ZIMMER BIOMET HOLDINGS, INC.
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
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, 2010
Commission file number
001-16407
ZIMMER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 13-4151777 | |
| (State of Incorporation) | (IRS Employer Identification No.) | |
| 345 East Main Street Warsaw, Indiana | 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
|
Name of each exchange on which registered | |
|
Common Stock, $.01 par value
|
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
þ
No
o
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
o
No
þ
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
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer”, “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check One):
|
Large accelerated
filer
þ
|
Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company
(as defined Exchange Act
Rule 12b-2). Yes
o
No
þ
The aggregate market value of shares held by non-affiliates was
$10,878,248,016 (based on the closing price of these shares on
the New York Stock Exchange on June 30, 2010 and
assuming solely for the purpose of this calculation that all
directors and executive officers of the registrant are
“affiliates”). As of February 10, 2011,
192,125,427 shares of the registrant’s $.01 par
value common stock were outstanding.
Documents
Incorporated by Reference
|
Document
|
Form 10-K
|
|||
|
Portions of the Proxy Statement with respect to the 2011 Annual
Meeting of Stockholders
|
Part III | |||
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Cautionary Note
About Forward-Looking Statements
This Annual Report on
Form 10-K
includes “forward-looking” statements within the
meaning of federal securities laws. Forward-looking statements
can be identified by the fact that they do not relate strictly
to historical or current facts. They often include words such as
“may,” “will,” “should,”
“would,” “could,” “anticipate,”
“expect,” “plan,” “seek,”
“believe,” “predict,” “estimate,”
“potential,” “project,” “target,”
“forecast,” “intend,” “strategy,”
“future,” “opportunity,” and similar
expressions. Forward-looking statements are based on current
expectations and assumptions that are subject to risks and
uncertainties which may cause actual results to differ
materially from the forward-looking statements. A detailed
discussion of risks and uncertainties that could cause actual
results and events to differ materially from such
forward-looking statements is included in the section titled
“Risk Factors” (refer to Part I, Item 1A of
this report). Readers of this report are cautioned not to place
undue reliance on these forward-looking statements. While we
believe the assumptions on which the forward-looking statements
are based are reasonable, there can be no assurance that these
forward-looking statements will prove to be accurate. We
expressly disclaim any obligation to update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised,
however, to consult any further disclosures we make on related
subjects in our Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K.
| Table of Contents | Page |
2
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| ITEM 1. | Business |
OVERVIEW
We are a global leader in the design, development, manufacture
and marketing of orthopaedic reconstructive, spinal and trauma
devices, dental implants and related surgical products. We also
provide other healthcare related services. In this report,
“Zimmer,” “we,” “us,”
“our” and similar words refer collectively to Zimmer
Holdings, Inc. and its subsidiaries. Zimmer Holdings refers to
the parent company only.
Zimmer Holdings was incorporated in Delaware in 2001. Our
history dates to 1927, when Zimmer Manufacturing Company, a
predecessor, was founded in Warsaw, Indiana. On August 6,
2001, Zimmer Holdings was spun off from its former parent and
became an independent public company.
CUSTOMERS, SALES
AND MARKETING
Our primary customers include orthopaedic surgeons,
neurosurgeons, oral surgeons, dentists, hospitals, stocking
distributors, healthcare dealers and, in their capacity as
agents, healthcare purchasing organizations or buying groups.
These customers range from large multinational enterprises to
independent surgeons.
We have operations in more than 25 countries and market products
in more than 100 countries, with corporate headquarters in
Warsaw, Indiana, and more than 100 manufacturing,
distribution and warehousing
and/or
office facilities worldwide. We manage our operations through
three major geographic segments — the Americas, which
is comprised principally of the U.S. and includes other
North, Central and South American markets; Europe, which is
comprised principally of Europe and includes the Middle East and
Africa markets; and Asia Pacific, which is comprised primarily
of Japan and Australia and includes other Asian and Pacific
markets.
We market and sell products through three principal channels:
1) direct to healthcare institutions, such as hospitals or
direct channel accounts; 2) through stocking distributors
and healthcare dealers; and 3) directly to dental practices
and dental laboratories. With direct channel accounts, inventory
is generally consigned to sales agents or customers. With sales
to stocking distributors, healthcare dealers, dental practices
and dental laboratories, title to product passes upon shipment
or upon implantation of the product. Direct channel accounts
represented approximately 80 percent of our net sales in
2010. No individual direct channel account, stocking
distributor, healthcare dealer, dental practice or dental
laboratory accounted for more than 1 percent of our net
sales for 2010.
We stock inventory in our warehouse facilities and retain title
to consigned inventory in sufficient quantities so that products
are available when needed for surgical procedures. Safety stock
levels are determined based on a number of factors, including
demand, manufacturing lead times and quantities required to
maintain service levels. We also carry trade accounts receivable
balances based on credit terms that are generally consistent
with local market practices.
We utilize a network of sales associates, sales managers and
support personnel, most of whom are employed or contracted by
independent distributors and sales agencies. We invest a
significant amount of time and expense in training sales
associates in how to use specific products and how to best
inform surgeons of product features and uses. Sales force
representatives must have strong technical selling skills and
medical education to provide technical support for surgeons.
In response to the different healthcare systems throughout the
world, our sales and marketing strategies and organizational
structures differ by region. We utilize a global approach to
sales force training, marketing and medical education to provide
consistent, high quality service. Additionally, we keep current
with key surgical developments and other issues related to
orthopaedic surgeons, neurosurgeons, dentists and oral surgeons
and the medical procedures they perform.
Americas.
The Americas is our largest
geographic segment, accounting for $2,431.6 million, or
58 percent, of 2010 net sales, with the
U.S. accounting for 94 percent of net sales in this
region. The U.S. sales force primarily consists of
independent sales agents, most of whom sell products exclusively
for Zimmer. Sales agents in the U.S. receive a commission
on product sales and are responsible for many operating
decisions and costs. Sales commissions are accrued at the time
of sale.
In this region, we contract with group purchasing organizations
and managed care accounts and have promoted unit growth by
offering volume discounts to customer healthcare institutions
within a specified group. Generally, we are designated as one of
several preferred purchasing sources for specified products,
although members are not obligated to purchase our products.
Contracts with group purchasing organizations generally have a
term of three years, with extensions as warranted.
In the Americas, we monitor and rank independent sales agents
across a range of performance metrics, including the achievement
of certain sales targets and maintenance of efficient levels of
working capital.
Europe.
The European geographic segment
accounted for $1,099.5 million, or 26 percent, of
2010 net sales, with France, Germany, Italy, Spain,
Switzerland and the United Kingdom collectively accounting
for 74 percent of net sales in the region. This segment
also includes other key markets, including Benelux, Nordic,
Central and Eastern Europe, the Middle East and Africa. Our
sales force in this segment is comprised of direct sales
associates, commissioned agents, independent distributors and
sales support personnel. In Europe, we emphasize the advantages
of our clinically
3
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
proven, established designs and innovative solutions, such as
minimally invasive surgical procedures and technologies and new
and enhanced materials and surfaces. In most European countries,
healthcare is sponsored by the government and therefore
government budgets have a role in healthcare spending, which can
affect our sales in this segment.
Asia Pacific.
The Asia Pacific geographic
segment accounted for $689.1 million, or 16 percent,
of 2010 net sales, with Japan being the largest market
within this segment, accounting for approximately
55 percent of the region’s sales. This segment also
includes key markets such as Australia, New Zealand, Korea,
China, Taiwan, India, Thailand, Singapore, Hong Kong and
Malaysia. In Japan and most countries in the Asia Pacific
region, we maintain a network of dealers, who act as order
agents on behalf of hospitals in the region, and sales
associates, who build and maintain relationships with
orthopaedic surgeons, neurosurgeons and dental surgeons in their
markets. These sales associates cover over 7,000 hospitals in
the region. The knowledge and skills of these sales associates
play a critical role in providing service, product information
and support to surgeons.
SEASONALITY
Our business is somewhat seasonal in nature, as many of our
products are used in elective procedures, which typically
decline during the summer months and can increase at the end of
the year once annual deductibles have been attained on health
insurance plans.
DISTRIBUTION
We operate distribution facilities domestically in Warsaw,
Indiana; Dover, Ohio; Statesville, North Carolina; Memphis,
Tennessee; Carlsbad, California; and Austin, Texas and
internationally in Australia, Austria, Belgium, Canada, the
Czech Republic, China, Finland, France, Germany, Hong Kong,
India, Italy, Japan, Korea, Malaysia, the Netherlands,
New Zealand, Portugal, Russia, Singapore, South Africa,
Spain, Sweden, Switzerland, Taiwan, Thailand and the
United Kingdom.
We generally ship our orders via expedited courier. We do not
consider our backlog of firm orders to be material to an
understanding of our business.
PRODUCTS
Our products include orthopaedic reconstructive, spinal and
trauma devices, dental implants and related surgical products.
We utilize our exclusive
Trabecular
Metal
tm
Technology across various product categories.
Trabecular
Metal
Material is a structural biomaterial with a cellular
architecture that resembles bone and approximates its physical
and mechanical properties more closely than other prosthetic
materials. The highly porous trabecular configuration is
conducive to more normal bone formation and bone in-growth.
Trabecular Metal
Implants are fabricated using elemental
tantalum metal and a patented vapor deposition technique that
creates a metallic strut configuration resembling cancellous
bone with nano-textured surface features.
Orthopaedic
Reconstructive Implants
| Knee Implants |
Total knee replacement surgeries typically include a femoral
component, a patella (knee cap), a tibial tray and an articular
surface (placed on the tibial tray). Knee replacement surgeries
include first-time, or primary, joint replacement procedures and
revision procedures for the replacement, repair or enhancement
of an implant or component from a previous procedure. Knee
implants are designed to accommodate different levels of
ligament stabilization of the joint. While some knee implant
designs, called cruciate retaining (CR) designs, require the
retention of the posterior cruciate ligament, other designs,
called posterior stabilized (PS) and ultracongruent (UC)
designs, provide joint stability without the posterior cruciate
ligament. There are also procedures for partial reconstruction
of the knee, which treat limited knee degeneration and involve
the replacement of only one side, or compartment, of the knee
with a unicompartmental knee prosthesis.
Our portfolio of
Minimally Invasive
Solutions
tm
Procedures (MIS) includes the MIS Mini-Incision Total Knee
Procedure. The MIS Mini-Incision Procedure utilizes specialized
MIS Instruments which feature smaller, ergonomic and highly
precise instruments which accommodate and facilitate a smaller
incision and less disruption of the surrounding soft tissues.
We offer a wide range of products for specialized knee
procedures, including the following:
NexGen
®
Complete Knee Solution. The number one selling knee
brand in the world, the
NexGen
Knee product line is a
comprehensive system for knee replacement surgery which has
significant application across the continuum of care in all
things related to primary and revision knee arthroplasty,
including CR, PS and revision procedures. The
NexGen
Knee
System offers joint stability, sizing and performance options in
a unified system of interchangeable components that can be
tailored to an individual patient. The
NexGen
Knee System
provides surgeons with complete and versatile knee instrument
options spanning multiple surgeon and treatment philosophies,
including soft tissue balancing and measured resection MIS
Mini-Incision Instruments, and multiple traditional instrument
systems. The breadth and versatility of the
NexGen
Knee
System allows surgeons to transition from one type of implant to
another during surgery, according to the respective needs of the
patient, and to support current surgical philosophies.
The
NexGen
CR product line is designed to be used in
conjunction with a functioning posterior cruciate ligament.
Similar to the posterior stabilized design, the
NexGen
CR-Flex
Fixed Bearing Knee is designed to provide a greater range of
motion for patients who require deep bending in their activities
of daily living. The
NexGen
CR-Flex Femoral Components
offer a tissue balancing (flexion balancing)
4
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
solution which allows the surgeon to adjust component sizing and
balance and stabilize the implant without removing additional
bone or wasting critical procedure time.
The
NexGen
Complete Knee Solution
Legacy
®
Knee-Posterior Stabilized product line provides stability in the
absence of the posterior cruciate ligament. The PS capabilities
can be augmented via the use of a
NexGen Legacy
Posterior
Stabilized Flex Knee (LPS-Flex Knee), a high-flexion implant
that has the potential to accommodate knee flexion up to
155-degrees
range of motion for patients whose lifestyle and body type
demand and can accommodate this performance standard. With our
NexGen
LPS-Flex Mobile Knee, we are one of only two
companies that can offer a mobile-bearing total knee treatment
option in the U.S. market.
Gender
Solutions
®
NexGen
Femorals represent the first knee implants
specifically shaped to offer fit and function optimized for the
unique anatomical considerations more commonly seen in female
patients.
Gender
tm
Implants are an important strategic focus, as more than half of
total knee arthroplasty patients are female.
Gender Solutions
Femorals are available in both
NexGen
CR-Flex and
LPS-Flex configurations. The concept of advancing implant design
through customization based on anatomy or other patient
characteristics has manifested in rapidly expanding gender
technologies across the continuum of our products and into other
important brands in our growing portfolio.
The
NexGen
Revision Knee product line consists of several
different products that are designed to provide clinical
solutions to surgeons for various revision situations, including
multiple constraint levels for ligament and soft tissue
inefficiencies and a bone augmentation implant system made from
our
Trabecular Metal
Technology material. These augments
are designed to address significant bone loss in revision
surgery while allowing natural bone to reconstruct within the
implant construct.
We offer improved polyethylene performance in the
NexGen
Knee System with our conventional polyethylene and
Prolong
®
Highly Crosslinked Polyethylene, which offers reduced wear and
resistance to oxidation, pitting and cracking.
Prolong
Highly Crosslinked Polyethylene is available in designs
compatible with both
NexGen
CR-Flex and LPS-Flex femoral
components.
Natural-Knee
®
II System. The
Natural-Knee
II System consists
of a range of interchangeable, anatomically designed implants
which include a proprietary
CSTi
tm
Cancellous-Structured Titanium Porous Coating option for stable
fixation in active patients.
Gender Solutions Natural-Knee
Flex System. The
Gender Solutions Natural-Knee
Flex System adds our High
Flex and
Gender Solutions
design concepts to the
Natural-Knee
System. The
Gender Solutions Natural-Knee
Flex System recognizes that two distinct populations exist
in total knee arthroplasty (female and male) and offers two
distinct implant shapes for enhanced fit. The system is
compatible with muscle sparing MIS procedures and accommodates
high flexion capacity up to 155 degrees. The system features the
proven clinical success of our asymmetric tibial plate,
CSTi
Porous Coating,
Prolong
Highly Crosslinked
Polyethylene and ultracongruent articular surface.
Innex
®
Total Knee System. The
Innex
Knee System
offers fixed bearing and mobile bearing knee components all
designed within the same system philosophy. While the
Innex
Knee System is best known for its mobile bearing knee
offering and the availability of differing levels of articular
constraint, the
Innex
Revision Knee and
Innex Gender
Solutions
Knee components make this offering a comprehensive
mobile and fixed bearing knee system. The
Innex
Knee
System is distributed in Europe and Asia Pacific and is not
currently available for commercial distribution in the U.S.
Zimmer
®
Unicompartmental Knee Systems. The
Zimmer
Unicompartmental Knee System offers a high flexion design
for unicompartmental knee surgery. This high flex product was
designed specifically for MIS Procedures and Technologies. The
system offers the surgeon the ability to conserve bone by
replacing only the compartment of the knee that has had
degenerative changes. A
Gender Solutions
Patello-Femoral
Joint System is also available, a system which incorporates key
gender specific design features and a proprietary guided milling
surgical technique for use in patello-femoral joint replacement.
Zimmer
®
Patient Specific Instruments. In late 2009, a 510(k)
Application for the
Zimmer
Patient Specific Instruments
was approved by the U.S. Food and Drug Administration
(FDA). The
Zimmer
Patient Specific Instruments simplify a
total knee procedure and help enhance appropriate placement of
the final implant based on a surgeon’s preoperative
surgical plan. Based on a patient’s MRI scan, a computer
generated, custom guide is produced to conform to a
patient’s unique knee anatomy. This guide is then utilized
intraoperatively to aid in the surgical correction of the
patient’s knee.
Zimmer
®
Segmental System. Adding to our broad portfolio of
revision options, the
Zimmer
Segmental System is a
comprehensive system designed to address patients with severe
bone loss associated with disease, trauma or revision. This
important addition realizes our strategic goal of expanding our
product solutions across the continuum of care and, with the
incorporation of
Trabecular Metal
Technology, expands the
possibilities for treatment, short and long-term fixation and
stability.
| Hip Implants |
Total hip replacement surgeries replace both the head of the
femur and the socket portion of the pelvis (acetabulum) of the
natural hip. Hip procedures include first time, or primary,
joint replacement as well as revision procedures. Approximately
30 percent of hip implant procedures involve the use of
bone cement to attach or affix the prosthetic components to the
surrounding bone. The remaining are
5
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
press-fit into bone, which means that they have a surface that
bone affixes to through either ongrowth or ingrowth technologies.
Our portfolio of MIS Techniques includes the Zimmer MIS Anterior
Supine Technique, the MIS Posterior Procedure, the Zimmer MIS
Anterolateral Technique and MIS
2-Incision
tm
Hip Replacement Procedure. The MIS Techniques are designed to be
less invasive to soft tissues and to shorten recovery time.
Our key hip replacement products include:
Zimmer
®
M/L Taper Hip Prosthesis. The
Zimmer
M/L Taper
Hip Prosthesis offers a proximally porous-coated wedge-shaped
design based on long-term clinically proven concepts. The M/L
Taper has become widely used in MIS Procedures due to several
key design features.
Zimmer
M/L Taper Hip Prosthesis with
Kinectiv
®
Technology. The
Zimmer
M/L Taper with
Kinectiv
Technology is a system of modular stem and neck
components designed to help the surgeon restore the natural hip
joint center intraoperatively by addressing the key variables of
leg length, offset and version independently.
Alloclassic
®
(
Zweymüller
®
)
Hip System. The
Alloclassic (Zweymüller)
Hip System has become one of the most used, primary,
cementless hip systems in the world. This is one of the few
stems available today that is practically unchanged since its
introduction in 1979. A new offset design was added in 2004 and
offers the surgeon increased capability to restore the
patient’s anatomical joint movement.
CLS
®
Spotorno
®
Hip System. The
CLS Spotorno
Stem is one of
our largest selling hip prostheses, especially in the European
markets. Additions to the product line provide the capability
for restoration of the physiological center of rotation.
Fitmore
®
Hip Stem. The
Fitmore
Hip Stem offers the
surgeon a short, bone preserving stem. Maintaining bone stock is
particularly important for patients who may undergo a later
revision procedure. Its shape facilitates MIS procedures,
especially the MIS Anterior Supine approach which is gaining in
popularity.
VerSys
®
Hip System. The
VerSys
Hip System is supported
by a common instrumentation set and is an integrated family of
hip products with design-specific options to meet varying
surgical philosophies and patient needs. An offering within the
VerSys
Hip System, the
VerSys
Epoch
®
Fullcoat Hip System, is the first reduced-stiffness stem
specifically designed to address varying patient femoral
anatomies and minimize implant-related complications such as
thigh pain, bone resorption and leg lengthening.
Continuum
®
Acetabular System,
Trilogy
®
IT Acetabular System and
Allofit
®
IT
Alloclassic
Acetabular System. These
systems were released in 2009 and each acetabular system offers
the surgeon a choice of advanced bearing options to meet the
clinical and lifestyle needs of each patient. Bearing options
include
Longevity
®
Highly Crosslinked Polyethylene,
Metasul
®
Metal-on-Metal
Technology and a
BIOLOX
®
1
delta
Ceramic-on-Ceramic
Technology (where Zimmer has regulatory clearances). The
acetabular systems also provide surgeons a choice of fixation
method that accommodates their surgical philosophy.
Trilogy
Acetabular System. The
Trilogy
Acetabular System, with its titanium alloy shell, fiber
metal mesh ingrowth surface and
Longevity
Highly
Crosslinked Polyethylene Liners, is our most widely sold
acetabular cup system.
Trabecular Metal
Modular Acetabular System. We
offer the
Trabecular Metal
Modular Acetabular System,
which incorporates design features from the
Trilogy
family of acetabular shells augmented with the advanced
fixation surface of
Trabecular Metal
Material. In
addition, we offer a
Trabecular Metal
Acetabular Revision
System that provides the surgeon with a variety of
off-the-shelf
options to address a wide range of bone deficiencies encountered
during acetabular revisions and to achieve a stable construct.
| Extremity Implants |
Our extremity portfolio, primarily shoulder and elbow products,
is designed to treat arthritic conditions, soft tissue injuries
and fractures.
Our key products include:
Bigliani/Flatow
®
Complete Shoulder Solution Family. The
Bigliani/Flatow
Shoulder product line combined with the
Trabecular Metal
Humeral Stem give us a significant
presence in the global shoulder implant market.
Trabecular Metal
Glenoid. The
Trabecular
Metal
Glenoid offers surgeons a glenoid component designed
to improve fixation.
Trabecular Meta
l Material’s
properties allow for more normal bone formation and maintenance.
Trabecular Metal
Reverse Shoulder System. The
Trabecular Metal
Reverse Shoulder System incorporates
advanced materials and design to offer improved biological
ingrowth potential through the utilization of
Trabecular
Metal
Technology, while addressing significant loss of
rotator cuff function. The reverse shoulder system is designed
to restore function to patients who, because of debilitating
rotator cuff tears, are not candidates for traditional shoulder
surgery and have exhausted other means of repair.
Zimmer
®
Anatomical
Shoulder
tm
System. The
Anatomical Shoulder
System can be
adjusted to each patient’s individual anatomy. This
portfolio of products includes the
Anatomical Shoulder
Inverse/Reverse System, designed to address significant loss of
rotator cuff function, and the
Anatomical Shoulder
Fracture System. Both the primary and fracture shoulder
implants can be converted to a reverse shoulder without removal
of the initial implant.
1
Registered
trademark of CeramTec AG
6
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Coonrad/Morrey Total Elbow. The Coonrad/Morrey Total Elbow
product line is a family of elbow replacement implant products
to address patients with conditions of severe arthritis or
trauma.
Dental
Implants
Our dental products division manufactures
and/or
distributes: (1) dental reconstructive implants —
for individuals who are totally without teeth or are missing one
or more teeth; (2) dental restorative products —
aimed at providing a more natural restoration to mimic the
original teeth; and (3) dental regenerative
products — for soft tissue and bone rehabilitation.
| Dental Reconstructive Implants |
Our dental reconstructive implant products and surgical and
restorative techniques include:
Tapered
Screw-Vent
®
Implant System. Our highest selling dental product
line provides the clinician a tapered geometry which mimics the
natural shape of a tooth root. The
Tapered Screw-Vent
Implant System, with its two-stage design, was developed to
minimize valuable chair time for restorations. The
Tapered
Screw-Vent
Implant System is a technologically advanced
dental implant featuring a proprietary internal hex connection,
multiple lead threads for reduced insertion time and selective
surface coatings. The
Zimmer
One-Piece Implant System,
designed to complement the success of the
Tapered Screw-Vent
Implant System, enhances this product line by offering
clinicians a fast, convenient restorative option. In 2010, the
Tapered Screw-Vent
Implant System celebrated its
10-year
anniversary with more than two million implants sold worldwide
since its introduction.
AdVent
®
Implant System. Utilizing many features of the
Tapered Screw-Vent
Implant System, the
AdVent
Implant System is a transgingival, one stage design that
utilizes the same surgical system as the
Tapered Screw-Vent
Implant System, allowing the clinician to use both design
concepts without incurring the added cost of a second surgical
system.
Tapered
SwissPlus
®
Implant System. Designed to meet the needs of
clinicians who prefer a transgingival, one stage, dental
implant, the
Tapered SwissPlus
Implant System
incorporates multiple lead threads for faster insertion time and
a tapered body to allow it to be placed in tight interdental
spaces. The
Tapered SwissPlus
Implant System also
incorporates an internal connection.
| Dental Restorative Products |
We commercialize products for the aesthetic market aimed at
providing a more natural restoration. We offer a full line of
prosthetic devices for each of the above dental implant systems
as well as a custom solution, as follows:
Zimmer
Hex-Lock
®
Contour Abutment and Restorative Products. Designed
to be used with our
Tapered Screw-Vent
and
Zimmer
One-Piece Implant Systems, our contour lines are a solution
for addressing the diversity of patients’ needs. Featuring
prepared margins, titanium and ceramic options and snap-on
impression caps, our abutments are designed to simplify the
restoration process, save time for clinicians and technicians
and offer versatility.
Our
Hex-Lock
Short Abutment and Restorative System is an
all-inclusive solution that promotes posterior restorations. We
also offer the
Zimmer
®
Contour Zirconia Abutment. Both are engineered for use with the
Tapered Screw-Vent
Implant System.
In 2010 we released the
Zimmer
®
Plastic Temporary Abutments for the
Tapered Screw-Vent
and
Screw-Vent
®
Implant Systems. These new provisional abutments, offered in
angled and straight designs, allow for expedient and simplified
modification.
| Dental Regenerative Products |
We market the following product lines for use in regenerative
techniques in oral surgery:
Puros
®
Allograft Products. The
Puros
biologic
offering is an allograft material, which in the case of
mineralized bone and dermal tissues, utilizes the
Tutoplast
®
2
Tissue Processing Technique to provide exceptional bone and soft
tissue grafting material for use in oral surgery. Zimmer Dental
offers a number of distinct
Puros
Allograft products to
use together or separately for various bone and soft tissue
grafting needs:
Puros
Cancellous Particulate,
Puros
Cortical Particulate,
Puros
Block
Allografts,
Puros
Pericardium Membranes,
Puros
Dermis Membranes,
Puros
Demineralized Bone Matrix
(DBM) and
Puros
DBM Putty with Chips.
We distribute the
Puros
Allograft Products through an
exclusive, worldwide agreement with RTI Biologics, Inc., which
was amended and renewed in 2010.
Through this same agreement with RTI Biologics, Inc., we provide
CopiOs
®
Pericardium Membrane in the U.S. Sourced from bovine
pericardial tissue, the
CopiOs
Pericardium Membrane
provides the characteristics of natural tissue and can be used
as a direct substitute for
Puros
Pericardium Membranes.
In addition, we have expanded our regenerative portfolio by
adding new, key product offerings to provide wound management
and sinus lift solutions. The
HemCon
®
3
Dental Dressing is an advanced wound dressing material that
utilizes a proprietary chitosan-based technology to effectively
seal the wound and minimize pain in various surgical procedures.
The
HemCon
Dental Dressing is exclusively
2
Registered
trademark of RTI Biologics, Inc.
3
Registered
trademark of HemCon Medical Technologies, Inc.
7
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
distributed by Zimmer Dental. We have also introduced our
Zimmer
®
Sinus Lift Balloon, created to simplify the delicate sinus lift
procedure, as well as the
Zimmer
®
Collagen Capsules, which represent the industry’s
first-ever bone-shaping membranes — all under an
agreement with Osseous Technologies of America (OTA). Finally,
in line with our goal to offer cutting-edge sinus lift solutions
and instrumentation, we began distributing the
minimally-invasive Neobiotech Sinus Lateral Approach and Sinus
Crestal Approach Kits in the U.S. These surgical kits
streamline and simplify the process for accessing the delicate
sinus area.
Spine
Implants
Our Spine products division designs, manufactures and
distributes medical devices and surgical instruments to deliver
comprehensive solutions for those with back or neck pain caused
by degenerative conditions, deformities or traumatic injury of
the spine. We provide surgeons a broad range of technologies for
posterior and anterior procedures in the cervical, thoracic and
lumbar regions of the spine.
Zimmer Spine’s portfolio of spinal solutions includes:
PathFinder
NXT
tm
Minimally Invasive Pedicle Screw System. Released in
2010, the
PathFinder NXT
System builds on the legacy of
the
PathFinder
®
Device, a pioneering technology in MIS spinal fusion procedures.
The
PathFinder NXT
System is designed to allow for a
mini-open or true percutaneous approach, depending on the
preferred surgeon technique and patient need. In addition, the
PathFinder NXT
System incorporates enhanced features that
provide improved efficiency in performing MIS fusion procedures.
Universal
Clamp
tm
Spinal Fixation System. The design of the
Universal Clamp
Implant allows it to be used alongside
traditional hooks, screws and wires to treat scoliotic
deformities and correct complex spinal pathologies.
Sequoia
®
Pedicle Screw System. The
Sequoia
System was
developed to simplify surgical flow, reduce implantation time
and improve ergonomic tool design. This pedicle screw system
combines ergonomic instrumentation with an effective design that
reduces implant metal volume.
Ardis
®
Interbody System. The
Ardis
Implant features a
self-distracting nose, convex geometry and wide range of sizes.
This versatile
PEEK-OPTIMA
®
4
Device incorporates a large space for graft placement, plus an
advanced tooth design to effectively resist migration and
expulsion during procedures.
Ardis
instrumentation was
also designed to streamline the surgical procedure and improve
surgeon comfort.
Trinica
®
Select Anterior Cervical Plating System. The
Trinica
Select System is designed to simplify the
surgical procedure with the
Secure-Twist
®
Anti-Migration System, which provides visual confirmation of
screw capture, as well as a wide variety of screw options to
customize the construct depending on patient need.
Biological Products. Zimmer Spine offers a full line
of bone void filler products to accommodate most surgical
procedures.
Puros
®
Demineralized Bone Matrix is available in Putty and Putty with
Chips formulations, and the
CopiOs
®
Bone Void Filler family of products includes synthetic bone
graft material in the form of sponges or pastes that are used to
fill bone voids during spine surgery.
Dynesys
®
Dynamic Stabilization System. The
Dynesys
Implant family was designed to facilitate a more physiologic
approach to low back spinal stabilization. The system threads
flexible components, instead of traditional rigid titanium rods,
through pedicle screws in order to stabilize affected spinal
segments in a more natural anatomic position and to alleviate
pain. The
Dynesys
Dynamic Stabilization System is
currently only indicated for use as an adjunct to fusion in the
U.S.
Wallis
®
Posterior Dynamic Stabilization System (available outside the
U.S. only). The
Wallis
System is a spinal
implant that was designed to stabilize the lumbar spine while
preserving the anatomy and minimizing the need for bony
resection. The
Wallis
System combines a
PEEK-OPTIMA
Spacer linked to the vertebrae via a
polyester band that permits an even distribution of stresses on
bone.
Trauma
Trauma products include devices used to stabilize damaged or
broken bones and their surrounding tissues to support the
body’s natural healing processes. Fractures are most often
stabilized using internal fixation devices such as plates,
screws, nails, wires and pins, but may also be stabilized using
external fixation devices. Orthobiologics are used in
conjunction with traditional trauma devices to encourage healing
and replace bone lost during an injury. We are focused on
providing exceptional options to treat a broad range of
traumatic injuries, addressing unmet clinical needs and
implementing next-generation technologies into our portfolio of
trauma solutions.
Zimmer Trauma offers a comprehensive line of products, including:
Zimmer Natural
Nail
®
System. The
Zimmer Natural Nail
System
includes a series of intramedullary nails designed to address a
broad range of long bone fractures. The nails are anatomically
shaped and incorporate a feature that allows the screws to be
linked to the nails, creating a construct even in poor quality
bone. Instrumentation for nail placement is designed to make it
easy for surgeons to utilize the implants as well as to address
growing concerns with obesity and osteoporosis.
NCB
®
Polyaxial Locking Plate System.
NCB
Polyaxial
Locking Plates provide surgeons with the ability to place screws
with polyaxial freedom and utilize both conventional and locking
technology in the treatment of complex fractures of the distal
femur, proximal humerus and
4
Registered
trademark of Ivibio, Ltd.
8
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
proximal tibia. We continue to invest in additional applications
of this technology.
Zimmer
®
Periarticular Locking Plate System. The
Zimmer
Periarticular Locking Plate System combines anatomic designs
with locking screw technology to create constructs for use in
comminuted fractures or where deficient bone stock or poor bone
quality is encountered. By combining locking screw holes with
compression slots, the plates can be used as both locking
devices and fracture compression devices.
Zimmer
®
Universal Locking System. The
Zimmer
Universal
Locking System is a comprehensive system of mini and small
fragment plates, screws and instruments for fracture fixation.
The Universal Locking System plates resemble standard plates,
but have figure-8 shaped holes which allow the plates to be used
as compression plates, locked internal fixators or as an
internal fixation system combining both techniques.
Zimmer
®
Cable-Ready
®
System. The
Zimmer Cable-Ready
System includes
a series of instruments, cables and other implants that help a
surgeon treat several different fracture types, including those
that occur around a previously implanted device
(periprosthetic). The cables are wrapped around the bone and
then secured, either to themselves or to plates, to provide
fixation for fractured limbs.
Surgical
We develop, manufacture and market products that support
reconstructive, trauma, spine and dental implant procedures,
with a focus on Bone Cements, Surgical Wound Site Management and
Blood Management. The Surgical product portfolio includes:
PALACOS
®
5
Bone Cement. We have exclusive U.S. and Canada
distribution rights for the
PALACOS
line of bone cement
products manufactured by Heraeus Kulzer GmbH. Included in these
brands are
PALACOS
R and
PALACOS
R+G Bone Cements,
as well as
PALACOS
LV and
PALACOS
LV+G Bone
Cements. The
PALACOS
R+G and
PALACOS
LV+G products
are bone cements with the antibiotic gentamicin pre-mixed in the
formulation. Both are used by orthopaedic surgeons to reduce the
risk of postoperative infection in second stage revisions. The
PALACOS
family’s history of clinical success,
fatigue strength, high visualization and handling
characteristics make it well-suited for orthopaedics.
Hi-Fatigue
tm
6
Bone Cement. We have exclusive European and Asian
distribution rights for the
Hi-Fatigue
line of bone
cement products manufactured by aap Biomaterials
GmbH & Co. KG. Included in these brands are
Hi-Fatigue
and
Hi-Fatigue
G Bone Cements. The
Hi-Fatigue
G Bone Cement utilizes the antibiotic
gentamicin pre-mixed in the formulation and is used by
orthopaedic surgeons to reduce the risk of postoperative
infection.
A.T.S.
®
Automatic Tourniquet Systems. The
A.T.S.
Tourniquet Systems Product Line is our
family of tourniquet machines and cuffs that are designed to
safely create a bloodless surgical field. The portfolio includes
the
A.T.S.
3000 Tourniquet System, which utilizes
proprietary technology to determine the patient’s
appropriate “Limb Occlusion Pressure” (LOP) based on
the patient’s specific physiology. Through reduction of a
patient’s LOP, the clinician may reduce the risk of tissue
and/or
nerve
damage. Complementing A.T.S. Tourniquet Systems machines is a
wide range of cuffs that provide the flexibility to occlude
blood flow safely with convenience and accuracy for limbs of
virtually every size and shape.
Pulsavac
®
Plus,
Pulsavac
Plus AC and
Pulsavac
Plus LP Wound
Debridement System. The
Pulsavac
Systems are
used for cleaning and debridement of contaminants and foreign
matter from wounds using simultaneous irrigation and suction.
