ZIMMER BIOMET HOLDINGS, INC.
10-Ks and 10-Qs
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Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2011
Commission File Number
001-16407
ZIMMER HOLDINGS, INC.
(Exact name of registrant as
specified in its charter)
|
Delaware
(State or other jurisdiction of incorporation or organization) |
13-4151777
(IRS Employer Identification No.) |
345 East Main Street, Warsaw, IN 46580
(Address of principal executive
offices)
Telephone:
(574) 267-6131
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 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 in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
As of July 25, 2011, 190,474,286 shares of the
registrant’s $.01 par value common stock were
outstanding.
ZIMMER
HOLDINGS, INC.
INDEX TO
FORM 10-Q
June 30,
2011
2
Table of Contents
| Item 1. | Financial Statements |
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
(In
millions, except per share amounts, unaudited)
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Net Sales
|
$ | 1,137.4 | $ | 1,057.7 | $ | 2,253.0 | $ | 2,120.5 | ||||||||
|
Cost of products sold
|
287.9 | 250.6 | 566.9 | 519.0 | ||||||||||||
|
Gross Profit
|
849.5 | 807.1 | 1,686.1 | 1,601.5 | ||||||||||||
|
Research and development
|
57.0 | 54.2 | 112.6 | 104.7 | ||||||||||||
|
Selling, general and administrative
|
469.9 | 438.3 | 928.2 | 885.5 | ||||||||||||
|
Certain claims (Note 15)
|
50.0 | 75.0 | 50.0 | 75.0 | ||||||||||||
|
Special items (Note 2)
|
13.5 | 11.5 | 39.0 | 14.1 | ||||||||||||
|
Operating expenses
|
590.4 | 579.0 | 1,129.8 | 1,079.3 | ||||||||||||
|
Operating Profit
|
259.1 | 228.1 | 556.3 | 522.2 | ||||||||||||
|
Interest expense, net
|
9.8 | 14.3 | 20.8 | 28.9 | ||||||||||||
|
Earnings before income taxes
|
249.3 | 213.8 | 535.5 | 493.3 | ||||||||||||
|
Provision for income taxes
|
45.5 | 48.3 | 122.8 | 122.4 | ||||||||||||
|
Net Earnings of Zimmer Holdings, Inc.
|
$ | 203.8 | $ | 165.5 | $ | 412.7 | $ | 370.9 | ||||||||
|
Earnings Per Common Share
|
||||||||||||||||
|
Basic
|
$ | 1.06 | $ | 0.82 | $ | 2.15 | $ | 1.83 | ||||||||
|
Diluted
|
$ | 1.06 | $ | 0.82 | $ | 2.14 | $ | 1.82 | ||||||||
|
Weighted Average Common Shares Outstanding
|
||||||||||||||||
|
Basic
|
191.5 | 201.9 | 192.1 | 202.4 | ||||||||||||
|
Diluted
|
192.7 | 203.0 | 193.3 | 203.6 | ||||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
3
Table of Contents
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
(In
millions, unaudited)
|
June 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
|
ASSETS
|
||||||||
|
Current Assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 624.1 | $ | 668.9 | ||||
|
Short-term investments
|
321.4 | 265.1 | ||||||
|
Accounts receivable, less allowance for doubtful accounts
|
888.4 | 775.9 | ||||||
|
Inventories, net
|
975.1 | 936.4 | ||||||
|
Prepaid expenses and other current assets
|
66.7 | 127.7 | ||||||
|
Deferred income taxes
|
232.6 | 235.7 | ||||||
|
Total Current Assets
|
3,108.3 | 3,009.7 | ||||||
|
Property, plant and equipment, net
|
1,213.0 | 1,213.8 | ||||||
|
Goodwill
|
2,694.0 | 2,580.8 | ||||||
|
Intangible assets, net
|
811.5 | 827.1 | ||||||
|
Other assets
|
422.4 | 368.5 | ||||||
|
Total Assets
|
$ | 8,249.2 | $ | 7,999.9 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
Current Liabilities:
|
||||||||
|
Accounts payable
|
$ | 124.0 | $ | 129.6 | ||||
|
Income taxes
|
31.1 | 48.9 | ||||||
|
Other current liabilities
|
523.9 | 524.0 | ||||||
|
Total Current Liabilities
|
679.0 | 702.5 | ||||||
|
Other long-term liabilities
|
407.1 | 384.0 | ||||||
|
Long-term debt
|
1,147.3 | 1,142.1 | ||||||
|
Total Liabilities
|
2,233.4 | 2,228.6 | ||||||
|
Commitments and Contingencies (Note 15)
|
||||||||
|
Stockholders’ Equity:
|
||||||||
|
Common stock, $0.01 par value, one billion shares
authorized, 255.5 million (254.6 million in
2010) issued
|
2.5 | 2.5 | ||||||
|
Paid-in capital
|
3,355.4 | 3,293.5 | ||||||
|
Retained earnings
|
6,111.3 | 5,699.4 | ||||||
|
Accumulated other comprehensive income
|
447.5 | 321.0 | ||||||
|
Treasury stock, 65.1 million shares (59.0 million
shares in 2010)
|
(3,900.9 | ) | (3,545.1 | ) | ||||
|
Total Stockholders’ Equity
|
6,015.8 | 5,771.3 | ||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 8,249.2 | $ | 7,999.9 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
4
Table of Contents
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
(In
millions, unaudited)
|
For the Six Months
|
||||||||
| Ended June 30, | ||||||||
| 2011 | 2010 | |||||||
|
Cash flows provided by (used in) operating activities:
|
||||||||
|
Net earnings of Zimmer Holdings, Inc.
|
$ | 412.7 | $ | 370.9 | ||||
|
Adjustments to reconcile net earnings to cash provided by
operating activities:
|
||||||||
|
Depreciation and amortization
|
174.7 | 165.8 | ||||||
|
Share-based compensation
|
31.7 | 30.6 | ||||||
|
Income tax benefit from stock option exercises
|
9.5 | 2.9 | ||||||
|
Excess income tax benefit from stock option exercises
|
(3.6 | ) | (1.0 | ) | ||||
|
Inventory
step-up
|
7.8 | 1.3 | ||||||
|
Changes in operating assets and liabilities, net of effect of
acquisitions:
|
||||||||
|
Income taxes
|
(11.5 | ) | (70.5 | ) | ||||
|
Receivables
|
(76.0 | ) | (51.3 | ) | ||||
|
Inventories
|
(21.8 | ) | 27.5 | |||||
|
Accounts payable and accrued expenses
|
(42.2 | ) | (37.4 | ) | ||||
|
Other assets and liabilities
|
(48.1 | ) | 93.4 | |||||
|
Net cash provided by operating activities
|
433.2 | 532.2 | ||||||
|
Cash flows provided by (used in) investing activities:
|
||||||||
|
Additions to instruments
|
(85.2 | ) | (83.1 | ) | ||||
|
Additions to other property, plant and equipment
|
(34.0 | ) | (26.7 | ) | ||||
|
Purchases of investments
|
(186.7 | ) | (4.0 | ) | ||||
|
Sales of investments
|
169.8 | 37.0 | ||||||
|
Investments in other assets
|
(26.4 | ) | (15.1 | ) | ||||
|
Net cash used in investing activities
|
(162.5 | ) | (91.9 | ) | ||||
|
Cash flows provided by (used in) financing activities:
|
||||||||
|
Net proceeds under revolving credit facilities
|
0.2 | — | ||||||
|
Proceeds from employee stock compensation plans
|
29.1 | 8.1 | ||||||
|
Excess income tax benefit from stock option exercises
|
3.6 | 1.0 | ||||||
|
Repurchase of common stock
|
(357.2 | ) | (178.9 | ) | ||||
|
Net cash used in financing activities
|
(324.3 | ) | (169.8 | ) | ||||
|
Effect of exchange rates on cash and cash equivalents
|
8.8 | (8.5 | ) | |||||
|
Increase (decrease) in cash and cash equivalents
|
(44.8 | ) | 262.0 | |||||
|
Cash and cash equivalents, beginning of year
|
668.9 | 691.7 | ||||||
|
Cash and cash equivalents, end of period
|
$ | 624.1 | $ | 953.7 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
5
Table of Contents
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
| 1. | Basis of Presentation |
The financial data presented herein is unaudited and should be
read in conjunction with the consolidated financial statements
and accompanying notes included in the 2010 Annual Report on
Form 10-K
filed by Zimmer Holdings, Inc. In our opinion, the accompanying
unaudited condensed consolidated financial statements include
all adjustments necessary for a fair statement of the financial
position, results of operations and cash flows for the interim
periods presented. The December 31, 2010 condensed balance
sheet data was derived from audited financial statements, but
does not include all disclosures required by accounting
principles generally accepted in the United States of America.
Results for interim periods should not be considered indicative
of results for the full year. Certain amounts in the 2010
condensed consolidated financial statements have been
reclassified to conform to the 2011 presentation.
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 |
Special Items
— We recognize expenses resulting
directly from our business combinations, employee termination
benefits, certain contract terminations and asset impairment
charges connected with global restructuring and transformation
initiatives, and other items as “Special items” in our
condensed consolidated statement of earnings. “Special
items” included (in millions):
|
Three Months
|
Six Months
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Impairment/loss on disposal of assets
|
$ | 0.4 | $ | 7.7 | $ | 2.9 | $ | 8.1 | ||||||||
|
Consulting and professional fees
|
4.9 | 0.9 | 8.4 | 1.9 | ||||||||||||
|
Employee severance and retention
|
3.6 | 2.3 | 19.8 | 2.2 | ||||||||||||
|
Information technology integration
|
— | — | — | 0.1 | ||||||||||||
|
Facility and employee relocation
|
0.6 | 0.5 | 0.9 | 0.5 | ||||||||||||
|
Distributor acquisitions
|
0.5 | — | 1.1 | — | ||||||||||||
|
Certain litigation matters
|
— | (0.5 | ) | 0.1 | (1.3 | ) | ||||||||||
|
Contract terminations
|
1.7 | 0.6 | 2.7 | 2.6 | ||||||||||||
|
Other
|
1.8 | — | 3.1 | — | ||||||||||||
|
Special items
|
$ | 13.5 | $ | 11.5 | $ | 39.0 | $ | 14.1 | ||||||||
In the first six months of 2011 we terminated employees as part
of a reduction of management layers, expansion of management
spans of control, and changes in our organizational structure.
