net sales in the three-month period ended December 31, 2020 include the benefit of expanded strategic sales, favorable bulk
orders and shipment timing.
The TRAF has had a significant impact on our net (loss) earnings in certain quarters. See Note 17 for further discussion on the
quarterly impacts of TRAF.
78
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, 2020, 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:
(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;
Item 9B. Other Information
(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, 2020. 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, 2020, 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, 2020, 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, 2020 that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
During the fourth quarter of 2020, the Audit Committee of our Board of Directors approved the engagement of
PricewaterhouseCoopers LLP, our independent registered public accounting firm, to perform certain non-audit services. This
disclosure is made pursuant to Section 10A(i)(2) of the Exchange Act.
79
PART III
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 14, 2021 (the “2021 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
https://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 2021 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 2021 Proxy Statement.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information required by this item is incorporated by reference from our 2021 Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information required by this item is incorporated by reference from our 2021 Proxy Statement.
80
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1.
Financial Statements
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, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
2.
Financial Statement Schedule
Schedule II. Valuation and Qualifying Accounts (in millions):
Description
Allowance for Doubtful Accounts:
Year Ended December 31, 2018
Year Ended December 31, 2019
Year Ended December 31, 2020
Deferred Tax Asset Valuation Allowances:
Year Ended December 31, 2018
Year Ended December 31, 2019
Year Ended December 31, 2020
Balance at
Beginning
of Period
Additions
Charged
(Credited)
to Expense
Deductions /
Other Additions
to Reserve
Effects of
Foreign
Currency
Balance at
End of
Period
$ 60.2
$10.7
$ (3.6)
$(1.6) $ 65.7
65.7
65.0
5.5
21.8
(5.3)
(0.9)
(12.7)(1)
1.7
65.0
75.8
$140.6
$48.2
$206.2(2)
$(4.1) $390.9
390.9
546.1
(6.6)
(3.8)
165.7(2)
(3.9)
546.1
(3.2)(2)
3.0
542.1
(1)
Includes the $3.1 cumulative-effect adjustment related to the adoption of ASU 2016-13, Financial Instruments –
Credit Losses (Topic 326).
(2) 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
81
INDEX TO EXHIBITS
Exhibit No
Description
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. dated February 19, 2021 (incorporated by reference to
Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed February 22, 2021)
Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly
Report on Form 10-Q filed August 5, 2019)
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 5.750% Note due 2039 (incorporated by reference to Exhibit 4.4 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 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 4.13 above)
Form of 2.425% Notes due 2026 (incorporated by reference to Exhibit 4.13 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 4.18 above)
Form of 3.700% Notes due 2023 (incorporated by reference to Exhibit 4.18 above)
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
82
Exhibit No
Description
4.21
4.22
4.23
4.24
4.25
4.26
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
Sixth Supplemental Indenture, dated as of November 15, 2019, 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 November 15, 2019)
Form of 1.164% Notes due 2027 (incorporated by reference to Exhibit 4.21 above)
Agency Agreement, dated as of November 15, 2019, by and between Zimmer Biomet Holdings, Inc., as
issuer, Elavon Financial Services DAC, UK Branch, as paying agent, U.S. Bank National Association, as
transfer agent and registrar, 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 on November 15, 2019)
Seventh Supplemental Indenture, dated as of March 20, 2020, 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 20, 2020)
Form of 3.050% Notes due 2026 (incorporated by reference to Exhibit 4.24 above)
Form of 3.550% Notes due 2030 (incorporated by reference to Exhibit 4.24 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)
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)
Amendment to Zimmer Biomet Holdings, Inc. Executive Performance Incentive Plan, Effective May 7, 2020
(incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q filed May 11,
2020)
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
(incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K filed
February 26, 2019)
Form of Change in Control Severance Agreement with Ivan Tornos, Suketu Upadhyay, Rachel Ellingson and
Carrie Nichol (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K
filed February 26, 2019)
Form of Confidentiality, Non-Competition and Non-Solicitation Agreement with Ivan Tornos, Suketu
Upadhyay, Rachel Ellingson and Carrie Nichol (incorporated by reference to Exhibit 10.12 to the
Registrant’s Annual Report on Form 10-K filed February 26, 2019)