All three
Pulsavac
Systems are disposable to reduce the
risk of cross contamination. While
Pulsavac
Plus and
Pulsavac
Plus LP Wound Debridement Systems are both
battery-powered, the
Pulsavac
Plus AC Wound Debridement
System is a disposable system that is powered by a reusable AC
power source to help alleviate environmental concerns associated
with battery disposal.
Zimmer
®
Blood Reinfusion System (ZBRS) and
Hemovac
®
Blood Management Systems. These two blood management
products are part of a larger family that supports the clinician
in managing patient blood loss after a surgical procedure. The
ZBRS product is a closed-loop postoperative system that
effectively salvages and filters the patient’s own blood to
help reduce dependency on banked blood
and/or
preoperative autologous donation.
HEALTHCARE
CONSULTING
Our healthcare consulting services subsidiary, Accelero Health
Partners, LLC (Accelero), is based in Canonsburg, Pennsylvania.
Accelero consultants work to design a customized program for
each client that promotes the active participation and
collaboration of the physicians and the hospital-based
departments with the goal of consistently producing a superior
outcome in the form of a growing, efficient and effective care
delivery network. Currently, revenue related to Accelero
services represents less than 1 percent of our total net
sales.
ORTHOBIOLOGICS
Our research and development efforts include an Orthobiologics
group based in Austin, Texas, with its own full-time staff and
dedicated projects focusing on the development of a variety of
biologic technologies for musculoskeletal
5
Registered
trademark of Heraeus Kulzer GmbH
6
Registered
trademark of aap Biomaterials GmbH & Co. KG
9
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
applications. This group works on biological solutions to repair
and regenerate damaged or degenerated musculoskeletal tissues
using biomaterials/cell therapies which offer the possibility of
treating damaged joints by biological repair rather than
replacing them. A sampling of some of our key projects in the
Orthobiologics area is set forth below.
We are collaborating with ISTO Technologies, Inc. (ISTO) to
develop chondral grafts for cartilage repair. ISTO creates
cell-based therapies for cartilage regeneration using cells from
juvenile donor cartilage.
DeNovo
®
NT Natural Tissue Graft was commercialized in 2009 and
represents our first product entry into the cartilage repair
market. This tissue product provides particulated juvenile
cartilage tissue for repair of articular cartilage defects of
the knee, ankle, shoulder, hip, elbow and toe joints. More than
1,700 patients have undergone this innovative cartilage
repair procedure.
DeNovo
ET Engineered Tissue Graft is a
living tissue-engineered cartilage graft under clinical
investigation for the restoration of cartilage defects,
reestablishment of joint function and relief of pain in the
knee. The Phase I/II clinical trial for
DeNovo
ET has
been completed and the data has been supplied to the FDA with a
request to allow Zimmer/ISTO to proceed with enrollment of the
pivotal Phase III clinical trial.
Many musculoskeletal surgical procedures use bone grafts to help
regenerate lost or damaged bone. Our Spine, Dental and Trauma
divisions have introduced a technologically advanced all-human
demineralized bone matrix,
Puros
DBM Putty and Putty with
bone chips. This bone-derived allograft material is used to fill
bone voids or defects. It is placed into the bone void where it
is then completely replaced by natural bone during the healing
process.
RESEARCH AND
DEVELOPMENT
We have extensive research and development activities to develop
new surgical techniques, materials, orthobiologics and product
designs. The research and development functions work closely
with our strategic brand marketing function. The rapid
commercialization of innovative new materials, orthobiologics
products, implant and instrument designs and surgical techniques
remains one of our core strategies and continues to be an
important driver of sales growth.
We are broadening our product offerings in each of our product
categories and exploring new technologies with possible
applications in multiple areas. For the years ended
December 31, 2010, 2009 and 2008, we spent
$220.0 million, $205.7 million and
$192.3 million, respectively, on research and development.
Our primary research and development facility is located in
Warsaw, Indiana. We have other research and development
personnel based in, among other places, Winterthur, Switzerland;
Austin, Texas; Minneapolis, Minnesota; Carlsbad, California;
Dover, Ohio; and Parsippany, New Jersey. As of December 31,
2010, we employed more than 1,000 research and development
employees worldwide.
We expect to continue to identify innovative technologies and
consider acquiring complementary products or businesses, or
establishing technology licensing arrangements or strategic
alliances.
GOVERNMENT
REGULATION AND COMPLIANCE
We are subject to government regulation in the countries in
which we conduct business. In the U.S., numerous laws and
regulations govern all the processes by which medical devices
are brought to market. These include, among others, the Federal
Food, Drug and Cosmetic Act and regulations issued or
promulgated thereunder. The FDA has enacted regulations that
control all aspects of the development, manufacture,
advertising, promotion and postmarket surveillance of medical
products, including medical devices. In addition, the FDA
controls the access of products to market through processes
designed to ensure that only products that are safe and
effective are made available to the public.
Most of our new products fall into an FDA classification that
requires the submission of a Premarket Notification (510(k)) to
the FDA. This process requires us to demonstrate that the device
to be marketed is at least as safe and effective as, that is,
substantially equivalent to, a legally marketed device. We must
submit information that supports our substantial equivalency
claims. Before we can market the new device, we must receive an
order from the FDA finding substantial equivalence and clearing
the new device for commercial distribution in the
U.S. Other devices we develop and market are in a category
(class) for which the FDA has implemented stringent clinical
investigation and Premarket Approval (PMA) requirements. The PMA
process requires us to provide clinical and laboratory data that
establishes that the new medical device is safe and effective.
The FDA will approve the new device for commercial distribution
if it determines that the data and information in the PMA
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 certain
pre-amendment
devices which were in commercial distribution prior to
May 28, 1976. The FDA has grandfathered these devices, so
new FDA submissions are not required. The FDA has the authority
to: halt the distribution of certain medical devices; detain or
seize adulterated or misbranded medical devices; or order the
repair, replacement or refund of the costs of such devices and
to seek criminal prosecution of executives for violation of FDA
regulations. There are also certain requirements of state, local
and foreign governments that we must comply with in the
manufacture and marketing of our products.
In many of the foreign countries in which we market our
products, we are subject to local regulations affecting, among
other things, design and product standards, packaging
requirements and labeling requirements. Many of the regulations
applicable to our devices and products in these countries are
similar to those of the FDA. The member countries of the
European Union have adopted the European Medical Device
Directive, which creates a single set of medical device
regulations for products marketed in all member countries.
Compliance with the Medical Device Directive and certification
to a quality system enable the manufacturer to place a CE mark
on its products. To obtain
10
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
authorization to affix the CE mark to a product, a recognized
European Notified Body must assess a manufacturer’s quality
systems and the product’s conformity to the requirements of
the Medical Device Directive. We are subject to inspection by
the Notified Bodies for compliance with these requirements.
Further, we are subject to various federal and state laws
concerning healthcare fraud and abuse, including false claims
laws and anti-kickback laws. These laws are administered by,
among others, the U.S. Department of Justice, the Office of
Inspector General of the Department of Health and Human Services
and state attorneys general. Many of these agencies have
increased their enforcement activities with respect to medical
device manufacturers in recent years. Violations of these laws
are punishable by criminal
and/or
civil
sanctions, including, in some instances, fines, imprisonment
and, within the U.S., exclusion from participation in government
healthcare programs, including Medicare, Medicaid and Veterans
Administration (VA) health programs.
Our operations in foreign countries are subject to the
extraterritorial application of the U.S. Foreign Corrupt
Practices Act (FCPA). As part of our global compliance program,
we seek to address FCPA risks proactively.
Our facilities and operations are also subject to complex
federal, state, local and foreign environmental and occupational
safety laws and regulations, including those relating to
discharges of substances in the air, water and land, the
handling, storage and disposal of wastes and the
clean-up
of
properties by pollutants. We do not expect that the ongoing
costs of compliance with these environmental requirements will
have a material impact on our consolidated earnings, capital
expenditures or competitive position.
We continue to assess the impact that the healthcare reform
legislation passed in 2010 by the U.S. federal government
will have on our business. The new law includes a
2.3 percent excise tax on a majority of our U.S. sales
that is scheduled to be implemented in 2013.
COMPETITION
The orthopaedics industry is highly competitive. In the global
markets for reconstructive implants, trauma and related surgical
products, our major competitors include: DePuy Orthopaedics,
Inc. (a subsidiary of Johnson & Johnson), Stryker
Corporation, Biomet, Inc., Smith & Nephew plc, Wright
Medical Group, Inc., Synthes, Inc. and Tornier, Inc.
In the Americas geographic segment, we and DePuy Orthopaedics,
Inc., Stryker Corporation, Biomet, Inc.,
Smith & Nephew, Inc. (a subsidiary of
Smith & Nephew plc), Wright Medical Group, Inc. and
Synthes, Inc. account for a large majority of the total
reconstructive and trauma implant sales.
In the Asia Pacific market for reconstructive implant and trauma
products, we compete primarily with DePuy Orthopaedics, Inc.,
Stryker Corporation, Synthes, Inc., Smith & Nephew plc
and Biomet, Inc., as well as regional companies, including Japan
Medical Materials Corporation and Japan Medical Dynamic
Marketing, Inc. Factors, such as the dealer system and complex
regulatory environments, make it difficult for smaller
companies, particularly those that are non-regional, to compete
effectively with the market leaders in the Asia Pacific region.
The European reconstructive implant and trauma product markets
are more fragmented than the Americas or the Asia Pacific
segments. The variety of philosophies held by European surgeons
regarding hip reconstruction, for example, has fostered the
existence of many regional European companies, including
Aesculap AG (a subsidiary of B. Braun), Waldemar LINK
GmbH & Co., KG and Mathys AG which, in addition to the
global competitors, compete with us. Today most hip implants
sold in Europe are products developed specifically for the
European market, although global products are gaining
acceptance. We will continue to develop and produce specially
tailored products to meet specific European needs.
In the spinal implant category, we compete globally primarily
with the spinal and biologic business of Medtronic, Inc., DePuy
Spine (a subsidiary of Johnson & Johnson), Synthes,
Inc., Stryker Corporation, Biomet Spine (a subsidiary of Biomet,
Inc.) and NuVasive, Inc.
In the dental implant category, we compete primarily with Nobel
Biocare Holding AG, Straumann Holding AG, Astra Tech Dental,
Dentsply International and Biomet 3i (a subsidiary of Biomet,
Inc.).
Competition within the industry is primarily based on
technology, innovation, quality, reputation and customer
service. A key factor in our continuing success in the future
will be our ability to develop new products and improve existing
products and technologies.
MANUFACTURING AND
RAW MATERIALS
We manufacture substantially all of our products at nine sites,
including Warsaw, Indiana; Winterthur, Switzerland; Ponce,
Puerto Rico; Dover, Ohio; Statesville, North Carolina; Carlsbad,
California; Parsippany, New Jersey; Shannon, Ireland; and
Etupes, France. Additionally, in December 2010 we acquired two
businesses, Beijing Montagne Medical Device Co., Ltd. (Montagne)
and Sodem Diffusion S.A. (Sodem). Montagne has manufacturing
facilities in Beijing and Xianning, China and Sodem has
manufacturing facilities in Geneva, Switzerland. We expect these
facilities will become an important part of our manufacturing
network.
We believe that our manufacturing facilities are among the best
in our industry in terms of automation and productivity and have
the flexibility to accommodate future growth. The manufacturing
operations at these facilities are designed to incorporate the
cellular concept for production and to implement tenets of a
manufacturing philosophy focused on continuous operational
improvement and optimization. Our continuous improvement efforts
are driven by Lean and Six Sigma methodologies. In addition, at
certain of our manufacturing facilities, many of the employees
are cross-trained to perform a broad array of operations.
We generally target operating our manufacturing facilities at
levels up to 90 percent of total capacity. We continually
11
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
evaluate the potential to in-source products currently purchased
from outside vendors to
on-site
production.
We have improved our manufacturing processes to protect our
profitability and offset the impact of inflationary costs. We
have, for example, employed computer-assisted robots and
multi-axis grinders to precision polish medical devices;
automated certain manufacturing and inspection processes,
including on-machine inspection and process controls; purchased
state-of-the-art
equipment; in-sourced core products, such as castings and
forgings; and negotiated reductions in third party supplier
costs.
We use a diverse and broad range of raw materials in the
manufacturing of our products. We purchase all of our raw
materials and select components used in manufacturing our
products from external suppliers. In addition, we purchase some
supplies from single sources for reasons of quality assurance,
sole source availability, cost effectiveness or constraints
resulting from regulatory requirements. We work closely with our
suppliers to assure continuity of supply while maintaining high
quality and reliability. To date, we have not experienced any
significant difficulty in locating and obtaining the materials
necessary to fulfill our production schedules.
INTELLECTUAL
PROPERTY
Patents and other proprietary rights are important to the
continued success of our business. We also rely upon trade
secrets, know-how, continuing technological innovation and
licensing opportunities to develop and maintain our competitive
position. We protect our proprietary rights through a variety of
methods, including confidentiality agreements and proprietary
information agreements with vendors, employees, consultants and
others who may have access to proprietary information. We own or
control through licensing arrangements more than 5,000 issued
patents and patent applications throughout the world that relate
to aspects of the technology incorporated in many of our
products.
EMPLOYEES
As of December 31, 2010, we employed more than
8,800 employees worldwide, including more than
1,000 employees dedicated to research and development.
Approximately 4,900 employees are located within the
U.S. and approximately 3,900 employees are located
outside of the U.S., primarily throughout Europe and in Japan.
We have over 3,700 employees dedicated to manufacturing our
products worldwide. The Warsaw, Indiana production facility
employs more than 1,500 employees. Approximately
150 U.S. employees are members of a trade union
covered by a collective bargaining agreement.
We have a collective bargaining agreement with the United Steel,
Paper and Forestry, Rubber Manufacturing, Energy, Allied
Industrial and Service Workers International Union for and on
behalf of Local
2737-15
covering employees at the Dover, Ohio facility, which continues
in effect until May 15, 2012.
EXECUTIVE
OFFICERS
The following table sets forth certain information with respect
to our executive officers as of February 15, 2011.
| Name | Age | Position | ||
|
David C. Dvorak
|
47 | President and Chief Executive Officer | ||
|
Cheryl R. Blanchard, Ph.D.
|
46 | Senior Vice President and Chief Scientific Officer | ||
|
James T. Crines
|
51 | Executive Vice President, Finance and Chief Financial Officer | ||
|
Derek M. Davis
|
41 | Vice President, Finance and Corporate Controller and Chief Accounting Officer | ||
|
Jeffery A. McCaulley
|
45 | President, Zimmer Reconstructive | ||
|
Bruno A. Melzi
|
63 | Chairman, Europe, Middle East and Africa | ||
|
Stephen H.L. Ooi
|
57 | President, Asia Pacific | ||
|
Jeffrey B. Paulsen
|
49 | Group President, Global Businesses | ||
|
Chad F. Phipps
|
39 | Senior Vice President, General Counsel and Secretary | ||
|
|
||||
Mr. Dvorak
was appointed President, Chief Executive Officer and
a member of the Board of Directors in May 2007. From December
2005 to April 2007, he served as Group President, Global
Businesses and Chief Legal Officer. Prior to that, he had served
as Executive Vice President, Corporate Services, Chief Counsel
and Secretary, as well as Chief Compliance Officer, since
October 2003. Mr. Dvorak joined Zimmer in 2001.
Dr. Blanchard
was appointed Senior Vice President and Chief
Scientific Officer in December 2005. She is responsible for
Corporate Research, Global Quality and Regulatory Affairs,
Global Medical Affairs, Biologics Research and Development and
Biologics Marketing. Previously, she had served as Vice
President, Corporate Research and Clinical Affairs since October
2003. Dr. Blanchard joined Zimmer in 2000.
Mr. Crines
was appointed Executive Vice President, Finance and
Chief Financial Officer in May 2007. From December 2005 to April
2007, he served as Senior Vice President, Finance, Operations
and Corporate Controller and Chief Accounting Officer. Prior to
that, he had served as Senior Vice President, Finance/Controller
and Information Technology since October 2003. Mr. Crines
joined Zimmer in 1995.
12
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Mr. Davis
was appointed Vice President, Finance and Corporate
Controller and Chief Accounting Officer in May 2007. He has
responsibility for internal and external reporting, planning and
analysis, and corporate and business unit accounting. From March
2006 to May 2007, he served as Director, Financial Planning and
Accounting. Prior to that, he had served as Director, Finance,
Operations and Logistics since December 2003. Mr. Davis
joined Zimmer in 2003.
Mr. McCaulley
was appointed President, Zimmer Reconstructive in
November 2008. He has overall responsibility for the Global
Reconstructive Division, including direct responsibility for
Global Brand Management, Product Research and Development,
Quality and Regulatory Affairs, and Medical Training and
Education, as well as Americas Marketing and Sales. Prior to
joining Zimmer, he served as President and Chief Executive
Officer of the Health Division of Wolters Kluwer from 2005, Vice
President and General Manager of the Diabetes Division of
Medtronic, Inc. from 2002, and spent 14 years with GE
Healthcare in numerous positions of increasing responsibility,
including President and Chief Executive Officer of GE Clinical
Services from 2000.
Mr. Melzi
was appointed Chairman, Europe, Middle East and
Africa in October 2003. He is responsible for the sales,
marketing and distribution of products in the European, Middle
Eastern and African regions. Mr. Melzi joined Zimmer in
1990.
Mr. Ooi
was appointed President, Asia Pacific in December
2005. He is responsible for the sales, marketing and
distribution of products in the Asia Pacific region. Prior to
that, he had served as President, Australasia since September
2003. Mr. Ooi joined Zimmer in 1986.
Mr. Paulsen
was appointed Group President, Global Businesses in
December 2009. He has responsibility for Zimmer Spine, Zimmer
Dental, Zimmer Trauma and Zimmer Surgical. Prior to joining
Zimmer, Mr. Paulsen served as Chief Operating Officer of
MPS Group, Inc., a privately held environmental services and
facility management firm, from September 2008 to December 2009.
Prior to that, he served as Group President of TriMas
Corporation, a specialty manufacturing company, from January
2007 to June 2008. Previously, Mr. Paulsen had held a
number of increasingly responsible executive roles at Stryker
Corporation from 1996 to December 2006, including President,
Orthopaedic Reconstructive Division.
Mr. Phipps
was appointed Senior Vice President, General Counsel
and Secretary in May 2007. He has global responsibility for our
legal affairs and he serves as Secretary to the Board of
Directors. Mr. Phipps also oversees our Government Affairs,
Corporate Marketing and Communications and Public Relations
activities. From December 2005 to May 2007, he served as
Associate General Counsel and Corporate Secretary. Prior to
that, he had served as Associate Counsel and Assistant Secretary
since September 2003. Mr. Phipps joined Zimmer in 2003.
AVAILABLE
INFORMATION
Our Internet address is www.zimmer.com. We routinely post
important information for investors on our website in the
“Investor Relations” section, which may be accessed
from our homepage at www.zimmer.com or directly at
http://investor.zimmer.com.
We intend to 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:
| • | our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file that material with or furnish it to the Securities and Exchange Commission (SEC); |
| • | announcements of investor conferences and events at which our executives talk about our products and competitive strategies. Podcasts and archives of these events are also available; |
| • | press releases on quarterly earnings, product announcements, legal developments and other material news that we may post from time to time; |
| • | corporate governance information including our Corporate Governance Guidelines, Code of Business Conduct, Code of Ethics for Chief Executive Officer and Senior Financial Officers, information concerning our Board of Directors and its committees, including the charters of the Audit Committee, Compensation and Management Development Committee, Corporate Governance Committee and Science and Technology Committee, and other governance-related policies; |
| • | shareholder services information, including ways to contact our transfer agent; and |
| • | opportunities to sign up for email alerts and RSS feeds to have information provided in real time. |
The information available on our website is not incorporated by
reference in, or a part of this or any other report we file with
or furnish to the SEC.
| ITEM 1A. | Risk Factors |
Risk factors which could cause actual results to differ from
our expectations and which could negatively impact our financial
condition and results of operations are discussed below and
elsewhere in this report. The risks and uncertainties described
below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that are currently
not believed to be significant to our business may also affect
our actual results and could harm our business, financial
condition and results of operations. If any of the risks or
13
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
uncertainties described below or any additional risks and
uncertainties actually occur, our business, results of
operations and financial condition could be materially and
adversely affected.
If we fail to comply with the terms of the Corporate
Integrity Agreement we entered into in September 2007, we may be
subject to exclusion from federal healthcare programs.
As previously reported, in September 2007 we settled an
investigation conducted by the U.S. Attorney’s Office
for the District of New Jersey (U.S. Attorney) into
financial relationships between major orthopaedic manufacturers
and consulting orthopaedic surgeons. As part of that settlement,
we entered into a Corporate Integrity Agreement (CIA) with the
Office of Inspector General of the Department of Health and
Human Services (OIG-HHS). A copy of the CIA is filed as an
exhibit to this report. If we do not comply with the terms of
the CIA, we could be subject to exclusion by OIG-HHS from
participation in federal healthcare programs, including Medicaid
and Medicare.
The ongoing investigation by the U.S. Securities and
Exchange Commission and the U.S. Department of Justice
regarding potential violations of the Foreign Corrupt Practices
Act in the sale of medical devices in a number of foreign
countries by companies in the medical device industry could have
a material adverse effect on our business, financial condition
and cash flows.
We are cooperating fully with the U.S. Securities and
Exchange Commission and the U.S. Department of Justice with
regard to an ongoing investigation of potential violations of
the Foreign Corrupt Practices Act in the sale of medical devices
in a number of foreign countries by companies in the medical
device industry. Although we have adopted policies and
procedures designed to prevent improper payments and we train
our employees, distributors and others concerning these issues,
we cannot assure that violations of these requirements will not
occur. If we are found to have violated the Foreign Corrupt
Practices Act, we may face sanctions including fines, criminal
penalties, disgorgement of profits and suspension or debarment
of our ability to contract with governmental agencies or receive
export licenses.
If we fail to retain the independent agents and distributors
upon whom we rely heavily to market our products, customers may
not buy our products and our revenue and profitability may
decline.
Our marketing success in the U.S. and abroad depends
significantly upon our agents’ and distributors’ sales
and service expertise in the marketplace. Many of these agents
have developed professional relationships with existing and
potential customers because of the agents’ detailed
knowledge of products and instruments. A loss of a significant
number of these agents could have a material adverse effect on
our business and results of operations.
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:
| • | evolving customer needs; |
| • | changing demographics; |
| • | slowing industry growth rates; |
| • | declines in the reconstructive implant market; |
| • | the introduction of new products and technologies; |
| • | evolving surgical philosophies; and |
| • | 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:
| • | properly identify and anticipate customer needs; |
| • | commercialize new products in a timely manner; |
| • | manufacture and deliver instruments and products in sufficient volumes on time; |
| • | differentiate our offerings from competitors’ offerings; |
| • | achieve positive clinical outcomes for new products; |
| • | satisfy the increased demands by healthcare payors, providers and patients for shorter hospital stays, faster post-operative recovery and lower-cost procedures; |
| • | innovate and develop new materials, product designs and surgical techniques; and |
| • | 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:
| • | entrenched patterns of clinical practice; |
| • | the need for regulatory clearance; and |
| • | 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.
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 derive more
than 40 percent of our net sales 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
14
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
are, and will continue to be, subject to a number of risks and
potential costs, including:
| • | changes in foreign medical reimbursement policies and programs; |
| • | unexpected changes in foreign regulatory requirements; |
| • | differing local product preferences and product requirements; |
| • | fluctuations in foreign currency exchange rates; |
| • | diminished protection of intellectual property in some countries outside of the U.S.; |
| • | trade protection measures and import or export requirements that may prevent us from shipping products to a particular market and may increase our operating costs; |
| • | foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S.; |
| • | complex data privacy requirements and labor relations laws; |
| • | extraterritorial effects of U.S. laws such as the Foreign Corrupt Practices Act; |
| • | difficulty in staffing and managing foreign operations; |
| • | labor force instability; |
| • | potentially negative consequences from changes in tax laws; and |
| • | political and economic instability. |
Violations of foreign laws or regulations could result in fines,
criminal sanctions against us, our officers or our employees,
prohibitions on the conduct of our business and damage to our
reputation.
We are subject to risks arising from currency exchange rate
fluctuations, which can increase our costs, cause our
profitability to decline and expose us to counterparty risks.
A substantial portion of our foreign revenues is generated in
Europe and Japan. The U.S. dollar value of our
foreign-generated revenues varies with currency exchange rate
fluctuations. Significant increases in the value of the
U.S. dollar relative to the Euro or the Japanese Yen, as
well as other currencies, could have a material adverse effect
on our results of operations. Although we address currency risk
management through regular operating and financing activities,
and, on a limited basis, through the use of derivative financial
instruments, those actions may not prove to be fully effective.
We may fail to adequately protect our proprietary technology
and other intellectual property, which would allow competitors
or others to take advantage of our research and development
efforts.
Our long-term success largely depends on our ability to market
technologically competitive products. If we fail to obtain or
maintain adequate intellectual property protection, we may not
be able to prevent third parties from using our proprietary
technologies. Also, our currently pending or future patent
applications may not result in issued patents, and issued
patents are subject to claims concerning priority, scope and
other issues.
The U.S. Patent and Trademark Office and the courts have
not consistently treated the breadth of claims allowed or
interpreted in orthopaedic reconstructive implant and
biotechnology patents. Future changes in, or unexpected
interpretations of, the patent laws may adversely affect our
ability to enforce our patent position.
In addition, intellectual property rights may be unavailable or
of limited effect in some foreign countries. If we do not obtain
sufficient international protection for our intellectual
property, our competitiveness in international markets could be
impaired, which could limit our growth and revenue.
We also attempt to protect our trade secrets, proprietary
know-how and continuing technological innovation with security
measures, including the use of confidentiality agreements with
our employees, consultants and collaborators. These measures may
prove to be ineffective and any remedies available to us may be
insufficient to compensate our damages.
We may be subject to intellectual property litigation and
infringement claims, which could cause us to incur significant
expenses or prevent us from selling our products.
A successful claim of patent or other intellectual property
infringement against us could adversely affect our growth and
profitability, in some cases materially. From time to time, we
receive notices from third parties of potential infringement and
receive claims of potential infringement. We may be unaware of
intellectual property rights of others that may cover some of
our technology. If someone claims that our products infringed
their intellectual property rights, any resulting litigation
could be costly and time consuming and would divert the
attention of management and key personnel from other business
issues. If we were to lose such litigation involving material
intellectual property rights, we may be unable to manufacture,
sell or use some of our products.
We may incur product liability losses, and insurance coverage
may be inadequate or unavailable to cover these losses.
In the ordinary course of business, we are the subject of
product liability lawsuits alleging that component failures,
manufacturing flaws, design defects or inadequate disclosure of
product-related risks or product-related information resulted in
an unsafe condition or injury to patients. As previously
reported, we temporarily suspended the marketing and
distribution of our
Durom
®
Acetabular Component (
Durom
Cup) in the U.S. in July
2008. Following our action, product liability lawsuits and other
claims were asserted against us and additional similar claims
may be asserted. Product liability lawsuits and claims, safety
alerts or product recalls, regardless of their ultimate outcome,
could have a material adverse effect on our business and
reputation and on our ability to attract and retain customers.
Although we maintain third-party product liability insurance
coverage, it is possible that claims against us may exceed the
coverage limits of our insurance policies or cause us to record
a self-insured loss. Even if any product liability loss is
covered by an insurance policy, these policies typically have
substantial retentions or deductibles for which we are
responsible. Product liability claims in excess of applicable
insurance could have a material adverse effect on our business,
financial condition and results of operations.
15
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
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, government investigations and
other legal proceedings that arise from time to time in the
ordinary course of our business. Although we believe we have
substantial defenses in these matters, litigation and other
claims are subject to inherent uncertainties and
management’s view of these matters may change in the
future. We could in the future incur judgments or enter into
settlements of claims that could have a material adverse effect
on our results of operations in any particular period.
We may make additional acquisitions or enter into strategic
alliances that could increase our costs or liabilities or be
disruptive.
We intend to continue to look for additional strategic
acquisitions of other businesses that are complementary to our
businesses and other companies with whom we could form strategic
alliances or enter into other arrangements to develop or exploit
intellectual property rights. These activities involve risks,
including the following:
| • | we may need to divert more management resources to integration than we planned, which may adversely affect our ability to pursue other more profitable activities; |
| • | the difficulties of integrating acquired businesses may be increased if we need to integrate geographically separated organizations, personnel with disparate business backgrounds and companies with different corporate cultures; |
| • | we may not recognize expected cost savings or the anticipated benefits of acquisitions or strategic alliances; |
| • | our acquisition candidates or strategic partners may have unexpected liabilities or prove unable to meet their obligations to us or the joint venture; and |
| • | the priorities of our strategic partners may prove incompatible with ours. |
We depend on a limited number of suppliers for some key raw
materials and outsourced activities.
We use a number of suppliers for raw materials that we need to
manufacture our products and to outsource some key manufacturing
activities. These suppliers must provide the materials and
perform the activities to our standards for us to meet our
quality and regulatory requirements. Some key raw materials and
outsourced activities can only be obtained from a single source
or a limited number of sources. A prolonged disruption or other
inability to obtain these materials or outsource key
manufacturing activities could materially and adversely affect
our ability to satisfy demand for our products.
Future material impairments in the carrying value of our
intangible assets, including goodwill, would negatively affect
our operating results.
Our assets include intangible assets, primarily goodwill. The
goodwill results from our acquisition activity and represents
the excess of the consideration transferred over the fair value
of the net assets acquired. We assess at least annually whether
events or changes in circumstances indicate that the carrying
value of our intangible assets may not be recoverable. If the
operating performance at one or more of our business units falls
significantly below current levels, if competing or alternative
technologies emerge, or if market conditions or future cash flow
estimates for one or more of our businesses decline, we could be
required, under current U.S. accounting rules, to record a
non-cash charge to operating earnings for the amount of the
impairment. Any write-off of a material portion of our
unamortized intangible assets would negatively affect our
results of operations.
We may have additional tax liabilities.
We are subject to income taxes in the U.S. and many foreign
jurisdictions. Significant judgment is required in determining
our worldwide provision for income taxes. In the ordinary course
of our business, there are many transactions and calculations
where the ultimate tax determination is uncertain. We regularly
are under audit by tax authorities. Although we believe our tax
estimates are reasonable, the final determination of tax audits
and any related litigation could be materially different from
our historical income tax provisions and accruals. The results
of an audit or litigation could have a material effect on our
financial statements in the period or periods for which that
determination is made.
We earn a significant amount of our operating income from
outside the U.S., and any repatriation of funds currently held
in foreign jurisdictions may result in higher effective tax
rates. In addition, there have been proposals to change
U.S. tax laws that would significantly impact how
U.S. multinational corporations are taxed on foreign
earnings. Although we cannot predict whether or in what form
this proposed legislation will pass, if enacted it could have a
material adverse impact on our tax expense and cash flow.
In January 2011, the IRS issued a Notice of Proposed Adjustment
(NOPA) for tax years 2006 and 2007. The NOPA relates to
intercompany pricing between certain of our U.S. and
foreign subsidiaries. We believe that we have followed
applicable U.S. tax laws and will vigorously defend our
income tax positions. However, the ultimate settlement with the
IRS related to these proposed adjustments could have a material
impact on our income tax expense and net earnings.
The impact of U.S. healthcare reform legislation on us
remains uncertain.
In March 2010, federal legislation to reform the
U.S. healthcare system was enacted into law. The
legislation is far-reaching and is intended to expand access to
health insurance coverage, improve quality and reduce costs over
time. We expect the new law will have a significant impact upon
various aspects of our business operations. For example, to the
extent that the number of uninsured or underinsured patients is
reduced, demand for our products in the U.S. could
marginally increase. However, it is unclear how the new law will
impact patient access to new technologies or reimbursement rates
under the Medicare program. In addition, the new law imposes a
2.3 percent excise tax on medical devices scheduled to be
implemented in 2013 that will apply to U.S. sales of a
majority of our medical device products.
Many of the details of the new law will be included in new and
revised regulations, which have not yet been promulgated, and
require additional guidance and specificity to be provided
16
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
by the Department of Health and Human Services, Department of
Labor and Department of the Treasury. Accordingly, while it is
too early to understand and predict the ultimate impact of the
new law on our business, the legislation could have a material
adverse effect on our business, cash flows, financial condition
and results of operations.
We are subject to healthcare fraud and abuse regulations on
an ongoing basis that could require us to change our business
practices and restrict our operations in the future.
Our industry is subject to various federal and state laws
pertaining to healthcare fraud and abuse, including false claims
laws, the federal Anti-Kickback Statute, similar state laws and
physician self-referral laws. Violations of these laws are
punishable by criminal
and/or
civil
sanctions, including, in some instances, fines, imprisonment
and, within the U.S., exclusion from participation in government
healthcare programs, including Medicare, Medicaid and Veterans
Administration (VA) health programs. The interpretation and
enforcement of these laws and regulations are uncertain and
subject to rapid change.
If third-party payors decline to reimburse our customers for
our products or reduce reimbursement levels, the demand for our
products may decline and our ability to sell our products
profitably may be harmed.
We sell our products and services to hospitals, doctors,
dentists and other healthcare providers, all of which receive
reimbursement for the healthcare services provided to their
patients from third-party payors, such as domestic and
international government programs, private insurance plans and
managed care programs. These third-party payors may deny
reimbursement if they determine that a device used in a
procedure was not in accordance with cost-effective treatment
methods, as determined by the third-party payor, or was used for
an unapproved indication. Third-party payors may also decline to
reimburse for experimental procedures and devices. If our
products are not considered cost-effective by third-party
payors, our customers may not be reimbursed for our products.
In addition, third-party payors are increasingly attempting to
contain healthcare costs by limiting both coverage and the level
of reimbursement for medical products and services. If
third-party payors reduce reimbursement levels to hospitals and
other healthcare providers for our products, demand for our
products may decline, or we may experience pressure to reduce
the prices of our products, which could have a material adverse
effect on our sales and results of operations.
We have also experienced downward pressure on product pricing
and other effects of healthcare reform in our international
markets. If key participants in government healthcare systems
reduce the reimbursement levels for our products, our sales and
results of operations may be adversely affected.
The ongoing cost-containment efforts of healthcare purchasing
organizations may have a material adverse effect on our results
of operations.
Many customers for our products have formed group purchasing
organizations in an effort to contain costs. Group purchasing
organizations negotiate pricing arrangements with medical supply
manufacturers and distributors, and these negotiated prices are
made available to a group purchasing organization’s
affiliated hospitals and other members. If we are not one of the
providers selected by a group purchasing organization,
affiliated hospitals and other members may be less likely to
purchase our products, and, if the group purchasing organization
has negotiated a strict compliance contract for another
manufacturer’s products, we may be precluded from making
sales to members of the group purchasing organization for the
duration of the contractual arrangement. Our failure to respond
to the cost-containment efforts of group purchasing
organizations may cause us to lose market share to our
competitors and could have a material adverse effect on our
sales and results of operations.
Our success depends on our ability to effectively develop and
market our products against those of our competitors.