Approximately 500 employees from across the globe were
affected by these actions. As a result, we incurred expenses
related to severance benefits, share-based compensation
acceleration and other employee termination-related costs. The
vast majority of these termination benefits were provided in
accordance with our existing or local government policies and
are considered ongoing benefits. These costs were accrued when
they became probable and estimable and were recorded as part of
other current liabilities. The majority of these costs have been
paid or will be paid by the end of 2011.
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.
6
Table of Contents
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 3. | Comprehensive Income |
The reconciliation of net earnings to comprehensive income is as
follows:
|
Three Months
|
Six Months
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (In millions) | (In millions) | |||||||||||||||
|
Net earnings of Zimmer Holdings, Inc.
|
$ | 203.8 | $ | 165.5 | $ | 412.7 | $ | 370.9 | ||||||||
|
Other Comprehensive Income:
|
||||||||||||||||
|
Foreign currency cumulative translation adjustments
|
38.9 | (97.0 | ) | 169.6 | (179.4 | ) | ||||||||||
|
Unrealized cash flow hedge gains/(losses), net of tax
|
(10.9 | ) | 24.3 | (58.2 | ) | 53.0 | ||||||||||
|
Reclassification adjustments on foreign currency hedges, net of
tax
|
8.8 | (8.3 | ) | 13.2 | (9.2 | ) | ||||||||||
|
Unrealized gains on securities, net of tax
|
0.3 | — | 0.5 | — | ||||||||||||
|
Adjustments to prior service cost and unrecognized actuarial
assumptions, net of tax
|
0.7 | 0.2 | 1.4 | 1.1 | ||||||||||||
|
Total Other Comprehensive Gain/(Loss)
|
37.8 | (80.8 | ) | 126.5 | (134.5 | ) | ||||||||||
|
Comprehensive Income Attributable to Zimmer
Holdings, Inc.
|
$ | 241.6 | $ | 84.7 | $ | 539.2 | $ | 236.4 | ||||||||
| 4. | Inventories |
|
June 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (In millions) | ||||||||
|
Finished goods
|
$ | 792.4 | $ | 757.3 | ||||
|
Work in progress
|
53.5 | 47.0 | ||||||
|
Raw materials
|
129.2 | 132.1 | ||||||
|
Inventories, net
|
$ | 975.1 | $ | 936.4 | ||||
| 5. | Property, Plant and Equipment |
|
June 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (In millions) | ||||||||
|
Land
|
$ | 22.3 | $ | 22.0 | ||||
|
Buildings and equipment
|
1,199.0 | 1,162.0 | ||||||
|
Capitalized software costs
|
179.9 | 172.0 | ||||||
|
Instruments
|
1,448.6 | 1,365.6 | ||||||
|
Construction in progress
|
65.9 | 66.5 | ||||||
| 2,915.7 | 2,788.1 | |||||||
|
Accumulated depreciation
|
(1,702.7 | ) | (1,574.3 | ) | ||||
|
Property, plant and equipment, net
|
$ | 1,213.0 | $ | 1,213.8 | ||||
7
Table of Contents
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 6. | Investments |
We invest in short and long-term investments classified as
available-for-sale
securities. Information regarding our investments is as follows
(in millions):
|
Amortized
|
Gross Unrealized | |||||||||||||||
| Cost | Gains | Losses | Fair value | |||||||||||||
|
As of June 30, 2011
|
||||||||||||||||
|
Corporate debt securities
|
$ | 240.4 | $ | 0.3 | $ | (0.1 | ) | $ | 240.6 | |||||||
|
U.S. government and agency debt securities
|
37.9 | — | — | 37.9 | ||||||||||||
|
Municipal bonds
|
1.0 | — | — | 1.0 | ||||||||||||
|
Foreign government debt securities
|
7.5 | — | — | 7.5 | ||||||||||||
|
Commercial paper
|
9.5 | — | — | 9.5 | ||||||||||||
|
Certificates of deposit
|
129.1 | 0.1 | — | 129.2 | ||||||||||||
|
Total short and long-term investments
|
$ | 425.4 | $ | 0.4 | $ | (0.1 | ) | $ | 425.7 | |||||||
|
As of December 31, 2010
|
||||||||||||||||
|
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 | |||||||
Unrealized gains and losses on these investments are recorded in
accumulated other comprehensive income in our consolidated
balance sheet.
The following table shows the fair value and gross unrealized
losses for all
available-for-sale
securities in an unrealized loss position deemed to be temporary
(in millions):
| As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
|
Unrealized
|
Unrealized
|
|||||||||||||||
| Fair Value | Losses | Fair value | Losses | |||||||||||||
|
Corporate debt securities
|
$ | 62.4 | $ | (0.1 | ) | $ | 126.1 | $ | (0.2 | ) | ||||||
|
Certificates of deposit
|
— | — | 50.6 | (0.1 | ) | |||||||||||
|
Total
|
$ | 62.4 | $ | (0.1 | ) | $ | 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 36
securities were in an unrealized loss position as of
June 30, 2011.
The unrealized losses on our investments in corporate debt
securities were caused by increases in interest yields resulting
from adverse conditions in the global credit markets. We believe
the unrealized losses associated with our
available-for-sale
securities as of June 30, 2011 are temporary because we do
not intend to sell these investments before maturity, and we do
not believe we will be required to sell them before recovery of
their amortized cost basis.
8
Table of Contents
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The amortized cost and fair value of our
available-for-sale
fixed-maturity securities by contractual maturity are as follows
(in millions):
| As of June 30, 2011 | ||||||||
|
Amortized
|
||||||||
| Cost | Fair Value | |||||||
|
Due in one year or less
|
$ | 321.2 | $ | 321.4 | ||||
|
Due after one year through two years
|
104.2 | 104.3 | ||||||
|
Total
|
$ | 425.4 | $ | 425.7 | ||||
| 7. | Other Current Liabilities |
|
June 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (In millions) | ||||||||
|
Other current liabilities:
|
||||||||
|
Salaries, wages and benefits
|
$ | 88.9 | $ | 118.1 | ||||
|
Fair value of derivatives
|
43.2 | 29.4 | ||||||
|
Accrued liabilities
|
391.8 | 376.5 | ||||||
|
Total other current liabilities
|
$ | 523.9 | $ | 524.0 | ||||
| 8. |
|
We had no short-term debt as of June 30, 2011 or
December 31, 2010. Long-term debt as of June 30, 2011
and December 31, 2010 on our condensed consolidated balance
sheet consisted of the following (in millions):
|
June 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
|
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
|
5.5 | 1.5 | ||||||
|
Senior Credit Facility
|
143.0 | 141.8 | ||||||
|
Total long-term debt
|
$ | 1,147.3 | $ | 1,142.1 | ||||
The estimated fair value of our Senior Notes as of June 30,
2011, based on quoted prices for the specific securities from
transactions in
over-the-counter
markets, was $1,039.4 million. The carrying value of the
Senior Credit Facility approximates fair value, as the
underlying instruments have variable interest rates at market
value.
9
Table of Contents
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 9. | Fair Value Measurement of Assets and Liabilities |
The following assets and liabilities are recorded at fair value
on a recurring basis (in millions):
| As of June 30, 2011 | ||||||||||||||||
| Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
|
Quoted
|
||||||||||||||||
|
Prices in
|
||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||
|
Markets for
|
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
|
$ | 240.6 | $ | — | $ | 240.6 | $ | — | ||||||||
|
U.S. government and agency debt securities
|
37.9 | — | 37.9 | — | ||||||||||||
|
Municipal bonds
|
1.0 | — | 1.0 | — | ||||||||||||
|
Foreign government debt securities
|
7.5 | — | 7.5 | — | ||||||||||||
|
Commercial paper
|
9.5 | — | 9.5 | — | ||||||||||||
|
Certificates of deposit
|
129.2 | — | 129.2 | — | ||||||||||||
|
Total
available-for-sale
securities
|
425.7 | — | 425.7 | — | ||||||||||||
|
Derivatives, current and long-term
|
||||||||||||||||
|
Foreign currency forward contracts and options
|
6.8 | — | 6.8 | — | ||||||||||||
|
Interest rate swaps
|
5.5 | — | 5.5 | — | ||||||||||||
| $ | 438.0 | $ | — | $ | 438.0 | $ | — | |||||||||
|
Liabilities
|
||||||||||||||||
|
Derivatives, current and long-term
|
||||||||||||||||
|
Foreign currency forward contracts and options
|
$ | 61.9 | $ | — | $ | 61.9 | $ | — | ||||||||
|
Cross-currency interest rate swaps
|
3.3 | — | 3.3 | — | ||||||||||||
| $ | 65.2 | $ | — | $ | 65.2 | $ | — | |||||||||
10
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ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| As of December 31, 2010 | ||||||||||||||||
| Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
|
Quoted
|
||||||||||||||||
|
Prices in
|
||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||
|
Markets for
|
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 | $ | — | |||||||||
We value our
available-for-sale
securities using a market approach based on 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
ongoing assessments of counterparty credit risk.
We value our interest rate swaps using a market approach based
on publicly available market yield curves and the terms of our
swaps.
We value our cross-currency interest rate swaps using a market
approach based upon publicly available market yield curves,
foreign currency exchange rates obtained from active markets and
the terms of our swaps. We also perform ongoing assessments of
counterparty credit risk.
| 10. | 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.
11
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ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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. generally accepted accounting principles (GAAP).