83
Exhibit No
Description
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)
Offer Letter between Zimmer Biomet Holdings, Inc. and Suketu Upadhyay dated June 13, 2019
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 19,
2019)
Letter of Appointment by and between Zimmer Asia (HK) Limited and Sang Yi dated June 15, 2020
(incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q filed
August 5, 2020)
Change in Control Severance Agreement with Sang Yi dated June 15, 2020 (incorporated by reference to
Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed August 5, 2020)
Confidentiality, Non-Competition and Non-Solicitation Agreement with Sang Yi dated June 15, 2020
(incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed
August 5, 2020)
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 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)
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. 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)
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)
Zimmer Biomet Holdings, Inc. Executive Physical Sub Plan (incorporated by reference to Exhibit 10.47 to
the Registrant’s Annual Report on Form 10-K filed February 26, 2019)
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 (incorporated by reference to Exhibit 10.32 to the Registrant’s
Annual Report on Form 10-K filed February 21, 2020)
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 (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)
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
10.32*
10.33*
10.34*
84
Exhibit No
Description
10.35*
10.36*
10.37*
10.38*
10.39*
10.40*
10.41*
10.42*
10.43*
10.44*
10.45
10.45
10.47
10.48
10.49
Form of Performance-Based Restricted Stock Unit Award Agreement (2019) under the Zimmer Biomet
Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.36 to the Registrant’s
Annual Report on Form 10-K filed February 26, 2019)
Form of Performance-Based Restricted Stock Unit Award Agreement (2020) 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 21, 2020)
Form of Restricted Stock Unit Award Agreement (four-year vesting) under the Zimmer Biomet Holdings,
Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.38 to the Registrant’s Annual
Report on Form 10-K filed February 21, 2020)
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 Performance-Based Restricted Stock Unit Award Agreement (Upadhyay one-time award) under the
Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.43 to the
Registrant’s Annual Report on Form 10-K filed February 21, 2020)
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)
First Amendment to Aircraft Time Sharing Agreement by and between Zimmer, Inc. and Bryan C. Hanson
(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed
August 5, 2019)
Credit Agreement, dated as of November 1, 2019, among Zimmer Biomet Holdings, Inc., Zimmer Biomet
G.K., Zimmer Luxembourg II S.À.R.L., the other 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
party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q
filed November 5, 2019)
First Amendment, dated as of April 23, 2020, to the Credit Agreement dated as of November 1, 2019, among
Zimmer Biomet Holdings, Inc., Zimmer Biomet G.K., Zimmer Luxembourg II S.À.R.L., the other 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 from time to time party thereto (incorporated by reference
to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed April 29, 2020)
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)
First Amendment and Limited Waiver, dated as of February 25, 2020, between Zimmer Biomet G.K. and
Sumitomo Mitsui Banking Corporation, to the JP¥21,300,000,000 Term Loan Agreement dated as of
September 22, 2017 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on
Form 10-Q filed May 11, 2020)
Second Amendment, dated as of April 28, 2020, to the Term Loan Agreement JP¥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 10.3 to the Registrant’s Current Report on Form 8-K filed April 29,
2020)
85
Exhibit No
10.50
10.51
10.52
10.53
10.54
10.55
21
23
31.1
31.2
32
101
Description
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)
First Amendment, dated as of April 23, 2018, to the 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 10.49 to the Registrant’s Annual Report on
Form 10-K filed February 21, 2020)
Second Amendment and Limited Waiver, dated as of February 25, 2020, between Zimmer Biomet G.K.
and Sumitomo Mitsui Banking Corporation, to the JP¥11,700,000,000 Amended and Restated Term Loan
Agreement dated as of September 22, 2017, as amended by the First Amendment dated as of April 23,
2018 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed
May 11, 2020)
Third Amendment, dated as of April 28, 2020, to the Amended and Restated Term Loan Agreement
JP¥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 10.4 to the Registrant’s Current Report on
Form 8-K filed April 29, 2020)
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 September 18, 2020, 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 September 21, 2020)
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
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File
because XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Management contract or compensatory plan or arrangement.
Item 16. Form 10-K Summary
None
86
SIGNATURES
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.