We operate in a highly competitive environment. Our present or
future products could be rendered obsolete or uneconomical by
technological advances by one or more of our present or future
competitors or by other therapies, including biological
therapies. To remain competitive, we must continue to develop
and acquire new products and technologies. Competition is
primarily on the basis of:
| • | technology; |
| • | innovation; |
| • | quality; |
| • | reputation; and |
| • | customer service. |
In markets outside of the U.S., other factors influence
competition as well, including:
| • | local distribution systems; |
| • | complex regulatory environments; and |
| • | differing medical philosophies and product preferences. |
Our competitors may:
| • | have greater financial, marketing and other resources than us; |
| • | respond more quickly to new or emerging technologies; |
| • | undertake more extensive marketing campaigns; |
| • | adopt more aggressive pricing policies; or |
| • | be more successful in attracting potential customers, employees and strategic partners. |
Any of these factors, alone or in combination, could cause us to
have difficulty maintaining or increasing sales of our products.
We and our customers are subject to various governmental
regulations relating to the manufacturing, labeling and
marketing of our products, and we may incur significant expenses
to comply with these regulations and develop products compatible
with these regulations.
The medical devices we design, develop, manufacture and market
are subject to rigorous regulation by the FDA and numerous other
federal, state and foreign governmental authorities. The process
of obtaining regulatory approvals to market a medical device can
be costly and time consuming and approvals might not be granted
for future products on a timely
17
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
basis, if at all. Delays in receipt of, or failure to obtain,
approvals for future products could result in delayed
realization of product revenues or in substantial additional
costs.
In addition, if we fail to comply with applicable material
regulatory requirements, including, for example, the Quality
System Regulation, recordkeeping regulations, labeling and
promotional requirements and adverse event reporting
regulations, we may be subject to a range of sanctions including:
| • | warning letters; |
| • | fines or civil penalties; |
| • | injunctions; |
| • | repairs, replacements or refunds; |
| • | recalls or seizures of products; |
| • | total or partial suspension of production; |
| • | the FDA’s refusal to grant future premarket clearances or approvals; |
| • | withdrawals or suspensions of current product applications; and |
| • | criminal prosecution. |
Moreover, the FDA recently announced wide-ranging proposals to
reform the 510(k) process. While it is not known which reforms
may ultimately be implemented, they may result in more extensive
data requirements and a longer process for obtaining clearance.
We expect 510(k) reform could delay new products from reaching
the market in the U.S. and increase the costs of
introducing new products and features, which could adversely
affect our business.
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.
| ITEM 1B. | Unresolved Staff Comments |
Not Applicable.
18
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| ITEM 2. | Properties |
We have the following properties:
| Location | Use | Owned/Leased | Square Feet | |||||
|
Warsaw, Indiana
|
Research & Development, Manufacturing, Warehousing, Marketing & Administration | Owned | 1,400,000 | |||||
|
Warsaw, Indiana
|
Corporate Headquarters and The Zimmer Institute | Owned | 117,000 | |||||
|
Warsaw, Indiana
|
Offices, Manufacturing & Warehousing | Leased | 90,000 | |||||
|
Carlsbad, California
|
Offices, Research & Development & Manufacturing | Leased | 118,000 | |||||
|
Minneapolis, Minnesota
|
Offices & Research & Development | Owned | 51,000 | |||||
|
Statesville, North Carolina
|
Manufacturing & Warehousing | Owned | 156,000 | |||||
|
Dover, Ohio
|
Research & Development, Manufacturing & | Owned | 140,000 | |||||
| Warehousing | Leased | 61,000 | ||||||
|
Parsippany, New Jersey
|
Office, Research & Development, Manufacturing, Warehousing & BioSkills Institute | Leased | 115,000 | |||||
|
Memphis, Tennessee
|
Offices & Warehousing | Leased | 30,000 | |||||
|
Austin, Texas
|
Offices, Administration, Research & Development | Leased | 97,000 | |||||
|
Sydney, Australia
|
Offices & Warehousing | Leased | 36,000 | |||||
|
Mödling, Austria
|
Offices & Warehousing | Owned | 14,000 | |||||
|
Wemmel, Belgium
|
Offices & Warehousing | Leased | 15,000 | |||||
|
Mississauga, Canada
|
Offices & Warehousing | Leased | 52,000 | |||||
|
Beijing, China
|
Offices & Manufacturing | Leased | 80,000 | |||||
|
Xianning, China
|
Offices, Research & Development & Manufacturing | Leased | 53,000 | |||||
|
Shanghai, China
|
Offices & Warehousing | Leased | 18,000 | |||||
|
Etupes, France
|
Offices, Manufacturing & Warehousing | Owned | 90,000 | |||||
|
Eschbach, Germany
|
Distribution Center | Owned | 94,000 | |||||
|
Freiburg, Germany
|
Offices & Warehousing | Leased | 51,000 | |||||
|
Shannon, Ireland
|
Offices & Manufacturing | Owned | 125,000 | |||||
|
Milan, Italy
|
Offices & Warehousing | Leased | 47,000 | |||||
|
Gotemba, Japan
|
Offices, Service Center & Warehousing | Owned | 87,000 | |||||
|
Tokyo, Japan
|
Offices & Warehousing | Leased | 24,000 | |||||
|
Seoul, Korea
|
Offices & Warehousing | Leased | 22,000 | |||||
|
Utrecht, Netherlands
|
Offices & Warehousing | Leased | 16,000 | |||||
|
Ponce, Puerto Rico
|
Offices, Manufacturing & Warehousing | Owned | 213,000 | |||||
|
Singapore
|
Offices & Warehousing | Leased | 19,000 | |||||
|
Barcelona, Spain
|
Offices & Warehousing | Leased | 16,000 | |||||
|
Winterthur, Switzerland
|
Offices, Research & Development & Manufacturing | Leased | 374,000 | |||||
|
Münsingen, Switzerland
|
Offices & Warehousing | Owned | 76,000 | |||||
|
Geneva, Switzerland
|
Offices, Research & Development & Manufacturing | Leased | 15,000 | |||||
|
Swindon, United Kingdom
|
Offices & Warehousing | Leased | 70,000 | |||||
We believe the current facilities, including manufacturing,
warehousing, research and development and office space provide
sufficient capacity to meet ongoing demands. Once a facility
reaches 85 percent utilization, we examine alternatives for
either expanding that facility or acquiring new facilities to
meet our ongoing demands.
In addition to the above, we maintain more than 100 other
offices and warehouse facilities in more than 25 countries
around the world, including the U.S., Japan, Australia, France,
Russia, India, Germany, Italy, Switzerland and China. We believe
that all of the facilities and equipment are in good condition,
well maintained and able to operate at present levels.
| ITEM 3. | Legal Proceedings |
Information pertaining to legal proceedings in which we are
involved can be found in Note 19 to our consolidated
financial statements (see Part II, Item 8 of this
report).
| ITEM 4. | [Removed and Reserved] |
Not Applicable.
19
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| ITEM 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is traded on the New York Stock Exchange and
the SIX Swiss Exchange under the symbol “ZMH.” The
high and low sales prices for our common stock on the New York
Stock Exchange for the calendar quarters of fiscal years 2010
and 2009 are set forth as follows:
| Quarterly High-Low Share Prices | High | Low | ||||||
|
Year Ended December 31, 2010:
|
||||||||
|
First Quarter
|
$ | 64.77 | $ | 54.72 | ||||
|
Second Quarter
|
$ | 62.50 | $ | 52.26 | ||||
|
Third Quarter
|
$ | 58.08 | $ | 46.27 | ||||
|
Fourth Quarter
|
$ | 54.99 | $ | 47.09 | ||||
|
Year Ended December 31, 2009:
|
||||||||
|
First Quarter
|
$ | 44.36 | $ | 30.67 | ||||
|
Second Quarter
|
$ | 47.41 | $ | 35.36 | ||||
|
Third Quarter
|
$ | 55.25 | $ | 38.55 | ||||
|
Fourth Quarter
|
$ | 60.64 | $ | 49.14 | ||||
We have not declared or paid dividends on our common stock since
becoming a public company in 2001. Currently, we do not
anticipate paying any cash dividends on the common stock in the
foreseeable future. Our credit facility also restricts the
payment of dividends under certain circumstances.
The number of holders of our common stock on February 10,
2011 was approximately 315,700. On February 10, 2011, the
closing price of the common stock, as reported on the New York
Stock Exchange, was $60.05 per share.
The information required by this Item concerning equity
compensation plans is incorporated by reference to Item 12
of this report.
The following table summarizes repurchases of common stock
settled during the three months ended December 31, 2010:
|
Total Number of
Shares
|
Approximate Dollar
Value of
|
|||||||||||||||
|
Purchased as Part
of
|
Shares that May Yet
Be
|
|||||||||||||||
|
Total Number of
|
Average Price
|
Publicly Announced
Plans
|
Purchased Under
Plans
|
|||||||||||||
| Shares Purchased | Paid per Share | or Programs (1) | or Programs | |||||||||||||
|
October 2010
|
– | $ | – | 57,039,739 | $ | 1,306,584,171 | ||||||||||
|
November 2010
|
2,000,824 | 50.45 | 59,040,563 | 1,205,641,008 | ||||||||||||
|
December 2010
|
– | – | 59,040,563 | 1,205,641,008 | ||||||||||||
|
Total
|
2,000,824 | $ | 50.45 | 59,040,563 | $ | 1,205,641,008 | ||||||||||
| (1) | Includes repurchases made under the program announced in July 2010 authorizing $1.5 billion of repurchases through December 31, 2013. |
20
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| ITEM 6. | Selected Financial Data |
The financial information for each of the past five years ended
December 31 is set forth below (in millions, except per share
amounts):
| Summary of Operations | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Net sales
|
$ | 4,220.2 | $ | 4,095.4 | $ | 4,121.1 | $ | 3,897.5 | $ | 3,495.4 | ||||||||||
|
Net earnings of Zimmer Holdings, Inc.
|
596.9 | 717.4 | 848.6 | 773.2 | 834.5 | |||||||||||||||
|
Earnings per common share
|
||||||||||||||||||||
|
Basic
|
$ | 2.98 | $ | 3.34 | $ | 3.73 | $ | 3.28 | $ | 3.43 | ||||||||||
|
Diluted
|
2.97 | 3.32 | 3.72 | 3.26 | 3.40 | |||||||||||||||
|
Average common shares outstanding
|
||||||||||||||||||||
|
Basic
|
200.0 | 215.0 | 227.3 | 235.5 | 243.0 | |||||||||||||||
|
Diluted
|
201.1 | 215.8 | 228.3 | 237.5 | 245.4 | |||||||||||||||
|
Balance Sheet Data
|
||||||||||||||||||||
|
Total assets
|
$ | 7,999.9 | $ | 7,785.5 | $ | 7,239.0 | $ | 6,633.7 | $ | 5,974.4 | ||||||||||
|
Long-term debt
|
1,142.1 | 1,127.6 | 460.1 | 104.3 | 99.6 | |||||||||||||||
|
Other long-term obligations
|
384.0 | 328.5 | 353.9 | 328.4 | 323.4 | |||||||||||||||
|
Stockholders’ equity
|
5,771.3 | 5,638.7 | 5,653.9 | 5,452.4 | 4,923.2 | |||||||||||||||
21
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and the
corresponding notes included elsewhere in this
Form 10-K.
Certain percentages presented in this discussion and analysis
are calculated from the underlying whole-dollar amounts and
therefore may not recalculate from the rounded numbers used for
disclosure purposes. Certain amounts in the 2009 and 2008
consolidated financial statements have been reclassified to
conform to the 2010 presentation.
OVERVIEW
We believe the following developments or trends are important in
understanding our financial condition, results of operations and
cash flows for the year ended December 31, 2010.
Demand (Volume
and Mix) Trends
Increased volume and changes in the mix of product sales
contributed 3 percentage points of 2010 sales growth, which
is 1 percentage point above the rate of growth from 2009
compared to 2008.
We believe long-term indicators point toward sustained growth
driven by an aging global population, growth in emerging
markets, obesity, proven clinical benefits, new material
technologies, advances in surgical techniques and more active
lifestyles, among other factors. In addition, the ongoing shift
in demand to premium products, such as
Longevity
and
Prolong
Highly Crosslinked Polyethylenes,
Trabecular
Metal
Technology products, hip stems with
Kinectiv
Technology, high-flex knees, knee revision products, porous
hip stems and the introduction of patient specific devices, is
expected to continue to positively affect sales growth.
Pricing
Trends
Global selling prices decreased 1 percent during 2010.
Selling prices in the Americas, Europe and Asia Pacific
decreased 1 percent, were flat, and decreased
2 percent, respectively, during 2010. We continue to see
pricing pressure from governmental healthcare cost containment
efforts and from local hospitals and health systems. In the
Americas, we have experienced compression of historic pricing
differentials amongst our customers. Asia Pacific was especially
influenced by a bi-annual pricing adjustment in Japan that went
into effect on April 1, 2010. Due to these pressures, we
expect selling prices will continue to have a negative 1 to
2 percent effect on sales on a global basis in 2011.
Foreign Currency
Exchange Rates
For 2010, foreign currency exchange rates resulted in a
1 percent increase in sales. If foreign currency exchange
rates remain consistent with 2010 year end rates, we
estimate that a weaker dollar versus foreign currency exchange
rates will have a positive effect in 2011 of approximately
1 percent on sales. We address currency risk through
regular operating and financing activities and, under
appropriate circumstances and subject to proper authorization,
through the use of forward contracts and options solely to
manage foreign currency volatility and risk. Changes to foreign
currency exchange rates affect sales growth, but due to
offsetting gains/losses on hedge contracts and options, which
are recorded in cost of products sold, the effect on net
earnings in the near term is expected to be minimal.
Global Economic
Conditions
We believe adverse conditions in the broader economy have
negatively affected elective hospital procedures. In the fourth
quarter of 2010, we saw some stabilization in procedure volumes
and we believe the number of procedures will increase as the
global economy strengthens. Despite the current conditions of
the global economy, it is well known that demographic trends
will expand the patient base that needs our products. We believe
these factors will ultimately foster long-term sustained growth
even if in the short-term the timing of these elective
procedures continues to be adversely affected.
2011
Outlook
We estimate our sales will grow between 3 and 5 percent in
2011. Such sales growth assumes knee and hip procedures will
grow in low single digits with modest global economic growth and
relatively stable employment. As discussed previously, we expect
pricing to have a negative effect on sales growth by 1 to
2 percent, and foreign currency exchange rates to have a
positive effect on sales growth by approximately 1 percent
based upon December 31, 2010 rates.
Assuming currency rates remain at December 31, 2010 rates,
we expect our gross margin to be approximately 75 percent
of sales in 2011. This takes into account anticipated losses
from foreign currency hedge losses resulting from relative
weakness in the U.S. Dollar. We expect to continue making
investments in research and development (R&D) in the range
of 5 to 6 percent of sales. Selling, general and
administrative expenses (SG&A) as a percent of sales is
expected to be between 40 and 41 percent as we realize
operational efficiencies from global restructuring and
transformation initiatives and leverage revenue growth.
We expect to incur $75 to $80 million of expenses in 2011
related to certain global restructuring and transformation
initiatives. We also expect to incur an additional $15 to
$20 million for certain acquisition and integration costs
connected with recent acquisitions. We anticipate recognizing
some of the $90 to $100 million in cost of products sold
and the majority in “Special items” on our statement
of net earnings. The gross margin and SG&A percentages
discussed above do not include these expenses.
We expect interest and other expense to be approximately
$50 million in 2011, which is slightly lower than 2010 as
we have entered into an interest rate swap to effectively
convert a portion of our $1 billion senior notes from
fixed-rate debt to variable-rate debt.
22
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
RESULTS OF
OPERATIONS
| Net Sales by Reportable Segment |
The following tables present net sales by reportable segment and
the components of the percentage changes (dollars in millions):
| Year Ended December 31, |
Volume/
|
Foreign
|
||||||||||||||||||||||
| 2010 | 2009 | % Inc/(Dec) | Mix | Price | Exchange | |||||||||||||||||||
|
Americas
|
$ | 2,431.6 | $ | 2,372.4 | 2 | % | 3 | % | (1 | )% | – | % | ||||||||||||
|
Europe
|
1,099.5 | 1,119.2 | (2 | ) | 1 | – | (3 | ) | ||||||||||||||||
|
Asia Pacific
|
689.1 | 603.8 | 14 | 8 | (2 | ) | 8 | |||||||||||||||||
|
Total
|
$ | 4,220.2 | $ | 4,095.4 | 3 | 3 | (1 | ) | 1 | |||||||||||||||
| Year Ended December 31, |
Volume/
|
Foreign
|
||||||||||||||||||||||
| 2009 | 2008 | % Inc/(Dec) | Mix | Price | Exchange | |||||||||||||||||||
|
Americas
|
$ | 2,372.4 | $ | 2,353.9 | 1 | % | 2 | % | (1 | )% | – | % | ||||||||||||
|
Europe
|
1,119.2 | 1,179.1 | (5 | ) | 1 | – | (6 | ) | ||||||||||||||||
|
Asia Pacific
|
603.8 | 588.1 | 3 | 1 | (1 | ) | 3 | |||||||||||||||||
|
Total
|
$ | 4,095.4 | $ | 4,121.1 | (1 | ) | 2 | (1 | ) | (2 | ) | |||||||||||||
“Foreign Exchange” as used in the tables in this
report represents the effect of changes in foreign currency
exchange rates on sales growth.
| Net Sales by Product Category |
The following tables present net sales by product category and
the components of the percentage changes (dollars in millions):
| Year Ended December 31, |
Volume/
|
Foreign
|
||||||||||||||||||||||
| 2010 | 2009 | % Inc (Dec) | Mix | Price | Exchange | |||||||||||||||||||
|
Reconstructive
|
||||||||||||||||||||||||
|
Knees
|
$ | 1,789.9 | $ | 1,756.3 | 2 | % | 3 | % | (2 | )% | 1 | % | ||||||||||||
|
Hips
|
1,262.3 | 1,228.5 | 3 | 4 | (2 | ) | 1 | |||||||||||||||||
|
Extremities
|
150.1 | 135.6 | 11 | 10 | – | 1 | ||||||||||||||||||
|
Total
|
3,202.3 | 3,120.4 | 3 | 4 | (2 | ) | 1 | |||||||||||||||||
|
Dental
|
219.0 | 204.7 | 7 | 4 | 4 | (1 | ) | |||||||||||||||||
|
Trauma
|
245.5 | 234.8 | 5 | 1 | 2 | 2 | ||||||||||||||||||
|
Spine
|
234.4 | 253.6 | (8 | ) | (6 | ) | (1 | ) | (1 | ) | ||||||||||||||
|
Surgical and other
|
319.0 | 281.9 | 13 | 11 | – | 2 | ||||||||||||||||||
|
Total
|
$ | 4,220.2 | $ | 4,095.4 | 3 | 3 | (1 | ) | 1 | |||||||||||||||
| Year Ended December 31, |
Volume/
|
Foreign
|
||||||||||||||||||||||
| 2009 | 2008 | % Inc (Dec) | Mix | Price | Exchange | |||||||||||||||||||
|
Reconstructive
|
||||||||||||||||||||||||
|
Knees
|
$ | 1,756.3 | $ | 1,761.1 | – | % | 3 | % | (1 | )% | (2 | )% | ||||||||||||
|
Hips
|
1,228.5 | 1,279.4 | (4 | ) | (1 | ) | (1 | ) | (2 | ) | ||||||||||||||
|
Extremities
|
135.6 | 121.0 | 12 | 14 | – | (2 | ) | |||||||||||||||||
|
Total
|
3,120.4 | 3,161.5 | (1 | ) | 1 | (1 | ) | (1 | ) | |||||||||||||||
|
Dental
|
204.7 | 227.5 | (10 | ) | (9 | ) | 1 | (2 | ) | |||||||||||||||
|
Trauma
|
234.8 | 222.3 | 6 | 5 | 1 | – | ||||||||||||||||||
|
Spine
|
253.6 | 229.7 | 10 | 12 | – | (2 | ) | |||||||||||||||||
|
Surgical and other
|
281.9 | 280.1 | 1 | – | 1 | – | ||||||||||||||||||
|
Total
|
$ | 4,095.4 | $ | 4,121.1 | (1 | ) | 2 | (1 | ) | (2 | ) | |||||||||||||
23
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
The following table presents net sales by product category by
region (dollars in millions):
| Year Ended December 31, | ||||||||||||||||||||
|
2010 vs. 2009
|
2009 vs. 2008
|
|||||||||||||||||||
| 2010 | 2009 | 2008 | % Inc (Dec) | % Inc (Dec) | ||||||||||||||||
|
Reconstructive
|
||||||||||||||||||||
|
Knees
|
||||||||||||||||||||
|
Americas
|
$ | 1,110.5 | $ | 1,098.7 | $ | 1,089.2 | 1 | % | 1 | % | ||||||||||
|
Europe
|
418.7 | 428.1 | 451.2 | (2 | ) | (5 | ) | |||||||||||||
|
Asia Pacific
|
260.7 | 229.5 | 220.7 | 14 | 4 | |||||||||||||||
|
Hips
|
||||||||||||||||||||
|
Americas
|
589.7 | 565.9 | 576.1 | 4 | (2 | ) | ||||||||||||||
|
Europe
|
433.2 | 448.6 | 493.9 | (3 | ) | (9 | ) | |||||||||||||
|
Asia Pacific
|
239.4 | 214.0 | 209.4 | 12 | 2 | |||||||||||||||
|
Extremities
|
||||||||||||||||||||
|
Americas
|
115.9 | 103.7 | 88.1 | 12 | 18 | |||||||||||||||
|
Europe
|
24.4 | 23.9 | 25.8 | 2 | (7 | ) | ||||||||||||||
|
Asia Pacific
|
9.8 | 8.0 | 7.1 | 22 | 15 | |||||||||||||||
|
Total
|
3,202.3 | 3,120.4 | 3,161.5 | 3 | (1 | ) | ||||||||||||||
|
Dental
|
||||||||||||||||||||
|
Americas
|
113.9 | 102.8 | 114.9 | 11 | (11 | ) | ||||||||||||||
|
Europe
|
80.0 | 78.2 | 82.2 | 2 | (5 | ) | ||||||||||||||
|
Asia Pacific
|
25.1 | 23.7 | 30.4 | 6 | (22 | ) | ||||||||||||||
|
Trauma
|
||||||||||||||||||||
|
Americas
|
130.1 | 125.9 | 126.7 | 3 | (1 | ) | ||||||||||||||
|
Europe
|
50.2 | 52.7 | 47.4 | (5 | ) | 11 | ||||||||||||||
|
Asia Pacific
|
65.2 | 56.2 | 48.2 | 16 | 17 | |||||||||||||||
|
Spine
|
||||||||||||||||||||
|
Americas
|
166.5 | 192.6 | 180.4 | (14 | ) | 7 | ||||||||||||||
|
Europe
|
51.5 | 46.9 | 40.1 | 10 | 17 | |||||||||||||||
|
Asia Pacific
|
16.4 | 14.1 | 9.2 | 17 | 54 | |||||||||||||||
|
Surgical and other
|
||||||||||||||||||||
|
Americas
|
205.0 | 182.8 | 178.5 | 12 | 2 | |||||||||||||||
|
Europe
|
41.5 | 40.8 | 38.5 | 2 | 6 | |||||||||||||||
|
Asia Pacific
|
72.5 | 58.3 | 63.1 | 24 | (8 | ) | ||||||||||||||
|
Total
|
$ | 4,220.2 | $ | 4,095.4 | $ | 4,121.1 | 3 | (1 | ) | |||||||||||
| Knees |
Knee sales have experienced flat to moderate growth over the
past two years. Our knee sales have been affected by broader
economic conditions impacting volume/mix and competitive
pressures from newer knee systems that have more modern surgical
instruments for implantation. We intend to counter these
competitive pressures in 2011 and thereafter as we continue to
launch our new patient specific and posterior referencing
instrumentation systems, as well as through new product
development.
The
NexGen
Complete Knee Solution product line, including
Gender Solutions
Knee Femoral Implants, the
NexGen
LPS-Flex Knee and the
NexGen
CR-Flex Knee, together
with the
Gender Solutions Natural-Knee
Flex System led
knee sales. In addition, sales of partial knee devices,
including the
Zimmer
Unicompartmental Knee and the
recently released
Gender Solutions
Patello-Femoral Joint,
exhibited growth. In Europe, changes in foreign currency
exchange rates negatively affected knee sales in the years ended
December 31, 2010 and 2009 by 2 percent and
6 percent, respectively. In Asia Pacific, changes in
foreign currency exchange rates positively affected knee sales
in the years ended December 31, 2010 and 2009 by
10 percent and zero percent, respectively.
| Hips |
Hip sales rebounded from negative growth in 2009 to positive
growth in 2010 driven by new product introductions, such as our
Continuum
Acetabular System and our
Zimmer
M/L
Taper Stem with
Kinectiv
Technology.
The
Zimmer
M/L Taper Stem, the
Zimmer
M/L Taper
Stem with
Kinectiv
Technology, the
CLS Spotorno
Stem from the
CLS
Hip System and the
Alloclassic
Zweymüller
Hip Stem led hip stem sales. In addition,
sales of revision hip products, such as the
ZMR
Hip
System and the
Trabecular Metal
Revision Shell and
Augment Cups, were strong when compared to the prior year
periods, as were sales of
Fitmore
Hip Stems. In Europe,
changes in foreign currency exchange rates negatively affected
hip sales in the years ended December 31, 2010 and 2009 by
2 percent and 6 percent, respectively. In Asia
Pacific, changes in foreign currency exchange rates positively
affected hip sales in the years ended December 31, 2010 and
2009 by 8 percent and 4 percent, respectively.
| Extremities |
Extremities sales have grown by low double digits the past two
years led by the
Bigliani/Flatow
Complete Shoulder
Solution and the
Zimmer Trabecular Metal
Reverse Shoulder
System.
Trabecular Metal
Technology is playing a critical
role
24
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
in addressing previously unmet clinical needs in the expanding
extremities market.
| Dental |
Dental sales have experienced a significant turnaround from a
negative 10 percent decline in 2009 to positive
7 percent growth in 2010. In 2009, our dental sales were
affected more by the global economic environment than our other
product categories, as many dental procedures are not reimbursed
by third-party payors. Sales were led by the
Tapered
Screw-Vent
Implant System. Additionally, regenerative
products have exhibited strong sales growth in 2010.
| Trauma |
Trauma sales increased in the mid single digits the past two
years.
Zimmer
Periarticular Locking Plates and the
ITST
®
Intertrochanteric/Subtrochanteric Fixation System led trauma
sales, while sales of cable products also made a strong
contribution. In 2009, we initiated the launch of the
Zimmer
Natural Nail
System, which made a strong contribution to
2010 sales. We anticipate that a broader launch of that system
will continue to positively affect sales growth.
| Spine |
In the fourth quarter of 2008 we acquired Abbott Spine. As a
result of the acquisition, spine sales increased in 2009, but
underlying that performance were sales losses associated with
integration of the business. In 2010, once we anniversaried out
of the additional sales from the acquisition, we experienced
sales declines, most notably in our Americas segment. In
addition to the operational challenges associated with the
integration of the Abbott Spine business in the Americas, a
difficult reimbursement landscape and a significant decline in
our
Dynesys
Dynamic Stabilization System have affected
sales. In contrast to the Americas, our spine sales grew in
Europe and Asia Pacific in 2010 driven by the stabilization of
our distribution channels, which followed the Abbott Spine
integration activity of 2009. Overall, solid sales of the
PathFinder
and
Sequoia
Pedicle Screw Systems, our
Universal Clamp
System and our
Trinica
Anterior
Cervical Plate System partly offset a decline in sales of the
Dynesys
System.
| Surgical and other |
Surgical and other sales went from 1 percent sales growth
in 2009 to 13 percent sales growth in 2010. In 2008, we
voluntarily recalled and suspended production of certain patient
care products, and were able to reintroduce those products
during the year in 2009. Accordingly, 2009 sales were
suppressed, especially in the first half of the year, but we
started to regain market share in the second half of 2009 and
throughout 2010. Surgical sales were led by
PALACOS
Bone
Cement, wound debridement products, tourniquet products and
powered instruments.
The following table presents estimated* 2010 global market size
and market share information (dollars in billions):
|
Global
|
Zimmer
|
Zimmer
|
||||||||||||||
|
Market
|
Global Market
|
Market
|
Market
|
|||||||||||||
| Size | % Growth** | Share | Position | |||||||||||||
|
Reconstructive
|
||||||||||||||||
|
Knees
|
$ | 6.7 | 4 | % | 27 | % | 1 | |||||||||
|
Hips
|
5.9 | 3 | 21 | 2 | ||||||||||||
|
Extremities
|
1.2 | 12 | 13 | 3 | ||||||||||||
|
Total
|
$ | 13.8 | 4 | 23 | 1 | |||||||||||
|
Dental
|
$ | 3.2 | 2 | 7 | 5 | |||||||||||
|
Trauma
|
$ | 5.0 | 6 | 5 | 5 | |||||||||||
|
Spine***
|
$ | 8.9 | 3 | 3 | 7 | |||||||||||
| * | Estimates are not precise and are based on competitor annual filings, Wall Street equity research and Company estimates |
| ** | Excludes the effect of changes in foreign currency exchange rates on sales growth |
| *** | Spine includes related orthobiologics |
| Expenses as a Percent of Net Sales |
| Year Ended December 31, | ||||||||||||||||||||
|
2010 vs. 2009
|
2009 vs. 2008
|
|||||||||||||||||||
| 2010 | 2009 | 2008 | Inc (Dec) | Inc (Dec) | ||||||||||||||||
|
Cost of products sold
|
24.0 | % | 24.2 | % | 24.2 | % | (0.2 | ) | – | |||||||||||
|
Research and development
|
5.2 | 5.0 | 4.7 | 0.2 | 0.3 | |||||||||||||||
|
Selling, general and administrative
|
41.6 | 42.2 | 41.3 | (0.6 | ) | 0.9 | ||||||||||||||
|
Certain claims
|
1.8 | 0.9 | 1.7 | 0.9 | (0.8 | ) | ||||||||||||||
|
Goodwill impairment
|
4.8 | 1.8 | – | 3.0 | 1.8 | |||||||||||||||
|
Net curtailment and settlement
|
– | (0.8 | ) | – | 0.8 | (0.8 | ) | |||||||||||||
|
Special items
|
0.8 | 1.8 | 1.6 | (1.0 | ) | 0.2 | ||||||||||||||
|
Operating profit
|
21.7 | 24.9 | 26.5 | (3.2 | ) | (1.6 | ) | |||||||||||||
|
Interest and other income (expense), net
|
(1.3 | ) | (0.5 | ) | 0.8 | 0.8 | 1.3 | |||||||||||||
| Cost of Products Sold |
Gross margin in total has not changed significantly over the
past three years for various offsetting reasons. In the last
half of 2009 and early 2010, lower production levels caused our
manufacturing costs per unit to be higher, resulting in
increased costs in both 2010 and 2009. In 2010, the higher unit
costs were offset by lower excess and obsolescence charges
resulting from improved inventory management and certain
product-specific matters that were experienced in 2009 which did
not recur in 2010.
Foreign currency hedging also affects our gross margin. Under
our hedging program, for derivatives which qualify as hedges of
future cash flows, the effective portion of changes in fair
value is temporarily recorded in other comprehensive income and
then recognized in cost of products sold when the hedged item
affects earnings. In 2010 and 2009, we recognized hedge gains in
cost of products sold with 2010 gains being less than 2009
gains. In 2008, we recognized foreign currency hedge losses.
25
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
The following table reconciles the gross margin changes for 2010
and 2009:
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Prior year gross margin
|
75.8 | % | 75.8 | % | ||||
|
Increased unit manufacturing costs
|
(0.8 | ) | (1.7 | ) | ||||
|
Excess and obsolete inventory
|
0.9 | (0.4 | ) | |||||
|
Foreign currency exchange impact, net
|
(0.4 | ) | 2.0 | |||||
|
Inventory
step-up
|
0.3 | (0.1 | ) | |||||
|
Other
|
0.2 | 0.2 | ||||||
|
Current year gross margin
|
76.0 | % | 75.8 | % | ||||
| Operating Expenses |
R&D expense and R&D as a percent of sales has
increased in each of the last two years. These increases are in
line with our strategy to invest in new product development
activities across nearly all of our product categories, as well
as to increase spending on external research, clinical,
regulatory and quality initiatives. Additionally, in 2008 we
experienced some delay in R&D activities as we implemented
enhancements to our compliance program. We continue to expect
R&D spending to be between 5 to 6 percent of sales in
2011.
SG&A has increased in dollars terms over the last three
years, but as a percent of sales was lower in 2010 and 2008
compared to 2009.
In 2010, SG&A increased in dollar terms from 2009 primarily
for variable selling and distribution expenses as 2010 sales
were higher than 2009 sales, and from increased spending to fund
medical education programs. SG&A as a percent of sales in
2010 decreased by 60 basis points from 2009, reflecting
disciplined spending combined with a higher base of sales, and
no expense in 2010 related to corporate monitoring that ended
after the first quarter of 2009.
In 2009, SG&A as a percent of sales increased approximately
90 basis points compared to 2008. SG&A expense in the
2008 period included approximately $60 million of
incremental costs, such as monitor fees and consulting and legal
fees associated with the global roll-out of enhancements to our
compliance program. The savings from these costs in 2009 were
offset by increased spending to fund enhanced medical education
programs, Abbott Spine costs and increased product liability
claims. The acquisition of Abbott Spine increased SG&A
costs for items such as selling expenses, increased instrument
depreciation and amortization of the acquired intangible assets.
Additionally, SG&A as a percentage of net sales was
negatively impacted by the decrease in revenues caused by
changes in foreign currency rates. A majority of our SG&A
spend is incurred in the U.S., primarily from our corporate
headquarters and similar functions at our various businesses
such as Dental, Trauma, Spine and Surgical. Therefore, SG&A
expense does not respond to changes in foreign currency rates
proportionally to our revenue, which caused SG&A as a
percentage of net sales to increase in 2009 compared to 2008.
“Certain claims” expense is a provision for estimated
liabilities to
Durom
Cup patients undergoing revision
surgeries. Provisions of $35.0 million and
$69.0 million were originally recorded during 2009 and
2008, respectively, with an additional $75.0 million
recorded during 2010, bringing the total provision to
$179.0 million for these claims. For more information
regarding these claims, see Note 19 to the consolidated
financial statements.
In connection with our annual goodwill impairment tests
performed in the fourth quarters of 2010 and 2009, we noted that
the carrying values of the assets of our U.S. Spine
reporting unit were in excess of the reporting unit’s
estimated fair value. As a result, we recorded goodwill
impairment charges of $204.0 million and $73.0 million
during the years ended December 31, 2010 and 2009,
respectively. For more information regarding goodwill impairment
and the factors that led to the impairment, see Note 9 to
the consolidated financial statements. We have five other
reporting units with goodwill assigned to them. We estimate the
fair values of those reporting units using the income approach
by discounting to present value the estimated future cash flows
of the reporting unit. For each of those five other reporting
units, the estimated fair values substantially exceed their
carrying value.