Changes in the fair value of the derivative instrument are
recorded in current earnings and are offset by gains or losses
on the underlying debt instrument.
In 2010, we entered into multiple nine-year
fixed-to-variable
interest rate swap agreements with a total notional amount of
$250 million. These interest rate swap agreements were
designated as fair value hedges of the fixed interest rate
obligation under our $500 million 4.625 percent Senior
Notes due November 30, 2019. We receive a fixed interest
rate of 4.625 percent and pay variable interest equal to
the three-month LIBOR plus an average of 133 basis points
on these interest rate swap agreements.
Foreign
Currency Exchange Rate Risk
We operate on a global basis and are exposed to the risk that
our financial condition, results of operations and cash flows
could be adversely affected by changes in foreign currency
exchange rates. To reduce the potential effects of foreign
currency exchange rate movements on net earnings, we enter into
derivative financial instruments in the form of foreign currency
exchange forward contracts and options with major financial
institutions. We are primarily exposed to foreign currency
exchange rate risk with respect to transactions and net assets
denominated in Euros, Swiss Francs, Japanese Yen, British
Pounds, Canadian Dollars, Australian Dollars, Korean Won,
Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South
African Rand, Russian Rubles and Indian Rupees. We do not use
derivative financial instruments for trading or speculative
purposes.
Derivatives
Designated as Cash Flow Hedges
Our revenues are generated in various currencies throughout the
world. However, a significant amount of our inventory is
produced in U.S. Dollars. Therefore, movements in foreign
currency exchange rates may have different proportional effects
on our revenues compared to our cost of products sold. To
minimize the effects of foreign currency exchange rate movements
on cash flows, we hedge intercompany sales of inventory expected
to occur within the next 30 months with foreign currency
exchange forward contracts and options. We designate these
derivative instruments as cash flow hedges.
We perform quarterly assessments of hedge effectiveness by
verifying and documenting the critical terms of the hedge
instrument and that forecasted transactions have not changed
significantly. We also assess on a quarterly basis whether there
have been adverse developments regarding the risk of a
counterparty default. For derivatives which qualify as hedges of
future cash flows, the effective portion of changes in fair
value is temporarily recorded in other comprehensive income and
then recognized in cost of products sold when the hedged item
affects net earnings. The ineffective portion of a
derivative’s change in fair value, if any, is immediately
reported in cost of products sold.
For forward contracts and options outstanding at June 30,
2011, 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 July 2011
through December 2013. As of June 30, 2011, 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 June 30, 2011, the notional
amounts of outstanding forward contracts and options entered
into with third parties to purchase Swiss Francs were
$183.8 million.
12
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ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Derivatives
Not Designated as Hedging Instruments
We enter into foreign currency forward exchange contracts with
terms of one month to manage currency exposures for monetary
assets and liabilities denominated in a currency other than an
entity’s functional currency. As a result, any foreign
currency remeasurement gains/losses recognized in earnings are
generally offset with gains/losses on the foreign currency
forward exchange contracts in the same reporting period. These
offsetting gains/losses are recorded in cost of products sold as
the underlying assets and liabilities exposed to remeasurement
include inventory-related transactions. These contracts are
settled on the last day of each reporting period. Therefore,
there is no outstanding balance related to these contracts
recorded on the balance sheet as of the end of the reporting
period. The notional amounts of these contracts are typically in
a range of $1.2 billion to $1.7 billion per quarter.
Foreign
Currency Exchange and Interest Rate Risk
Derivatives
Designated as Cash Flow Hedges
In 2011, our Japan subsidiary, with a functional currency of
Japanese Yen, borrowed variable-rate debt of $143.0 million
denominated in U.S. Dollars under our Senior Credit
Facility. To manage the foreign currency exchange risk
associated with remeasuring the debt to Japanese Yen and the
interest rate risk associated with the variable-rate debt, we
have entered into multiple cross-currency interest rate swap
agreements with a total notional amount of 11,798 million
Japanese Yen. We designated these swaps as cash flow hedges of
the foreign currency exchange and interest rate risks. The
effective portion of changes in fair value of the cross-currency
interest rate swaps is temporarily recorded in other
comprehensive income and then recognized in interest expense,
net when the hedged item affects net earnings. We pay a fixed
interest rate of 0.1 percent and receive variable interest
equal to the three-month LIBOR plus 18.5 basis points on
these cross-currency interest rate swap agreements.
Derivatives
Designated as Fair Value Hedges
Derivative instruments designated as fair value hedges had the
following effects on our condensed consolidated statement of
earnings (in millions):
| Gain on Instrument | Loss on Hedged Item | |||||||||||||||||||||||||||||||||||
|
Three Months
|
Six Months
|
Three Months
|
Six Months
|
|||||||||||||||||||||||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||||||||||||||||||||||
|
Location on
|
June 30, | June 30, | June 30, | June 30, | ||||||||||||||||||||||||||||||||
| Derivative Instrument | Statement of Earnings | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||
|
Interest rate swaps
|
Interest expense, net | $ | 7.1 | $ | — | $ | 4.0 | $ | — | $ | (7.1 | ) | $ | — | $ | (4.0 | ) | $ | — | |||||||||||||||||
We had no ineffective fair value hedging instruments during the
three and six month periods ended June 30, 2011 and 2010.
13
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ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Derivatives
Designated as Cash Flow Hedges
Derivative instruments designated as cash flow hedges had the
following effects on other comprehensive income (OCI) on our
condensed consolidated balance sheet and our condensed
consolidated statement of earnings (in millions):
|
Amount of
|
Amount of
|
|||||||||||||||||||||||||||||||||
|
Gain/(Loss)
|
Gain/(Loss)
|
|||||||||||||||||||||||||||||||||
| Recognized in OCI | Reclassified from OCI | |||||||||||||||||||||||||||||||||
|
Three Months
|
Six Months
|
Three Months
|
Six Months
|
|||||||||||||||||||||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||||||||||||||||||||
| June 30, | June 30, |
Location on
|
June 30, | June 30, | ||||||||||||||||||||||||||||||
| Derivative Instrument | 2011 | 2010 | 2011 | 2010 | Statement of Earnings | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
|
Foreign exchange forward contracts
|
$ | (16.0 | ) | $ | 28.3 | $ | (74.1 | ) | $ | 58.9 | Cost of products sold | $ | (12.2 | ) | $ | 8.0 | $ | (17.4 | ) | $ | 7.6 | |||||||||||||
|
Foreign exchange options
|
2.8 | — | 3.7 | — | Cost of products sold | — | — | — | — | |||||||||||||||||||||||||
|
Cross-currency interest rate swaps
|
(0.8 | ) | — | 0.2 | — | Interest expense, net | (0.5 | ) | — | (3.5 | ) | — | ||||||||||||||||||||||
| $ | (14.0 | ) | $ | 28.3 | $ | (70.2 | ) | $ | 58.9 | $ | (12.7 | ) | $ | 8.0 | $ | (20.9 | ) | $ | 7.6 | |||||||||||||||
The net amount recognized in earnings during the three and six
month periods ended June 30, 2011 and 2010 due to
ineffectiveness and amounts excluded from the assessment of
hedge effectiveness was not significant.
The fair value of outstanding derivative instruments designated
as cash flow hedges and recorded on the balance sheet at
June 30, 2011, together with settled derivatives where the
hedged item has not yet affected earnings, was a net unrealized
loss of $73.4 million, or $45.0 million after taxes,
which is deferred in accumulated other comprehensive income. Of
the net unrealized loss, $43.0 million, or
$28.3 million after taxes, is expected to be reclassified
to earnings over the next twelve months.
Derivatives
Not Designated as Hedging Instruments
The following gains/(losses) from these derivative instruments
were recognized on our condensed consolidated statement of
earnings (in millions):
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||||||
|
Location on
|
June 30, | June 30, | ||||||||||||||||||
| Derivative Instrument | Statement of Earnings | 2011 | 2010 | 2011 | 2010 | |||||||||||||||
|
Foreign exchange forward contracts
|
Cost of products sold | $ | 1.3 | $ | 11.1 | $ | (13.7 | ) | $ | 18.3 | ||||||||||
This impact does not include any offsetting gains/losses
recognized in earnings as a result of foreign currency
remeasurement of monetary assets and liabilities denominated in
a currency other than an entity’s functional currency.
Balance
Sheet Presentation
As of June 30, 2011 and December 31, 2010, all
derivative instruments designated as fair value hedges and cash
flow hedges are recorded at fair value on the balance sheet. On
our consolidated balance sheet, we recognize individual forward
contracts and options with the same counterparty on a net
asset/liability basis if we have a master
14
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ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
netting agreement with the counterparty. The fair value of
derivative instruments on a gross basis is as follows (in
millions):
| June 30, 2011 | December 31, 2010 | |||||||||
|
Balance
|
Balance
|
|||||||||
|
Sheet
|
Fair
|
Sheet
|
Fair
|
|||||||
| Location | Value | Location | Value | |||||||
|
Asset Derivatives
|
||||||||||
|
Foreign exchange forward contracts
|
Other current assets | $ | 27.1 | Other current assets | $32.2 | |||||
|
Foreign exchange options
|
Other current assets | 1.8 | Other current assets | 0.4 | ||||||
|
Foreign exchange forward contracts
|
Other assets | 5.8 | Other assets | 11.6 | ||||||
|
Foreign exchange options
|
Other assets | 4.6 | Other assets | 2.3 | ||||||
|
Interest rate swaps
|
Other assets | 5.5 | Other assets | 1.5 | ||||||
|
Total asset derivatives
|
$ | 44.8 | $48.0 | |||||||
|
Liability Derivatives
|
||||||||||
|
Foreign exchange forward contracts
|
Other current liabilities | $ | 66.3 | Other current liabilities | $37.6 | |||||
|
Cross-currency interest rate swaps
|
Other current liabilities | 3.3 | Other current liabilities | — | ||||||
|
Foreign exchange forward contracts
|
Other long-term liabilities | 28.1 | Other long-term liabilities | 14.4 | ||||||
|
Total liability derivatives
|
$ | 97.7 | $52.0 | |||||||
| 11. | Income Taxes |
We operate on a global basis and are subject to numerous and
complex tax laws and regulations. Our income tax filings are
regularly under audit in multiple federal, state and foreign
jurisdictions. Income tax audits may require an extended period
of time to reach resolution and may result in significant income
tax adjustments when interpretation of tax laws or allocation of
company profits is disputed. During the first and second
quarters of 2011, we resolved tax matters in multiple
jurisdictions resulting in a reduction in both the net amount of
tax liability for unrecognized tax benefits and income tax
expense. The net amount of tax liability for unrecognized tax
benefits may change within the next twelve months due to changes
in audit status, expiration of statutes of limitations and other
events which could impact our determination of unrecognized tax
benefits. Currently, we cannot reasonably estimate the amount by
which our unrecognized tax benefits will change.