Dated: February 22, 2021
ZIMMER BIOMET HOLDINGS, INC.
By: /s/ Bryan Hanson
Bryan Hanson
President and Chief Executive Officer
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 Hanson
Bryan Hanson
/s/ Suketu Upadhyay
Suketu Upadhyay
/s/ Carrie Nichol
Carrie Nichol
/s/ Christopher Begley
Christopher Begley
/s/ Betsy Bernard
Betsy Bernard
/s/ Gail Boudreaux
Gail Boudreaux
/s/ Michael Farrell
Michael Farrell
/s/ Larry Glasscock
Larry Glasscock
/s/ Robert Hagemann
Robert Hagemann
/s/ Arthur Higgins
Arthur Higgins
/s/ Maria Teresa Hilado
Maria Teresa Hilado
/s/ Syed Jafry
Syed Jafry
Sreelakshmi Kolli
/s/ Michael Michelson
Michael Michelson
President, Chief Executive Officer and Director (Principal
Executive Officer)
February 22, 2021
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
87
ZIMMER BIOMET HOLDINGS, INC.
RECONCILIATION OF OPERATING (LOSS) PROFIT TO ADJUSTED OPERATING PROFIT
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, 2018, 2017 and 2016
(in millions, unaudited)
For the Years Ended December 31,
2020
2019
Operating (Loss) Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (87.8) $1,137.5
$
Inventory step-up and other inventory and manufacturing related charges(1) . . . . . . . . . . . . . .
Intangible asset amortization(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible asset impairment(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other cost reduction initiatives(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quality remediation(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition, integration and related(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54.2
597.6
645.0
116.9
49.8
23.8
Litigation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
159.8
Litigation settlement gain(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
European Union Medical Device Regulation(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other charges(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
25.3
24.5
53.9
584.3
70.1
50.0
87.6
12.2
65.0
(23.5)
30.9
120.5
2018
33.8
32.5
595.9
979.7
34.2
165.4
99.5
186.0
–
3.7
79.6
2017
2016
$ 799.3
$ 821.1
70.8
603.9
331.5
17.6
195.1
262.2
104.0
–
–
468.3
565.9
31.1
–
54.3
504.9
33.3
–
–
41.2
(11.0)
Adjusted Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,609.1
$2,188.5
$2,210.3
$2,425.6
$2,467.9
(1) Please refer to pages 32 and 33 of this annual report for detailed explanations of each adjustment.
88
ZIMMER BIOMET HOLDINGS, INC.
RECONCILIATION OF OPERATING (LOSS) PROFIT MARGIN TO ADJUSTED OPERATING
PROFIT MARGIN
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, 2018, 2017 and 2016
(in millions, unaudited)
For the Years Ended December 31,
2020
2019
2018
2017
2016
Operating (Loss) Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1.2)%14.2% 0.4% 10.2% 10.7%
Inventory step-up and other inventory and manufacturing related charges(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset amortization(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible asset impairment(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other cost reduction initiatives(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quality remediation(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition, integration and related(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.8
8.5
9.2
1.7
0.7
0.3
2.3
0.7
7.3
0.9
0.6
1.1
0.2
0.8
Litigation settlement gain(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
(0.3)
European Union Medical Device Regulation(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other charges(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.4
0.2
0.4
1.5
0.4
7.5
12.4
0.4
2.1
1.3
2.3
–
–
0.9
7.7
4.2
0.2
2.5
3.4
1.3
–
–
6.1
7.4
0.4
–
0.7
6.6
0.4
–
–
1.1
0.7
(0.1)
Adjusted Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22.9% 27.4% 27.9% 31.1% 32.2%
(1) Please refer to pages 32 and 33 of this annual report for detailed explanations of each adjustment.
89
ZIMMER BIOMET HOLDINGS, INC.
RECONCILIATION OF DILUTED EPS TO ADJUSTED DILUTED EPS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, 2018, 2017 and 2016
(unaudited)
For the Years Ended December 31,
2020
2019
2018
2017
2016
Diluted (Loss) Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(0.67) $ 5.47
$(1.86) $ 8.90
$ 1.51
Inventory step-up and other inventory and manufacturing related charges(1) . . . . . . . . . . . . . . . . . . . . . .