We recognized a net curtailment and settlement gain of
$32.1 million during 2009 related to amending our
U.S. and Puerto Rico postretirement benefit plans. For more
information regarding the net curtailment and settlement gain,
see Note 14 to the consolidated financial statements.
“Special items” expense for the years ended
December 31, 2010, 2009 and 2008 were $34.7 million,
$75.3 million and $68.5 million, respectively. 2010
includes expenses related to restructuring of our information
technology infrastructure as well as our management structure.
This resulted in $7.7 million of asset impairment charges
and $6.7 million of employee severance and
termination-related expenses. We have also incurred consulting
and professional fees, facility and employee relocation costs,
contract termination expenses and other various expenses
resulting from our acquisitions of Abbott Spine, Beijing
Montagne Medical Device Co., Ltd, and third party distributors.
“Special items” also includes the impairment of an
available-for-sale
security that was acquired as part of a business acquisition and
certain litigation related matters.
“Special items” in 2009 included a workforce
realignment, which resulted in the elimination of positions in
some areas and increases in others to support long-term growth.
As a result of this realignment and headcount reductions from
acquisitions, we incurred approximately $19.0 million of
severance and termination-related expenses. Other “Special
items” in 2009 included approximately $9.4 million of
expenses related to contract termination costs,
$23.4 million of certain litigation matters that were
recognized during the period and various costs incurred to
integrate the Abbott Spine business acquired in the fourth
quarter of 2008.
Included in “Special items” in 2008 was
$38.5 million of in-process research and development
related to the Abbott Spine acquisition and other costs related
to the integration of Abbott Spine.
26
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
See Note 2 to the consolidated financial statements for
more information regarding “Special items” charges.
| Interest and Other, Income Taxes and Net Earnings |
Interest and other expense has increased over the past three
years. Interest and other expense increased in 2010 over 2009
due to the $1.0 billion senior unsecured notes that we
issued in November 2009. As a result, in 2010 we had a full year
of interest on these notes. Interest and other expense in 2009
increased over 2008 as the result of long-term debt incurred to
partially fund the Abbott Spine acquisition in the fourth
quarter of 2008 and the issuance of the senior unsecured notes
in November 2009. Interest and other income in 2008 included a
realized gain of $38.8 million related to the sale of
certain marketable securities.
The effective tax rate on earnings before income taxes for the
years ended December 31, 2010, 2009 and 2008 has been
30.6 percent, 28.1 percent and 24.3 percent,
respectively. The effective tax rates for 2010 and 2009 are
negatively impacted by the goodwill impairment charges of
$204.0 million and $73.0 million, respectively, for
which no tax benefit was recorded. The goodwill impairment
charges have increased the effective tax rate for the years
ended December 31, 2010 and 2009 by approximately
6 percent and 2 percent, respectively. Additionally,
in 2010 the effective tax rate was favorably impacted by the
resolution of certain tax contingencies. The effective tax rate
for 2008 includes the impact of a current tax benefit of
$31.7 million related to a 2007 U.S. government civil
settlement expense, resulting in a decrease of approximately
3 percent in the 2008 effective tax rate. This impact on
the 2008 effective tax rate was partially offset by Abbott Spine
acquisition-related in-process research and development charges
recorded during 2008 for which no tax benefit was recorded.
These discrete items account for the majority of the change in
our effective tax rates in the past three years.
As a result of the revenues and expenses discussed previously,
net earnings in 2010 decreased 17 percent compared to 2009.
In 2009, net earnings decreased 15 percent compared to
2008. Basic and diluted earnings per share decreased
11 percent in 2010 compared to 2009, while 2009 basic and
diluted earnings per share decreased 10 percent and
11 percent, respectively, from 2008. The disproportionate
change in earnings per share as compared to net earnings is
attributed to the effect of share repurchases made in the last
three years.
| Non-GAAP operating performance measures |
We use non-GAAP financial measures to evaluate our operating
performance that differ from financial measures determined in
accordance with U.S. generally accepted accounting
principles (GAAP). Our non-GAAP financial measures exclude the
impact of inventory
step-up
charges, “Special items,” “Certain claims,”
Net curtailment and settlement and Goodwill impairment, and the
taxes on those items and the tax benefit related to a 2007 civil
settlement. We use this information internally and believe it is
helpful to investors because it allows more meaningful
period-to-period
comparisons of our on-going operating results, it helps to
better identify operating trends and perform trend analysis that
may otherwise be masked or distorted by these types of items,
and provides a higher degree of transparency of certain items.
Certain of these non-GAAP financial measures are used as metrics
for our incentive compensation programs.
Our non-GAAP adjusted net earnings used for internal management
purposes for the years ended December 31, 2010, 2009 and
2008 were $871.6 million, $849.9 million, and
$924.3 million, respectively, and our non-GAAP adjusted
diluted earnings per share were $4.33, $3.94, and $4.05,
respectively.
Our non-GAAP adjusted net earnings increased in 2010 compared to
2009 due to increased sales, disciplined spending in SG&A,
and the absence of monitor-related expenses in 2010. Such
increases to non-GAAP adjusted net earnings were slightly offset
by increased R&D and medical education expenses and
increased interest expense from the senior unsecured notes
issued in 2009.
Our non-GAAP adjusted net earnings decreased in 2009 compared to
2008 as lower sales and higher R&D and medical education
expenses reduced non-GAAP adjusted net earnings. Additionally,
2008 non-GAAP adjusted net earnings featured a
$38.8 million pre-tax gain related to sales of certain
marketable securities. The 2009 period did contain some expense
savings such as the $60 million of incremental savings
related to monitor fees and consulting and legal fees associated
with the global roll-out of enhancements to our compliance
program, but such savings were not enough to offset the other
items that reduced non-GAAP adjusted net earnings.
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.
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net Earnings of Zimmer Holdings, Inc.
|
$ | 596.9 | $ | 717.4 | $ | 848.6 | ||||||
|
Inventory
step-up
|
1.4 | 12.5 | 7.0 | |||||||||
|
Special items
|
34.7 | 75.3 | 68.5 | |||||||||
|
Certain claims
|
75.0 | 35.0 | 69.0 | |||||||||
|
Net curtailment and settlement
|
– | (32.1 | ) | – | ||||||||
|
Goodwill impairment
|
204.0 | 73.0 | – | |||||||||
|
Taxes on inventory
step-up,
special items, certain claims and
net curtailment and settlement* |
(40.4 | ) | (31.2 | ) | (37.1 | ) | ||||||
|
Tax benefit from civil settlement
|
– | – | (31.7 | ) | ||||||||
|
Adjusted Net Earnings
|
$ | 871.6 | $ | 849.9 | $ | 924.3 | ||||||
| * | The tax effect is calculated based upon the statutory rates for the jurisdictions where the items were incurred. |
27
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Diluted EPS
|
$ | 2.97 | $ | 3.32 | $ | 3.72 | ||||||
|
Inventory
step-up
|
0.01 | 0.06 | 0.03 | |||||||||
|
Special items
|
0.17 | 0.35 | 0.30 | |||||||||
|
Certain claims
|
0.37 | 0.16 | 0.30 | |||||||||
|
Net curtailment and settlement
|
– | (0.15 | ) | – | ||||||||
|
Goodwill impairment
|
1.01 | 0.34 | – | |||||||||
|
Taxes on inventory
step-up,
special items, certain claims and net curtailment and settlement*
|
(0.20 | ) | (0.14 | ) | (0.16 | ) | ||||||
|
Tax benefit from civil settlement
|
– | – | (0.14 | ) | ||||||||
|
Adjusted Diluted EPS
|
$ | 4.33 | $ | 3.94 | $ | 4.05 | ||||||
| * | The tax effect is calculated based upon the statutory rates for the jurisdictions where the items were incurred. |
| Healthcare Reform in the U.S. |
We continue to assess the impact that the healthcare reform
legislation passed in 2010 by the U.S. federal government
will have on our business. The new law includes a
2.3 percent excise tax on a majority of our U.S. sales
that is scheduled to be implemented in 2013.
LIQUIDITY AND
CAPITAL RESOURCES
Cash flows provided by operating activities were
$1,193.5 million in 2010 compared to $1,117.5 million
in 2009. The principal source of cash from operating activities
in 2010 was net earnings. Non-cash charges included in net
earnings accounted for another $535.1 million of operating
cash. All other items of operating cash flows in 2010 provided
$61.5 million of cash. The resolution of outstanding
payments to healthcare professionals and institutions resulted
in increased cash outflows during the 2009 period compared to
the delay in similar payments during the 2008 period as we
implemented enhancements to our compliance program. The
resolution of these outstanding payments, along with a change in
the timing of employee bonus payments compared to the 2008
period and product liability payments, contributed to increased
outflows from accrued expenses in 2009. Accrued expenses did not
have any such significant variations in 2010, thus reflecting
lower outflows in 2010 in our indirect statement of cash flows
when compared to 2009. We have paid approximately
$45 million and $25 million in 2010 and 2009,
respectively, related to
Durom
Cup product liability
claims. We estimate the remaining liability for
Durom
Cup
claims as of December 31, 2010, is $132.8 million. We
expect to pay the majority of this amount over the next three
years.
At December 31, 2010, we had 58 days of sales
outstanding in trade accounts receivable, an increase of
2 days when compared to December 31, 2009, reflecting
some changes in collection practices that may have slightly
increased days sales outstanding, but have decreased our costs
to collect at an acceptable risk level. At December 31,
2010, we had 307 days of inventory on hand, a slight
increase of 5 days compared to December 31, 2009.
Cash flows used in investing activities were $726.9 million
in 2010, compared to $381.2 million in 2009. Additions to
instruments increased in 2010 compared to the 2009 period to
support new product launches, such as our
Continuum
Acetabular System, and as we introduced new instrumentation
in our knee product category such as posterior referencing
instrumentation. In 2011, we expect to spend approximately $140
to $150 million on instruments to support new products and
sales growth. Spending on other property, plant and equipment
decreased in 2010 compared to the 2009 period as there were no
significant infrastructure initiatives in 2010. During 2011, we
expect to purchase approximately $110 to $120 million in
other property, plant and equipment, reflecting the cash outlays
necessary to complete new product-related investments and
replacement of older machinery and equipment. Beginning in 2009
and with more significance in 2010, we began investing some of
our cash and cash equivalents in highly rated debt securities.
The purchases and any sales or maturities of these investments
are reflected as cash flows from investing activities. Acquired
intellectual property rights decreased to $8.5 million in
2010 compared to $35.8 million in 2009 and
$109.4 million in 2008. These items relate to lump-sum
payments made to certain healthcare professionals and
institutions in place of future royalty payments that otherwise
would have been due under the terms of existing contractual
arrangements. These lump-sum payments were based upon a third
party fair market valuation of the current net present value of
the contractual arrangements. Included in investing cash flows
in 2008 were $363.0 million paid to acquire Abbott Spine
and $54.9 million of proceeds we received from the sale of
certain equity securities. In the past three years, we have made
other smaller business acquisitions including Beijing Montagne
Medical Device Co., Ltd., Sodem Diffusion S.A. and foreign-based
distributors.
Cash flows used in financing activities were $489.6 million
for 2010, compared to $262.1 million in 2009. In 2010, the
only significant cash we used in financing activities related to
the repurchase of $505.6 million of our common stock. In
November 2009, we sold $1.0 billion aggregate principal
amount of senior unsecured notes (Senior Notes) in a public
offering. We received net proceeds of approximately
$998.8 million, net of an offering discount of
$1.2 million. We also paid an additional $8.5 million
of debt issuance costs related to the sale of the Senior Notes.
We used cash from operating cash flows and some of the proceeds
from the Senior Notes to repurchase $923.7 million of our
common stock in 2009.
The Senior Notes include two tranches: $500 million
aggregate principal amount of 4.625 percent Senior Notes
due November 30, 2019, and $500 million aggregate
principal amount of 5.75 percent Senior Notes due
November 30, 2039. Interest on the Senior Notes is payable
on May 30 and November 30 of each year until maturity.
We may redeem the Senior Notes at our election in whole or in
part at any time prior to maturity at a redemption price equal
to the greater of 1) 100 percent of the principal
amount of the notes being redeemed; or 2) the sum of the
present values of the remaining scheduled payments of principal
and interest (not including any portion of such payments of
28
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
interest accrued as of the date of redemption), discounted to
the date of redemption on a semi-annual basis at the Treasury
Rate (as defined in the debt agreement), plus 20 basis
points, in the case of the 2019 notes, and 25 basis points,
in the case of the 2039 notes. We will also pay the accrued and
unpaid interest on the Senior Notes to the redemption date.
We have a five year $1,350 million revolving,
multi-currency, senior unsecured credit facility maturing
November 30, 2012 (Senior Credit Facility). We had
$141.8 million outstanding under the Senior Credit Facility
at December 31, 2010, and an availability of
$1,208.2 million.
We also have available uncommitted credit facilities totaling
$77.8 million.
We place our cash and cash equivalents in highly rated financial
institutions and limit the amount of credit exposure to any one
entity. We invest only in high-quality financial instruments in
accordance with our internal investment policy.
As of December 31, 2010 we had short-term and long-term
investments in debt securities with a fair value of
$410.6 million. These investments are in debt securities of
many different counterparties and therefore we have no
significant concentration of risk with a single counterparty.
All these debt securities are highly-rated and therefore we
believe the risk of default by the counterparties is low.
As of December 31, 2010, $725.3 million of our cash
and cash equivalents and short-term and long-term investments
are held in jurisdictions outside of the U.S and expected to be
indefinitely reinvested for continued use in foreign operations.
Repatriation of these assets to the U.S. would have
negative tax consequences. Approximately $550 million of
this amount is denominated in U.S. Dollars and therefore
bears no foreign currency translation risk. The remaining is
denominated in the various currencies where we operate.
We may use excess cash to repurchase additional common stock
under our share repurchase program. As of December 31,
2010, approximately $1.2 billion remained authorized under
a $1.5 billion repurchase program, which will expire on
December 31, 2013.
Management believes that cash flows from operations and
available borrowings under the Senior Credit Facility are
sufficient to meet our expected working capital, capital
expenditure and debt service needs. Should investment
opportunities arise, we believe that our earnings, balance sheet
and cash flows will allow us to obtain additional capital, if
necessary.
CONTRACTUAL
OBLIGATIONS
We have entered into contracts with various third parties in the
normal course of business that will require future payments. The
following table illustrates our contractual obligations (in
millions):
|
2012
|
2014
|
2016
|
||||||||||||||||||
|
and
|
and
|
and
|
||||||||||||||||||
| Contractual Obligations | Total | 2011 | 2013 | 2015 | Thereafter | |||||||||||||||
|
Long-term debt
|
$ | 1,141.8 | $ | – | $ | 141.8 | $ | – | $ | 1,000.0 | ||||||||||
|
Interest payments
|
1,044.5 | 53.6 | 104.6 | 103.8 | 782.5 | |||||||||||||||
|
Operating leases
|
142.7 | 44.6 | 50.0 | 23.1 | 25.0 | |||||||||||||||
|
Purchase obligations
|
27.1 | 26.1 | 1.0 | – | – | |||||||||||||||
|
Other long-term liabilities
|
232.9 | – | 149.3 | 31.9 | 51.7 | |||||||||||||||
|
Total contractual obligations
|
$ | 2,589.0 | $ | 124.3 | $ | 446.7 | $ | 158.8 | $ | 1,859.2 | ||||||||||
Approximately 8 percent of the other long-term liabilities
on our balance sheet 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 on voluntary contributions, we are unable to
reasonably estimate future contributions beyond 2011. Therefore,
this table does not include any amounts related to future
contributions to our plans. See Note 14 to our consolidated
financial statements for further information on our defined
benefit plans.
Also included in other long-term liabilities on our balance
sheet are liabilities related to uncertain 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 uncertain
tax benefits. See Note 15 to our consolidated financial
statements for further information on these uncertain tax
benefits.
We have entered into various contractual agreements that may
result in future payments dependent upon various events such as
the achievement of certain product R&D milestones, sales
milestones, or at our discretion to maintain exclusive rights to
distribute a product. Since there is uncertainty on the timing
or whether such payments will have to be made, we have not
included them in this table. These payments could range from $0
to $60 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
29
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
our inventory may ultimately prove to be unsaleable or
unsaleable at our carrying cost. Similarly, we must also
determine if instruments on hand will be put to productive use
or remain undeployed as a result of excess supply. Reserves are
established to effectively adjust inventory and instruments to
net realizable value. To determine the appropriate level of
reserves, we evaluate current stock levels in relation to
historical and expected patterns of demand for all of our
products and instrument systems and components. The basis for
the determination is generally the same for all inventory and
instrument items and categories except for
work-in-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 valuation reserves
based on market conditions, competitive offerings and other
factors on a regular basis.
Income Taxes
– Our income tax expense, deferred
tax assets and liabilities and reserves for unrecognized tax
benefits reflect management’s best assessment of estimated
future taxes to be paid. We are subject to income taxes in the
U.S. and numerous foreign jurisdictions. Significant
judgments and estimates are required in determining the
consolidated income tax expense.
We estimate income tax expense and income tax liabilities and
assets by taxable jurisdiction. Realization of deferred tax
assets in each taxable jurisdiction is dependent on our ability
to generate future taxable income sufficient to realize the
benefits. We evaluate deferred tax assets on an ongoing basis
and provide valuation allowances unless we determine it is
“more likely than not” that the deferred tax benefit
will be realized. Federal income taxes are provided on the
portion of the income of foreign subsidiaries that is expected
to be remitted to the U.S.
The calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax laws and
regulations in a multitude of jurisdictions across our global
operations. We are subject to regulatory review or audit in
virtually all of those jurisdictions and those reviews and
audits may require extended periods of time to resolve. We
record our income tax provisions based on our knowledge of all
relevant facts and circumstances, including existing tax laws,
our experience with previous settlement agreements, the status
of current examinations and our understanding of how the tax
authorities view certain relevant industry and commercial
matters.
We recognize tax liabilities in accordance with the Financial
Accounting Standards Board’s (FASB) guidance on income
taxes and we adjust these liabilities when our judgment changes
as a result of the evaluation of new information not previously
available. Due to the complexity of some of these uncertainties,
the ultimate resolution may result in a payment that is
materially different from our current estimate of the tax
liabilities. These differences will be reflected as increases or
decreases to income tax expense in the period in which they are
determined.
Commitments and Contingencies
– Accruals for
product liability and other claims are established with the
assistance of internal and external legal counsel based on
current information and historical settlement information for
claims, related legal fees and for claims incurred but not
reported. We use an actuarial model to assist management in
determining an appropriate level of accruals for product
liability claims. Historical patterns of claim loss development
over time are statistically analyzed to arrive at factors which
are then applied to loss estimates in the actuarial model.
In addition to our general product liability, we have recorded
“Certain claims” provisions totaling
$179.0 million related to the
Durom
Cup, including
$75.0 million in 2010. The additional provision was needed
in 2010 in part because we revised the definition of
“Certain claims” recorded in our statement of earnings
to include worldwide claims relating to all revisions of
Durom
Cup cases where the original surgery was performed
before our July 22, 2008 suspension of marketing and
distribution, regardless of the time period elapsed between the
original surgery and the revision surgery. This additional
provision represents management’s updated estimate of
liability to
Durom
Cup patients undergoing revisions
associated with original surgeries occurring before
July 22, 2008. The remaining liability as of
December 31, 2010 is $132.8 million.
Goodwill and Intangible Assets
– We evaluate
the carrying value of goodwill and indefinite life intangible
assets annually, or whenever events or circumstances indicate
the carrying value may not be recoverable. We evaluate the
carrying value of finite life intangible assets whenever events
or circumstances indicate the carrying value may not be
recoverable. Significant assumptions are required to estimate
the fair value of goodwill and intangible assets, most notably
estimated future cash flows generated by these assets. As such,
these fair valuation measurements use significant unobservable
inputs. Changes to these assumptions could require us to record
impairment charges on these assets.
As of December 31, 2010, we had intangible assets of
$210.7 million related to trademarks and trade names, of
which $197.3 million are classified as having an indefinite
life. We currently have and anticipate future product
development efforts that may replace the current products that
use those trademarks and trade names. While it is possible, it
is not known if these new products will utilize these trademarks
and trade names. If these new products do not use these
trademarks and trade names, these assets may be impaired.
In the fourth quarter of 2010, we determined our U.S. Spine
reporting unit’s carrying value was in excess of its
estimated fair value. Fair value was determined using an equal
weighting of income and market approaches. Fair value under the
income approach was determined by discounting to present value
the estimated future cash flows of the reporting unit. Fair
value under the market approach utilized the comparable
transaction methodology, which uses valuation indicators
determined from sales of other businesses that are similar to
our U.S. Spine reporting unit.
As a result, we recorded a goodwill impairment charge for the
U.S. Spine reporting unit of $204.0 million during the
year ended December 31, 2010. In the year ended
December 31,
30
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
2009, we also recorded an impairment charge related to this
reporting unit of $73.0 million. See Note 9 to our
consolidated financial statements for further discussion and the
factors that contributed to these impairment charges.
We have five other reporting units with goodwill assigned to
them. We estimate the fair value of those reporting units using
the income approach by discounting to present value the
estimated future cash flows of the reporting unit. For each of
those five reporting units, the estimated fair values
substantially exceed their carrying value.
Share-based Payment
– We measure share-based
payment expense at the grant date based on the fair value of the
award and recognize expense over the requisite service period.
Determining the fair value of share-based awards at the grant
date requires judgment, including estimating the expected life
of stock options and the expected volatility of our stock.
Additionally, we must estimate the amount of share-based awards
that are expected to be forfeited. We estimate expected
volatility based upon the implied volatility of actively traded
options on our stock. The expected life of stock options and
estimated forfeitures are based upon our employees’
historical exercise and forfeiture behaviors. The assumptions
used in determining the grant date fair value and the expected
forfeitures represent management’s best estimates.
RECENT ACCOUNTING
PRONOUNCEMENTS
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.
31
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
MARKET
RISK
We are exposed to certain market risks as part of our ongoing
business operations, including risks from changes in foreign
currency exchange rates, interest rates and commodity prices
that could affect our financial condition, results of operations
and cash flows. We manage our exposure to these and other market
risks through regular operating and financing activities and
through the use of derivative financial instruments. We use
derivative financial instruments solely as risk management tools
and not for speculative investment purposes.
FOREIGN CURRENCY
EXCHANGE RISK
We operate on a global basis and are exposed to the risk that
our financial condition, results of operations and cash flows
could be adversely affected by changes in foreign currency
exchange rates. We are primarily exposed to foreign currency
exchange rate risk with respect to transactions and net assets
denominated in Euros, Swiss Francs, Japanese Yen, British
Pounds, Canadian Dollars, Australian Dollars, Korean Won,
Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South
African Rand, Russian Rubles and Indian Rupees. We manage the
foreign currency exposure centrally, on a combined basis, which
allows us to net exposures and to take advantage of any natural
offsets. To reduce the uncertainty of foreign currency exchange
rate movements on transactions denominated in foreign
currencies, we enter into derivative financial instruments in
the form of foreign currency exchange forward contracts and
options with major financial institutions. These forward
contracts and options are designed to hedge anticipated foreign
currency transactions, primarily intercompany sale and purchase
transactions, for periods consistent with commitments. Realized
and unrealized gains and losses on these contracts and options
that qualify as cash flow hedges are temporarily recorded in
other comprehensive income, then recognized in cost of products
sold when the hedged item affects net earnings.
For contracts outstanding at December 31, 2010, we had
obligations to purchase U.S. Dollars and sell Euros,
Japanese Yen, British Pounds, Canadian Dollars, Australian
Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht,
Taiwan Dollars, South African Rand, Russian Rubles and Indian
Rupees and purchase Swiss Francs and sell U.S. Dollars at
set maturity dates ranging from January 2011 through June 2013.
The notional amounts of outstanding forward contracts entered
into with third parties to purchase U.S. Dollars at
December 31, 2010 were $1.4 billion. The notional
amounts of outstanding forward contracts entered into with third
parties to purchase Swiss Francs at December 31, 2010 were
$212.1 million. The weighted average contract rates
outstanding at December 31, 2010 were Euro:USD 1.35,
USD:Swiss Franc 1.04, USD:Japanese Yen 87.20, British Pound:USD
1.57, USD:Canadian Dollar 1.07, Australian Dollar:USD 0.82,
USD:Korean Won 1,231, USD:Swedish Krona 7.32, USD:Czech Koruna
19.57, USD:Thai Baht 31.27, USD:Taiwan Dollar 30.62,
USD:South African Rand 7.85, USD:Russian Ruble 32.24 and
USD:Indian Ruppee 48.08.
We maintain written policies and procedures governing our risk
management activities. Our policy requires that critical terms
of hedging instruments are the same as hedged forecasted
transactions. On this basis, with respect to cash flow hedges,
changes in cash flows attributable to hedged transactions are
generally expected to be completely offset by changes in the
fair value of hedge instruments. As part of our risk management
program, we also perform sensitivity analyses to assess
potential changes in revenue, operating results, cash flows and
financial position relating to hypothetical movements in
currency exchange rates. A sensitivity analysis of changes in
the fair value of foreign currency exchange forward contracts
outstanding at December 31, 2010 indicated that, if the
U.S. Dollar uniformly changed in value by 10 percent
relative to the Euro, Swiss Franc, Japanese Yen, British Pound,
Canadian Dollar, Australian Dollar, Korean Won, Swedish Krona,
Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand,
Russian Rubles and Indian Rupees, with no change in the interest
differentials, the fair value of those contracts would increase
or decrease earnings before income taxes in periods through
2012, depending on the direction of the change, by an average
approximate amount of $59.8 million, $19.8 million,
$36.1 million, $11.3 million, $7.2 million,
$12.6 million, $1.7 million, $2.3 million,
$0.6 million, $0.6 million, $1.7 million,
$0.5 million, $1.2 million and $1.1 million,
respectively. Any change in the fair value of foreign currency
exchange forward contracts as a result of a fluctuation in a
currency exchange rate is expected to be largely offset by a
change in the value of the hedged transaction. Consequently,
foreign currency exchange contracts would not subject us to
material risk due to exchange rate movements because gains and
losses on these contracts offset gains and losses on the assets,
liabilities and transactions being hedged.
We had net investment exposures to net foreign currency
denominated assets and liabilities of approximately
$2,250 million at December 31, 2010, primarily in
Euros and Japanese Yen. Approximately $1,295 million of the
net asset exposure at December 31, 2010 relates to goodwill
recorded in the Europe and Asia Pacific geographic segments.
We enter into foreign currency forward exchange contracts with
terms of one month to manage currency exposures for monetary
assets and liabilities denominated in a currency other than an
entity’s functional currency. As a result, foreign currency
remeasurement gains/losses recognized in earnings are generally
offset with gains/losses on the foreign currency forward
exchange contracts in the same reporting period.
COMMODITY PRICE
RISK
We purchase raw material commodities such as cobalt chrome,
titanium, tantalum, polymer and sterile packaging. We enter into
supply contracts generally with terms of 12 to 24 months,
where available, on these commodities to alleviate
32
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
the effect of market fluctuation in prices. As part of our risk
management program, we perform sensitivity analyses related to
potential commodity price changes. A 10 percent price
change across all these commodities would not have a material
effect on our consolidated financial position, results of
operations or cash flows.
INTEREST RATE
RISK
In the normal course of business, we are exposed to market risk
from changes in interest rates that could affect our results of
operations and financial condition. We manage our exposure to
interest rate risks through our regular operations and financing
activities.
We invest our cash and cash equivalents primarily in
highly-rated corporate commercial paper and bank deposits. We
also have short-term and long-term investments in highly-rated
corporate debt securities, U.S. government and agency debt
securities, U.S. government treasury funds, municipal
bonds, foreign government debt securities, commercial paper and
certificates of deposit. The primary investment objective is to
ensure capital preservation of our invested principal funds.
Currently, we do not use derivative financial instruments in our
investment portfolio.
We are exposed to interest rate risk on our debt obligations and
our cash and cash equivalents. Presently, all of our debt
outstanding under the Senior Credit Facility bears interest at
short-term rates.
In December 2010, we entered into interest rate swap agreements
with a consolidated notional amount of $250 million that
hedge a portion of our $500 million 4.625 percent
Senior Notes due November 30, 2019. On the interest rate
swap agreements outstanding as of December 31, 2010, we
receive a fixed interest rate of 4.625 percent and we pay
variable interest equal to the three-month LIBOR plus an average
of 133 basis points.
The interest rate swap agreements are to manage our exposure to
interest rate movements by converting fixed-rate debt into
variable-rate debt. The objective of the instruments is to more
closely align interest expense with interest income received on
cash and cash equivalents.
These derivative instruments are designated as fair value hedges
under U.S. GAAP. Changes in the fair value of the
derivative instrument are recorded in earnings and are offset by
gains or losses on the underlying debt instrument.
Based upon our overall interest rate exposure as of
December 31, 2010, a change of 10 percent in interest
rates, assuming the amount outstanding remains constant, would
not have a material effect on net interest expense. This
analysis does not consider the effect of the change in the level
of overall economic activity that could exist in such an
environment.
CREDIT
RISK
Financial instruments, which potentially subject us to
concentrations of credit risk, are primarily cash and cash
equivalents, short-term and long-term investments, derivative
instruments, counterparty transactions and accounts receivable.
We place our investments in highly-rated financial institutions
and limit the amount of credit exposure to any one entity. We
believe we do not have any significant credit risk on our cash
and cash equivalents and investments.
We are exposed to credit loss if the financial institutions with
which we conduct business fail to perform. However, this loss is
limited to the amounts, if any, by which the obligations of the
counterparty to the financial instrument contract exceed our
obligation. We also minimize exposure to credit risk by dealing
with a diversified group of major financial institutions. We
manage credit risk by monitoring the financial condition of our
counterparties using standard credit guidelines. We do not
anticipate any nonperformance by any of the counterparties.
Concentration of credit risk with respect to trade accounts
receivable is limited due to the large number of customers and
their dispersion across a number of geographic areas and by
frequent monitoring of the creditworthiness of the customers to
whom credit is granted in the normal course of business.
However, essentially all of our trade receivables are
concentrated in the public and private hospital and healthcare
industry in the U.S. and internationally or with
distributors or dealers who operate in international markets
and, accordingly, are exposed to their respective business,
economic and country specific variables. Repayment is dependent
upon the financial stability of these industry sectors and the
respective countries’ national economic and healthcare
systems. Exposure to credit risk is controlled through credit
approvals, credit limits and monitoring procedures, and we
believe that reserves for losses are adequate. While we are
exposed to risks from the broader healthcare industry where we
do business, there is no significant net exposure due to any
individual customer.
33
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Management’s Report on
Internal Control Over Financial Reporting
The management of Zimmer Holdings, Inc. is responsible for
establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting
is defined in
Rules 13a-15(f)
or
15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers and effected by the company’s Board of Directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting
principles and includes those policies and procedures that:
| • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; | |
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and | |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, the company’s internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
The company’s management assessed the effectiveness of the
company’s internal control over financial reporting as of
December 31, 2010. In making this assessment, the
company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in
Internal Control-Integrated Framework
.
Based on that assessment, management has concluded that, as of
December 31, 2010, the company’s internal control over
financial reporting is effective based on those criteria.
The company’s independent registered public accounting firm
has audited the effectiveness of the company’s internal
control over financial reporting as of December 31, 2010,
as stated in its report which appears in Item 8 of this
Annual Report on
Form 10-K.
34
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| ITEM 8. | Financial Statements and Supplementary Data |
| Index to Consolidated Financial Statements | Page |
| Financial Statements: | ||||
| 36 | ||||
| 37 | ||||
| 38 | ||||
| 39 | ||||
| 40 | ||||
| 41 | ||||
| 42 | ||||
35
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
To The Stockholders and Board
of Directors of Zimmer Holdings, Inc.:
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Zimmer
Holdings, Inc. and its subsidiaries at December 31, 2010
and 2009, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2010 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
accompanying index appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, based on
criteria established in
Internal Control –
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Report of Management on Internal Control over
Financial Reporting. Our responsibility is to express opinions
on these financial statements and on the Company’s internal
control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 24, 2011
36
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| (in millions, except per share amounts) | ||||||||||||
| For the Years Ended December 31, | 2010 | 2009 | 2008 | |||||||||
|
Net Sales
|
$ | 4,220.2 | $ | 4,095.4 | $ | 4,121.1 | ||||||
|
Cost of products sold
|
1,012.4 | 990.7 | 997.3 | |||||||||
|
Gross Profit
|
3,207.8 | 3,104.7 | 3,123.8 | |||||||||
|
Research and development
|
220.0 | 205.7 | 192.3 | |||||||||
|
Selling, general and administrative
|
1,757.4 | 1,729.0 | 1,704.0 | |||||||||
|
Certain claims (Note 19)
|
75.0 | 35.0 | 69.0 | |||||||||
|
Goodwill impairment (Note 9)
|
204.0 | 73.0 | – | |||||||||
|
Net curtailment and settlement (Note 14)
|
– | (32.1 | ) | – | ||||||||
|
Special items (Note 2)
|
34.7 | 75.3 | 68.5 | |||||||||
|
Operating expenses
|
2,291.1 | 2,085.9 | 2,033.8 | |||||||||
|
Operating Profit
|
916.7 | 1,018.8 | 1,090.0 | |||||||||
|
Interest and other income (expense), net
|
(56.5 | ) | (20.6 | ) | 31.8 | |||||||
|
Earnings before income taxes
|
860.2 | 998.2 | 1,121.8 | |||||||||
|
Provision for income taxes
|
263.3 | 280.8 | 272.3 | |||||||||
|
Net earnings
|
596.9 | 717.4 | 849.5 | |||||||||
|
Less: Net earnings attributable to noncontrolling interest
|
– | – | (0.9 | ) | ||||||||
|
Net Earnings of Zimmer Holdings, Inc.
|
$ | 596.9 | $ | 717.4 | $ | 848.6 | ||||||
|
Earnings Per Common Share – Basic
|
$ | 2.98 | $ | 3.34 | $ | 3.73 | ||||||
|
Earnings Per Common Share – Diluted
|
$ | 2.97 | $ | 3.32 | $ | 3.72 | ||||||
|
Weighted Average Common Shares Outstanding
|
||||||||||||
|
Basic
|
200.0 | 215.0 | 227.3 | |||||||||
|
Diluted
|
201.1 | 215.8 | 228.3 | |||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
37
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| (in millions) | ||||||||
| December 31, | 2010 | 2009 | ||||||
|
ASSETS
|
||||||||
|
Current Assets:
|
||||||||
|
Cash and cash equivalents
|
$668.9 | $ | 691.7 | |||||
|
Short-term investments
|
265.1 | 66.4 | ||||||
|
Accounts receivable, less allowance for doubtful accounts
|
775.9 | 751.4 | ||||||
|
Inventories, net
|
936.4 | 913.2 | ||||||
|
Prepaid expenses and other current assets
|
127.7 | 105.4 | ||||||
|
Deferred income taxes
|
235.7 | 209.9 | ||||||
|
Total Current Assets
|
3,009.7 | 2,738.0 | ||||||
|
Property, plant and equipment, net
|
1,213.8 | 1,221.7 | ||||||
|
Goodwill
|
2,580.8 | 2,783.5 | ||||||
|
Intangible assets, net
|
827.1 | 858.0 | ||||||
|
Other assets
|
368.5 | 184.3 | ||||||
|
Total Assets
|
$7,999.9 | $ | 7,785.5 | |||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current Liabilities:
|
||||||||
|
Accounts payable
|
$129.6 | $ | 134.6 | |||||
|
Income taxes
|
48.9 | 57.5 | ||||||
|
Other current liabilities
|
524.0 | 498.6 | ||||||
|
Total Current Liabilities
|
702.5 | 690.7 | ||||||
|
Other long-term liabilities
|
384.0 | 328.5 | ||||||
|
Long-term debt
|
1,142.1 | 1,127.6 | ||||||
|
Total Liabilities
|
2,228.6 | 2,146.8 | ||||||
|
Commitments and Contingencies (Note 19)
|
||||||||
|
Stockholders’ Equity:
|
||||||||
|
Common stock, $0.01 par value, one billion shares
authorized,
|
||||||||
|
254.6 million (254.1 million in 2009) issued
|
2.5 | 2.5 | ||||||
|
Paid-in capital
|
3,293.5 | 3,214.6 | ||||||
|
Retained earnings
|
5,699.4 | 5,102.5 | ||||||
|
Accumulated other comprehensive income
|
321.0 | 358.6 | ||||||
|
Treasury stock, 59.0 million shares (49.9 million
shares in 2009)
|
(3,545.1 | ) | (3,039.5 | ) | ||||
|
Total Stockholders’ Equity
|
5,771.3 | 5,638.7 | ||||||
|
Total Liabilities and Stockholders’ Equity
|
$7,999.9 | $ | 7,785.5 | |||||
The accompanying notes are an integral part of these
consolidated financial statements.