In the three and six month periods ended June 30, 2011, our
effective tax rate was 18.2 percent and 22.9 percent,
respectively. Our effective tax rates were lower than the
U.S. statutory income tax rate of 35 percent primarily
due to income earned in foreign locations with lower tax rates,
the resolution of certain tax matters discussed above, and the
accrual of $50.0 million “Certain claims”
expense, which lowered the U.S. tax jurisdiction income
relative to the income of our foreign operations.
In May 2011, the IRS concluded their examination of our
U.S. federal returns for years 2005 through 2007 and issued
income tax assessments reallocating profits between certain of
our U.S. and foreign subsidiaries. We believe that we have
followed applicable U.S. tax laws and are vigorously
defending our income tax positions. The ultimate resolution of
this matter is uncertain and could have a material impact on our
income tax expense, results of operations, and cash flows for
future periods.
| 12. | 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 compensation. In addition to the
15
Table of Contents
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
The components of net pension expense for our U.S. and
non-U.S. defined
benefit retirement plans are as follows (in millions):
|
Three Months
|
Six Months
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Service cost
|
$ | 7.2 | $ | 6.2 | $ | 14.1 | $ | 12.5 | ||||||||
|
Interest cost
|
5.2 | 4.4 | 10.2 | 9.0 | ||||||||||||
|
Expected return on plan assets
|
(8.0 | ) | (6.4 | ) | (15.8 | ) | (12.9 | ) | ||||||||
|
Amortization of prior service cost
|
(0.2 | ) | (0.3 | ) | (0.4 | ) | (0.4 | ) | ||||||||
|
Amortization of unrecognized actuarial loss
|
1.8 | 0.8 | 3.7 | 1.7 | ||||||||||||
|
Net periodic benefit cost
|
$ | 6.0 | $ | 4.7 | $ | 11.8 | $ | 9.9 | ||||||||
We contributed $36.5 million during the six month period
ended June 30, 2011 to our U.S. and Puerto Rico
defined benefit plans and do not expect to contribute additional
funds to these plans during the remainder of 2011. We
contributed $7.9 million to our foreign-based defined
benefit plans in the six month period ended June 30, 2011
and expect to contribute approximately $8 million to these
foreign-based plans during the remainder of 2011.
| 13. | Earnings Per Share |
The following is a reconciliation of weighted average shares for
the basic and diluted shares computations (in millions):
|
Three Months
|
Six Months
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Weighted average shares outstanding for basic net earnings per
share
|
191.5 | 201.9 | 192.1 | 202.4 | ||||||||||||
|
Effect of dilutive stock options and other equity awards
|
1.2 | 1.1 | 1.2 | 1.2 | ||||||||||||
|
Weighted average shares outstanding for diluted net earnings per
share
|
192.7 | 203.0 | 193.3 | 203.6 | ||||||||||||
During the three and six month periods ended June 30, 2011,
an average of 11.6 million options and 12.2 million
options, respectively, to purchase shares of common stock were
not included in the computation of diluted earnings per share
because the exercise prices of these options were greater than
the average market price of the common stock. During the three
and six month periods ended June 30, 2010, an average of
13.3 million options and 13.1 million options,
respectively, were not included in the computation.
In the three month period ended June 30, 2011, we
repurchased 1.8 million shares of our common stock at an
average price of $66.21 per share for a total cash outlay of
$121.1 million, including commissions. In the six month
period ended June 30, 2011, we repurchased 6.1 million
shares of our common stock at an average price of $58.97 per
share for a total cash outlay of $357.2 million, including
commissions. As of June 30, 2011, approximately
$0.8 billion remained authorized under a $1.5 billion
repurchase program, which will expire on December 31, 2013.
16
Table of Contents
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 14. | Segment Information |
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 which generate revenues that
are 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” and global operations and corporate functions.
Global operations and corporate functions include research,
development engineering, medical education, brand management,
corporate legal, finance, and human resource functions,
U.S. 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.
Net sales and segment operating profit are as follows (in
millions):
| Net Sales | Operating Profit | |||||||||||||||
|
Three Months
|
Three Months
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Americas
|
$ | 608.6 | $ | 609.3 | $ | 302.0 | $ | 307.5 | ||||||||
|
Europe
|
324.7 | 276.5 | 105.4 | 101.8 | ||||||||||||
|
Asia Pacific
|
204.1 | 171.9 | 73.1 | 65.7 | ||||||||||||
|
Total
|
$ | 1,137.4 | $ | 1,057.7 | ||||||||||||
|
Share-based compensation
|
(17.4 | ) | (17.9 | ) | ||||||||||||
|
Inventory
step-up
|
(3.4 | ) | — | |||||||||||||
|
Certain Claims
|
(50.0 | ) | (75.0 | ) | ||||||||||||
|
Special items
|
(13.5 | ) | (11.5 | ) | ||||||||||||
|
Global operations and corporate functions
|
(137.1 | ) | (142.5 | ) | ||||||||||||
|
Operating profit
|
$ | 259.1 | $ | 228.1 | ||||||||||||
17
Table of Contents
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Net Sales | Operating Profit | |||||||||||||||
|
Six Months
|
Six Months
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Americas
|
$ | 1,238.3 | $ | 1,225.0 | $ | 613.4 | $ | 614.3 | ||||||||
|
Europe
|
623.9 | 562.6 | 216.2 | 206.6 | ||||||||||||
|
Asia Pacific
|
390.8 | 332.9 | 147.0 | 126.8 | ||||||||||||
|
Total
|
$ | 2,253.0 | $ | 2,120.5 | ||||||||||||
|
Share-based compensation
|
(31.7 | ) | (30.6 | ) | ||||||||||||
|
Inventory
step-up
|
(7.8 | ) | (1.3 | ) | ||||||||||||
|
Certain Claims
|
(50.0 | ) | (75.0 | ) | ||||||||||||
|
Special items
|
(39.0 | ) | (14.1 | ) | ||||||||||||
|
Global operations and corporate functions
|
(291.8 | ) | (304.5 | ) | ||||||||||||
|
Operating profit
|
$ | 556.3 | $ | 522.2 | ||||||||||||
Net sales by product category are as follows (in millions):
|
Three Months
|
Six Months
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Reconstructive
|
||||||||||||||||
|
Knees
|
$ | 470.9 | $ | 452.9 | $ | 933.1 | $ | 913.3 | ||||||||
|
Hips
|
345.0 | 317.1 | 682.3 | 632.8 | ||||||||||||
|
Extremities
|
40.7 | 38.2 | 83.6 | 76.6 | ||||||||||||
|
Total
|
856.6 | 808.2 | 1,699.0 | 1,622.7 | ||||||||||||
|
Dental
|
67.1 | 55.9 | 129.5 | 107.6 | ||||||||||||
|
Trauma
|
69.1 | 57.8 | 139.2 | 118.2 | ||||||||||||
|
Spine
|
56.4 | 57.9 | 113.3 | 117.9 | ||||||||||||
|
Surgical and other
|
88.2 | 77.9 | 172.0 | 154.1 | ||||||||||||
|
Total
|
$ | 1,137.4 | $ | 1,057.7 | $ | 2,253.0 | $ | 2,120.5 | ||||||||
| 15. | Commitments and Contingencies |
Product
Liability and 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.
18
Table of Contents
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 have recorded provisions totaling $229.0 million as
“Certain claims” on our statement of earnings,
including $50.0 million and $75.0 million in the three
month periods ending June 30, 2011 and 2010, respectively,
representing our estimate of the
Durom
Cup-related claims
we expect to be made for revision surgeries. Initially, the
“Certain claims” provision was limited to original
surgeries performed before July 22, 2008, with a revision
surgery occurring within two years of the original surgery.
However, based upon subsequent claims received we revised our
estimate to include all claims for 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. We have received claims in excess of our previous
estimates, which necessitated the additional $50.0 million
provision in the three month period ended June 30, 2011.
From 2008 through March 31, 2010, we recorded
$42.7 million 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. Of this amount, $10.9 million was recorded in the
three month period ended March 31, 2010. Beginning with the
second quarter of 2010, any additional provisions for such
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 June 30, 2011, we have recorded
cumulative provisions totaling $9.0 million for such
post-suspension claims.
Our estimate as of June 30, 2011 of the remaining liability
for all
Durom
Cup-related claims relating to original
surgeries performed before July 22, 2008 is
$159.8 million, of which $42.5 million is classified
as short-term in “Other current liabilities” and
$117.3 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
amount we pay per claim may differ from our estimates. We cannot
reasonably estimate the possible loss or range of loss that may
result from
Durom
Cup-related claims in excess of the
losses we have accrued.