Intangible asset amortization(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible asset impairment(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other cost reduction initiatives(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quality remediation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition, integration and related(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.26
2.89
3.12
0.56
0.24
0.12
0.77
0.26
2.83
0.34
0.24
0.42
0.06
0.31
Litigation settlement gain(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
(0.11)
European Union Medical Device Regulation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other charges(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt extinguishment cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.12
0.05
–
0.15
0.58
–
0.16
2.93
4.81
0.17
0.81
0.49
0.91
–
0.02
0.41
–
0.35
2.96
1.63
0.09
0.96
1.28
0.51
–
–
2.32
2.80
0.15
–
0.27
2.49
0.16
–
–
0.22
(0.03)
–
0.26
Taxes on above items(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1.22)
(1.09)
(1.18)
(2.07)
(2.22)
Biomet merger-related measurement period tax adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. tax reform(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
–
–
–
–
–
0.26
0.04
(6.25)
Swiss tax reform(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.03)
(1.52)
–
–
Other certain tax adjustments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.50)
(0.07)
(0.02)
(0.55)
(0.01)
Effect of dilutive shares assuming net earnings(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.04)
–
(0.05)
–
–
Adjusted Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5.67
$ 7.87
$ 7.64
$ 8.03
$ 7.96
(1) Please refer to pages 32 and 33 of this annual report for detailed explanations of each adjustment.
90
–
–
ZIMMER BIOMET HOLDINGS, INC.
RECONCILIATION OF SALES GROWTH RATE TO CONSTANT CURRENCY SALES GROWTH RATE
FOR THE YEAR ENDED DECEMBER 31, 2020
(unaudited)
For the Year Ended December 31, 2020
Reported
% Growth
Foreign
Exchange
Impact
Constant
Currency
% Growth
Geographic Segment
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(11)%
–%
(11)%
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(20)
(5)
(12)
Product Category
Knees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15)
Hips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S.E.T.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dental, Spine & CMFT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9)
(8)
(10)
(18)
(12)
1
1
–
–
1
1
1
1
–
(21)
(6)
(12)
(15)
(10)
(9)
(11)
(19)
(12)
91
[THIS PAGE INTENTIONALLY LEFT BLANK]
Financial Highlights (Dollars in millions except per share amounts)
Corporate Information (As of March 15, 2021)
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:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
+1-888-552-8493 (domestic)
+1-718-575-3336 (international)
Website: www.computershare.com
Investor Relations
Zimmer Biomet invites shareholders, security
analysts, portfolio managers and other
interested parties to contact:
Keri Mattox
+1-215-275-2431
keri.mattox@zimmerbiomet.com
Ezgi Yagci
+1-617-549-2443
ezgi.yagci@zimmerbiomet.com
Dividend Reinvestment and Stock Purchase Plan
Computershare Trust Company, N.A. administers the Computershare CIP, a direct stock purchase and dividend reinvestment plan, which allows registered shareholders
to purchase additional shares of Zimmer Biomet common stock through the automatic reinvestment of dividends. The plan also allows registered shareholders to
purchase shares with optional cash investments of at least $25. The minimum initial investment for new investors is $10,000. Existing registered shareholders as well as
new investors may enroll in the plan online at www.computershare.com/investor, or by completing and submitting an enrollment form that may be obtained by
contacting Computershare at the address or telephone numbers shown above.
Stock Performance Graph
Comparison of Cumulative Total Return for years ended December 31
Assumes $100 was invested on
December 31, 2015 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
$0
Zimmer Biomet Holdings, Inc.
S&P 500 Stock Index
S&P 500 Health Care Equipment Index
Baseline
$100
$100
$100
2016
$101
$112
$106
2017
$120
$136
$139
2018
$104
$130
$162
2019
$151
$171
$210
2020
$156
$203
$246
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.
This annual report is printed on paper that contains 10% post-consumer waste.
Your Progress. Our Promise®.
zimmerbiomet.com
ZIMMER BIOMET HOLDINGS, INC.,
345 EAST MAIN STREET, P.O. BOX 708,
WARSAW, IN 46580, U.S.A.