38
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| (in millions) | ||||||||||||||||||||||||||||||||||||
| Zimmer Holdings, Inc. Stockholders | ||||||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||||||
|
Other
|
Total
|
|||||||||||||||||||||||||||||||||||
| Common Shares |
Paid-in
|
Retained
|
Comprehensive
|
Treasury Shares |
Noncontrolling
|
Stockholders’
|
||||||||||||||||||||||||||||||
| Number | Amount | Capital | Earnings | Income | Number | Amount | Interest | Equity | ||||||||||||||||||||||||||||
|
Balance January 1, 2008
|
252.2 | $ | 2.5 | $ | 2,999.1 | $ | 3,536.9 | $ | 290.3 | (19.3 | ) | $ | (1,379.2 | ) | $ | 2.8 | $ | 5,452.4 | ||||||||||||||||||
|
Net earnings
|
– | – | – | 848.6 | – | – | – | 0.9 | 849.5 | |||||||||||||||||||||||||||
|
Other comprehensive income
|
– | – | – | – | (50.3 | ) | – | – | – | (50.3 | ) | |||||||||||||||||||||||||
|
Stock compensation plans,
|
||||||||||||||||||||||||||||||||||||
|
including tax benefits
|
1.5 | – | 139.4 | – | – | – | – | – | 139.4 | |||||||||||||||||||||||||||
|
Share repurchases
|
– | – | – | – | – | (10.8 | ) | (737.0 | ) | – | (737.0 | ) | ||||||||||||||||||||||||
|
Currency translation
|
– | – | – | – | – | – | – | (0.1 | ) | (0.1 | ) | |||||||||||||||||||||||||
|
Balance December 31, 2008
|
253.7 | 2.5 | 3,138.5 | 4,385.5 | 240.0 | (30.1 | ) | (2,116.2 | ) | 3.6 | 5,653.9 | |||||||||||||||||||||||||
|
Net earnings
|
– | – | – | 717.4 | – | – | – | – | 717.4 | |||||||||||||||||||||||||||
|
Other comprehensive loss
|
– | – | – | – | 118.6 | – | – | – | 118.6 | |||||||||||||||||||||||||||
|
Purchase of noncontrolling
|
||||||||||||||||||||||||||||||||||||
|
interest
|
– | – | (5.0 | ) | – | – | – | – | (3.6 | ) | (8.6 | ) | ||||||||||||||||||||||||
|
Stock compensation plans,
|
||||||||||||||||||||||||||||||||||||
|
including tax benefits
|
0.4 | – | 81.1 | (0.4 | ) | – | – | 0.4 | – | 81.1 | ||||||||||||||||||||||||||
|
Share repurchases
|
– | – | – | – | – | (19.8 | ) | (923.7 | ) | – | (923.7 | ) | ||||||||||||||||||||||||
|
Balance December 31, 2009
|
254.1 | 2.5 | 3,214.6 | 5,102.5 | 358.6 | (49.9 | ) | (3,039.5 | ) | – | 5,638.7 | |||||||||||||||||||||||||
|
Net earnings
|
– | – | – | 596.9 | – | – | – | – | 596.9 | |||||||||||||||||||||||||||
|
Other comprehensive income
|
– | – | – | – | (37.6 | ) | – | – | – | (37.6 | ) | |||||||||||||||||||||||||
|
Stock compensation plans,
|
||||||||||||||||||||||||||||||||||||
|
including tax benefits
|
0.5 | – | 78.9 | – | – | – | – | – | 78.9 | |||||||||||||||||||||||||||
|
Share repurchases
|
– | – | – | – | – | (9.1 | ) | (505.6 | ) | – | (505.6 | ) | ||||||||||||||||||||||||
|
Balance December 31, 2010
|
254.6 | $ | 2.5 | $ | 3,293.5 | $ | 5,699.4 | $ | 321.0 | (59.0 | ) | $ | (3,545.1 | ) | $ | — | $ | 5,771.3 | ||||||||||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
39
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| (in millions) | ||||||||||||
| For the Years Ended December 31, | 2010 | 2009 | 2008 | |||||||||
|
Cash flows provided by (used in) operating activities:
|
||||||||||||
|
Net earnings of Zimmer Holdings, Inc.
|
$ | 596.9 | $ | 717.4 | $ | 848.6 | ||||||
|
Adjustments to reconcile net earnings to net cash provided
by operating activities: |
||||||||||||
|
Depreciation and amortization
|
340.2 | 337.4 | 275.1 | |||||||||
|
Goodwill impairment
|
204.0 | 73.0 | – | |||||||||
|
Gain on sale of investments
|
– | – | (38.8 | ) | ||||||||
|
In-process research and development
|
– | – | 38.5 | |||||||||
|
Net curtailment and settlement
|
– | (32.1 | ) | – | ||||||||
|
Share-based compensation
|
62.0 | 75.3 | 69.9 | |||||||||
|
Income tax benefit from stock option exercises
|
4.2 | 3.5 | 12.5 | |||||||||
|
Excess income tax benefit from stock option exercises
|
(1.3 | ) | (0.4 | ) | (6.5 | ) | ||||||
|
Inventory
step-up
|
1.4 | 12.5 | 7.0 | |||||||||
|
Deferred income tax provision
|
(72.5 | ) | (19.7 | ) | 2.0 | |||||||
|
Changes in operating assets and liabilities, net of acquired
assets and liabilities
Income taxes payable |
7.7 | 7.0 | (77.3 | ) | ||||||||
|
Receivables
|
(33.0 | ) | (4.6 | ) | (44.4 | ) | ||||||
|
Inventories
|
25.8 | 36.2 | (148.1 | ) | ||||||||
|
Accounts payable and accrued liabilities
|
(0.8 | ) | (132.6 | ) | 119.3 | |||||||
|
Other assets and liabilities
|
58.9 | 44.6 | (19.7 | ) | ||||||||
|
Net cash provided by operating activities
|
1,193.5 | 1,117.5 | 1,038.1 | |||||||||
|
Cash flows provided by (used in) investing activities:
|
||||||||||||
|
Additions to instruments
|
(192.5 | ) | (123.7 | ) | (237.9 | ) | ||||||
|
Additions to other property, plant and equipment
|
(79.2 | ) | (105.1 | ) | (250.0 | ) | ||||||
|
Acquisition of intellectual property rights
|
(8.5 | ) | (35.8 | ) | (109.4 | ) | ||||||
|
Purchases of investments
|
(413.3 | ) | (66.4 | ) | – | |||||||
|
Sales of investments
|
67.5 | – | 54.9 | |||||||||
|
Abbott Spine acquisition, net of acquired cash
|
– | – | (363.0 | ) | ||||||||
|
Other business combination investments
|
(82.6 | ) | (39.5 | ) | (18.8 | ) | ||||||
|
Investments in other assets
|
(18.3 | ) | (10.7 | ) | – | |||||||
|
Net cash used in investing activities
|
(726.9 | ) | (381.2 | ) | (924.2 | ) | ||||||
|
Cash flows provided by (used in) financing activities:
|
||||||||||||
|
Net proceeds (payments) under revolving credit facilities
|
(2.2 | ) | (330.0 | ) | 330.0 | |||||||
|
Debt issuance costs
|
– | (8.5 | ) | – | ||||||||
|
Proceeds from employee stock compensation plans
|
16.9 | 9.5 | 57.0 | |||||||||
|
Excess income tax benefit from stock option exercises
|
1.3 | 0.4 | 6.5 | |||||||||
|
Proceeds from issuance of notes
|
– | 998.8 | – | |||||||||
|
Acquisition of noncontrolling interest
|
– | (8.6 | ) | – | ||||||||
|
Repurchase of common stock
|
(505.6 | ) | (923.7 | ) | (737.0 | ) | ||||||
|
Net cash used in financing activities
|
(489.6 | ) | (262.1 | ) | (343.5 | ) | ||||||
|
Effect of exchange rates on cash and cash equivalents
|
0.2 | 4.9 | (21.7 | ) | ||||||||
|
Increase (decrease) in cash and cash equivalents
|
(22.8 | ) | 479.1 | (251.3 | ) | |||||||
|
Cash and cash equivalents, beginning of year
|
691.7 | 212.6 | 463.9 | |||||||||
|
Cash and cash equivalents, end of year
|
$ | 668.9 | $ | 691.7 | $ | 212.6 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
40
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| (in millions) | ||||||||||||
| For the Years Ended December 31, | 2010 | 2009 | 2008 | |||||||||
|
Net Earnings
|
$ | 596.9 | $ | 717.4 | $849.5 | |||||||
|
Other Comprehensive Income (Loss):
|
||||||||||||
|
Foreign currency cumulative translation adjustments
|
(38.6 | ) | 114.0 | (49.4 | ) | |||||||
|
Unrealized foreign currency hedge gains/(losses), net of tax
effects of
$10.1 in 2010, $8.9 in 2009 and $0.7 in 2008 |
21.6 | (28.9 | ) | 35.0 | ||||||||
|
Reclassification adjustments on foreign currency hedges, net of
tax effects of
$(4.3) in 2010, $(0.1) in 2009 and $(9.2) in 2008 |
(11.6 | ) | (18.1 | ) | 43.4 | |||||||
|
Unrealized gains/(losses) on securities, net of tax effects of
$0.3 in 2010,
$0.1 in 2009 and $(15.2) in 2008 |
(0.8 | ) | (0.3 | ) | 24.4 | |||||||
|
Reclassification adjustments on securities, net of tax effects
of $(1.2) in 2010
and $15.0 in 2008 |
2.2 | – | (23.8 | ) | ||||||||
|
Adjustments to prior service cost and unrecognized actuarial
assumptions,
net of tax effects of $4.4 in 2010, $(1.4) in 2009 and $14.1 in 2008 |
(10.4 | ) | 51.9 | (79.9 | ) | |||||||
|
Total Other Comprehensive Income (Loss)
|
(37.6 | ) | 118.6 | (50.3 | ) | |||||||
|
Comprehensive (Loss) Attributable to Noncontrolling Interest
|
– | – | (0.9 | ) | ||||||||
|
Comprehensive Income Attributable to Zimmer Holdings, Inc.
|
$ | 559.3 | $ | 836.0 | $798.3 | |||||||
The accompanying notes are an integral part of these
consolidated financial statements.
41
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| 1. | BUSINESS |
We design, develop, manufacture and market orthopaedic
reconstructive, spinal and trauma devices, dental implants and
related surgical products. We also provide other healthcare
related services. Orthopaedic reconstructive devices restore
function lost due to disease or trauma in joints such as knees,
hips, shoulders and elbows. Dental reconstructive implants
restore function and aesthetics in patients who have lost teeth
due to trauma or disease. Spinal devices are utilized by
orthopaedic surgeons and neurosurgeons in the treatment of
degenerative diseases, deformities and trauma in all regions of
the spine. Trauma products are devices used primarily to
reattach or stabilize damaged bone and tissue to support the
body’s natural healing process. Our related surgical
products include surgical supplies and instruments designed to
aid in orthopaedic surgical procedures and post-operation
rehabilitation. We have operations in more than 25 countries and
market our products in more than 100 countries. We operate in a
single industry but have three reportable geographic segments,
the Americas, Europe and Asia Pacific.
The words “we,” “us,” “our” and
similar words refer to Zimmer Holdings, Inc. and its
subsidiaries. Zimmer Holdings refers to the parent company only.
| 2. | Significant Accounting Policies |
Basis of Presentation
– The consolidated
financial statements include the accounts of Zimmer Holdings and
its subsidiaries in which it holds a controlling equity
position. Investments in companies in which we exercise
significant influence over the operating and financial affairs,
but do not control, are accounted for under the equity method.
Under the equity method, we record the investment at cost and
adjust the carrying amount of the investment by our
proportionate share of the investee’s net earnings or
losses. All significant intercompany accounts and transactions
are eliminated. Certain amounts in the 2009 and 2008
consolidated financial statements have been reclassified to
conform to the 2010 presentation.
Use of Estimates
– The consolidated financial
statements are prepared in conformity with accounting principles
generally accepted in the U.S. which require us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Foreign Currency Translation
– The financial
statements of our foreign subsidiaries are translated into
U.S. dollars using period-end exchange rates for assets and
liabilities and average exchange rates for operating results.
Unrealized translation gains and losses are included in
accumulated other comprehensive income in stockholders’
equity. When a transaction is denominated in a currency other
than the subsidiary’s functional currency, we recognize a
transaction gain or loss when the transaction is settled.
Foreign currency transaction gains and losses included in net
earnings for the years ended December 31, 2010, 2009 and
2008 were not significant.
Revenue Recognition
– We sell product through
three principal channels: 1) direct to healthcare
institutions, referred to as direct channel accounts;
2) through stocking distributors and healthcare dealers;
and 3) directly to dental practices and dental
laboratories. The direct channel accounts represent
approximately 80 percent of our net sales. Through this
channel, inventory is generally consigned to sales agents or
customers so that products are available when needed for
surgical procedures. No revenue is recognized upon the placement
of inventory into consignment as we retain title and maintain
the inventory on our balance sheet. Upon implantation, we issue
an invoice and revenue is recognized. Pricing for products is
generally predetermined by contracts with customers, agents
acting on behalf of customer groups or by government regulatory
bodies, depending on the market. Price discounts under group
purchasing contracts are generally linked to volume of implant
purchases by customer healthcare institutions within a specified
group. At negotiated thresholds within a contract buying period,
price discounts may increase. Sales to stocking distributors,
healthcare dealers, dental practices and dental laboratories
account for approximately 20 percent of our net sales. With
these types of sales, revenue is recognized when title to
product passes, either upon shipment of the product or in some
cases upon implantation of the product. Product is generally
sold at contractually fixed prices for specified periods.
Payment terms vary by customer, but are typically less than
90 days. In some cases sales incentives may be earned by a
customer for purchasing a specified amount of our product. We
estimate whether such incentives will be achieved and, if so,
recognize these incentives as a reduction in revenue in the same
period the underlying revenue transaction is recognized.
Occasionally products are returned, and, accordingly, we
maintain an estimated sales return reserve that is recorded as a
reduction in revenue. Product returns were not significant for
the years ended December 31, 2010, 2009 and 2008.
Taxes Collected from Customers
– Taxes
collected from customers and remitted to governmental
authorities are presented on a net basis and excluded from
revenues.
Shipping and Handling
– Amounts billed to
customers for shipping and handling of products are reflected in
net sales and are not significant. Expenses incurred related to
shipping and handling of products are reflected in selling,
general and administrative and were $129.1 million,
$121.8 million and $117.3 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
Research and Development
– We expense all
research and development costs as incurred. Research and
development costs include salaries, prototypes, depreciation of
equipment used in research and development, consultant
42
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
fees and service fees paid to collaborative partners. Where
contingent milestone payments are due to third parties under
research and development arrangements, the milestone payment
obligations are expensed when the milestone results are achieved.
Special Items
– We recognize expenses resulting
directly from our business combinations and other items as
“Special items” in our consolidated statement of
earnings. Expenses in the “Special items” line for the
years ended December 31, 2010, 2009 and 2008, included (in
millions):
| 2010 | 2009 | 2008 | ||||||||||
|
Adjustment or impairment of assets and obligations, net
|
$ | 11.4 | $ | (1.5 | ) | $ | (10.4 | ) | ||||
|
Consulting and professional fees
|
4.9 | 11.7 | 13.2 | |||||||||
|
Employee severance and retention, including share-based
compensation acceleration
|
6.7 | 19.0 | 0.2 | |||||||||
|
Information technology integration
|
0.1 | 1.1 | 0.7 | |||||||||
|
In-process research & development
|
– | – | 38.5 | |||||||||
|
Vacated facilities
|
0.2 | 1.4 | – | |||||||||
|
Facility and employee relocation
|
2.0 | 5.4 | 7.5 | |||||||||
|
Distributor acquisitions
|
1.9 | 1.1 | 6.9 | |||||||||
|
Certain litigation matters
|
(0.3 | ) | 23.4 | – | ||||||||
|
Contract terminations
|
3.9 | 9.4 | 5.7 | |||||||||
|
Other
|
3.9 | 4.3 | 6.2 | |||||||||
|
Special items
|
$ | 34.7 | $ | 75.3 | $ | 68.5 | ||||||
Adjustment or impairment of assets and obligations relates to
impairment on assets that were acquired in business
combinations, impairment of assets related to a transformation
of our global information technology infrastructure or
adjustments to certain liabilities of acquired companies due to
changes in circumstances surrounding those liabilities
subsequent to the related measurement period.
Consulting and professional fees relate to third-party
integration consulting performed in a variety of areas such as
tax, compliance, logistics and human resources for our business
combinations and include third-party fees related to severance
and termination benefits matters. These fees also include legal
fees related to litigation matters involving acquired businesses
that existed prior to our acquisition or resulted from our
acquisition.
In 2010 and 2009, we terminated some employees as we reduced
management layers, restructured certain areas, and commenced
initiatives to focus on business opportunities that best support
our strategic priorities. In 2010 and 2009, approximately 60 and
300 employees, respectively, from across the globe were
affected by these actions. As a result of these changes in our
work force and headcount reductions from acquisitions, we
incurred expenses related to severance benefits, redundant
salaries as we worked through transition periods, share-based
compensation acceleration and other employee termination-related
costs. These termination benefits were provided in accordance
with our existing or local government policies and are
considered ongoing benefits. These costs were accrued when they
became probable and estimable and were recorded as part of other
current liabilities. The majority of these costs were paid
during the year they were incurred.
Information technology integration relates to the
non-capitalizable costs associated with integrating the
information systems of acquired businesses.
In-process research and development charges for 2008 relate to
the acquisition of Abbott Spine.
We ceased using certain leased facilities in 2010 and 2009 and,
accordingly, recorded expense for the remaining lease payments,
less estimated sublease recoveries, and wrote-off any assets
being used in those facilities.
Facility and employee relocation relates to costs associated
with relocating certain facilities as well as employee
relocation resulting from our business combinations. Most
notably, we consolidated our legacy European distribution
centers into a new distribution center in Eschbach, Germany.
Over the past few years we have acquired a number of
U.S. and foreign-based distributors. We have incurred
various costs related to the acquisition and integration of
those businesses.
Certain litigation matters relate to costs and adjustments
recognized during the year for the estimated or actual
settlement of various legal matters, including patent litigation
matters, commercial litigation matters and matters arising from
our acquisitions of certain competitive distributorships in
prior years. We recognize expense for the potential settlement
of a legal matter when we believe it is probable that a loss has
been incurred and we can reasonably estimate the loss. In 2009,
we made a concerted effort to settle some of these matters to
avoid further litigation costs.
Contract termination costs relate to terminated agreements in
connection with the integration of acquired companies and
changes to our distribution model as part of business
restructuring and transformation. The terminated contracts
primarily relate to sales agents and distribution agreements.
Cash and Cash Equivalents
– We consider all
highly liquid investments with an original maturity of three
months or less to be cash equivalents. The carrying amounts
reported in the balance sheet for cash and cash equivalents are
valued at cost, which approximates their fair value.
Investments
– We invest in debt securities to
promote business and strategic objectives. Our investments
include corporate debt securities, foreign government debt
securities, U.S. agency debt securities and certificates of
deposit and are classified and accounted for as
available-for-sale.
Available-for-sale
debt securities are recorded at fair value on our consolidated
balance sheet. Investments with a contractual maturity of less
than one year are classified as short-term investments on our
consolidated balance sheet, or in other non-current assets if
the contractual maturity is greater than one year. Changes in
fair value for
43
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
available-for-sale
securities are recorded, net of taxes, as a component of
accumulated other comprehensive loss on our consolidated balance
sheet. We review our investments for
other-than-temporary
impairment at each reporting period. If an unrealized loss for
any investment is considered to be
other-than-temporary,
the loss will be recognized in the consolidated statement of
earnings in the period the determination is made. See
Note 7 for more information regarding our investments.
Accounts Receivable
– Accounts receivable
consists of trade and other miscellaneous receivables. We grant
credit to customers in the normal course of business and
maintain an allowance for doubtful accounts for potential credit
losses. We determine the allowance for doubtful accounts by
geographic market and take into consideration historical credit
experience, creditworthiness of the customer and other pertinent
information. We make concerted efforts to collect all accounts
receivable, but sometimes we have to write-off the account
against the allowance when we determine the account is
uncollectible. The allowance for doubtful accounts was
$14.4 million and $18.8 million as of
December 31, 2010 and 2009, respectively.
Inventories
– Inventories, net of allowances
for obsolete and slow-moving goods, are stated at the lower of
cost or market, with cost determined on a
first-in
first-out basis.
Property, Plant and Equipment
– Property, plant
and equipment is carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based on
estimated useful lives of ten to forty years for buildings and
improvements and three to eight years for machinery and
equipment. Maintenance and repairs are expensed as incurred. We
review property, plant and equipment for impairment whenever
events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. An impairment loss
would be recognized when estimated future undiscounted cash
flows relating to the asset are less than its carrying amount.
An impairment loss is measured as the amount by which the
carrying amount of an asset exceeds its fair value.
Software Costs
– We capitalize certain computer
software and software development costs incurred in connection
with developing or obtaining computer software for internal use
when both the preliminary project stage is completed and it is
probable that the software will be used as intended. Capitalized
software costs generally include external direct costs of
materials and services utilized in developing or obtaining
computer software and compensation and related benefits for
employees who are directly associated with the software project.
Capitalized software costs are included in property, plant and
equipment on our balance sheet and amortized on a straight-line
basis when the software is ready for its intended use over the
estimated useful lives of the software, which approximate three
to ten years.
Instruments
– Instruments are hand-held devices
used by surgeons during total joint replacement and other
surgical procedures. Instruments are recognized as long-lived
assets and are included in property, plant and equipment.
Undeployed instruments are carried at cost, net of allowances
for excess and obsolete instruments. Instruments in the field
are carried at cost less accumulated depreciation. Depreciation
is computed using the straight-line method based on average
estimated useful lives, determined principally in reference to
associated product life cycles, primarily five years. We review
instruments for impairment whenever events or changes in
circumstances indicate that the carrying value of an instrument
may not be recoverable. Depreciation of instruments is
recognized as selling, general and administrative expense.
Goodwill
– Goodwill is not amortized but is
subject to annual impairment tests. Goodwill has been assigned
to reporting units. We perform annual impairment tests by
comparing each reporting unit’s fair value to its carrying
amount to determine if there is potential impairment. The fair
value of the reporting unit and the implied fair value of
goodwill are determined based upon a discounted cash flow
analysis. Significant assumptions are incorporated into these
discounted cash flow analyses such as estimated growth rates and
risk-adjusted discount rates. We perform this test in the fourth
quarter of the year or whenever events or changes in
circumstances indicate that the carrying value of the reporting
unit’s assets may not be recoverable. If the fair value of
the reporting unit is less than its carrying value, an
impairment loss is recorded to the extent that the implied fair
value of the reporting unit goodwill is less than the carrying
value of the reporting unit goodwill. During the years ended
December 31, 2010 and 2009 we recorded goodwill impairment
charges of $204.0 million and $73.0 million,
respectively, related to our U.S. Spine reporting unit. See
Note 9 for more information regarding goodwill and goodwill
impairment.
Intangible Assets
– Intangible assets are
initially measured at their fair value. We have determined the
fair value of our intangible assets either by the fair value of
the consideration exchanged for the intangible asset or the
estimated after-tax discounted cash flows expected to be
generated from the intangible asset. Intangible assets with an
indefinite life, including certain trademarks and trade names,
are not amortized. Indefinite life intangible assets are
assessed annually to determine whether events and circumstances
continue to support an indefinite life. Intangible assets with a
finite life, including core and developed technology, certain
trademarks and trade names, customer-related intangibles,
intellectual property rights and patents and licenses are
amortized on a straight-line basis over their estimated useful
life, ranging from less than one year to 40 years.
Intangible assets with a finite life are tested for impairment
whenever events or circumstances indicate that the carrying
amount may not be recoverable. Intangible assets with an
indefinite life are tested for impairment annually or whenever
events or circumstances indicate that the carrying amount may
not be recoverable. An impairment loss is recognized if the
carrying
44
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
amount exceeds the estimated fair value of the asset. The amount
of the impairment loss to be recorded would be determined based
upon the excess of the asset’s carrying value over its fair
value. The fair values of indefinite lived intangible assets are
determined based upon a discounted cash flow analysis using the
relief from royalty method. The relief from royalty method
estimates the cost savings associated with owning, rather than
licensing, assets. Significant assumptions are incorporated into
these discounted cash flow analyses such as estimated growth
rates, royalty rates and risk-adjusted discount rates.
In determining the useful lives of intangible assets, we
consider the expected use of the assets and the effects of
obsolescence, demand, competition, anticipated technological
advances, changes in surgical techniques, market influences and
other economic factors. For technology-based intangible assets,
we consider the expected life cycles of products, absent
unforeseen technological advances, which incorporate the
corresponding technology. Trademarks and trade names that do not
have a wasting characteristic (i.e., there are no legal,
regulatory, contractual, competitive, economic or other factors
which limit the useful life) are assigned an indefinite life.
Trademarks and trade names that are related to products expected
to be phased out are assigned lives consistent with the period
in which the products bearing each brand are expected to be
sold. For customer relationship intangible assets, we assign
useful lives based upon historical levels of customer attrition.
Intellectual property rights are assigned useful lives that
approximate the contractual life of any related patent or the
period for which we maintain exclusivity over the intellectual
property.
Income Taxes
– We account for income taxes
under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been
included in the financial statements. Under this method,
deferred tax assets and liabilities are determined based on the
differences between the financial statements and tax basis of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. The
effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes
the enactment date.
We record net deferred tax assets to the extent we believe these
assets will more likely than not be realized. In making such
determination, we consider all available positive and negative
evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax
planning strategies and recent financial operations. In the
event we were to determine that we would be able to realize our
deferred income tax assets in the future in excess of their net
recorded amount, we would make an adjustment to the valuation
allowance which would reduce the provision for income taxes.
Federal income taxes are provided on the portion of the income
of foreign subsidiaries that is expected to be remitted to the
U.S.
Derivative Financial Instruments
– We measure
all derivative instruments at fair value and report them on our
consolidated balance sheet as assets or liabilities. We maintain
written policies and procedures that permit, under appropriate
circumstances and subject to proper authorization, the use of
derivative financial instruments solely for hedging purposes.
The use of derivative financial instruments for trading or
speculative purposes is prohibited by our policy. See
Note 13 for more information regarding our derivative and
hedging activities.
Other Comprehensive Income
– Other
comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are
included in comprehensive income but are excluded from net
earnings as these amounts are recorded directly as an adjustment
to stockholders’ equity. Other comprehensive income is
comprised of foreign currency translation adjustments,
unrealized foreign currency hedge gains and losses, unrealized
gains and losses on
available-for-sale
securities and amortization of prior service costs and
unrecognized gains and losses in actuarial assumptions.
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
– On January 1,
2009, we adopted the FASB’s newly issued guidance related
to noncontrolling interests. This new guidance changes the
accounting and reporting for minority interests, which are now
recharacterized as noncontrolling interests and classified as a
component of equity. This new guidance requires retroactive
adoption of the presentation and disclosure requirements for
existing noncontrolling interests. This adoption did not have a
material impact on our consolidated financial statements or
results of operations. During the year ended December 31,
2009, we acquired 100 percent ownership of our only
outstanding noncontrolling interest for approximately
$8.6 million. This purchase was recorded as an equity
transaction and is reflected as a financing activity in our
consolidated statement of cash flows. As a result, the carrying
balance of the noncontrolling interests of $3.6 million was
eliminated, and the remaining $5.0 million, representing
the difference between the purchase price and carrying balance,
was recorded as a reduction in paid-in capital. Transactions
with noncontrolling interests had the following
45
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
effect on equity attributable to Zimmer Holdings, Inc. (in
millions):
| 2009 | ||||
|
Net earnings of Zimmer Holdings, Inc.
|
$ | 717.4 | ||
|
Transfers to noncontrolling interests:
|
||||
|
Decrease in equity related to the purchase of noncontrolling
interests
|
(5.0 | ) | ||
|
Change from net earnings of Zimmer Holdings, Inc. and transfers
to noncontrolling interests
|
$ | 712.4 | ||
Accounting Pronouncements
– 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. | SHARE-BASED COMPENSATION |
Our share-based payments primarily consist of stock options,
restricted stock, restricted stock units (RSUs), performance
shares and an employee stock purchase plan. Share-based
compensation expense for the years ended December 31, 2010,
2009 and 2008 is as follows (in millions):
| 2010 | 2009 | 2008 | ||||||||||
|
Stock options
|
$ | 47.6 | $ | 61.9 | $ | 65.4 | ||||||
|
RSU and other
|
14.4 | 13.4 | 4.5 | |||||||||
|
Total expense, pre-tax
|
62.0 | 75.3 | 69.9 | |||||||||
|
Tax benefit related to awards
|
(16.2 | ) | (20.9 | ) | (20.4 | ) | ||||||
|
Total expense, net of tax
|
$ | 45.8 | $ | 54.4 | $ | 49.5 | ||||||
Share-based compensation cost capitalized as part of inventory
for the years ended December 31, 2010, 2009 and 2008 was
$12.2 million, $17.2 million, and $19.6 million,
respectively. As of December 31, 2010 and 2009,
approximately $6.6 million and $9.4 million of
capitalized costs remained in finished goods inventory.
Stock
Options
We had two equity compensation plans in effect at
December 31, 2010: the 2009 Stock Incentive Plan (2009
Plan) and the Stock Plan for Non-Employee Directors. The 2009
Plan succeeds the 2006 Stock Incentive Plan (2006 Plan) and the
TeamShare Stock Option Plan (TeamShare Plan). Following
stockholder approval of the 2009 Plan in May 2009, no further
awards were granted under the 2006 Plan or under the TeamShare
Plan, and shares remaining available for grant under those plans
are expected to be merged into the 2009 Plan. Vested and
unvested stock options and unvested restricted stock and RSUs
previously granted under the 2006 Plan, the TeamShare Plan and
another prior plan, the 2001 Stock Incentive Plan, remained
outstanding as of December 31, 2010. We have reserved the
maximum number of shares of common stock available for award
under the terms of each of these plans. We have registered
57.9 million shares of common stock. The 2009 Plan provides
for the grant of nonqualified stock options and incentive stock
options, long-term performance awards in the form of performance
shares or units, restricted stock, RSUs and stock appreciation
rights. The Compensation and Management Development Committee of
the Board of Directors determines the grant date for annual
grants under our equity compensation plans. The date for annual
grants under the 2009 Plan to our executive officers is expected
to occur in the first quarter of each year following the
earnings announcements for the previous quarter and full year.
The Stock Plan for Non-Employee Directors provides for awards of
stock options, restricted stock and RSUs to non-employee
directors. It has been our practice to issue shares of common
stock upon exercise of stock options from previously unissued
shares. The total number of awards which may be granted in a
given year
and/or
over
the life of the plan under each of our equity compensation plans
is limited. At December 31, 2010, an aggregate of
11.9 million shares were available for future grants and
awards under these plans.
Stock options granted to date under our plans generally vest
over four years and generally have a maximum contractual life of
10 years. As established under our equity compensation
plans, vesting may accelerate upon retirement after the first
anniversary date of the award if certain criteria are met. We
recognize expense related to stock options on a straight-line
basis over the requisite service period, less awards expected to
be forfeited using estimated forfeiture rates. Due to the
accelerated retirement provisions, the requisite service period
of our stock options range from one to four years. Stock options
are granted with an exercise price equal to the market price of
our common stock on the date of grant, except in limited
circumstances where local law may dictate otherwise.
46
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
A summary of stock option activity for the year ended
December 31, 2010 is as follows (options in thousands):
|
Weighted
|
||||||||||||||||
|
Average
|
||||||||||||||||
|
Weighted
|
Remaining
|
Intrinsic
|
||||||||||||||
|
Average
|
Contractual
|
Value
|
||||||||||||||
| Stock Options | Exercise Price | Life | (in millions) | |||||||||||||
|
Outstanding at December 31, 2009
|
16,912 | $ | 67.17 | |||||||||||||
|
Options granted
|
2,023 | 57.82 | ||||||||||||||
|
Options exercised
|
(404 | ) | 34.47 | |||||||||||||
|
Options cancelled
|
(545 | ) | 60.49 | |||||||||||||
|
Options expired
|
(548 | ) | 76.22 | |||||||||||||
|
Outstanding at December 31, 2010
|
17,438 | $ | 66.76 | 5.8 | $ | 50.3 | ||||||||||
|
Vested or expected to vest as of December 31, 2010
|
16,733 | $ | 67.09 | 5.7 | $ | 47.6 | ||||||||||
|
Exercisable at December 31, 2010
|
12,108 | $ | 69.26 | 4.9 | $ | 31.7 | ||||||||||
We use a Black-Scholes option-pricing model to determine the
fair value of our stock options. Expected volatility was derived
from the implied volatility of traded options on our stock that
were actively traded around the grant date of the stock options
with exercise prices similar to the stock options and maturities
of over one year. The expected term of the stock options has
been derived from historical employee exercise behavior. The
risk-free interest rate is 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. A dividend yield of zero percent has been used as we
have not paid any dividends since becoming a public company in
2001 and we do not expect to pay any dividends in the
foreseeable future.