On August 20, 2008, Margo and Daniel Polett filed an action
against us and an unrelated third party, Public Communications,
Inc. (PCI), in the Court of Common Pleas, Philadelphia,
Pennsylvania seeking an unspecified amount of damages for
injuries and loss of consortium allegedly suffered by
Mrs. Polett and her spouse, respectively. The complaint
alleged that defendants were negligent in connection with
Mrs. Polett’s participation in a promotional video
featuring one of our knee products. The case was tried in
November 2010 and the jury returned a verdict in favor of
plaintiffs. The jury awarded $27.6 million in compensatory
damages and apportioned fault 30 percent to plaintiffs,
34 percent to us and 36 percent to PCI. Under
applicable law, we may be liable for any portion of the damages
apportioned to PCI that it does not pay. On December 2,
2010, we and PCI filed a Motion for Post-Trial Relief seeking a
judgment notwithstanding the verdict, a new trial or a
remittitur. On June 10, 2011, the trial court entered an
order denying our Motion for Post-Trial Relief and affirming the
jury verdict in full and entered judgment for $20.3 million
against us and PCI. On June 29, 2011, we filed a Notice of
Appeal to the Superior Court of Pennsylvania and posted a bond
for the verdict amount plus interest. 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 condensed
consolidated statement of earnings for the quarter ended
June 30, 2011 or for any prior period, because we believe
we have strong arguments for reversing the jury verdict 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.
19
Table of Contents
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Intellectual
Property and 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.
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, 2010, Howmedica filed a petition for a
re-hearing en banc, which was denied on December 14, 2010.
On March 14, 2011, Howmedica filed a Petition for Writ of
Certiorari in the U.S. Supreme Court seeking review of the
Federal Circuit decision, which was denied on May 16, 2011.
The case otherwise remains stayed pending the USPTO’s
re-examination of the ‘020 patent. We continue to believe
that our defenses against infringement of the ‘020 patent
are valid and meritorious, and we intend to continue to defend
this lawsuit vigorously.
We are involved in certain ongoing contractual and other
disputes pertaining to royalty arrangements with licensors of
technology. We intend to defend ourselves vigorously against the
licensors’ claims. Because these matters are in the
preliminary stages of the dispute resolution process, we cannot
estimate the possible loss, if any, we may incur or predict the
likely outcome of these matters.
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 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 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. 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. In the first
quarter of 2011, we received a subpoena from the SEC seeking
documents and other records pertaining to our business
activities in substantially all countries in the Asia Pacific
20
Table of Contents
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
region where we operate. We are in the process of responding to
the subpoena. We cannot currently predict the outcome of this
investigation.
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. On February 25, 2011, the
plaintiff filed 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.
21
Table of Contents
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in
conjunction with the condensed consolidated financial statements
and corresponding notes included elsewhere in this
Form 10-Q.
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. In addition, certain amounts in the 2010
condensed consolidated financial statements have been
reclassified to conform to the 2011 presentation.
Overview
We believe the following developments or trends are important in
understanding our financial condition, results of operations and
cash flows for the three and six month periods ended
June 30, 2011 and our expected results for the remainder of
2011.
Demand
(Volume and Mix) Trends
Increased volume and changes in the mix of product sales
contributed 3 percentage points of
year-over-year
sales growth during the three month period ended June 30,
2011, which is 1 percentage point less than the three month
period ended June 30, 2010, as well as the three month
period ended March 31, 2011.
Volume and mix trends continued to be challenged by the global
economy, especially in our Americas operating segment. We
believe continued high unemployment levels are linked to lower
enrollment in private health insurance plans, which has affected
the patient pool for joint replacement procedures.
Long-term indicators still point toward sustained growth driven
by an aging global population, obesity, more active lifestyles,
growth in emerging markets, new material technologies, advances
in surgical techniques and proven clinical benefits of joint
replacement procedures. In addition, the ongoing shift in demand
to premium products, such as
Prolong
®
Highly Crosslinked Polyethylene,
Trabecular
Metal
TM
Technology products, hip stems with
Kinectiv
®
Technology, high-flex knees, porous hip stems and the
introduction of patient specific devices, is expected to
continue to positively affect sales growth.
Pricing
Trends
Global selling prices had a negative effect of 1 percent on
year-over-year
sales growth during the three month period ended June 30,
2011, which is consistent with the three month period ended
June 30, 2010, as well as the three month period ended
March 31, 2011. Selling prices in the Americas had a
negative effect of 1 percent on sales growth in that
operating segment during the three month period ended
June 30, 2011. Europe selling prices had minimal effects on
sales growth in that operating segment during the three month
period ended June 30, 2011. In our Asia Pacific operating
segment, the pricing trends improved from a negative
3 percent effect on
year-over-year
sales growth in the three month period ended March 31,
2011, to a negative 1 percent effect in the three month
period ended June 30, 2011. This is mainly attributable to
the anniversary of bi-annual pricing adjustments in Japan that
went into effect on April 1, 2010. Accordingly, we expect
pricing trends consistent with the three month period ended
June 30, 2011 for the rest of the year in the Asia Pacific
operating segment. We now expect selling prices will be down
approximately 1 percent on a global basis for 2011 largely
due to governmental healthcare cost containment efforts and
continuing pricing pressure from local hospitals and health
systems.
Foreign
Currency Exchange Rates
For the three month period ended June 30, 2011, foreign
currency exchange rates resulted in a 6 percent increase in
sales. Assuming currency rates remain at June 30, 2011
rates, for the year ending December 31, 2011, we estimate
that an overall weaker U.S. Dollar versus foreign currency
exchange rates will have a positive effect of approximately
3 percent on sales. We seek to mitigate currency risk
through regular operating and financing activities and, under
appropriate circumstances and subject to proper authorization,
through the use of forward contracts and foreign currency
options solely for managing foreign currency volatility and
risk. Changes to foreign currency exchange rates affect sales
growth, but due to offsetting gains/losses on hedge contracts,
which are recorded in cost of products sold, the effect on net
earnings in the near term is expected to be minimal.
22
Table of Contents
2011
Outlook
We estimate our sales will grow between 5.5 and 6.5 percent
for the full year in 2011. Such sales growth assumes the market
for global knee and hip procedures will be flat to slightly
positive. As discussed previously, we expect pricing to have a
negative effect on sales growth of approximately 1 percent,
and foreign currency exchange rates to have a positive effect on
sales growth of approximately 3 percent based upon
June 30, 2011 rates.
Assuming currencies remain at June 30, 2011 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 contracts 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 5.5 percent of sales. Selling, general and
administrative expenses (SG&A) as a percent of sales is
expected to be approximately 41 percent as we continue to
invest to further build out our global sales channels and
realize a higher mix of revenues from overseas markets.
We expect to incur $75 to $80 million of expenses in 2011
related to ongoing global restructuring and transformation
initiatives. We also expect to incur an additional $15 to
$20 million for certain 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.
RESULTS
OF OPERATIONS
Net
Sales by Operating Segment
The following tables present net sales by operating segment and
the components of the percentage changes (dollars in millions):
|
Three Months Ended
|
||||||||||||||||||||||||
| June 30, |
Volume/
|
Foreign
|
||||||||||||||||||||||
| 2011 | 2010 | % Inc | Mix | Price | Exchange | |||||||||||||||||||
|
Americas
|
$ | 608.6 | $ | 609.3 | — | % | 1 | % | (1 | ) % | — | % | ||||||||||||
|
Europe
|
324.7 | 276.5 | 17 | 5 | — | 12 | ||||||||||||||||||
|
Asia Pacific
|
204.1 | 171.9 | 19 | 7 | (1 | ) | 13 | |||||||||||||||||
|
Total
|
$ | 1,137.4 | $ | 1,057.7 | 8 | 3 | (1 | ) | 6 | |||||||||||||||
“Foreign Exchange” as used in the tables in this
report represents the effect of changes in foreign currency
exchange rates on sales growth.
|
Six Months Ended
|
||||||||||||||||||||||||
| June 30, |
Volume/
|
Foreign
|
||||||||||||||||||||||
| 2011 | 2010 | % Inc | Mix | Price | Exchange | |||||||||||||||||||
|
Americas
|
$ | 1,238.3 | $ | 1,225.0 | 1 | % | 2 | % | (1 | ) % | — | % | ||||||||||||
|
Europe
|
623.9 | 562.6 | 11 | 4 | 1 | 6 | ||||||||||||||||||
|
Asia Pacific
|
390.8 | 332.9 | 17 | 9 | (2 | ) | 10 | |||||||||||||||||
|
Total
|
$ | 2,253.0 | $ | 2,120.5 | 6 | 4 | (1 | ) | 3 | |||||||||||||||
23
Table of Contents
Net
Sales by Product Category
The following tables present net sales by product category and
the components of the percentage changes (dollars in millions):
|
Three Months Ended
|
||||||||||||||||||||||||
| June 30, |
% Inc
|
Volume/
|
Foreign
|
|||||||||||||||||||||
| 2011 | 2010 | (Dec) | Mix | Price | Exchange | |||||||||||||||||||
|
Reconstructive
|
||||||||||||||||||||||||
|
Knees
|
$ | 470.9 | $ | 452.9 | 4 | % | 1 | % | (2 | ) % | 5 | % | ||||||||||||
|
Hips
|
345.0 | 317.1 | 9 | 4 | (2 | ) | 7 | |||||||||||||||||
|
Extremities
|
40.7 | 38.2 | 7 | 5 | (1 | ) | 3 | |||||||||||||||||
|
Total
|
856.6 | 808.2 | 6 | 2 | (2 | ) | 6 | |||||||||||||||||
|
Dental
|
67.1 | 55.9 | 20 | 8 | 8 | 4 | ||||||||||||||||||
|
Trauma
|
69.1 | 57.8 | 20 | 12 | 2 | 6 | ||||||||||||||||||
|
Spine
|
56.4 | 57.9 | (3 | ) | (5 | ) | (1 | ) | 3 | |||||||||||||||
|
Surgical and other
|
88.2 | 77.9 | 13 | 8 | — | 5 | ||||||||||||||||||
|
Total
|
$ | 1,137.4 | $ | 1,057.7 | 8 | 3 | (1 | ) | 6 | |||||||||||||||
|
Six Months Ended
|
||||||||||||||||||||||||
| June 30, |
% Inc
|
Volume/
|
Foreign
|
|||||||||||||||||||||
| 2011 | 2010 | (Dec) | Mix | Price | Exchange | |||||||||||||||||||
|
Reconstructive
|
||||||||||||||||||||||||
|
Knees
|
$ | 933.1 | $ | 913.3 | 2 | % | 1 | % | (2 | ) % | 3 | % | ||||||||||||
|
Hips
|
682.3 | 632.8 | 8 | 5 | (2 | ) | 5 | |||||||||||||||||
|
Extremities
|
83.6 | 76.6 | 9 | 8 | (1 | ) | 2 | |||||||||||||||||
|
Total
|
1,699.0 | 1,622.7 | 5 | 3 | (2 | ) | 4 | |||||||||||||||||
|
Dental
|
129.5 | 107.6 | 20 | 9 | 9 | 2 | ||||||||||||||||||
|
Trauma
|
139.2 | 118.2 | 18 | 13 | 1 | 4 | ||||||||||||||||||
|
Spine
|
113.3 | 117.9 | (4 | ) | (4 | ) | (2 | ) | 2 | |||||||||||||||
|
Surgical and other
|
172.0 | 154.1 | 12 | 7 | — | 5 | ||||||||||||||||||
|
Total
|
$ | 2,253.0 | $ | 2,120.5 | 6 | 4 | (1 | ) | 3 | |||||||||||||||
24
Table of Contents
The following table presents net sales by product category by
region (dollars in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| 2011 | 2010 | % Inc (Dec) | 2011 | 2010 | % Inc (Dec) | |||||||||||||||||||
|
Reconstructive
|
||||||||||||||||||||||||
|
Knees
|
||||||||||||||||||||||||
|
Americas
|
$ | 266.5 | $ | 279.8 | (5 | ) % | $ | 544.3 | $ | 566.0 | (4 | ) % | ||||||||||||
|
Europe
|
127.9 | 106.1 | 21 | 245.1 | 219.7 | 12 | ||||||||||||||||||
|
Asia Pacific
|
76.5 | 67.0 | 14 | 143.7 | 127.6 | 13 | ||||||||||||||||||
|
Hips
|
||||||||||||||||||||||||
|
Americas
|
151.4 | 148.4 | 2 | 306.0 | 295.2 | 4 | ||||||||||||||||||
|
Europe
|
121.8 | 109.2 | 12 | 236.0 | 221.0 | 7 | ||||||||||||||||||
|
Asia Pacific
|
71.8 | 59.5 | 20 | 140.3 | 116.6 | 20 | ||||||||||||||||||
|
Extremities
|
||||||||||||||||||||||||
|
Americas
|
31.1 | 29.6 | 5 | 64.3 | 59.2 | 9 | ||||||||||||||||||
|
Europe
|
6.9 | 6.2 | 10 | 13.7 | 12.7 | 8 | ||||||||||||||||||
|
Asia Pacific
|
2.7 | 2.4 | 14 | 5.6 | 4.7 | 20 | ||||||||||||||||||
|
Total
|
856.6 | 808.2 | 6 | 1,699.0 | 1,622.7 | 5 | ||||||||||||||||||
|
Dental
|
||||||||||||||||||||||||
|
Americas
|
33.6 | 28.5 | 18 | 68.3 | 55.7 | 23 | ||||||||||||||||||
|
Europe
|
25.0 | 21.4 | 16 | 45.7 | 40.2 | 13 | ||||||||||||||||||
|
Asia Pacific
|
8.5 | 6.0 | 44 | 15.5 | 11.7 | 33 | ||||||||||||||||||
|
Trauma
|
||||||||||||||||||||||||
|
Americas
|
35.1 | 31.3 | 12 | 72.1 | 63.9 | 13 | ||||||||||||||||||
|
Europe
|
15.9 | 11.2 | 43 | 30.0 | 23.0 | 31 | ||||||||||||||||||
|
Asia Pacific
|
18.1 | 15.3 | 19 | 37.1 | 31.3 | 18 | ||||||||||||||||||
|
Spine
|
||||||||||||||||||||||||
|
Americas
|
37.3 | 41.7 | (11 | ) | 76.1 | 85.7 | (11 | ) | ||||||||||||||||
|
Europe
|
14.4 | 12.6 | 15 | 28.2 | 25.5 | 11 | ||||||||||||||||||
|
Asia Pacific
|
4.7 | 3.6 | 29 | 9.0 | 6.7 | 34 | ||||||||||||||||||
|
Surgical and other
|
||||||||||||||||||||||||
|
Americas
|
53.6 | 50.0 | 7 | 107.2 | 99.3 | 8 | ||||||||||||||||||
|
Europe
|
12.8 | 9.8 | 32 | 25.2 | 20.5 | 23 | ||||||||||||||||||
|
Asia Pacific
|
21.8 | 18.1 | 20 | 39.6 | 34.3 | 15 | ||||||||||||||||||
|
Total
|
$ | 1,137.4 | $ | 1,057.7 | 8 | $ | 2,253.0 | $ | 2,120.5 | 6 | ||||||||||||||
Knees
Knee sales increased 4 percent and 2 percent in the
three and six month periods ended June 30, 2011,
respectively, when compared to the same prior year periods. We
estimate that industry procedure volumes were likely flat to
slightly positive on a global basis in the first half of 2011
while pricing was negative. While
year-over-year
comparisons ease in the second half of 2011, we believe
procedure volumes will continue to be pressured from a cyclical
downturn related to unemployment levels.
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 the
Gender
Solutions
Patello Femoral Joint and
Zimmer
®
Patient Specific Instruments exhibited growth. In Europe, we
completed a large tender contract to the ministry of health in a
25
Table of Contents
government-run healthcare system in the three month period ended
June 30, 2011, which contributed to knee sales growth in
that operating segment. Additionally in Europe, changes in
foreign currency exchange rates positively affected knee sales
by 12 percent and 6 percent in the three and six month
periods ended June 30, 2011, respectively. In Asia Pacific,
changes in foreign currency exchange rates positively affected
knee sales by 12 percent and 11 percent in the three
and six month periods ended June 30, 2011, respectively.
Hips
Hip sales increased 9 percent and 8 percent in the
three and six month periods ended June 30, 2011,
respectively, when compared to the same prior year periods. The
increase was driven primarily by our
Continuum
®
Acetabular System and our
Zimmer
M/L Taper Stem with
Kinectiv
Technology. Additionally, negative publicity in
the marketplace over the use of hip systems that use
metal-on-metal
technology may have contributed to an increase in sales of hip
systems with alternative bearing surfaces.
Metal-on-metal
technology represents only a small portion of our hip sales.
Therefore, our market share position may have benefited from
customers using our hip systems instead of a competitor’s
metal-on-metal
system.
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 the
Continuum
Acetabular System,
Trilogy
®
IT Acetabular System and
Allofit
®
IT
Alloclassic
Acetabular System and the
Trabecular
Metal
Revision Shell and Augment Cups were strong when
compared to the prior year periods, as were sales of
BIOLOX
®
1
delta
Heads and
Fitmore
®
Hip Stems. In Europe, changes in foreign currency exchange rates
positively affected hip sales by 13 percent and
7 percent in the three and six month periods ended
June 30, 2011, respectively. In Asia Pacific, our December
2010 acquisition of Beijing Montagne Medical Device Co., Ltd.
made a contribution to that operating segment’s sales
growth in the three and six month periods ended June 30,
2011. Additionally, in Asia Pacific changes in foreign currency
exchange rates positively affected hip sales by 13 percent
and 11 percent in the three and six month periods ended
June 30, 2011, respectively.
Extremities
Extremities sales increased by 7 percent and 9 percent
in the three and six month periods ended June 30, 2011,
respectively, when compared to the same prior year periods. The
Bigliani/Flatow
®
Complete Shoulder Solution and the
Zimmer Trabecular Metal
Reverse Shoulder System led extremities sales. We continue
to see competitive pressure in this category, but expect that
new product introductions will help to accelerate growth.
Dental
Dental sales increased by 20 percent in the three and six
month periods ended June 30, 2011 when compared to the same
prior year periods, including increases of 8 percent and
9 percent, respectively, due to pricing. A significant
portion of this pricing increase was due to a change in the
agreement by which we distribute certain regenerative products.
Under the prior agreement we did not take title to the products
and only received a commission from the end-user sale. Under the
new agreement, we take title to the product and recognize the
final end-user sale along with the cost of products sold and any
other selling-related costs. Sales were led by the
Tapered
Screw-Vent
®
Implant System.
Trauma
Trauma sales increased 20 percent and 18 percent in
the three and six month periods ended June 30, 2011,
respectively, when compared to the same prior year periods. We
have continued the launch of the
Zimmer Natural
Nail
®
System, which has significantly increased sales. In addition to
the
Zimmer Natural Nail
System,
Zimmer
Periarticular Locking Plates and the
Zimmer
NCB
®
Plating System led trauma sales, while sales of cable products
also made a strong contribution.
1
BIOLOX
®
is a trademark of CeramTec AG
26
Table of Contents
Spine
Spine sales decreased 3 percent and 4 percent in the
three and six month periods ended June 30, 2011,
respectively, when compared to the same prior year periods. Our
spine business in the Americas operating segment continued to
experience operational challenges, a difficult reimbursement
landscape and challenges related to the
Dynesys
®
Dynamic Stabilization System. Solid sales of the
PathFinder
®
and
Sequoia
®
Pedicle Screw Systems, our
Universal
Clamp
TM
System and
Trabecular Metal
Technology products partly
offset a decline in sales of the
Dynesys
System.
Surgical
and other
Surgical sales increased 13 percent and 12 percent in
the three and six month periods ended June 30, 2011,
respectively, when compared to the same prior year periods.
Surgical sales were led by
PALACOS
®
2
Bone Cement and tourniquet products. Our wound debridement
products also made a strong contribution to sales results, as
did our December 2010 acquisition of Sodem Diffusion S.A.
Expenses
as a Percent of Net Sales
|
Three Months
|
Six Months Ended
|
|||||||||||||||||||||||
| Ended June 30, | June 30, | |||||||||||||||||||||||
| 2011 | 2010 | Inc (Dec) | 2011 | 2010 | Inc (Dec) | |||||||||||||||||||
|
Cost of products sold
|
25.3 | % | 23.7 | % | 1.6 | 25.2 | % | 24.5 | % | 0.7 | ||||||||||||||
|
Research and development
|
5.0 | 5.1 | (0.1 | ) | 5.0 | 4.9 | 0.1 | |||||||||||||||||
|
Selling, general and administrative
|
41.3 | 41.4 | (0.1 | ) | 41.2 | 41.8 | (0.6 | ) | ||||||||||||||||
|
Certain claims
|
4.4 | 7.1 | (2.7 | ) | 2.2 | 3.5 | (1.3 | ) | ||||||||||||||||
|
Special items
|
1.2 | 1.1 | 0.1 | 1.7 | 0.7 | 1.0 | ||||||||||||||||||
|
Operating profit
|
22.8 | 21.6 | 1.2 | 24.7 | 24.6 | 0.1 | ||||||||||||||||||
Cost
of Products Sold
The increase in cost of products sold as a percentage of net
sales for the three month period ended June 30, 2011
compared to the same prior year period is primarily due to
foreign currency hedge losses recorded in the current year
period compared to foreign currency hedge gains recorded in the
prior year period. 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.
Additionally, the average cost per unit was higher in the
current year period than the prior year period, but this was
partially offset by lower excess and obsolescence charges from
some product specific matters and lower royalty expense.
The increase in cost of products sold as a percentage of net
sales for the six month period ended June 30, 2011 compared
to the same prior year period is primarily due to foreign
currency losses recorded in the current year period compared to
foreign currency hedge gains recorded in the prior year period.
This was partially offset by lower royalty expense.
Operating
Expenses
R&D expenses increased in both the three and six month
periods ended June 30, 2011, when compared to the same
prior year periods, while R&D as a percent of sales stayed
relatively stable when comparing the same periods. The expense
increase is in line with our strategy to focus more investment
into new product development activities across nearly all of our
product categories as well as to increase spending on external
research, clinical, regulatory and quality initiatives. We
expect R&D spending in 2011 to be 5 to 5.5 percent of
sales for the full year.
2
PALACOS
®
is a trademark of Heraeus Kulzer GmbH
27
Table of Contents
SG&A expenses increased in dollar terms in the three and
six month periods ended June 30, 2011, but have decreased
as a percent of sales when compared to the same prior year
periods. The dollar increases in both the three and six month
periods are primarily from variable selling and distribution
expenses resulting from higher net sales in the 2011 periods
compared to the 2010 periods, increased intangible amortization
from our December 2010 acquisitions and other intangible asset
investments, and higher medical education expenses as we
continue to expand training and education on the safe and
effective use of our products.
In the three month period ended June 30, 2011, SG&A as
a percent of sales was only slightly lower than the same prior
year period as savings from certain cost savings initiatives
have been reinvested in sales channels in emerging and other key
markets and a higher mix of revenues in overseas markets.
In the six month period ended June 30, 2011, SG&A as a
percent of sales decreased by 60 basis points for similar
reasons as the three month period in addition to lower product
liability costs. See Note 15 to the condensed consolidated
financial statements for a more complete discussion of product
liability claims.
“Certain claims” expense is a provision for estimated
liabilities to
Durom
Cup patients undergoing revision
surgeries. A provision of $104.0 million was originally
recorded during 2008 and 2009 with an additional
$50.0 million and $75.0 million recorded during the
three month periods ended June 30, 2011 and 2010,
respectively, bringing the total provision to
$229.0 million for these claims. For more information
regarding these claims, see Note 15 to the condensed
consolidated financial statements.
“Special items” for the three and six month periods
ended June 30, 2011 increased to $13.5 million and
$39.0 million, respectively, from $11.5 million and
$14.1 million in the same prior year periods, respectively.
The largest component of “Special items” in 2011 was
employee severance and termination-related expenses resulting
from a reduction in management layers, expansion of management
spans of control, and changes in our organizational structure.
“Special items” also includes expenses relating to
integration of business acquisitions and fixed asset
impairments. The 2010 expenses were primarily related to
expenses resulting from business acquisitions. See Note 2
to the condensed consolidated financial statements for more
information regarding “Special items” charges.
Interest
Expense, Income Taxes and Net Earnings
Interest expense, net for the three and six month periods ended
June 30, 2011 decreased to $9.8 million and
$20.8 million, respectively, from $14.3 million and
$28.9 million in the same prior year periods, respectively.
The decrease in interest expense is the result of interest rate
swap agreements we entered into in late 2010 and early 2011 to
convert fixed-rate debt into variable-rate debt. Additionally,
interest income has increased due to higher balances of cash and
cash equivalents and short-term and long-term investments and
higher returns on certain investments.
The effective tax rate on earnings before income taxes for the
three and six month periods ended June 30, 2011 decreased
to 18.2 percent and 22.9 percent, respectively, from
22.6 percent and 24.8 percent in the same prior year
periods, respectively. The effective tax rates in the 2011
periods were positively affected by the favorable resolution of
certain tax matters and the tax effect of the “Certain
claims” provision. The effective tax rates in the 2010
periods were positively affected by the “Certain
claims” provision. We anticipate the outcome of various
federal, state and foreign audits as well as expiration of
certain statutes of limitations could potentially impact our
2011 effective tax rate in future quarters. Currently, we cannot
reasonably estimate the impact of these items on our financial
results.
Net earnings increased 23 percent to $203.8 million
for the three month period ended June 30, 2011, compared to
$165.5 million in the same prior year period. Net earnings
increased 11 percent to $412.7 million for the six
month period ended June 30, 2011, compared to
$370.9 million in the same prior year period. The
improvements in net earnings were due to the changes in revenues
and expenses discussed above. For the three month period ended
June 30, 2011, basic and diluted earnings per share both
increased 29 percent to $1.06 from $0.82 in the same prior
year period. For the six month period ended June 30, 2011,
basic and diluted earnings per share both increased
18 percent to $2.15 and $2.14, respectively, from $1.83 and
$1.82, respectively, in the same prior year period. The
disproportional change in earnings per share as compared with
net earnings is attributed to the effect of 2011 and
2010 share repurchases.
28
Table of Contents
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. GAAP. Our non-GAAP financial measures
exclude the impact of inventory
step-up
charges, “Certain claims” and “Special
items,” and the taxes on those items in addition to certain
other tax adjustments. We use this information internally and
believe it is helpful to investors because it allows more
meaningful
period-to-period
comparisons of our ongoing operating results, it helps to
perform trend analysis and to better identify operating trends
that may otherwise be masked or distorted by these types of
items, and it provides a higher degree of transparency of
certain items. Certain of these non-GAAP financial measures are
used as metrics for our incentive compensation programs.
Our non-GAAP adjusted net earnings used for internal management
purposes for the three and six month periods ended June 30,
2011 were $232.5 million and $463.4 million,
respectively, compared to $221.2 million and
$428.6 million in the same prior year periods,
respectively. Our non-GAAP adjusted diluted earnings per share
for the three and six month periods ended June 30, 2011
were $1.21 and $2.40, respectively, compared to $1.09 and $2.10
in the same prior year periods, respectively.
Our non-GAAP adjusted net earnings and adjusted diluted earnings
per share increased in the 2011 periods compared to the 2010
periods due to increased sales, disciplined spending in
SG&A, and lower product liability costs. These improvements
were slightly offset by higher product costs, higher surgeon
medical training and education expenses and additional
intangible amortization.
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.
|
Three Months
|
Six Months
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (In millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Net Earnings of Zimmer Holdings, Inc.
|
$ | 203.8 | $ | 165.5 | $ | 412.7 | $ | 370.9 | ||||||||
|
Inventory
step-up
|
3.4 | — | 7.8 | 1.3 | ||||||||||||
|
Certain claims
|
50.0 | 75.0 | 50.0 | 75.0 | ||||||||||||
|
Special items
|
13.5 | 11.5 | 39.0 | 14.1 | ||||||||||||
|
Taxes on inventory
step-up,
certain claims and special items and tax adjustments related to
resolution of certain tax matters*
|
(38.2 | ) | (30.8 | ) | (46.1 | ) | (32.7 | ) | ||||||||
|
Adjusted Net Earnings
|
$ | 232.5 | $ | 221.2 | $ | 463.4 | $ | 428.6 | ||||||||
| * | The tax effect is calculated based upon the statutory rates for the jurisdictions where the items were incurred. |
|
Three Months
|
Six Months
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Diluted EPS
|
$ | 1.06 | $ | 0.82 | $ | 2.14 | $ | 1.82 | ||||||||
|
Inventory
step-up
|
0.02 | — | 0.04 | 0.01 | ||||||||||||
|
Certain claims
|
0.26 | 0.37 | 0.26 | 0.37 | ||||||||||||
|
Special items
|
0.07 | 0.05 | 0.20 | 0.06 | ||||||||||||
|
Taxes on inventory
step-up,
certain claims and special items and tax adjustments related to
resolution of certain tax matters*
|
(0.20 | ) | (0.15 | ) | (0.24 | ) | (0.16 | ) | ||||||||
|
Adjusted Diluted EPS
|
$ | 1.21 | $ | 1.09 | $ | 2.40 | $ | 2.10 | ||||||||
| * | The tax effect is calculated based upon the statutory rates for the jurisdictions where the items were incurred. |
29
Table of Contents
Healthcare
Reform in the U.S.
We continue to assess the impact that federal healthcare reform
will have on our business. Federal healthcare reform 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
$433.2 million for the six month period ended June 30,
2011, compared to $532.2 million in the same prior year
period. The principal source of cash from operating activities
was net earnings. Non-cash items included in net earnings
accounted for another $214.2 million of operating cash. All
other items of operating cash flows reflect a use of
$193.7 million of cash, compared to a use of
$36.4 million in the same 2010 period. The lower cash flows
provided by operating activities in the 2011 period were
primarily due to lower receivable collections, investments in
inventory, increased pension funding, and increased product
liability payments.
At June 30, 2011, we had 68 days of sales outstanding
in trade accounts receivable, which represents an increase of
2 days compared to March 31, 2011 and an increase of
7 days compared to June 30, 2010, reflecting changes
in certain accounts receivable factoring programs in our Europe
operating segment. At June 30, 2011, we had 307 days
of inventory on hand, which is a decrease of 5 days
compared to March 31, 2011 and a decrease of 11 days
from June 30, 2010. Despite an increase in inventory value
to support new product launches, days of inventory on hand have
decreased slightly due to higher cost of products sold that are
part of the denominator in this calculation.
Cash flows used in investing activities were $162.5 million
for the six month period ended June 30, 2011, compared to
$91.9 million in the same prior year period. Additions to
instruments increased slightly in the 2011 period compared to
the 2010 period to support new product launches, such as our
Continuum
Acetabular System, and to support sales growth.
Spending on other property, plant and equipment increased in the
2011 period compared to the 2010 period, reflecting cash outlays
necessary to complete new product-related investments and
replace older machinery and equipment. We invest 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. We increased our
purchases of investments beginning in the second half of 2010
and into 2011, which explains the increased investment activity
in the first six months of 2011 compared to the same 2010
period. Investments in other assets increased in the 2011 period
compared to the 2010 period primarily for payments to acquire
certain foreign-based distributors and payments for exclusive
distribution rights for certain products.
Cash flows used in financing activities were $324.3 million
for the three month period ended June 30, 2011, compared to
$169.8 million in the same 2010 period. In the 2011 period,
we repurchased 6.1 million common shares for a total of
$357.2 million, including commissions, under our share
repurchase program authorized by our Board of Directors,
compared to $178.9 million in the same 2010 period.
Proceeds from our stock compensation plans increased in the six
month period ended June 30, 2011, compared to the same 2010
period, due to an increase in employee stock option exercises.
We have two outstanding tranches of unsecured senior notes
(Senior Notes): $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
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.
30
Table of Contents
We have a five year $1,350 million revolving,
multi-currency, senior unsecured credit facility maturing
November 30, 2012 (Senior Credit Facility). We had
$143.0 million in outstanding borrowings under the Senior
Credit Facility as of June 30, 2011, and an availability of
$1,207.0 million.
We also have available uncommitted credit facilities totaling
$53.5 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 June 30, 2011, we had short-term and long-term
investments in debt securities with a fair value of
$425.7 million. These investments are in debt securities of
many different issuers and therefore we have no significant
concentration of risk with a single issuer. All of these debt
securities are highly-rated and therefore we believe the risk of
default by the issuer is low.
As of June 30, 2011, $909.4 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 $780 million of
this amount is denominated in U.S. Dollars and therefore
bears no foreign currency translation risk. The balance of these
assets is denominated in currencies of the various countries
where we operate.
We may use excess cash to repurchase additional common stock
under our share repurchase program. As of June 30, 2011,
approximately $0.8 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 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.
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.
Forward-Looking
Statements
This quarterly report contains certain statements that are
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. When used in this report, the words
“may,” “will,” “should,”
“would,” “could,” “anticipate,”
“expect,” “plan,” “seek,”
“believe,” “predict,” “estimate,”
“potential,” “project,” “target,”
“forecast,” “intend,” “strategy,”
“future,” “opportunity,” “assume,”
“guide” and similar expressions are intended to
identify forward-looking statements. Forward-looking statements
are based on current expectations and assumptions that are
subject to risks and uncertainties that could cause actual
results to differ materially from such forward-looking
statements. These risks and uncertainties include, but are not
limited to:
| • | our compliance through 2012 with the Corporate Integrity Agreement we entered into as part of the 2007 settlement with the United States government; | |
| • | the outcome of the investigation by the U.S. government into Foreign Corrupt Practices Act matters announced in 2007; | |
| • | competition; | |
| • | pricing pressures; | |
| • | changes in customer demand for our products and services caused by demographic changes or other factors; | |
| • | dependence on new product development, technological advances and innovation; |
31
Table of Contents
| • | product liability claims; | |
| • | retention of our independent agents and distributors; | |
| • | our ability to protect proprietary technology and other intellectual property and claims for infringement of the intellectual property rights of third parties; | |
| • | the possible disruptive effect of additional strategic acquisitions and our ability to successfully integrate acquired companies; | |
| • | our ability to form and implement strategic alliances; | |
| • | our dependence on a limited number of suppliers for key raw materials and outsourced activities; | |
| • | the impact of the federal healthcare reform legislation, including the impact of the new excise tax on medical devices; | |
| • | reductions in reimbursement levels by third-party payors and cost containment efforts of healthcare purchasing organizations; | |
| • | challenges relating to changes in and compliance with governmental laws and regulations affecting our U.S. and international businesses, including regulations of the U.S. Food and Drug Administration and foreign government regulators, such as more stringent requirements for regulatory clearance of our products; | |
| • | tax reform measures, tax authority examinations and associated tax risks and potential obligations; | |
| • | the success of our quality and operational improvement initiatives; | |
| • | the costs of defending or resolving putative class action litigation arising out of trading or ownership of our stock; | |
| • | changes in prices of raw materials and products and our ability to control costs and expenses; | |
| • | changes in general domestic and international economic conditions, including interest rate and currency exchange rate fluctuations; | |
| • | changes in general industry and market conditions, including domestic and international growth rates; and | |
| • | shifts in our product category sales mix or our regional sales mix away from products or geographic regions that generate higher operating margins. |
Our Annual Report on
Form 10-K
for the year ended December 31, 2010 contains a detailed
discussion of these and other important factors under the
heading “Risk Factors” in Part I, Item IA of
that report. You should understand that it is not possible to
predict or identify all factors that could cause actual results
to differ materially from forward-looking statements.
Consequently, you should not consider any list or discussion of
such factors to be a complete set of all potential risks or
uncertainties.
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. This
cautionary statement is applicable to all forward-looking
statements contained in this report.
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
Form 10-Q,
8-K
and
10-K
reports
and our other filings with the Securities and Exchange
Commission.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes from the information
provided in our Annual Report on
Form 10-K
for the year ended December 31, 2010.
32
Table of Contents
| Item 4. | Controls and Procedures |
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Rules 13a-15(e)
under the Securities Exchange Act of 1934 (the “Exchange
Act”)) that are designed to provide reasonable assurance
that information required to be disclosed in the reports that we
file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosures. Because of inherent limitations, disclosure
controls and procedures, no matter how well designed and
operated, can provide only reasonable, and not absolute,
assurance that the objectives of disclosure controls and
procedures are met.
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, as of the
end of the period covered by this report, our disclosure
controls and procedures are effective at a reasonable assurance
level.
Changes
in Internal Control Over Financial Reporting
There was no change in our internal control over financial
reporting (as defined in
Rule 13a-15(f)
of the Exchange Act) that occurred during the quarter ended
June 30, 2011 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
| Item 1. | Legal Proceedings |
Information pertaining to legal proceedings can be found in
Note 15 to the interim condensed consolidated financial
statements included in Part I of this report.
| Item 1A. | Risk Factors |
There have been no material changes from the risk factors
disclosed in Part I, Item 1A of our Annual Report on
Form 10-K
for the year ended December 31, 2010.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table summarizes repurchases of common stock
settled during the three month period ended June 30, 2011:
|
Total Number of
|
Approximate
|
|||||||||||||||
|
Shares Purchased
|
Dollar Value of
|
|||||||||||||||
|
as Part of
|
Shares that May
|
|||||||||||||||
|
Total Number
|
Publicly
|
Yet Be Purchased
|
||||||||||||||
|
of Shares
|
Average Price
|
Announced Plans
|
Under Plans
|
|||||||||||||
| Purchased | Paid per Share | or Programs* | or Programs | |||||||||||||
|
April 2011
|
— | $ | — | 63,267,163 | $ | 969,670,852 | ||||||||||
|
May 2011
|
1,040,000 | 69.16 | 64,307,163 | 897,748,742 | ||||||||||||
|
June 2011
|
789,000 | 62.33 | 65,096,163 | 848,568,032 | ||||||||||||
|
Total
|
1,829,000 | $ | 66.21 | 65,096,163 | $ | 848,568,032 | ||||||||||
| * | Includes repurchases made under expired programs as well as the current program authorizing $1.5 billion of repurchases through December 31, 2013. |
33
Table of Contents
| Item 5. | Other Information |
During the three month period ended June 30, 2011, the
Audit Committee of our Board of Directors was not asked to, and
did not, approve the engagement of PricewaterhouseCoopers LLP,
our independent registered public accounting firm, to perform
any non-audit services. This disclosure is made pursuant to
Section 10A(i)(2) of the Exchange Act, as added by
Section 202 of the Sarbanes-Oxley Act of 2002.
| Item 6. | Exhibits |
The following exhibits are filed or furnished as part of this
report:
| 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 | Certifications 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* |
| * | 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. |
34
Table of Contents
Pursuant to the requirements 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.
(Registrant) |
||||||
|
Date: August 8, 2011
|
By: |
/s/ James
T.
Crines
|
||||
| James T. Crines | ||||||
| Executive Vice President, Finance and | ||||||
| Chief Financial Officer | ||||||
|
Date: August 8, 2011
|
By: |
/s/ Derek
M.
Davis
|
||||
| Derek M. Davis | ||||||
| Vice President, Finance and Corporate | ||||||
| Controller and Chief Accounting Officer | ||||||
35
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 5. Other InformationItem 6. Exhibits