The weighted average fair value of the options granted in the
years ended December 31, 2010, 2009 and 2008 were
determined using the following assumptions:
| 2010 | 2009 | 2008 | ||||||||||
|
Dividend Yield
|
– | % | – | % | – | % | ||||||
|
Volatility
|
26.3 | % | 41.6 | % | 27.4 | % | ||||||
|
Risk-free interest rate
|
2.8 | % | 1.7 | % | 2.9 | % | ||||||
|
Expected life (years)
|
5.9 | 5.4 | 5.4 | |||||||||
The weighted average fair value for stock options granted during
2010, 2009 and 2008 was $18.17, $16.02 and $23.32, respectively.
The total intrinsic value of stock options exercised during the
years ended December 31, 2010, 2009 and 2008 was
$8.5 million, $3.3 million and $31.9 million,
respectively.
As of December 31, 2010, there was $63.4 million of
unrecognized share-based payment expense related to nonvested
stock options granted under our plans. That expense is expected
to be recognized over a weighted average period of
2.2 years.
Performance
Shares and RSUs
We have awarded both performance shares and RSUs to our
employees. Some of these awards have had service conditions
while others have had performance conditions. The terms of the
service condition awards have been either two or five years with
vesting occurring ratably on the anniversary date of the award.
However, based upon meeting certain criteria, as established
under our equity compensation plans, these awards may accelerate
upon retirement after the first anniversary date of the award.
Accordingly, the requisite service period used for share-based
payment expense ranges from one to five years.
The last awards issued with performance conditions were to vest
in 2008. However, for these performance condition awards it was
determined in 2008 that the performance targets would not be
achieved. Therefore, no performance condition awards are
outstanding.
A summary of nonvested RSU activity for the year ended
December 31, 2010 is as follows (in thousands):
|
Weighted Average
|
||||||||
|
Grant Date Fair
|
||||||||
| RSUs | Value | |||||||
|
Outstanding at January 1, 2010
|
435 | $ | 42.09 | |||||
|
Granted
|
807 | 57.92 | ||||||
|
Vested
|
(56 | ) | 42.63 | |||||
|
Forfeited
|
(238 | ) | 55.08 | |||||
|
Outstanding at December 31, 2010
|
948 | 52.30 | ||||||
The fair value of the awards was determined based upon the fair
market value of our common stock on the date of grant. We are
required to estimate the number of RSUs that will vest and
recognize share-based payment expense on a straight-line basis
over the requisite service period. As of December 31, 2010,
we estimate that approximately 842,000 outstanding RSUs will
vest. If our estimate were to change in the future, the
cumulative effect of the change in estimate will be recorded in
that period. Based upon the number of RSUs that we expect to
vest, the unrecognized share-based payment expense as of
December 31, 2010 was $30.2 million and is expected to
be recognized over a weighted-average period of 3.0 years.
47
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
| 4. | INVENTORIES |
Inventories at December 31, 2010 and 2009 consist of the
following (in millions):
| 2010 | 2009 | |||||||
|
Finished goods
|
$ | 757.3 | $ | 718.6 | ||||
|
Work in progress
|
47.0 | 48.0 | ||||||
|
Raw materials
|
132.1 | 146.6 | ||||||
|
Inventories, net
|
$ | 936.4 | $ | 913.2 | ||||
Reserves for excess and obsolete inventory were
$268.4 million and $255.1 million at December 31,
2010 and 2009, respectively.
| 5. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment at December 31, 2010 and 2009
was as follows (in millions):
| 2010 | 2009 | |||||||
|
Land
|
$ | 22.0 | $ | 21.8 | ||||
|
Building and equipment
|
1,162.0 | 1,147.7 | ||||||
|
Capitalized software costs
|
172.0 | 158.8 | ||||||
|
Instruments
|
1,365.6 | 1,210.2 | ||||||
|
Construction in progress
|
66.5 | 62.0 | ||||||
| 2,788.1 | 2,600.5 | |||||||
|
Accumulated depreciation
|
(1,574.3 | ) | (1,378.8 | ) | ||||
|
Property, plant and equipment, net
|
$ | 1,213.8 | $ | 1,221.7 | ||||
Depreciation expense was $247.9 million,
$244.2 million and $215.8 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
| 6. | ACQUISITIONS |
We made a number of business acquisitions during the years 2010,
2009 and 2008. In December 2010 we acquired Beijing Montagne
Medical Device Co., Ltd. (Montagne) and Sodem Diffusion S.A.
(Sodem). The Montagne acquisition makes us a leading provider of
orthopaedic solutions in China and provides product lines
tailored exclusively to the rapidly growing Chinese market. The
Sodem acquisition broadens our portfolio of surgical power tools
and strengthens our position in the approximate $1 billion
surgical power tool market. In 2008 we acquired Abbott Spine,
which provided us a number of innovative products and helped
build critical mass in the spine market. Additionally, we have
acquired a number of foreign-based distributors during the three
year period.
The results of operations of the acquired companies have been
included in our consolidated results of operations subsequent to
the transaction dates, and the respective assets and liabilities
of the acquired companies have been recorded at their estimated
fair values in our consolidated statement of financial position
as of the transaction dates, with any excess purchase price
being allocated to goodwill. The estimated fair values of the
Montagne and Sodem assets are preliminary. Pro forma financial
information and other information required by the FASB’s
guidance on business combinations have not been included as the
acquisitions did not have a material impact upon our financial
position or results of operations.
| 7. | INVESTMENTS |
We invest in short and long-term investments classified as
available-for-sale
securities. Information regarding our investments as of
December 31, 2010 is as follows (in millions):
|
Amortized
|
Gross Unrealized | ||||||||||||
| Cost | Gains | Losses | Fair value | ||||||||||
|
Corporate debt securities
|
$ | 203.9 | $ | 0.1 | $ | (0.2 | ) | $ | 203.8 | ||||
|
U.S. government and agency debt securities
|
47.9 | – | – | 47.9 | |||||||||
|
Municipal bonds
|
1.1 | – | – | 1.1 | |||||||||
|
Foreign government debt securities
|
10.3 | – | – | 10.3 | |||||||||
|
Commercial paper
|
16.1 | – | – | 16.1 | |||||||||
|
Certificates of deposit
|
131.5 | – | (0.1 | ) | 131.4 | ||||||||
|
Total short and long-term investments
|
$ | 410.8 | $ | 0.1 | $ | (0.3 | ) | $ | 410.6 | ||||
Information regarding our investments as of December 31,
2009 is as follows (in millions):
|
Amortized
|
Gross Unrealized | |||||||||||
| Cost | Gains | Losses | Fair value | |||||||||
|
Certificates of deposit
|
$ | 66.4 | $ | – | $ | – | $ | 66.4 | ||||
|
Total short-term investments
|
$ | 66.4 | $ | – | $ | – | $ | 66.4 | ||||
The following table shows the fair value and gross unrealized
losses for all
available-for-sale
securities in an unrealized loss position deemed to be temporary
as of December 31, 2010 (in millions):
|
Unrealized
|
||||||||
| Fair Value | Losses | |||||||
|
Corporate debt securities
|
$ | 126.1 | $ | (0.2 | ) | |||
|
Certificates of deposit
|
50.6 | (0.1 | ) | |||||
|
Total
|
$ | 176.7 | $ | (0.3 | ) | |||
All securities in the table above have been in an unrealized
loss position for less than twelve months. A total of 72
securities were in an unrealized loss position as of
December 31, 2010.
The unrealized losses on our investments in corporate debt
securities were caused by increases in interest yields resulting
from the current adverse conditions in the global credit
markets. We believe the unrealized losses associated with our
available-for-sale
securities as of December 31, 2010 are temporary because we
do not intend to sell these investments, nor is it more likely
than not that we will be required to sell them, before recovery
of their amortized cost basis.
48
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
The amortized cost and fair value of our
available-for-sale
fixed-maturity securities by contractual maturity as of
December 31, 2010 are as follows (in millions):
|
Amortized
|
||||||||
| Cost | Fair Value | |||||||
|
Due in one year or less
|
$ | 265.2 | $ | 265.1 | ||||
|
Due after one year through two years
|
145.6 | 145.5 | ||||||
|
Total
|
$ | 410.8 | $ | 410.6 | ||||
| 8. | FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES |
The following financial assets and liabilities are recorded at
fair value on a recurring basis as of December 31, 2010 (in
millions):
| Fair Value Measurements at Reporting Date Using: | ||||||||||||
|
Quoted Prices
|
||||||||||||
|
in Active
|
||||||||||||
|
Markets for
|
Significant Other
|
Significant
|
||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||
|
Recorded
|
Assets
|
Inputs
|
Inputs
|
|||||||||
| Description | Balance | (Level 1) | (Level 2) | (Level 3) | ||||||||
|
Assets
|
||||||||||||
|
Available-for-sale
securities
|
||||||||||||
|
Corporate debt securities
|
$ | 203.8 | $ | – | $ | 203.8 | $ | – | ||||
|
U.S. government and agency debt securities
|
47.9 | – | 47.9 | – | ||||||||
|
Municipal bonds
|
1.1 | – | 1.1 | – | ||||||||
|
Foreign government debt securities
|
10.3 | – | 10.3 | – | ||||||||
|
Commercial paper
|
16.1 | – | 16.1 | – | ||||||||
|
Certificates of deposit
|
131.4 | – | 131.4 | – | ||||||||
|
Total
available-for-sale
securities
|
410.6 | – | 410.6 | – | ||||||||
|
Derivatives, current and long-term
|
||||||||||||
|
Foreign currency forward contracts and options
|
34.5 | – | 34.5 | – | ||||||||
|
Interest rate swaps
|
1.5 | – | 1.5 | – | ||||||||
| $ | 446.6 | $ | – | $ | 446.6 | $ | – | |||||
|
Liabilities
|
||||||||||||
|
Derivatives, current and long-term
|
||||||||||||
|
Foreign currency forward contracts and options
|
$ | 40.0 | $ | – | $ | 40.0 | $ | – | ||||
| $ | 40.0 | $ | – | $ | 40.0 | $ | – | |||||
The following financial assets and liabilities are recorded at
fair value on a recurring basis as of December 31, 2009 (in
millions):
| Fair Value Measurements at Reporting Date Using: | ||||||||||||
|
Quoted Prices
|
||||||||||||
|
in Active
|
||||||||||||
|
Markets for
|
Significant Other
|
Significant
|
||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||
|
Recorded
|
Assets
|
Inputs
|
Inputs
|
|||||||||
| Description | Balance | (Level 1) | (Level 2) | (Level 3) | ||||||||
|
Assets
|
||||||||||||
|
Available-for-sale
securities
|
||||||||||||
|
Certificates of deposit
|
$ | 66.4 | $ | – | $ | 66.4 | $ | – | ||||
|
Total
available-for-sale
securities
|
66.4 | – | 66.4 | – | ||||||||
|
Derivatives, current and non-current
|
12.4 | – | 12.4 | – | ||||||||
| $ | 78.8 | $ | – | $ | 78.8 | $ | – | |||||
|
Liabilities
|
||||||||||||
|
Derivatives, current and non-current
|
$ | 32.7 | $ | – | $ | 32.7 | $ | – | ||||
| $ | 32.7 | $ | – | $ | 32.7 | $ | – | |||||
Available-for-sale
securities are valued under a market approach using broker
prices for identical assets in
over-the-counter
markets.
We value our foreign currency forward contracts and foreign
currency options using a market approach based on foreign
currency exchange rates obtained from active markets and perform
an assessment of counterparty credit risk.
We value our interest rate swaps using a market approach based
on publicly available market yield curves and the terms of our
swaps.
The following nonfinancial assets were measured at fair value on
a nonrecurring basis during the year ended December 31,
2010 (in millions):
| Fair Value Measurements Using: | |||||||||||||||
|
Quoted Prices
|
|||||||||||||||
|
in Active
|
Significant
|
||||||||||||||
|
Markets for
|
Other
|
Significant
|
|||||||||||||
|
Year Ended
|
Identical
|
Observable
|
Unobservable
|
||||||||||||
|
December 31,
|
Assets
|
Inputs
|
Inputs
|
Total
|
|||||||||||
| Description | 2010 | (Level 1) | (Level 2) | (Level 3) | Losses | ||||||||||
|
Goodwill
|
$ | 137.0 | $ | – | $ | – | $ | 137.0 | $ | 204.0 | |||||
| $ | 137.0 | $ | – | $ | – | $ | 137.0 | $ | 204.0 | ||||||
The following nonfinancial assets were measured at fair value on
a nonrecurring basis during the year ended December 31,
2009 (in millions):
| Fair Value Measurements Using: | |||||||||||||||
|
Quoted Prices
|
|||||||||||||||
|
in Active
|
Significant
|
||||||||||||||
|
Markets for
|
Other
|
Significant
|
|||||||||||||
|
Year Ended
|
Identical
|
Observable
|
Unobservable
|
||||||||||||
|
December 31,
|
Assets
|
Inputs
|
Inputs
|
Total
|
|||||||||||
| Description | 2009 | (Level 1) | (Level 2) | (Level 3) | Losses | ||||||||||
|
Goodwill
|
$ | 342.9 | $ | – | $ | – | $ | 342.9 | $ | 73.0 | |||||
| $ | 342.9 | $ | – | $ | – | $ | 342.9 | $ | 73.0 | ||||||
In 2010, goodwill relating to our U.S. Spine reporting unit
with a carrying amount of $341.0 million was written down
to its implied fair value of $137.0 million, resulting in
an impairment charge of $204.0 million. The implied fair
value of goodwill equals the estimated fair value of a reporting
unit
49
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
minus the fair value of the reporting unit’s net assets. In
determining the implied fair value of the U.S. Spine
reporting unit’s goodwill, we used unobservable inputs to
estimate the fair value of the reporting unit and its assets and
liabilities. Fair value was determined using an equal weighting
of income and market approaches. Fair value under the income
approach was determined by discounting to present value the
estimated future cash flows of the reporting unit. Fair value
under the market approach utilized the comparable transaction
methodology, which uses valuation indicators determined from
sales of other businesses that are similar to our
U.S. Spine reporting unit. In estimating the future cash
flows of the reporting unit, we utilized a combination of market
and company specific inputs that a market participant would use
in assessing the fair value of the reporting unit. The primary
market input was revenue growth rates. These rates were based
upon historical trends and estimated future growth drivers such
as an aging global population, obesity and more active
lifestyles. Significant company specific inputs included
assumptions regarding how the reporting unit could leverage
operating expenses as revenue grows and the impact any new
products will have on revenues. Under the comparable transaction
methodology, we took into consideration when the comparable
transaction occurred and the differences that may exist due to
changes in the economic environment. We also took into
consideration differences between the comparable companies and
our U.S. Spine reporting unit that could affect fair value,
such as cash and debt levels.
The fair value of the reporting unit’s assets and
liabilities was determined by using the same methods that are
used in business combination purchase accounting. See
Note 9 for further information regarding this goodwill
impairment.
In 2009, the implied fair value of goodwill was determined using
the same methodologies utilized in the 2010 valuation.
There were no other significant nonfinancial assets that were
measured at fair value in the years ended December 31, 2010
and December 31, 2009.
| 9. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The following table summarizes the changes in the carrying
amount of goodwill for the years ended December 31, 2010
and 2009 (in millions):
| Americas | Europe | Asia Pacific | Total | |||||||||||||
|
Balance at January 1, 2009
|
||||||||||||||||
|
Goodwill
|
$ | 1,540.3 | $ | 1,110.1 | $ | 124.4 | $ | 2,774.8 | ||||||||
|
Accumulated impairment losses
|
– | – | – | – | ||||||||||||
| 1,540.3 | 1,110.1 | 124.4 | 2,774.8 | |||||||||||||
|
Change in fair value estimates of Abbott Spine related to:
|
||||||||||||||||
|
Integration liability
|
1.0 | 4.2 | 0.3 | 5.5 | ||||||||||||
|
Inventory
|
2.2 | – | – | 2.2 | ||||||||||||
|
Income taxes
|
(1.9 | ) | – | – | (1.9 | ) | ||||||||||
|
U.S. Spine reporting unit impairment
|
(73.0 | ) | – | – | (73.0 | ) | ||||||||||
|
Other acquisitions
|
– | 5.0 | – | 5.0 | ||||||||||||
|
Currency translation
|
6.3 | 53.8 | 10.8 | 70.9 | ||||||||||||
|
Balance at December 31, 2009
|
||||||||||||||||
|
Goodwill
|
1,547.9 | 1,173.1 | 135.5 | 2,856.5 | ||||||||||||
|
Accumulated impairment losses
|
(73.0 | ) | – | – | (73.0 | ) | ||||||||||
| 1,474.9 | 1,173.1 | 135.5 | 2,783.5 | |||||||||||||
|
U.S. Spine reporting unit impairment
|
(204.0 | ) | – | – | (204.0 | ) | ||||||||||
|
Other acquisitions
|
13.1 | 3.7 | 37.3 | 54.1 | ||||||||||||
|
Currency translation
|
1.8 | (69.7 | ) | 15.1 | (52.8 | ) | ||||||||||
|
Balance at December 31, 2010
|
||||||||||||||||
|
Goodwill
|
1,562.8 | 1,107.1 | 187.9 | 2,857.8 | ||||||||||||
|
Accumulated impairment losses
|
(277.0 | ) | – | – | (277.0 | ) | ||||||||||
| $ | 1,285.8 | $ | 1,107.1 | $ | 187.9 | $ | 2,580.8 | |||||||||
We conduct our annual impairment test in the fourth quarter of
every year or whenever events occur or circumstances change that
would more likely than not reduce the fair value of a reporting
unit below its carrying amount. During our 2009 and 2010 annual
impairment tests, it was determined that our U.S. Spine
reporting unit’s carrying value was in excess of its
estimated fair value. Fair value was determined using an equal
weighting of income and market approaches.
In the 2009 period, factors that contributed to the estimated
fair value of the reporting unit being below its carrying value
included a decrease in projected revenues related to the
Dynesys
Dynamic Stabilization System. This product line
experienced increased competition and insurance reimbursement
issues in 2009. We had been seeking approval from the FDA to
market this product differently in the U.S., which would have
enhanced its position in the market. However, in November 2009
an FDA advisory panel issued a non-approvable recommendation,
increasing the uncertainty of the estimated future cash flows at
that time. In addition to the
Dynesys
product, revenues
from other products had been affected as we worked through the
integration of the sales channel following the Abbott Spine
acquisition.
In the first quarter of 2010, our U.S. Spine reporting unit
results were below our expectations so we performed an
impairment test using similar methodologies to those used in
2009. We determined at that time that goodwill was not
50
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
impaired. In the second and third quarters of 2010, we did not
perform impairment tests because our revenues and underlying
cash flows were in line with our estimates from the first
quarter.
As we completed our annual impairment testing in the fourth
quarter of 2010, factors in the broader U.S. spine
marketplace as well as company specific factors contributed to a
further decrease in the estimated fair value of the reporting
unit. At the time of our 2009 impairment test, we estimated that
the U.S. spine market was experiencing
year-over-year
revenue growth in the low double digits that would continue into
the foreseeable future. Since the time of our 2009 test,
year-over-year
growth continued to decelerate and after multiple quarters of
deceleration we estimated this may be a longer-term trend
instead of a temporary phenomenon. In our fourth quarter 2010
impairment test, we concluded that
year-over-year
growth had fallen to the low to mid single digits which we
estimate to be the trend in the near-term. A portion of this
decrease has come from lower pricing as hospitals try to reduce
their costs.
Another factor in the lower growth trend includes increased
scrutiny from insurance companies and continued discussion in
the healthcare community on whether certain spine procedures are
necessary. As an example, late in the third quarter of 2010 in
one state an insurer provided notice that starting
January 1, 2011, the insurer will require prior review and
certification that the patient has met specific clinical
criteria before the procedure will be covered. While revenues
from these procedures in this one state are not significant to
our overall revenues, it has caused uncertainty on whether more
insurers may take similar actions.
As discussed above, we believe such deceleration and uncertainty
as to revenue growth have decreased the valuations of other
spine companies in the U.S. market and thus has affected
our estimated fair value of our U.S. Spine reporting unit.
In addition, following the FDA advisory panel decision in
November 2009 we continued to evaluate our regulatory options
for marketing the
Dynesys
product differently. In 2010,
we concluded that obtaining regulatory approval would take more
time and cost more money than originally expected. This
conclusion has also contributed to the decrease in our estimated
fair value of the reporting unit.
As a result, we recorded goodwill impairment charges of
$204.0 million and $73.0 million during the years
ended December 31, 2010 and 2009, respectively.
We have five other reporting units with goodwill assigned to
them. We estimate the fair value of those reporting units using
the income approach by discounting to present value the
estimated future cash flows of the reporting unit. For each of
those five reporting units, the estimated fair value
substantially exceeds its carrying value.
We will continue to monitor the fair value of our
U.S. Spine reporting unit as well as our other five
reporting units in our interim and annual reporting periods. If
our estimated cash flows for these reporting units decrease, we
may have to record further impairment charges in the future.
Factors that could result in our cash flows being lower than our
current estimates include: 1) decreased revenues caused by
changes in the healthcare market, or our inability to generate
new product revenue from our research and development
activities, and 2) if we are not able to achieve the
estimated operating margins in our forecasts due to unforeseen
factors. Additionally, changes in the broader economic
environment could cause changes to our estimated discount rates,
which will impact our estimated fair values.
The components of identifiable intangible assets are as follows
(in millions):
|
Intellectual
|
Trademarks
|
|||||||||||||||||||||||||||
|
Core
|
Developed
|
Property
|
and Trade
|
Customer
|
||||||||||||||||||||||||
| Technology | Technology | Rights | Names | Relationships | Other | Total | ||||||||||||||||||||||
|
As of December 31, 2010:
|
||||||||||||||||||||||||||||
|
Intangible assets subject to amortization:
|
||||||||||||||||||||||||||||
|
Gross carrying amount
|
$ | 144.1 | $ | 511.5 | $ | 153.7 | $ | 36.8 | $ | 147.7 | $ | 70.0 | $ | 1,063.8 | ||||||||||||||
|
Accumulated amortization
|
(52.0 | ) | (219.3 | ) | (73.4 | ) | (23.4 | ) | (32.8 | ) | (33.1 | ) | (434.0 | ) | ||||||||||||||
|
Intangible assets not subject to amortization:
|
||||||||||||||||||||||||||||
|
Gross carrying amount
|
– | – | – | 197.3 | – | – | 197.3 | |||||||||||||||||||||
|
Total identifiable intangible assets
|
$ | 92.1 | $ | 292.2 | $ | 80.3 | $ | 210.7 | $ | 114.9 | $ | 36.9 | $ | 827.1 | ||||||||||||||
|
As of December 31, 2009:
|
||||||||||||||||||||||||||||
|
Intangible assets subject to amortization:
|
||||||||||||||||||||||||||||
|
Gross carrying amount
|
$ | 144.1 | $ | 499.1 | $ | 145.2 | $ | 34.7 | $ | 129.2 | $ | 51.5 | $ | 1,003.8 | ||||||||||||||
|
Accumulated amortization
|
(44.0 | ) | (183.5 | ) | (40.3 | ) | (20.0 | ) | (23.4 | ) | (31.1 | ) | (342.3 | ) | ||||||||||||||
|
Intangible assets not subject to amortization:
|
||||||||||||||||||||||||||||
|
Gross carrying amount
|
– | – | – | 196.5 | – | – | 196.5 | |||||||||||||||||||||
|
Total identifiable intangible assets
|
$ | 100.1 | $ | 315.6 | $ | 104.9 | $ | 211.2 | $ | 105.8 | $ | 20.4 | $ | 858.0 | ||||||||||||||
The 2010 additions to developed technology, trademarks and trade
names, and customer relationships intangible assets relate to
our acquisitions of Montagne, Sodem and foreign-based
distributors. The majority of the 2010 additions to other
intangible assets relates to a distribution agreement.
We currently have and anticipate future product development
efforts that may replace the current products that use our
trademarks and trade names. While it is possible, it is not
known if these new products will utilize these trademarks and
trade names. If these new products do not
51
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
use these trademarks and trade names, these assets may be
impaired.
Total amortization expense for finite-lived intangible assets
was $92.3 million, $93.2 million and
$59.3 million for the years ended December 31, 2010,
2009 and 2008, respectively. For 2010, $33.1 million of
amortization expense was recorded as part of cost of goods sold,
with the remaining $59.2 million recorded as part of
selling, general and administrative expenses. For 2009,
$33.6 million of amortization expense was recorded as part
of cost of goods sold, with the remaining $59.6 million
recorded as part of selling, general and administrative
expenses. For 2008, $6.7 million of amortization expense
was recorded as part of cost of goods sold, with the remaining
$52.6 million recorded as part of selling, general and
administrative expenses. Estimated annual amortization expense
for the years ending December 31, 2011 through 2015 is
$89.4 million, $82.6 million, $75.7 million,
$71.3 million and $63.7 million, respectively.
| 10. | OTHER CURRENT AND LONG-TERM LIABILITIES |
Other current and long-term liabilities at December 31,
2010 and 2009 consist of the following (in millions):
| 2010 | 2009 | |||||||
|
Other current liabilities:
|
||||||||
|
License and service agreements
|
$ | 108.5 | $ | 108.0 | ||||
|
Certain claims accrual (Note 19)
|
42.5 | 42.5 | ||||||
|
Salaries, wages and benefits
|
118.1 | 95.7 | ||||||
|
Accrued liabilities
|
254.9 | 252.4 | ||||||
|
Total other current liabilities
|
$ | 524.0 | $ | 498.6 | ||||
|
Other long-term liabilities:
|
||||||||
|
Long-term income tax payable
|
$ | 113.5 | $ | 94.3 | ||||
|
Certain claims accrual (Note 19)
|
90.3 | 29.4 | ||||||
|
Other long-term liabilities
|
180.2 | 204.8 | ||||||
|
Total other long-term liabilities
|
$ | 384.0 | $ | 328.5 | ||||
| 11. |
|
We had no short-term debt as of December 31, 2010 or 2009.
Long-term debt as of December 31, 2010 and 2009 on our
consolidated balance sheet consisted of the following (in
millions):
| 2010 | 2009 | |||||||
|
Senior Notes due 2019
|
$ | 500.0 | $ | 500.0 | ||||
|
Senior Notes due 2039
|
500.0 | 500.0 | ||||||
|
Debt discount
|
(1.2 | ) | (1.2 | ) | ||||
|
Interest rate swaps
|
1.5 | – | ||||||
|
Senior Credit Facility
|
141.8 | 128.8 | ||||||
|
Total long-term debt
|
$ | 1,142.1 | $ | 1,127.6 | ||||
In November 2009, we sold $500 million aggregate principal
amount of our 4.625 percent Senior Notes due
November 30, 2019 and $500 million aggregate principal
amount of our 5.75 percent Senior Notes due
November 30, 2039 (Senior Notes) in a public offering.
Interest is payable on May 30 and November 30 of each year until
maturity. We received net proceeds of approximately
$998.8 million, net of an offering discount of
$1.2 million. The Senior Notes carry an effective interest
rate of 4.634 percent and 5.762 percent, respectively.
The estimated fair value of our Senior Notes as of
December 31, 2010 and 2009 was $1,022.0 million and
$992.1 million, respectively.
We may redeem the Senior Notes at our election in whole or in
part at any time prior to maturity at a redemption price equal
to the greater of 1) 100 percent of the principal
amount of the notes being redeemed; or 2) the sum of the
present values of the remaining scheduled payments of principal
and interest (not including any portion of such payments of
interest accrued as of the date of redemption), discounted to
the date of redemption on a semi-annual basis at the Treasury
Rate (as defined in the debt agreement), plus 20 basis
points, in the case of the 2019 notes, and 25 basis points,
in the case of the 2039 notes. We will also pay the accrued and
unpaid interest on the Senior Notes to the redemption date.
In December 2010, 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. We did not have
any interest rate swap agreements outstanding as of
December 31, 2009. See Note 13 for additional
information regarding the interest rate swap agreements.
We have a five year $1,350 million senior credit agreement
(Senior Credit Facility). The Senior Credit Facility is a
revolving, multi-currency, senior unsecured credit facility
maturing November 30, 2012. Available borrowings under the
Senior Credit Facility at December 31, 2010 were
$1,208.2 million. The carrying value of the Senior Credit
Facility approximates fair value, as the underlying instruments
have variable interest rates at market value.
We and certain of our wholly owned foreign subsidiaries are the
borrowers under the Senior Credit Facility. Borrowings under the
Senior Credit Facility bear interest at a LIBOR-based rate plus
an applicable margin determined by reference to our senior
unsecured long-term credit rating and the amounts drawn under
the Senior Credit Facility, at an alternate base rate, or at a
fixed rate determined through a competitive bid process. The
Senior Credit Facility contains customary affirmative and
negative covenants and events of default for an unsecured
financing arrangement, including, among other things,
limitations on consolidations, mergers and sales of assets.
Financial covenants include a maximum leverage ratio of 3.0 to
1.0 and a minimum interest coverage ratio of 3.5 to 1.0. If we
fall below an investment grade credit rating, additional
restrictions would result, including restrictions on
investments, payment of dividends and stock repurchases. We were
in compliance with all covenants under the Senior Credit
Facility as of December 31, 2010. Commitments under the
Senior Credit Facility are subject to certain fees, including a
facility and a utilization fee.
52
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
Borrowings under the Senior Credit Facility at December 31,
2010 and 2009 were Japanese Yen-based borrowings.
We also have available uncommitted credit facilities totaling
$77.8 million.
The weighted average interest rate for all borrowings was
3.9 percent at December 31, 2010. We paid
$59.8 million, $17.0 million and $14.0 million in
interest during 2010, 2009 and 2008, respectively.
| 12. | OTHER COMPREHENSIVE INCOME |
Other comprehensive income items represent certain amounts that
are reported as components of shareholders’ equity in our
consolidated balance sheet, including foreign currency
translation adjustments, unrealized gains and losses, net of
tax, on
available-for-sale
investments and hedging instruments and pension liability
adjustments.
Accumulated other comprehensive income at December 31, 2010
and 2009 consists of the following:
| 2010 | 2009 | |||||||
|
Foreign currency translation
|
$ | 394.8 | $ | 433.4 | ||||
|
Foreign currency cash flow hedges
|
(4.0 | ) | (14.0 | ) | ||||
|
Unrealized loss on securities
|
(0.2 | ) | (1.6 | ) | ||||
|
Unrecognized prior service cost and unrecognized loss in
actuarial assumptions
|
(69.6 | ) | (59.2 | ) | ||||
|
Accumulated other comprehensive income
|
$ | 321.0 | $ | 358.6 | ||||
| 13. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
We are exposed to certain market risks relating to our ongoing
business operations, including foreign currency exchange rate
risk, commodity price risk, interest rate risk and credit risk.
We manage our exposure to these and other market risks through
regular operating and financing activities. Currently, the only
risks that we manage through the use of derivative instruments
are interest rate risk and foreign currency exchange rate risk.
Interest Rate
Risk
Derivatives
Designated as Fair Value Hedges
We use interest rate derivative instruments to manage our
exposure to interest rate movements by converting fixed-rate
debt into variable-rate debt. Under these agreements, we agree
to exchange, at specified intervals, the difference between
fixed and variable interest amounts calculated by reference to
an
agreed-upon
notional principal amount. The objective of the instruments is
to more closely align interest expense with interest income
received on cash and cash equivalents. These derivative
instruments are designated as fair value hedges under
U.S. GAAP. Changes in the fair value of the derivative
instrument are recorded in current earnings and are offset by
gains or losses on the underlying debt instrument.
In December 2010, we entered into five nine-year
fixed-to-variable
interest rate swap agreements with notional amounts of
$50 million each for a total notional amount of
$250 million. These interest rate swap agreements were
designated as fair value hedges of the fixed interest rate
obligation under our $500 million 4.625 percent Senior
Notes due November 30, 2019. On the interest rate swap
agreements outstanding as of December 31, 2010, we receive
a fixed interest rate of 4.625 percent and pay variable
interest equal to the three-month LIBOR plus an average of
133 basis points. We did not have any interest rate swap
agreements outstanding as of December 31, 2009.
Derivative instruments designated as fair value hedges had the
following effects on our consolidated statement of earnings for
the year ended December 31, 2010 (in millions):
| 2010 | ||||||||
|
Gain on
|
Loss on
|
|||||||
| Income Statement Classification | Swaps | Borrowings | ||||||
|
Interest and other income (expense), net
|
$ | 1.5 | $ | (1.5 | ) | |||
| $ | 1.5 | $ | (1.5 | ) | ||||
We had no ineffective fair value hedging instruments during the
year ended December 31, 2010.
Foreign Currency
Exchange Rate Risk
We operate on a global basis and are exposed to the risk that
our financial condition, results of operations and cash flows
could be adversely affected by changes in foreign currency
exchange rates. To reduce the potential effects of foreign
currency exchange rate movements on net earnings, we enter into
derivative financial instruments in the form of foreign currency
exchange forward contracts and options with major financial
institutions. We are primarily exposed to foreign currency
exchange rate risk with respect to transactions and net assets
denominated in Euros, Swiss Francs, Japanese Yen, British
Pounds, Canadian Dollars, Australian Dollars, Korean Won,
Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South
African Rand, Russian Rubles and Indian Rupees. We do not use
derivative financial instruments for trading or speculative
purposes.
Derivatives
Designated as Cash Flow Hedges
Our revenues are generated in various currencies throughout the
world. However, a significant amount of our inventory is
produced in U.S. Dollars. Therefore, movements in foreign
currency exchange rates may have different proportional effects
on our revenues compared to our cost of products sold. To
minimize the effects of foreign currency exchange rate movements
on cash flows, we hedge intercompany sales of inventory expected
to occur within the next 30 months with foreign currency
exchange forward contracts and options. We designate these
derivative instruments as cash flow hedges.
53
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
We perform quarterly assessments of hedge effectiveness by
verifying and documenting the critical terms of the hedge
instrument and that forecasted transactions have not changed
significantly. We also assess on a quarterly basis whether there
have been adverse developments regarding the risk of a
counterparty default. For derivatives which qualify as hedges of
future cash flows, the effective portion of changes in fair
value is temporarily recorded in other comprehensive income and
then recognized in cost of products sold when the hedged item
affects net earnings. The ineffective portion of a
derivative’s change in fair value, if any, is reported in
cost of products sold immediately. The net amount recognized in
earnings during the years ended December 31, 2010, 2009 and
2008 due to ineffectiveness and amounts excluded from the
assessment of hedge effectiveness was not significant.
For forward contracts and options outstanding at
December 31, 2010, we have obligations to purchase
U.S. Dollars and sell Euros, Japanese Yen, British Pounds,
Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona,
Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand,
Russian Rubles and Indian Rupees and purchase Swiss Francs and
sell U.S. Dollars at set maturity dates ranging from
January 2011 through June 2013. As of December 31, 2010,
the notional amounts of outstanding forward contracts and
options entered into with third parties to purchase
U.S. Dollars were $1.4 billion. As of
December 31, 2010, the notional amounts of outstanding
forward contracts entered into with third parties to purchase
Swiss Francs were $212.1 million.
Derivative instruments designated as cash flow hedges had the
following effects on other comprehensive income (OCI) on our
consolidated balance sheet and our consolidated statement of
earnings on a gross basis for the years ended December 31,
2010 and 2009 (in millions):
|
Amount of
|
Amount of
|
|||||||||||||||||||||||
|
Gain/(Loss)
|
Gain/(Loss)
|
|||||||||||||||||||||||
|
Recognized
|
Reclassified From
OCI
|
|||||||||||||||||||||||
| in OCI | to Cost of Products Sold | |||||||||||||||||||||||
| Derivative Instrument | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
|
Foreign exchange forward contracts
|
$ | 11.2 | $ | (35.8) | $ | 33.1 | $ | 7.3 | $ | 16.8 | $ | (52.6) | ||||||||||||
|
Foreign exchange options
|
0.3 | (2.0) | 1.2 | – | 1.2 | – | ||||||||||||||||||
|
Total
|
$ | 11.5 | $ | (37.8) | $ | 34.3 | $ | 7.3 | $ | 18.0 | $ | (52.6) | ||||||||||||
The fair value of outstanding derivative instruments designated
as cash flow hedges and recorded on the balance sheet at
December 31, 2010, together with settled derivatives where
the hedged item has not yet affected earnings, was a net
unrealized loss of $20.6 million, or $4.0 million
after taxes, which is deferred in other comprehensive income, of
which a loss of $6.4 million, or a gain of
$2.4 million after taxes, is expected to be reclassified to
earnings over the next twelve months.
Derivatives Not
Designated as Hedging Instruments
We enter into foreign currency forward exchange contracts with
terms of one month to manage currency exposures for monetary
assets and liabilities denominated in a currency other than an
entity’s functional currency. As a result, any foreign
currency remeasurement gains/losses recognized in earnings are
generally offset with gains/losses on the foreign currency
forward exchange contracts in the same reporting period. These
offsetting gains/losses are recorded in cost of products sold as
the underlying assets and liabilities exposed to remeasurement
include inventory-related transactions. These contracts are
settled on the last day of each reporting period. Therefore,
there is no outstanding balance related to these contracts
recorded on the balance sheet as of the end of the reporting
period. The notional amounts of these contracts are typically in
a range of $1.0 billion to $1.4 billion per quarter.
The following gains/(losses) from these derivative instruments
were recognized in cost of products sold on our consolidated
statement of earnings (in millions):
| Year Ended December 31, | ||||||||||||
| Derivative Instrument | 2010 | 2009 | 2008 | |||||||||
|
Foreign exchange forward contracts
|
$ | 3.3 | $ | (10.3 | ) | $ | (2.2 | ) | ||||
|
Total
|
$ | 3.3 | $ | (10.3 | ) | $ | 2.2 | |||||
This impact does not include any offsetting gains/losses
recognized in earnings as a result of foreign currency
remeasurement of monetary assets and liabilities denominated in
a currency other than an entity’s functional currency.
54
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
As of December 31, 2010 and 2009, all derivative
instruments designated as fair valued hedges and cash flow
hedges are recorded at fair value on the balance sheet. On our
consolidated balance sheet, we recognize individual forward
contracts and options with the same counterparty on a net
asset/liability basis if we have a master netting agreement with
the counterparty. The fair value of derivative instruments on a
gross basis as of December 31, 2010 and 2009 is as follows
(in millions):
| 2010 | 2009 | |||||||||||||
|
Balance Sheet
|
Fair
|
Balance Sheet
|
Fair
|
|||||||||||
| Location | Value | Location | Value | |||||||||||
|
Asset Derivatives
|
||||||||||||||
|
Foreign exchange forward contracts
|
Other current assets | $ | 32.2 | Other current assets | $ | 23.3 | ||||||||
|
Foreign exchange options
|
Other current assets | 0.4 | Other current assets | – | ||||||||||
|
Foreign exchange forward contracts
|
Other assets | 11.6 | Other assets | 6.3 | ||||||||||
|
Foreign exchange options
|
Other assets | 2.3 | Other assets | – | ||||||||||
|
Interest rate swaps
|
Other assets | 1.5 | Other assets | – | ||||||||||
|
Total asset derivatives
|
$ | 48.0 | $ | 29.6 | ||||||||||
|
Liability Derivatives
|
||||||||||||||
|
Foreign exchange forward contracts
|
Other current liabilities | $ | 37.6 | Other current liabilities | $ | 35.4 | ||||||||
|
Foreign exchange forward contracts
|
Other long-term liabilities | 14.4 | Other long-term liabilities | 14.5 | ||||||||||
|
Total liability derivatives
|
$ | 52.0 | $ | 49.9 | ||||||||||
| 14. | RETIREMENT BENEFIT PLANS |
We have defined benefit pension plans covering certain
U.S. and Puerto Rico employees. The employees who are not
participating in the defined benefit plans receive additional
benefits under our defined contribution plans. Plan benefits are
primarily based on years of credited service and the
participant’s average eligible compensation. In addition to
the U.S. and Puerto Rico defined benefit pension plans, we
sponsor various
non-U.S. pension
arrangements, including retirement and termination benefit plans
required by local law or coordinated with government sponsored
plans.
We use a December 31 measurement date for our benefit plans.
Defined Benefit
Plans
The components of net pension expense for the years ended
December 31, 2010, 2009 and 2008 for our defined benefit
retirement plans are as follows (in millions):
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
|
Service cost
|
$ | 10.9 | $ | 12.3 | $ | 11.7 | $ | 14.6 | $ | 13.7 | $ | 12.1 | ||||||||||||
|
Interest cost
|
11.5 | 10.6 | 9.7 | 6.7 | 6.8 | 7.3 | ||||||||||||||||||
|
Expected return on plan assets
|
(18.1 | ) | (16.4 | ) | (13.5 | ) | (8.0 | ) | (8.2 | ) | (9.3 | ) | ||||||||||||
|
Curtailment
|
– | 0.4 | – | – | – | – | ||||||||||||||||||
|
Settlement
|
– | – | 3.4 | – | – | 0.1 | ||||||||||||||||||
|
Amortization of prior service cost
|
(0.1 | ) | 0.1 | 0.1 | (0.7 | ) | (0.7 | ) | (0.1 | ) | ||||||||||||||
|
Amortization of unrecognized
actuarial loss |
2.4 | 4.1 | 2.2 | 1.2 | 1.9 | 0.1 | ||||||||||||||||||
|
Net periodic benefit cost
|
$ | 6.6 | $ | 11.1 | $ | 13.6 | $ | 13.8 | $ | 13.5 | $ | 10.2 | ||||||||||||
55
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
The weighted average actuarial assumptions used to determine net
pension expense for our defined benefit retirement plans were as
follows:
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
|
Discount rate
|
6.26 | % | 5.79 | % | 6.16 | % | 3.19 | % | 3.40 | % | 3.60 | % | ||||||||||||
|
Rate of compensation increase
|
3.80 | % | 3.84 | % | 3.84 | % | 2.63 | % | 2.39 | % | 3.06 | % | ||||||||||||
|
Expected long-term rate of return on plan assets
|
7.50 | % | 7.75 | % | 8.00 | % | 4.12 | % | 4.16 | % | 4.64 | % | ||||||||||||
The expected long-term rate of return on plan assets is based on
the historical and estimated future rates of return on the
different asset classes held in the plans. The expected
long-term rate of return is the weighted average of the target
asset allocation of each individual asset class. We believe that
historical asset results approximate expected market returns
applicable to the funding of a long-term benefit obligation.
Discount rates were determined for each of our defined benefit
retirement plans at their measurement date to reflect the yield
of a portfolio of high quality bonds matched against the timing
and amounts of projected future benefit payments.
Changes in projected benefit obligations and plan assets, for
the years ended December 31, 2010 and 2009 for our defined
benefit retirement plans, were (in millions):
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Projected benefit obligation – beginning of year
|
$ | 187.6 | $ | 188.4 | $ | 197.3 | $ | 192.1 | ||||||||
|
Service cost
|
10.9 | 12.3 | 14.6 | 13.7 | ||||||||||||
|
Interest cost
|
11.5 | 10.6 | 6.7 | 6.8 | ||||||||||||
|
Employee contributions
|
– | – | 12.6 | 12.0 | ||||||||||||
|
Benefits paid
|
(3.6 | ) | (2.6 | ) | (18.1 | ) | (27.0 | ) | ||||||||
|
Actuarial (gain) loss
|
20.7 | (21.0 | ) | 0.2 | (3.0 | ) | ||||||||||
|
Prior service cost
|
– | – | – | (5.0 | ) | |||||||||||
|
Curtailment
|
– | (0.1 | ) | – | – | |||||||||||
|
Translation loss
|
– | – | 13.2 | 7.7 | ||||||||||||
|
Projected benefit obligation – end of year
|
$ | 227.1 | $ | 187.6 | $ | 226.5 | $ | 197.3 | ||||||||
|
Plan assets at fair market value – beginning of year
|
$ | 202.1 | $ | 138.5 | $ | 179.0 | $ | 163.7 | ||||||||
|
Actual return on plan assets
|
23.2 | 25.8 | 6.8 | 11.0 | ||||||||||||
|
Employer contributions
|
23.2 | 40.4 | 14.0 | 12.2 | ||||||||||||
|
Employee contributions
|
– | – | 12.6 | 12.0 | ||||||||||||
|
Benefits paid
|
(3.6 | ) | (2.6 | ) | (18.1 | ) | (27.0 | ) | ||||||||
|
Translation gain
|
– | – | 11.7 | 7.1 | ||||||||||||
|
Plan assets at fair market value – end of year
|
$ | 244.9 | $ | 202.1 | $ | 206.0 | $ | 179.0 | ||||||||
|
Funded status
|
$ | 17.8 | $ | 14.5 | $ | (20.5 | ) | $ | (18.3 | ) | ||||||
|
Amounts recognized in consolidated balance sheet:
|
||||||||||||||||
|
Prepaid pension
|
$ | 27.0 | $ | 21.4 | $ | 3.0 | $ | 1.8 | ||||||||
|
Short-term accrued benefit liability
|
(0.7 | ) | (0.3 | ) | – | – | ||||||||||
|
Long-term accrued benefit liability
|
(8.5 | ) | (6.6 | ) | (23.5 | ) | (20.1 | ) | ||||||||
|
Net amount recognized
|
$ | 17.8 | $ | 14.5 | $ | (20.5 | ) | $ | (18.3 | ) | ||||||
|
Amounts recognized in accumulated other comprehensive income:
|
||||||||||||||||
|
Unrecognized prior service cost
|
$ | 0.6 | $ | 0.5 | $ | (5.7 | ) | $ | (5.8 | ) | ||||||
|
Unrecognized actuarial loss
|
79.5 | 66.2 | 33.5 | 30.8 | ||||||||||||
|
Total amount recognized
|
$ | 80.1 | $ | 66.7 | $ | 27.8 | $ | 25.0 | ||||||||
56
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
We estimate the following amounts recorded as part of
accumulated other comprehensive income will be recognized as
part of our net pension expense during 2011 (in millions):
|
U.S. and
|
||||||||
| Puerto Rico | Non-U.S. | |||||||
|
Unrecognized prior service cost
|
$ | – | $ | (0.8 | ) | |||
|
Unrecognized actuarial loss
|
6.1 | 1.2 | ||||||
| $ | 6.1 | $ | 0.4 | |||||
The weighted average actuarial assumptions used to determine the
projected benefit obligation for our defined benefit retirement
plans were as follows:
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
|
Discount rate
|
5.82 | % | 6.26 | % | 5.79 | % | 2.82 | % | 3.25 | % | 3.34 | % | ||||||||||||
|
Rate of compensation increase
|
3.80 | % | 3.80 | % | 3.84 | % | 2.61 | % | 2.46 | % | 3.03 | % | ||||||||||||
Plans with projected benefit obligations in excess of plan
assets as of December 31, 2010 and 2009 were as follows (in
millions):
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Projected benefit obligation
|
$ | 9.2 | $ | 6.9 | $ | 200.7 | $ | 157.5 | ||||||||
|
Plan assets at fair market value
|
– | – | 177.3 | 137.7 | ||||||||||||
Plans with accumulated benefit obligations in excess of plan
assets as of December 31, 2010 and 2009 were as follows (in
millions):
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Accumulated benefit obligation
|
$ | 6.1 | $ | 5.0 | $ | 167.2 | $ | 145.9 | ||||||||
|
Plan assets at fair market value
|
– | – | 154.1 | 133.8 | ||||||||||||
The accumulated benefit obligation for U.S. and Puerto Rico
defined benefit retirement pension plans was $182.1 million
and $148.3 million as of December 31, 2010 and 2009,
respectively. The accumulated benefit obligation for
non-U.S. defined
benefit retirement plans was $212.9 million and
$186.6 million as of December 31, 2010 and 2009,
respectively.
The benefits expected to be paid out in each of the next five
years and for the five years combined thereafter are as follows
(in millions):
|
U.S. and
|
||||||||
| For the Years Ending December 31, | Puerto Rico | Non-U.S. | ||||||
|
2011
|
$ | 5.1 | $ | 15.3 | ||||
|
2012
|
6.6 | 16.0 | ||||||
|
2013
|
7.3 | 15.4 | ||||||
|
2014
|
8.7 | 15.1 | ||||||
|
2015
|
9.9 | 16.1 | ||||||
|
2016-2020
|
73.7 | 82.4 | ||||||
The U.S. and Puerto Rico defined benefit retirement
plans’ overall investment strategy is to maximize total
returns by emphasizing long-term growth of capital while
avoiding risk. We have established target ranges of assets held
by the plans of 45 to 50 percent for equity securities, 45
to 50 percent for debt securities and 5 to 10 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. The investments in the plans may
be rebalanced quarterly based upon the target asset allocation
of the plans.
In the U.S. and Puerto Rico, we maintain an investment
policy statement that guides the investment allocation in the
plans. The investment policy statement describes the target
asset allocation positions described above. We have a benefits
committee to monitor compliance with the investment policy
statement and manage the general investment strategy and
objectives of the plans. The benefits committee meets quarterly
to review performance and to ensure that the current investment
allocation is within the guidelines set forth in the investment
policy statement.
The investment strategies of
non-U.S. based
plans vary according to the plan provisions and local laws. The
majority of the assets in
non-U.S. based
plans are located in Switzerland based plans. These assets are
held in trusts and are commingled with the assets of other Swiss
companies with representatives of all the companies making the
investment decisions. The overall strategy is to maximize total
returns while avoiding risk. The trustees of the assets have
established target ranges of assets held by the plans of 30 to
50 percent in debt securities, 20 to 37 percent in
equity
57
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
securities, 15 to 24 percent in real estate, 3 to
15 percent in cash funds and 0 to 12 percent in other
funds.
The fair value of our U.S. and Puerto Rico pension plan
assets as of December 31, 2010, by asset category are as
follows (in millions):
| Fair Value Measurements at Reporting Date Using: | ||||||||||||
|
Quoted Prices
|
||||||||||||
|
in Active
|
Significant
|
|||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||
|
Assets
|
Inputs
|
Inputs
|
||||||||||
| Asset Category | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||
|
Cash and cash equivalents
|
$ | 0.8 | $ | 0.8 | $ | – | $ | – | ||||
|
Equity securities:
|
||||||||||||
|
U.S. large-cap
|
34.1 | – | 34.1 | – | ||||||||
|
U.S. small-cap
|
12.3 | – | 12.3 | – | ||||||||
|
International
|
43.8 | – | 43.8 | – | ||||||||
|
Real estate
|
14.8 | – | 14.8 | – | ||||||||
|
Commodity-linked mutual funds
|
25.7 | – | 25.7 | – | ||||||||
|
Intermediate fixed income securities
|
113.4 | – | 113.4 | – | ||||||||
|
Total
|
$ | 244.9 | $ | 0.8 | $ | 244.1 | $ | – | ||||
The fair value of our U.S. and Puerto Rico pension plan
assets as of December 31, 2009, by asset category are as
follows (in millions):
| Fair Value Measurements at Reporting Date Using: | ||||||||||||
|
Quoted Prices
|
||||||||||||
|
in Active
|
Significant
|
|||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||
|
Assets
|
Inputs
|
Inputs
|
||||||||||
| Asset Category | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||
|
Cash and cash equivalents
|
$ | 12.1 | $ | 12.1 | $ | – | $ | – | ||||
|
Equity securities:
|
||||||||||||
|
U.S. large-cap
|
67.6 | – | 67.6 | – | ||||||||
|
U.S. small-cap
|
20.8 | – | 20.8 | – | ||||||||
|
International
|
22.5 | – | 22.5 | – | ||||||||
|
Intermediate fixed income securities
|
79.1 | – | 79.1 | – | ||||||||
|
Total
|
$ | 202.1 | $ | 12.1 | $ | 190.0 | $ | – | ||||
The fair value of our
non-U.S. pension
plan assets as of December 31, 2010, by asset category are
as follows (in millions):
| Fair Value Measurements at Reporting Date Using: | ||||||||||||
|
Quoted Prices
|
||||||||||||
|
in Active
|
Significant
|
|||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||
|
Assets
|
Inputs
|
Inputs
|
||||||||||
| Asset Category | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||
|
Cash and cash equivalents
|
$ | 14.3 | $ | 14.3 | $ | – | $ | – | ||||
|
Equity securities:
|
||||||||||||
|
Energy
|
2.0 | 2.0 | – | – | ||||||||
|
Materials
|
1.6 | 1.6 | – | – | ||||||||
|
Industrials
|
3.4 | 3.4 | – | – | ||||||||
|
Consumer discretionary
|
2.5 | 2.5 | – | – | ||||||||
|
Consumer staples
|
3.7 | 3.7 | – | – | ||||||||
|
Healthcare
|
6.7 | 6.7 | – | – | ||||||||
|
Financials
|
7.0 | 7.0 | – | – | ||||||||
|
Information technology
|
2.8 | 2.8 | – | – | ||||||||
|
Telecommunication services
|
1.0 | 1.0 | – | – | ||||||||
|
Utilities
|
2.2 | 2.2 | – | – | ||||||||
|
Other
|
27.1 | 24.2 | 2.9 | – | ||||||||
|
Fixed income securities:
|
||||||||||||
|
Government bonds
|
33.0 | – | 33.0 | – | ||||||||
|
Corporate bonds
|
41.0 | – | 41.0 | – | ||||||||
|
Asset-backed securities
|
7.4 | – | 7.4 | – | ||||||||
|
Other debt
|
1.1 | – | 1.1 | – | ||||||||
|
Other types of investments:
|
||||||||||||
|
Mortgage loans
|
5.6 | – | 5.6 | – | ||||||||
|
Insurance contracts
|
5.0 | – | 5.0 | – | ||||||||
|
Other investments
|
7.1 | – | 7.1 | – | ||||||||
|
Real estate
|
31.5 | – | – | 31.5 | ||||||||
|
Total
|
$ | 206.0 | $ | 71.4 | $ | 103.1 | $ | 31.5 | ||||
The fair value of our
non-U.S. pension
plan assets as of December 31, 2009, by asset category are
as follows (in millions):
| Fair Value Measurements at Reporting Date Using: | ||||||||||||
|
Quoted Prices
|
||||||||||||
|
in Active
|
Significant
|
|||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||
|
Assets
|
Inputs
|
Inputs
|
||||||||||
| Asset Category | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||
|
Cash and cash equivalents
|
$ | 7.4 | $ | 7.4 | $ | – | $ | – | ||||
|
Equity securities:
|
||||||||||||
|
Energy
|
1.6 | 1.6 | – | – | ||||||||
|
Materials
|
1.3 | 1.3 | – | – | ||||||||
|
Industrials
|
3.0 | 3.0 | – | – | ||||||||
|
Consumer discretionary
|
2.2 | 2.2 | – | – | ||||||||
|
Consumer staples
|
3.5 | 3.5 | – | – | ||||||||
|
Healthcare
|
6.3 | 6.3 | – | – | ||||||||
|
Financials
|
5.7 | 5.7 | – | – | ||||||||
|
Information technology
|
2.7 | 2.7 | – | – | ||||||||
|
Telecommunication services
|
1.0 | 1.0 | – | – | ||||||||
|
Utilities
|
1.4 | 1.4 | – | – | ||||||||
|
Other
|
23.2 | 20.5 | 2.7 | – | ||||||||
|
Fixed income securities:
|
||||||||||||
|
Government bonds
|
29.5 | – | 29.5 | – | ||||||||
|
Corporate bonds
|
36.9 | – | 36.9 | – | ||||||||
|
Asset-backed securities
|
8.6 | – | 8.6 | – | ||||||||
|
Other debt
|
0.9 | – | 0.9 | – | ||||||||
|
Other types of investments:
|
||||||||||||
|
Mortgage loans
|
5.0 | – | 5.0 | – | ||||||||
|
Insurance contracts
|
5.1 | – | 5.1 | – | ||||||||
|
Other investments
|
5.8 | – | 5.8 | – | ||||||||
|
Real estate
|
27.9 | – | – | 27.9 | ||||||||
|
Total
|
$ | 179.0 | $ | 56.6 | $ | 94.5 | $ | 27.9 | ||||
58
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
As of December 31, 2010 and 2009, our defined benefit
pension plans’ assets did not hold any direct investment in
Zimmer Holdings common stock.
Equity securities are valued using a market approach, based on
quoted prices for the specific security from transactions in
active exchange markets (Level 1), or in some cases where
we are invested in mutual or collective funds, based upon the
net asset value per unit of the fund which is determined from
quoted market prices of the underlying securities in the
fund’s portfolio (Level 2). Fixed income securities
are valued using a market approach, based upon quoted prices for
the specific security or from institutional bid evaluations.
Some fixed income securities are in funds with a net asset value
per unit which is determined using similar techniques for the
underlying securities in the fund’s portfolio. Real estate
is valued by discounting to present value the cash flows
expected to be generated by the specific properties.
The following table provides a reconciliation of the beginning
and ending balances of our
non-U.S. pension
plan assets measured at fair value that used significant
unobservable inputs (Level 3):
|
December 31,
|
||||
| 2010 | ||||
|
Beginning Balance
|
27.9 | |||
|
Gains on assets sold
|
0.2 | |||
|
Change in fair value of assets
|
0.4 | |||
|
Net purchases and sales
|
0.6 | |||
|
Translation gain
|
2.4 | |||
|
Ending Balance
|
$ | 31.5 | ||
We expect that we will have no legally required minimum funding
requirements in 2011 for the qualified U.S. and Puerto Rico
defined benefit retirement plans. We expect to voluntarily
contribute between $35 million and $50 million to
these plans during 2011. Contributions to
non-U.S. defined
benefit plans are estimated to be approximately $15 million
in 2011. We do not expect the plan assets in any of our plans to
be returned to us in the next year.
Defined
Contribution Plans
We also sponsor defined contribution plans for substantially all
of the U.S. and Puerto Rico employees and certain employees
in other countries. The benefits offered under these plans are
reflective of local customs and practices in the countries
concerned. We expensed $24.4 million, $21.6 million
and $17.1 million related to these plans for the years
ended December 31, 2010, 2009 and 2008, respectively.
Postretirement
Benefit Plans
During 2009, we amended the postretirement healthcare benefit
plans for certain U.S. and Puerto Rico employees.
Participants in the plans between the ages of 55 and 65 who were
previously receiving benefits will continue to receive benefits
until reaching the age of 65. For all other participants in the
plans, no benefits will be paid after January 1, 2010.
Additionally, we contributed approximately $7 million to a
Voluntary Employees’ Beneficiary Association (VEBA) trust
to settle any future obligations. We recognized a curtailment
gain and settlement loss related to these actions.
The components of net periodic expense for the years ended
December 31, 2010, 2009 and 2008 for our unfunded
postretirement benefit plans are as follows (in millions):
| 2010 | 2009 | 2008 | ||||||||||
|
Service cost
|
$ | – | $ | 0.8 | $ | 1.5 | ||||||
|
Interest cost
|
– | 1.3 | 2.5 | |||||||||
|
Amortization of prior service cost
|
– | (0.2 | ) | (0.5 | ) | |||||||
|
Amortization of unrecognized actuarial loss
|
– | 0.3 | 0.6 | |||||||||
|
Settlement
|
– | 3.2 | – | |||||||||
|
Curtailment
|
– | (35.3 | ) | – | ||||||||
|
Net periodic benefit cost
|
$ | – | $ | (29.9 | ) | $ | 4.1 | |||||
We have not provided further disclosures related to these
postretirement benefit plans as other than the curtailment gain
and settlement loss in 2009 discussed above, these plans were
not significant to our results of operations or financial
position.
| 15. | INCOME TAXES |
The components of earnings before taxes consist of the following
(in millions):
| For the Years Ended December 31, | 2010 | 2009 | 2008 | |||||||||
|
United States operations
|
$ | 382.4 | $ | 489.7 | $ | 618.8 | ||||||
|
Foreign operations
|
477.8 | 508.5 | 503.0 | |||||||||
|
Total
|
$ | 860.2 | $ | 998.2 | $ | 1,121.8 | ||||||
The provision for income taxes consists of (in millions):
|
Current:
|
||||||||||||
|
Federal
|
$ | 235.3 | $ | 204.9 | $ | 136.0 | ||||||
|
State
|
19.5 | 23.3 | 27.3 | |||||||||
|
Foreign
|
81.0 | 72.3 | 107.0 | |||||||||
| 335.8 | 300.5 | 270.3 | ||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(54.9 | ) | (17.4 | ) | 31.6 | |||||||
|
State
|
(2.0 | ) | (3.1 | ) | (2.0 | ) | ||||||
|
Foreign
|
(15.6 | ) | 0.8 | (27.6 | ) | |||||||
| (72.5 | ) | (19.7 | ) | 2.0 | ||||||||
|
Provision for income taxes
|
$ | 263.3 | $ | 280.8 | $ | 272.3 | ||||||
Income taxes paid during 2010, 2009 and 2008 were
$330.6 million, $268.5 million and
$332.9 million, respectively.
A reconciliation of the U.S. statutory income tax rate to
our effective tax rate is as follows:
59
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
| For the Years Ended December 31, | 2010 | 2009 | 2008 | |||||||||
|
U.S. statutory income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State taxes, net of federal deduction
|
1.7 | 1.4 | 1.6 | |||||||||
|
Tax impact of foreign operations, including foreign tax credits
|
(10.6 | ) | (9.9 | ) | (9.8 | ) | ||||||
|
Tax benefit relating to U.S. manufacturer’s deduction and
export sales
|
(2.6 | ) | (1.5 | ) | (1.3 | ) | ||||||
|
R&D credit
|
(0.8 | ) | (0.3 | ) | (0.1 | ) | ||||||
|
2007 settlement (tax benefit)
|
– | – | (2.8 | ) | ||||||||
|
In-process research and development charges
|
– | – | 1.2 | |||||||||
|
Goodwill impairment
|
8.3 | 2.6 | – | |||||||||
|
Other
|
(0.4 | ) | 0.8 | 0.5 | ||||||||
|
Effective income tax rate
|
30.6 | % | 28.1 | % | 24.3 | % | ||||||
Our operations in Puerto Rico, Switzerland and the State of
Indiana benefit from various tax incentive grants. Unless these
grants are extended, they will expire between fiscal years 2016
and 2019.
During the third quarter of 2008, we reached an agreement with
the U.S. Internal Revenue Service (IRS) confirming the
deductibility of a portion of a payment we made to the
U.S. government to settle certain claims and recorded a tax
benefit of $31.7 million.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. We have established valuation
allowances for deferred tax assets when the amount of expected
future taxable income is not likely to support the use of the
deduction or credit.
The components of deferred taxes consisted of the following (in
millions):
| December 31, | 2010 | 2009 | ||||||
|
Deferred tax assets:
|
||||||||
|
Inventory
|
$ | 234.3 | $ | 204.1 | ||||
|
Net operating loss carryover
|
22.0 | 37.5 | ||||||
|
Tax credit carryover
|
32.5 | 20.7 | ||||||
|
Accrued liabilities
|
91.3 | 78.3 | ||||||
|
Share-based compensation
|
85.4 | 71.1 | ||||||
|
Unremitted earnings of foreign subsidiaries
|
104.2 | 105.5 | ||||||
|
Other
|
59.2 | 49.9 | ||||||
|
Total deferred tax assets
|
628.9 | 567.1 | ||||||
|
Less: Valuation allowances
|
(39.9 | ) | (37.3 | ) | ||||
|
Total deferred tax assets after valuation
|
589.0 | 529.8 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Fixed assets
|
$ | (101.7 | ) | $ | (105.0 | ) | ||
|
Intangible assets
|
(151.9 | ) | (162.7 | ) | ||||
|
Accrued liabilities
|
(0.7 | ) | (2.4 | ) | ||||
|
Other
|
(1.0 | ) | (1.5 | ) | ||||
|
Total deferred tax liabilities
|
(255.3 | ) | (271.6 | ) | ||||
|
Total net deferred tax assets
|
$ | 333.7 | $ | 258.2 | ||||
The net operating loss carryovers are available to reduce future
federal, state and foreign taxable earnings. At
December 31, 2010, these net operating loss carryovers
generally expire within a period of 1 to 20 years.
Valuation allowances for net operating loss carryovers have been
established in the amount of $14.6 million and
$13.2 million at December 31, 2010 and 2009,
respectively. The tax credit carryovers are available to offset
future federal, state and foreign tax liabilities. At
December 31, 2010, these tax credit carryovers generally
expire within a period of 1 to 10 years. We have
established valuation allowances for certain tax credit
carryovers in the amount of $17.5 million and
$17.9 million at December 31, 2010 and 2009,
respectively. The remaining valuation allowances of
$7.8 million and $6.2 million at December 31,
2010 and 2009, respectively, relate primarily to potential
capital losses. We have established valuation allowances related
to certain business combination transactions through goodwill.
These allowances were approximately $13.3 million and
$14.5 million at December 31, 2010 and 2009,
respectively.
At December 31, 2010, we had an aggregate of approximately
$2,191 million of unremitted earnings of foreign
subsidiaries that have been, or are intended to be, indefinitely
reinvested for continued use in foreign operations. If the total
undistributed earnings of foreign subsidiaries were remitted, a
significant amount of the additional tax would be offset by the
allowable foreign tax credits. It is not practical for us to
determine the additional tax of remitting these earnings.
The following is a tabular reconciliation of the total amounts
of unrecognized tax benefits (in millions):
| 2010 | 2009 | 2008 | ||||||||||
|
Balance at January 1
|
$ | 150.4 | $ | 129.5 | $ | 135.2 | ||||||
|
Increases related to prior periods
|
23.1 | 32.9 | 12.1 | |||||||||
|
Decreases related to prior periods
|
(6.1 | ) | (26.7 | ) | (32.0 | ) | ||||||
|
Increases related to current period
|
23.7 | 17.4 | 15.8 | |||||||||
|
Decreases related to settlements with taxing authorities
|
(14.1 | ) | (1.1 | ) | (1.3 | ) | ||||||
|
Decreases related to lapse of statute of limitations
|
(9.0 | ) | (1.6 | ) | (0.3 | ) | ||||||
|
Balance at December 31
|
$ | 168.0 | $ | 150.4 | $ | 129.5 | ||||||
Included in the balance of unrecognized tax benefits at
December 31, 2010 are $112.2 million of tax benefits
that, if recognized, would affect the effective tax rate.
We recognize accrued interest and penalties related to
unrecognized tax benefits as income tax expense. We decreased
interest and penalties by $5.8 million during 2010, and as
of December 31, 2010, had recognized a liability for
interest and penalties of $22.8 million. During 2009, we
accrued interest and penalties of $5.7 million, and as of
December 31, 2009, had recognized a liability for interest
and penalties of $28.6 million. During 2008, we accrued
interest and penalties of $3.3 million, and as of
December 31, 2008, had recognized a liability for interest
and penalties of $22.9 million.
We operate in multiple income tax jurisdictions both inside and
outside the U.S. and are currently under audit in numerous
federal, state and foreign jurisdictions. Accordingly, we expect
that the net amount of tax liability for unrecognized tax
benefits will change in the next twelve
60
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
months due to changes in audit status, expiration of statutes of
limitations and other events which could impact our
determination of unrecognized tax benefits. Currently, we cannot
reasonably estimate the amount by which our unrecognized tax
benefits will change.
During the third quarter of 2009 we settled various tax matters
with the IRS for all years prior to 2005. Our U.S. federal
returns for years 2005 through 2007 are currently under IRS
examination. In January 2011, the IRS issued a Notice of
Proposed Adjustment (NOPA) for tax years 2006 and 2007. The NOPA
relates to intercompany pricing between certain of our
U.S. and foreign subsidiaries. We believe that we have
followed applicable U.S. tax laws and will vigorously
defend our income tax positions. However, the ultimate
settlement with the IRS related to these proposed adjustments
could have a material impact on our income tax expense and net
earnings.
State income tax returns are generally subject to examination
for a period of 3 to 5 years after filing of the respective
return. The state impact of any federal changes generally
remains subject to examination by various states for a period of
up to one year after formal notification to the states. We have
various state income tax returns in the process of examination,
administrative appeals or litigation.
Our tax returns are currently under examination in various
foreign jurisdictions. Foreign jurisdictions have statutes of
limitations generally ranging from 3 to 5 years. Years
still open to examination by foreign tax authorities in major
jurisdictions include: Australia (2004 onward), Canada (2004
onward), France (2008 onward), Germany (2005 onward), Ireland
(2008 onward), Italy (2006 onward), Japan (2004 onward), Korea
(2005 onward), Puerto Rico (2005 onward), Singapore (2004
onward), Switzerland (2009 onward), and the United Kingdom (2009
onward).
| 16. | CAPITAL STOCK AND EARNINGS PER SHARE |
We are authorized to issue 250 million shares of preferred
stock, none of which were issued or outstanding as of
December 31, 2010.
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 for the years ended December 31 (in millions):
| 2010 | 2009 | 2008 | ||||||||||
|
Weighted average shares outstanding for basic net earnings per
share
|
200.0 | 215.0 | 227.3 | |||||||||
|
Effect of dilutive stock options and other equity awards
|
1.1 | 0.8 | 1.0 | |||||||||
|
Weighted average shares outstanding for diluted net earnings per
share
|
201.1 | 215.8 | 228.3 | |||||||||
For the year ended December 31, 2010, an average of
13.7 million options to purchase shares of common stock
were not included in the computation of diluted earnings per
share as the exercise prices of these options were greater than
the average market price of the common stock. For the years
ended December 31, 2009 and 2008, an average of
14.3 million and 11.2 million options, respectively,
were not included.
During 2010, we repurchased 9.1 million shares of our
common stock at an average price of $55.26 per share for a total
cash outlay of $505.6 million, including commissions. As of
December 31, 2010, approximately $1.2 billion remained
authorized under a $1.5 billion repurchase program, which
will expire on December 31, 2013.
61
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
| 17. | SEGMENT DATA |
We design, develop, manufacture and market orthopaedic
reconstructive implants, dental implants, spinal implants,
trauma products and related surgical products which include
surgical supplies and instruments designed to aid in surgical
procedures and post-operation rehabilitation. We also provide
other healthcare-related services. Revenue related to these
services currently represents less than 1 percent of our
total net sales. We manage operations through three major
geographic segments – the Americas, which is comprised
principally of the U.S. and includes other North, Central
and South American markets; Europe, which is comprised
principally of Europe and includes the Middle East and African
markets; and Asia Pacific, which is comprised primarily of Japan
and includes other Asian and Pacific markets. This structure is
the basis for our reportable segment information discussed
below. Management evaluates reportable segment performance based
upon segment operating profit exclusive of operating expenses
pertaining to share-based payment expense, inventory
step-up,
“Certain claims”, goodwill impairment, “Special
items”, net curtailment and settlement and global
operations and corporate functions. Global operations include
research, development engineering, medical education, brand
management, corporate legal, finance, and human resource
functions, U.S. and Puerto Rico-based manufacturing
operations and logistics and intangible amortization resulting
from business combination accounting. Intercompany transactions
have been eliminated from segment operating profit. Management
reviews accounts receivable, inventory, property, plant and
equipment, goodwill and intangible assets by reportable segment
exclusive of U.S. and Puerto Rico-based manufacturing operations
and logistics and corporate assets.
Net sales, segment operating profit and year-end assets are as
follows (in millions):
| Net Sales | Operating Profit | Year-End Assets | ||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | |||||||||||||||||||||||||
|
Americas
|
$ | 2,431.6 | $ | 2,372.4 | $ | 2,353.9 | $ | 1,214.6 | $ | 1,168.7 | $ | 1,209.4 | $ | 2,578.0 | $ | 3,022.4 | ||||||||||||||||
|
Europe
|
1,099.5 | 1,119.2 | 1,179.1 | 398.0 | 436.8 | 470.2 | 2,210.8 | 2,273.6 | ||||||||||||||||||||||||
|
Asia Pacific
|
689.1 | 603.8 | 588.1 | 259.9 | 257.4 | 257.1 | 561.4 | 443.6 | ||||||||||||||||||||||||
|
Net sales
|
$ | 4,220.2 | $ | 4,095.4 | $ | 4,121.1 | ||||||||||||||||||||||||||
|
Share-based payment expense
|
(62.0 | ) | (75.3 | ) | (69.9 | ) | ||||||||||||||||||||||||||
|
Inventory
step-up
|
(1.4 | ) | (12.5 | ) | (7.0 | ) | ||||||||||||||||||||||||||
|
Certain claims
|
(75.0 | ) | (35.0 | ) | (69.0 | ) | ||||||||||||||||||||||||||
|
Goodwill impairment
|
(204.0 | ) | (73.0 | ) | – | |||||||||||||||||||||||||||
|
Special items
|
(34.7 | ) | (75.3 | ) | (68.5 | ) | ||||||||||||||||||||||||||
|
Net curtailment and settlement
|
– | 32.1 | – | |||||||||||||||||||||||||||||
|
Global operations and corporate functions
|
(578.7 | ) | (605.1 | ) | (632.3 | ) | 2,649.7 | 2,045.9 | ||||||||||||||||||||||||
|
Operating profit
|
$ | 916.7 | $ | 1,018.8 | $ | 1,090.0 | ||||||||||||||||||||||||||
|
Total assets
|
$ | 7,999.9 | $ | 7,785.5 | ||||||||||||||||||||||||||||
U.S. sales were $2,277.2 million,
$2,237.5 million and $2,212.3 million for the years
ended December 31, 2010, 2009 and 2008, respectively. Sales
within any other individual country were less than
10 percent of our consolidated sales. Sales are
attributable to a country based upon the customer’s country
of domicile.
Net sales by product category are as follows (in millions):
| 2010 | 2009 | 2008 | ||||||||||
|
Reconstructive
|
||||||||||||
|
Knees
|
$ | 1,789.9 | $ | 1,756.3 | $ | 1,763.1 | ||||||
|
Hips
|
1,262.3 | 1,228.5 | 1,279.4 | |||||||||
|
Extremities
|
150.1 | 135.6 | 121.0 | |||||||||
|
Total
|
3,202.3 | 3,120.4 | 3,163.5 | |||||||||
|
Dental
|
219.0 | 204.7 | 227.5 | |||||||||
|
Trauma
|
245.5 | 234.8 | 222.3 | |||||||||
|
Spine
|
234.4 | 253.6 | 229.7 | |||||||||
|
Surgical and other
|
319.0 | 281.9 | 278.1 | |||||||||
|
Total
|
$ | 4,220.2 | $ | 4,095.4 | $ | 4,121.1 | ||||||
62
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
Long-lived tangible assets as of December 31, 2010 and 2009
are as follows (in millions):
| 2010 | 2009 | |||||||
|
Americas
|
$ | 841.5 | $ | 851.0 | ||||
|
Europe
|
281.7 | 285.0 | ||||||
|
Asia Pacific
|
90.6 | 85.7 | ||||||
|
Total
|
$ | 1,213.8 | $ | 1,221.7 | ||||
The Americas long-lived tangible assets are located primarily in
the U.S. Approximately $235.4 million of Europe
long-lived tangible assets as of December 31, 2010 are
located in Switzerland.
Capital expenditures by reportable segment for the years ended
December 31, 2010, 2009 and 2008 were as follows (in
millions):
| 2010 | 2009 | 2008 | ||||||||||
|
Americas
|
||||||||||||
|
Additions to other property, plant and equipment
|
$ | 0.3 | $ | 0.6 | $ | 1.5 | ||||||
|
Europe
|
||||||||||||
|
Additions to instruments
|
22.9 | 17.0 | 25.3 | |||||||||
|
Additions to other property, plant and equipment
|
16.9 | 28.8 | 59.6 | |||||||||
|
Asia Pacific
|
||||||||||||
|
Additions to instruments
|
5.2 | 5.3 | 2.2 | |||||||||
|
Additions to other property, plant and equipment
|
7.6 | 5.1 | 9.4 | |||||||||
|
Global operations and corporate functions
|
||||||||||||
|
Additions to instruments
|
164.4 | 101.4 | 210.4 | |||||||||
|
Additions to other property, plant and equipment
|
54.4 | 70.6 | 179.5 | |||||||||
For segment reporting purposes, deployed instruments are
included in the measurement of reportable segment assets while
undeployed instruments at U.S. and Puerto Rico-based
manufacturing operations and logistics are included in global
operations and corporate functions. The majority of instruments
are purchased by U.S. and Puerto Rico-based manufacturing
operations and logistics and are deployed to the reportable
segments as needed for the business.
Depreciation and amortization included in reportable segment
profit for the years ended December 31, 2010, 2009 and 2008
was as follows (in millions):
| 2010 | 2009 | 2008 | ||||||||||
|
Americas
|
$ | 78.1 | $ | 86.4 | $ | 78.5 | ||||||
|
Europe
|
70.5 | 64.8 | 57.0 | |||||||||
|
Asia Pacific
|
30.0 | 26.7 | 25.6 | |||||||||
|
Global operations and corporate functions
|
161.6 | 159.5 | 114.0 | |||||||||
| $ | 340.2 | $ | 337.4 | $ | 275.1 | |||||||
| 18. | LEASES |
Future minimum rental commitments under non-cancelable operating
leases in effect as of December 31, 2010 were
$44.6 million for 2011, $30.6 million for 2012,
$19.4 million for 2013, $12.6 million for 2014,
$10.5 million for 2015 and $25.0 million thereafter. Total
rent expense for the years ended December 31, 2010, 2009
and 2008 aggregated $46.2 million, $43.5 million and $41.4
million, respectively.
| 19. | COMMITMENTS AND CONTINGENCIES |
Product
Liability-Related Claims
We are subject to product liability claims arising in the
ordinary course of our business. We establish standard accruals
for product liability claims in conjunction with outside counsel
based on current information and historical settlement
information for open claims, related legal fees and claims
incurred but not reported. These standard product liability
accruals are recognized in selling, general and administrative
expense. We may also establish provisions for certain product
liability claims outside of the standard accruals that are
recorded separately on our statement of earnings, such as the
provision for claims related to the
Durom
®
Acetabular Component (
Durom
Cup) discussed below. We
maintain insurance, subject to self-insured retention
requirements, for losses from these and other claims.
On July 22, 2008, we temporarily suspended marketing and
distribution of the
Durom
Cup in the
U.S. Subsequently, a number of product liability lawsuits
and other claims have been asserted against us. We have settled
some of these claims and the others are still pending.
Additional claims may be asserted in the future.
We recorded a provision of $69.0 million in 2008 as
“Certain claims” on our statement of earnings
representing our estimate of the
Durom
Cup-related claims
we expected to be made for revision surgeries occurring within
two years of the original surgery. In 2009, based on claims
information received after our initial estimate, we increased
our estimate of the number of claims for revision surgeries
occurring within two years of the original surgery and,
accordingly, increased the “Certain claims” provision
by $35.0 million. In the second quarter of 2010, based on
more recent claims information available and after consultation
with an independent actuary, we revised our estimate to include
all claims for revisions of original surgeries performed before
July 22, 2008 on a worldwide basis, regardless of the
amount of time between the revision surgery and the original
surgery. As a result, we increased the “Certain
claims” provision by $75.0 million, for a total of
$179.0 million.
For the years ended December 31, 2010, 2009 and 2008 we
recorded $10.9 million, $24.6 million and
$7.2 million, respectively, as part of our standard product
liability accruals for worldwide claims relating to revisions of
Durom
Cup cases where the revisions had occurred, or were
estimated to occur, more than two years after the original
surgery. Beginning with the second quarter of 2010, any
additional provisions for such
63
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
claims are recorded as part of the “Certain claims”
accrual, as described above.
We will continue to record any provisions for claims relating to
Durom
Cup cases where the original surgery was performed
after July 22, 2008 as part of our standard product
liability accruals. As of December 31, 2010, we have
recorded provisions totaling $6.0 million for such
post-suspension claims.
Our estimate as of December 31, 2010 of the remaining
liability for all
Durom
Cup-related claims relating to
original surgeries performed before July 22, 2008 is
$132.8 million, of which $42.5 million is classified
as short-term in “Other current liabilities” and
$90.3 million is classified as long-term in “Other
long-term liabilities” on our consolidated balance sheet.
We expect to pay the majority of the
Durom
Cup-related
claims within the next three years.
We rely on significant estimates in determining the provisions
for
Durom
Cup-related claims, including the number of
claims that we will receive and the average amount we will pay
per claim. The actual number of claims that we receive and the
average amount we pay per claim may differ from our estimates,
which could result in further changes to the provision.
On August 20, 2008, Margo and Daniel Polett filed an action
against us and an unrelated third party, Public Communications,
Inc. (PCI), in the Court of Common Pleas, Philadelphia,
Pennsylvania seeking an unspecified amount of damages for
injuries and loss of consortium allegedly suffered by
Mrs. Polett and her spouse, respectively. The complaint
alleged that defendants were negligent in connection with
Mrs. Polett’s participation in a promotional video
featuring one of our knee products. The case was tried in
November 2010 and the jury returned a verdict in favor of
plaintiffs. The jury awarded $27.6 million in compensatory
damages and apportioned fault 30 percent to plaintiffs,
34 percent to us and 36 percent to PCI. Under
applicable law, we may be liable for any portion of the damages
apportioned to PCI that it does not pay. The trial court has not
yet entered a judgment on the verdict. On December 2, 2010,
we and PCI filed a Motion for Post-Trial Relief seeking a
judgment notwithstanding the verdict, a new trial or a
remittitur. That motion is pending. If our post-trial motion is
unsuccessful, we intend to appeal the verdict and will be
required to post a bond for the verdict amount plus interest. We
do not believe the facts and evidence support the jury’s
verdict. We have not recorded any charge relating to this matter
in our consolidated statement of earnings for the year ended
December 31, 2010, because we believe we have strong
arguments for reversing the jury verdict, either before the
trial court or on appeal. As a result, we do not believe that it
is probable that we have incurred a liability consistent with
the verdict and we cannot reasonably estimate any loss that
might eventually be incurred. Although we believe we have strong
grounds to reverse the jury’s verdict, the ultimate
resolution of this matter is uncertain. We could in the future
be required to record a charge to our consolidated statement of
earnings that could have a material adverse effect on our
results of operations in any particular period.
Intellectual
Property-Related Claims
We are subject to claims of patent infringement and other
intellectual property-related claims and lawsuits in the
ordinary course of our business. We maintain insurance, subject
to self-insured retention requirements, for losses from these
and other claims.
On February 15, 2005, Howmedica Osteonics Corp. filed an
action against us and an unrelated party in the
U.S. District Court for the District of New Jersey alleging
infringement of U.S. Patent Nos. 6,174,934; 6,372,814;
6,664,308; and 6,818,020. On June 13, 2007, the Court
granted our motion for summary judgment on the invalidity of the
asserted claims of U.S. Patent Nos. 6,174,934; 6,372,814;
and 6,664,308 by ruling that all of the asserted claims are
invalid for indefiniteness. On August 19, 2008, the Court
granted our motion for summary judgment of non-infringement of
certain claims of U.S. Patent No. 6,818,020, reducing
the number of claims at issue in the suit to five. On
April 9, 2009, in response to our earlier petition, the
U.S. Patent and Trademark Office (USPTO) instituted
re-examination proceedings against U.S. Patent
No. 6,818,020. The USPTO rejected all previously issued
claims of U.S. Patent No. 6,818,020 as being
unpatentable in light of one or more prior art references. On
September 30, 2009, the Court issued an order staying
proceedings in the litigation pending the outcome of the
re-examination process. Subsequent to that stay order, Howmedica
filed a motion seeking to certify an appeal of the summary
judgment ruling on the ’934, ’814 and ’308
patents. That motion was granted on January 13, 2010. On
October 13, 2010, the U.S. Court of Appeals for the
Federal Circuit affirmed the District Court’s ruling on the
invalidity of the asserted claims of the ’934, ’814
and ’308 patents. On November 12, Howmedica filed a
petition for a re-hearing en banc, which was denied on
December 14, 2010. The case otherwise remains stayed
pending the USPTO’s re-examination of the ’020 patent.
We continue to believe that our defenses against infringement
are valid and meritorious, and we intend to continue to defend
this lawsuit vigorously.
While it is not possible to predict the outcome of these
lawsuits and claims with any certainty, we believe that the
liability, if any, resulting from these claims will not have a
material adverse effect on our consolidated financial position,
results of operations or cash flows.
Government
Investigations
In September 2007, we and other orthopaedic companies settled a
U.S. government investigation pertaining to consulting
contracts, professional services agreements and other agreements
by which remuneration is provided to orthopaedic surgeons. As
part of the settlement, we entered
64
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
into a Corporate Integrity Agreement (CIA) with the Office of
Inspector General of the Department of Health and Human Services
(OIG-HHS). Under the CIA, which has a term expiring in 2012, we
agreed, among other provisions, to continue the operation of our
enhanced Corporate Compliance Program, designed to promote
compliance with federal healthcare program requirements. We also
agreed to retain an independent review organization to perform
annual reviews to assist us in assessing our compliance with the
obligations set forth in the CIA to ensure that arrangements we
enter into do not violate the Anti-Kickback Statute
(42 U.S.C.
§ 1320a-7b).
A material breach of the CIA may subject us to exclusion by
OIG-HHS from participation in all federal healthcare programs,
which would have a material adverse effect on our financial
position, results of operations and cash flows.
In November 2007, we received a civil investigative demand from
the Massachusetts Attorney General’s office seeking
additional information regarding our financial relationships
with a number of Massachusetts healthcare providers. We received
a similar inquiry from the Oregon Attorney General’s office
in October 2008. We are cooperating fully with the investigators
with regard to these matters.
In September 2007, the Staff of the U.S. Securities and
Exchange Commission (SEC) informed us that it was conducting an
investigation regarding potential violations of the Foreign
Corrupt Practices Act (FCPA) in the sale of medical devices in a
number of foreign countries by companies in the medical device
industry. In November 2007, we received a letter from the
U.S. Department of Justice (DOJ) requesting that any
information provided to the SEC also be provided to the DOJ on a
voluntary basis. We are continuing to provide information and
cooperate fully with the SEC and the DOJ. In the course of
continuing dialogues with the agencies, we have voluntarily
disclosed information to the SEC and DOJ relating to sales of
our products by independent distributors in two South American
countries. We cannot currently predict the outcome of the
investigation or the impact of our voluntary disclosures to the
authorities.
Putative
Class Actions
On August 5, 2008, a complaint was filed in the
U.S. District Court for the Southern District of Indiana,
Plumbers and Pipefitters Local Union 719 Pension Fund v.
Zimmer Holdings, Inc., et al., naming us and two of our
executive officers as defendants. The complaint related to a
putative class action on behalf of persons who purchased our
common stock between January 29, 2008 and July 22,
2008. The complaint alleged that the defendants violated the
federal securities law by allegedly failing to disclose
developments relating to our orthopaedic surgical products
manufacturing operations in Dover, Ohio and the
Durom
Cup. The plaintiff sought unspecified damages and interest,
attorneys’ fees, costs and other relief. On
December 24, 2008, the lead plaintiff filed a consolidated
complaint that alleged the same claims and related to the same
time period. The defendants filed a motion to dismiss the
consolidated complaint on February 23, 2009. On
December 1, 2009, the Court granted defendants’ motion
to dismiss, without prejudice. On January 15, 2010, the
plaintiff filed a motion for leave to amend the consolidated
complaint. On January 28, 2011, the Court denied the
plaintiff’s motion for leave to amend the consolidated
complaint and dismissed the case. The plaintiff has 30 days
to file a notice of appeal to the U.S. Court of Appeals for
the Seventh Circuit. We believe this lawsuit is without merit,
and we and the individual defendants intend to defend it
vigorously.
On November 20, 2008, a complaint was filed in the
U.S. District Court for the Northern District of Indiana,
Dewald v. Zimmer Holdings, Inc., et al., naming us and
certain of our current and former directors and employees as
defendants. The complaint relates to a putative class action on
behalf of all persons who were participants in or beneficiaries
of our U.S. or Puerto Rico Savings and Investment Programs
(plans) between October 5, 2007 and the date of filing and
whose accounts included investments in our common stock. The
complaint alleges, among other things, that the defendants
breached their fiduciary duties in violation of the Employee
Retirement Income Security Act of 1974, as amended, by
continuing to offer Zimmer stock as an investment option in the
plans when the stock purportedly was no longer a prudent
investment and that defendants failed to provide plan
participants with complete and accurate information sufficient
to advise them of the risks of investing their retirement
savings in Zimmer stock. The plaintiff seeks an unspecified
monetary payment to the plans, injunctive and equitable relief,
attorneys’ fees, costs and other relief. On
January 23, 2009, the plaintiff filed an amended complaint
that alleges the same claims and clarifies that the class period
is October 5, 2007 through September 2, 2008. The
defendants filed a motion to dismiss the amended complaint on
March 23, 2009. The motion to dismiss is pending with the
court. On June 12, 2009, the U.S. Judicial Panel on
Multidistrict Litigation entered an order transferring the
Dewald case to the U.S. District Court for the Southern
District of Indiana for coordinated or consolidated pretrial
proceedings with the Plumbers & Pipefitters Local
Union 719 Pension Fund case referenced above. We believe this
lawsuit is without merit, and we and the individual defendants
intend to defend it vigorously.
65
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Notes to
Consolidated Financial Statements
(Continued)
| 20. | QUARTERLY FINANCIAL INFORMATION (UNAUDITED) |
(in millions, except per share data)
| 2010 Quarter Ended | 2009 Quarter Ended | |||||||||||||||||||||||||||||||
| Mar | Jun | Sep | Dec | Mar | Jun | Sep | Dec | |||||||||||||||||||||||||
|
Net sales
|
$ | 1,062.8 | $ | 1,057.7 | $ | 965.0 | $ | 1,134.7 | $ | 992.6 | $ | 1,019.9 | $ | 975.6 | $ | 1,107.3 | ||||||||||||||||
|
Gross profit
|
794.4 | 807.1 | 745.8 | 860.5 | 762.3 | 783.1 | 726.3 | 832.9 | ||||||||||||||||||||||||
|
Net earnings of Zimmer Holdings, Inc.
|
205.4 | 165.5 | 191.1 | 34.9 | 202.2 | 210.1 | 149.9 | 155.2 | ||||||||||||||||||||||||
|
Earnings per common share
|
||||||||||||||||||||||||||||||||
|
Basic
|
1.01 | 0.82 | 0.96 | 0.18 | 0.91 | 0.98 | 0.70 | 0.74 | ||||||||||||||||||||||||
|
Diluted
|
1.01 | 0.82 | 0.96 | 0.18 | 0.91 | 0.98 | 0.70 | 0.74 | ||||||||||||||||||||||||
In the fourth quarter of 2010, we recorded certain adjustments
related to prior periods that reduced net earnings by
$5.0 million. The adjustments increased operating expenses
by $2.9 million and increased the provision for income
taxes by $2.1 million. We assessed the effects of these
adjustments had they been made in prior periods to be immaterial.
66
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| ITEM 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None
| ITEM 9A. | Controls and Procedures |
We have established disclosure controls and procedures and
internal controls over financial reporting to provide reasonable
assurance that material information relating to us, including
our consolidated subsidiaries, is made known on a timely basis
to management and the Board of Directors. However, no control
system, no matter how well designed and operated, can provide
absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if
any, within a company have been detected.
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of our disclosure controls and
procedures (as defined in
Rule 13a-15(e)
of the Securities Exchange Act of 1934). Based upon that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures as
of the end of the period covered by this report are effective.
There was no change in our internal control over financial
reporting (as defined in
Rule 13a-15(f)
of the Securities Exchange Act of 1934) that occurred
during the quarter ended December 31, 2010 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Management’s report on internal control over financial
reporting appears in this report at the conclusion of
Part II, Item 7A.
| ITEM 9B. | Other Information |
During the fourth quarter of 2010, the Audit Committee of the
Board of Directors was not asked to and did not approve the
engagement of PricewaterhouseCoopers LLP, our independent
registered public accounting firm, to perform any non-audit
services. This disclosure is made pursuant to
Section 10A(i)(2) of the Securities Exchange Act of 1934,
as added by Section 202 of the Sarbanes-Oxley Act of 2002.
67
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| ITEM 10. | Directors, Executive Officers and Corporate Governance |
Information required by this item regarding our directors is
incorporated by reference from the section entitled
“Proposal No. 1: Election of Directors” in
our definitive Proxy Statement for the annual meeting of
stockholders to be held on May 2, 2011 (the “2011
Proxy Statement”). Information about our Audit Committee is
incorporated by reference from the section entitled
“Committees of the Board” in our 2011 Proxy Statement.
Information regarding the procedures by which stockholders may
recommend nominees to the Board of Directors is incorporated by
reference from the section entitled “Corporate
Governance — Nominations for Directors” in our
2011 Proxy Statement. Information regarding our executive
officers is set forth in Item 1 of Part I of this
report under the caption “Executive Officers.”
Information about compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference
from the section entitled “Section 16(a) Beneficial
Ownership Reporting Compliance” in our 2011 Proxy Statement.
We have adopted the Zimmer Code of Ethics for Chief Executive
Officer and Senior Financial Officers (the “finance code of
ethics”), a code of ethics that applies to our Chief
Executive Officer, Chief Financial Officer, Chief Accounting
Officer and Corporate Controller, and other finance organization
employees. The finance code of ethics is publicly available in
the Investor Relations section of our website, which may be
accessed from our homepage at www.zimmer.com or directly at
http://investor.zimmer.com.
If we make any substantive amendments to the finance code of
ethics or grant any waiver, including any implicit waiver, from
a provision of the code to our Chief Executive Officer, Chief
Financial Officer, or Chief Accounting Officer and Corporate
Controller, we will disclose the nature of that amendment in the
Investor Relations section of our website.
| ITEM 11. | Executive Compensation |
Information required by this item is incorporated by reference
from the sections entitled “Committees of the Board”
and “Executive Compensation” in our 2011 Proxy
Statement.
| ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information required by this item is incorporated by reference
from the sections entitled “Security Ownership of Certain
Beneficial Owners,” “Security Ownership of Directors
and Executive Officers” and “Equity Compensation Plan
Information” in our 2011 Proxy Statement.
| ITEM 13. | Certain Relationships and Related Transactions and Director Independence |
Information required by this item is incorporated by reference
from the sections entitled “Corporate
Governance – Certain Relationships and Related Person
Transactions” and “Corporate Governance –
Director Independence” in our 2011 Proxy Statement.
| ITEM 14. | Principal Accounting Fees and Services |
Information required by this item is incorporated by reference
from the sections entitled “Audit and Non-Audit Fees”
and “Audit Committee Pre-Approval of Services of
Independent Registered Public Accounting Firm” in
“Proposal No. 4” of our 2011 Proxy Statement.
68
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| ITEM 15. | Exhibits, Financial Statement Schedules |
(a) 1. Financial Statements
The following consolidated financial statements of Zimmer
Holdings, Inc. and its subsidiaries are set forth in
Part II, Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings for the Years Ended
December 31, 2010, 2009 and 2008
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Stockholders’ Equity for the
Years Ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2010, 2009 and 2008
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II. Valuation and Qualifying Accounts
Other financial statement schedules are omitted because they are
not applicable or the required information is shown in the
financial statements or the notes thereto.
3. Exhibits
A list of exhibits required to be filed as part of this report
is set forth in the Index to Exhibits, which immediately
precedes such exhibits and is incorporated herein by reference.
69
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
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.
Zimmer Holdings, Inc.
| By: |
/s/
David
C. Dvorak
|
David C. Dvorak
President and Chief Executive Officer
Dated: February 24, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Title | Date | ||
|
/s/
David
C. Dvorak
|
President, Chief Executive Officer and Director
(Principal Executive Officer) |
February 24, 2011 | ||
|
/s/
James
T. Crines
|
Executive Vice President, Finance
and Chief Financial Officer (Principal Financial Officer) |
February 24, 2011 | ||
|
/s/
Derek
M. Davis
|
Vice President, Finance, and Corporate Controller and Chief
Accounting Officer
(Principal Accounting Officer) |
February 24, 2011 | ||
|
/s/
Betsy
J. Bernard
|
Director | February 24, 2011 | ||
|
/s/
Marc
N. Casper
|
Director | February 24, 2011 | ||
|
/s/
Larry
C. Glasscock
|
Director | February 24, 2011 | ||
|
/s/
Robert
A. Hagemann
|
Director | February 24, 2011 | ||
|
/s/
Arthur
J. Higgins
|
Director | February 24, 2011 | ||
|
/s/
John
L. McGoldrick
|
Director | February 24, 2011 | ||
|
/s/
Cecil
B. Pickett, Ph.D.
|
Director | February 24, 2011 | ||
70
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Index to Exhibits
| Exhibit No | Description | |||
| 3 | .1 | Restated Certificate of Incorporation of Zimmer Holdings, Inc. dated May 13, 2008 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 5, 2008) | ||
| 3 | .2 | Restated By-Laws of Zimmer Holdings, Inc. effective May 6, 2008 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed May 9, 2008) | ||
| 4 | .1 | Specimen Common Stock certificate (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-8 filed January 20, 2006) | ||
| 4 | .2 | Indenture dated as of November 17, 2009 between Zimmer Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to the form filed as Exhibit 4.8 to the Registrant’s Registration Statement on Form S-3 filed November 12, 2009) | ||
| 4 | .3 | 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) | ||
| 4 | .4 | Form of 4.625% Note due 2019 (incorporated by reference to Exhibit 4.3 above) | ||
| 4 | .5 | Form of 5.750% Note due 2039 (incorporated by reference to Exhibit 4.3 above) | ||
| 10 | .1* | Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Appendix B to the Registrant’s definitive Proxy Statement on Schedule 14A filed March 24, 2003) | ||
| 10 | .2* | First Amendment to the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 15, 2005) | ||
| 10 | .3* | Zimmer Holdings, Inc. 2006 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | ||
| 10 | .4* | Zimmer Holdings, Inc. Executive Performance Incentive Plan, as amended (incorporated by reference to Appendix B to the Registrant’s definitive Proxy Statement on Schedule 14A filed March 20, 2008) | ||
| 10 | .5* | Restated Zimmer, Inc. Long-Term Disability Income Plan for Highly Compensated Employees (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K filed February 28, 2007) | ||
| 10 | .6* | Change in Control Severance Agreement with David C. Dvorak (incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K filed February 27, 2009) | ||
| 10 | .7* | Form of Change in Control Severance Agreement with Bruno A. Melzi (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed May 8, 2002) | ||
| 10 | .8* | Form of Change in Control Severance Agreement with James T. Crines and Cheryl R. Blanchard (incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K filed February 27, 2009) | ||
| 10 | .9* | Form of Change in Control Severance Agreement with Jeffery A. McCaulley and Chad F. Phipps (incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed February 27, 2009) | ||
| 10 | .10* | Form of Change in Control Severance Agreement with Jeffrey B. Paulsen (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed May 5, 2010) | ||
| 10 | .11* | Change in Control Severance Agreement with Stephen Hong Liang, Ooi (incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K filed March 12, 2003) | ||
| 10 | .12 | Change in Control Severance Agreement with Derek M. Davis (incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K filed February 27, 2009) | ||
| 10 | .13* | 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) | ||
| 10 | .14* | Restated Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan (incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K filed February 27, 2009) | ||
| 10 | .15* | Form of Confidentiality, Non-Competition and Non-Solicitation Employment Agreement with U.S.-Based Executive Officers (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 7, 2009) | ||
| 10 | .16* | Non-Disclosure, Non-Competition and Non-Solicitation Employment Agreement with Stephen Hong Liang, Ooi (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed March 27, 2006) | ||
71
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Index to Exhibits
(Continued)
| Exhibit No | Description | |||
| 10 | .17* | Confidentiality, Non-Competition and Non-Solicitation Agreement with Bruno A. Melzi (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed March 27, 2006) | ||
| 10 | .18* | Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed January 11, 2006) | ||
| 10 | .19* | Form of Nonqualified Performance-Conditioned Stock Option Grant Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 21, 2005) | ||
| 10 | .20* | Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors, as amended (incorporated by reference to Appendix C to the Registrant’s Definitive Proxy Statement filed March 20, 2009) | ||
| 10 | .21* | Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed April 5, 2005) | ||
| 10 | .22* | Form of Restricted Stock Unit Award Letter under the Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 21, 2006) | ||
| 10 | .23* | Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | ||
| 10 | .24* | Form of Nonqualified Stock Option Award Letter for Non-U.S. Employees under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | ||
| 10 | .25* | Form of Restricted Stock Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (five-year vesting) (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | ||
| 10 | .26* | Form of Performance-Based Restricted Stock Unit Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 17, 2009) | ||
| 10 | .27* | Restated Zimmer Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors (incorporated by reference to Appendix D to the Registrant’s Definitive Proxy Statement filed March 20, 2009) | ||
| 10 | .28* | Zimmer Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement filed March 20, 2009) | ||
| 10 | .29* | Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K filed February 25, 2010) | ||
| 10 | .30* | Form of Nonqualified Stock Option Award Letter for Non-U.S. Employees under the Zimmer Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K filed February 25, 2010) | ||
| 10 | .31* | Form of Performance-Based Restricted Stock Unit Award Letter under the Zimmer Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K filed February 25, 2010) | ||
| 10 | .32* | Form of Performance-Based Restricted Stock Unit Award Letter for Non-U.S. Employees under the Zimmer Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K filed February 25, 2010) | ||
| 10 | .33* | Form of Restricted Stock Unit Award Letter (five-year vesting) under the Zimmer Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K filed February 25, 2010) | ||
| 10 | .34* | Summary Compensation Sheet | ||
| 10 | .35 | $1,350,000,000 Amended and Restated Credit Agreement dated as of November 30, 2007 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 6, 2007) | ||
| 10 | .36 | Corporate Integrity Agreement dated September 27, 2007, among Zimmer Holdings, Inc., Zimmer, Inc. and the Office of Inspector General of the Department of Health and Human Services (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed November 9, 2007) | ||
72
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
Index to Exhibits
(Continued)
| Exhibit No | Description | |||
| 10 | .36 | Form of Indemnification Agreement with Non-Employee Directors and Officers (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 31, 2008) | ||
| 21 | List of Subsidiaries of Zimmer Holdings, Inc. | |||
| 23 | Consent of PricewaterhouseCoopers LLP | |||
| 31 | .1 | 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 | ||
| 31 | .2 | 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 | ||
| 32 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
| 101 | .INS** | XBRL Instance Document | ||
| 101 | .SCH** | XBRL Taxonomy Extension Schema Document | ||
| 101 | .CAL** | XBRL Taxonomy Extension Calculation Linkbase Document | ||
| 101 | .LAB** | XBRL Taxonomy Extension Label Linkbase Document | ||
| 101 | .PRE** | XBRL Taxonomy Extension Presentation Linkbase Document | ||
| 101 | .DEF** | XBRL Taxonomy Extension Definition Linkbase Document | ||
| * | Management contract or compensatory plan or arrangement |
| ** | Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing. |
73
Table of Contents
| ZIMMER HOLDINGS, INC. | 2010 FORM 10-K ANNUAL REPORT |
| Valuation and Qualifying Accounts | Schedule II |
| (in millions) | ||||||||||||||||||||||||
|
Additions
|
||||||||||||||||||||||||
|
Balance at
|
Charged
|
Effects of
|
Balance at
|
|||||||||||||||||||||
|
Beginning
|
(Credited)
|
Deductions
|
Foreign
|
Acquired
|
End of
|
|||||||||||||||||||
| Description | of Period | to Expense | to Reserve | Currency | Allowances | Period | ||||||||||||||||||
|
Doubtful Accounts:
|
||||||||||||||||||||||||
|
Year Ended December 31, 2008
|
$ | 21.7 | $ | (0.5 | ) | $ | (1.9 | ) | $ | (1.2 | ) | $ | 1.9 | $ | 20.0 | |||||||||
|
Year Ended December 31, 2009
|
20.0 | 0.1 | (1.8 | ) | 0.5 | – | 18.8 | |||||||||||||||||
|
Year Ended December 31, 2010
|
18.8 | (1.0 | ) | (3.1 | ) | (0.6 | ) | 0.3 | 14.4 | |||||||||||||||
|
Excess and Obsolete Inventory:
|
||||||||||||||||||||||||
|
Year Ended December 31, 2008
|
$ | 143.7 | $ | 66.5 | $ | (23.1 | ) | $ | (2.6 | ) | $ | 15.1 | $ | 199.6 | ||||||||||
|
Year Ended December 31, 2009
|
199.6 | 81.7 | (33.5 | ) | 7.3 | – | 255.1 | |||||||||||||||||
|
Year Ended December 31, 2010
|
255.1 | 45.8 | (42.2 | ) | 7.4 | 2.3 | 268.4 | |||||||||||||||||
|
Excess and Obsolete Instruments:
|
||||||||||||||||||||||||
|
Year Ended December 31, 2008
|
$ | 31.7 | $ | 5.6 | $ | (2.9 | ) | $ | 0.3 | $ | 2.4 | $ | 37.1 | |||||||||||
|
Year Ended December 31, 2009
|
37.1 | 22.7 | (6.5 | ) | 0.5 | – | 53.8 | |||||||||||||||||
|
Year Ended December 31, 2010
|
53.8 | 12.1 | (3.6 | ) | 0.7 | – | 63.0 | |||||||||||||||||
74
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. [removed and Reserved]Part IIItem 5. Market For The Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules