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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For year ended December 31, 2006
Commission file number 001-16407
ZIMMER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 13-4151777 | |
| (State of Incorporation) | (IRS Employer Identification No.) | |
| 345 East Main Street, Warsaw, Indiana | 46580 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
(574) 267-6131
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Name of each exchange on which registered | |
|
Common Stock, $.01 par value
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by checkmark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2 of the
Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by checkmark whether the registrant is a shell company
(as defined Exchange Act
Rule 12b-2).
Yes o No þ
The aggregate market value of shares held by non-affiliates was
$13,780,396,086 (based on closing price of these shares on the
New York Stock Exchange on June 30, 2006, and assuming
solely for the purpose of this calculation that all directors
and executive officers of the registrant are
“affiliates”). As of February 15, 2007,
237,163,344 shares of the registrant’s $.01 par
value common stock were outstanding.
Documents Incorporated by Reference
|
Document
|
Form 10-K | |||
|
Portions of the Proxy Statement with respect to the 2007 Annual
Meeting of Stockholders
|
Part III | |||
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
This annual report contains certain statements that are
forward-looking statements within the meaning of federal
securities laws. When used in this report, the words
“may,” “will,” “should,”
“anticipate,” “estimate,”
“expect,” “plan,” “believe,”
“predict,” “potential,” “project,”
“target,” “forecast,” “intend” and
similar expressions are intended to identify forward-looking
statements. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties
include the important risks and uncertainties that may affect
our future operations that we describe in Part I,
Item 1A – Risk Factors of this report. We may
update that discussion in Part II, Item 1A –
Risk Factors in a Quarterly Report on
Form 10-Q we file
hereafter. 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.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
PART I
| ITEM 1. | Business |
GENERAL
We are a global leader in the design, development, manufacture
and marketing of reconstructive orthopaedic implants, including
joint and dental, spinal implants, trauma products and related
orthopaedic surgical products. We also provide hospital-focused
consulting services to help member institutions design,
implement and manage successful orthopaedic programs of
distinction. In this report, “Zimmer” “we”,
“us”, “our” and similar words refer
collectively to Zimmer Holdings, Inc. and its subsidiaries.
Zimmer Holdings refers to the parent company only.
Zimmer Holdings was incorporated in Delaware in 2001. Our
history dates to 1927, when Zimmer Manufacturing Company, a
predecessor, was founded in Warsaw, Indiana. On August 6,
2001, Zimmer Holdings was spun off from its former parent and
became an independent public company.
In October 2003, we finalized our acquisition of Centerpulse AG
(“Centerpulse”), a Switzerland-based orthopaedics
company and the leader in the European reconstructive market. In
addition to providing us with a leading position in the European
orthopaedic reconstructive implant market, the Centerpulse
acquisition furnished us with a platform in the growing spine
and dental implant markets.
In April 2004, we acquired Implex Corp. (“Implex”),
now known as Zimmer Trabecular Metal Technology, Inc., a company
with which we had a distribution and strategic alliance since
2000 for the commercialization of reconstructive implant and
trauma products incorporating Trabecular
Metaltm
Technology. Trabecular Metal Technology is made of the
highly biocompatible element Tantalum and it resembles natural
bone in its porosity, structural strength and bending
characteristics, making it an attractive choice for orthopaedic
implants.
We acquired Musculoskeletal Management Systems, LLC, more
commonly known as The Human Motion Institute (“HMI”),
in June 2006. HMI is a hospital efficiency consulting business
focused on orthopaedics and its programs are designed to enable
hospitals to build volumes, improve patient care and increase
margins. The HMI acquisition has provided us a platform upon
which to further execute and expand our strategic initiatives
related to healthcare economics.
In 2006, we redefined our overall corporate strategies to focus
on our ability to ENABLE, INNOVATE and GROW as our industry and
business evolves. Each of these redefined corporate strategies
is linked with three underlying initiatives. Under our corporate
strategy to ENABLE, we have established initiatives pertaining
to Educational Leadership, Healthcare Economics, and New
Audiences. In addition, concerning our redefined corporate
strategy to INNOVATE, we are focusing on initiatives dedicated
to Biologics, Advanced Designs and Materials, and
Zimmer®
SmartTools Solutions. Finally, with regard to our corporate
strategy to GROW, we have identified initiatives regarding
Women’s Musculoskeletal Health, Expanding Spine and Dental,
and Continued Infrastructure Investments.
We expect that, together, these strategic initiatives that we
redefined in 2006 will guide our business for the foreseeable
future. Additional information concerning our redefined
strategic initiatives can be found below in Part II,
Item 7 – Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
CUSTOMERS, SALES AND MARKETING
Our primary customers include musculoskeletal surgeons,
neurosurgeons, oral surgeons, dentists, hospitals, distributors,
healthcare dealers and, in their capacity as agents, healthcare
purchasing organizations or buying groups. These customers range
from large multinational enterprises to independent surgeons.
We have operations in more than 24 countries and market products
in more than 100 countries, with corporate headquarters in
Warsaw, Indiana, and more than 100 manufacturing, distribution
and warehousing and/or office facilities worldwide. We manage
our operations through three major geographic
segments – the Americas, which is comprised
principally of the United States and includes other North,
Central and South American markets; Europe, which is comprised
principally of Europe and includes the Middle East and Africa;
and Asia Pacific, which is comprised primarily of Japan and
includes other Asian and Pacific markets. Detailed financial and
other information regarding our reportable geographic segments
can be found in Note 13 to the Consolidated Financial
Statements, which are included in this report under Item 8.
We market and sell products through three principal channels:
1) direct to health care institutions, such as hospitals,
or direct channel accounts, 2) through stocking
distributors and, in the Asia Pacific region, healthcare
dealers, and 3) directly to dental practices and dental
laboratories. With direct channel accounts, inventory is
generally consigned to sales agents or customers. With sales to
stocking distributors, healthcare dealers, dental practices and
dental laboratories, title to product passes generally upon
shipment. Direct channel accounts represented more than
80 percent of our net sales in 2006. No individual direct
channel account, stocking distributor, healthcare dealer, dental
practice or dental laboratory accounted for more than
1 percent of our net sales for 2006.
We stock inventory in our warehouse facilities and retain title
to consigned inventory in sufficient quantities so that products
are available when needed for surgical procedures. Safety stock
levels are determined based on a number of factors, including
demand, manufacturing lead times and quantities required to
maintain service levels. We also carry
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trade accounts receivable balances based on credit terms that
are generally consistent with local market practices.
We utilize a network of sales associates, sales managers and
support personnel, most of whom are employed by independent
distributors and sales agencies. We invest a significant amount
of time and expense in training sales associates in such areas
as product features and benefits, how to use specific products
and how to best inform surgeons of product features and uses.
Sales force representatives rely heavily on strong technical
selling skills, medical education and the ability to provide
technical support for surgeons.
In response to the different healthcare systems throughout the
world, our sales and marketing strategies and organizational
structures differ by region. We utilize a global approach to
sales force training, marketing and medical education to provide
consistent, high quality service. Additionally, we keep current
with key surgical developments and other issues related to
musculoskeletal surgeons and the medical procedures they
perform, in part, by sponsoring medical education events. In
2006, we sponsored more than 1,800 medical education events and
meetings with and among musculoskeletal surgeons around the
world.
Americas. The Americas is our largest geographic segment,
accounting for $2,076.5 million, or 59 percent, of
2006 net sales, with the United States accounting for
95 percent of net sales in this region. The United States
sales force consists of independent sales agents, most of whom
sell products exclusively for Zimmer. Sales agents in the United
States receive a commission on product sales and are responsible
for many operating decisions and costs. Sales commissions are
accrued at the time of sale.
In this region, we contract with group purchasing organizations
and managed care accounts and have promoted unit growth by
offering volume discounts to customer health care institutions
within a specified group. At negotiated thresholds within a
contract buying period, price discounts increase. Generally, we
are designated as one of several preferred purchasing sources
for specified products, although members are not obligated to
purchase our products. Contracts with group purchasing
organizations generally have a term of three years with
extensions as warranted.
A majority of hospitals in the United States belong to at least
one group purchasing organization. In 2006, individual hospital
orders purchased through contractual arrangements with such
group purchasing organizations accounted for approximately
58 percent of our net sales in the United States.
Contractual sales were highest through Novation, LLC, Premier
Purchasing Partners, L.P., and Health Trust Purchasing
Group, representing 32 percent, 16 percent and
8 percent, respectively, of net sales in the United States.
No individual end-user, however, accounted for over
1 percent of our net sales, and the top ten end-users
accounted for approximately 4 percent of our aggregate net
sales in the United States.
In the Americas, we monitor and rank independent sales agents
across a range of performance metrics. We evaluate and reward
independent sales agents based on achieving certain sales
targets and on maintaining efficient levels of working capital.
We set expectations for efficient management of inventory and
provide independent sales agents an incentive to aid in the
collection of receivables.
Europe. The European geographic segment accounted for
$931.1 million, or 27 percent, of 2006 net sales,
with France, Germany, Italy, Spain, Switzerland and the United
Kingdom collectively accounting for more than 77 percent of
net sales in the region. This segment also includes other key
markets, including Benelux, Nordic, Central and Eastern Europe,
the Middle East and Africa. Our sales force in this region is
comprised of independent distributors, commissioned agents,
direct sales associates and sales support personnel. In Europe,
we emphasize the advantages of our clinically proven,
established designs and innovative solutions, such as minimally
invasive surgical procedures and technologies and new and
enhanced materials and surfaces.
Asia Pacific. The Asia Pacific geographic segment
accounted for $487.8 million, or 14 percent, of
2006 net sales, with Japan being the largest market within
this segment, accounting for approximately 58 percent of
the region’s sales. This segment also includes key markets
such as Australia, New Zealand, Korea, China, Taiwan, India,
Thailand, Singapore, Hong Kong and Malaysia. In Japan and most
countries in the Asia Pacific region, we maintain a network of
dealers, who act as order agents on behalf of hospitals in the
region, and sales associates, who build and maintain
relationships with musculoskeletal surgeons in their markets.
These sales associates cover over 7,000 hospitals in the region.
The knowledge and skills of our sales associates play a critical
role in providing service, product information and support to
surgeons. We intend to continue to sponsor medical education and
training programs in the region relating to orthopaedic surgery.
The key marketing and educational activities in the region
center on minimally invasive surgical procedures and
technologies, increased range of motion and improved patient
outcomes.
SEASONALITY
Our business is somewhat seasonal in nature, as many of our
products are used in elective procedures, which typically
decline during the summer months and holiday seasons.
DISTRIBUTION
We generally ship our orders via expedited courier. Our
operations support local language labeling for shipments to the
European Union member countries. We operate distribution
facilities domestically in Warsaw, Indiana; Dover, Ohio;
Statesville, North Carolina; Memphis, Tennessee; Carlsbad,
California; and, internationally, in Australia, Belgium, Canada,
France, Germany, Italy, Japan, Korea, the Netherlands,
Singapore, Spain, Switzerland and the United Kingdom. Our
backlog of firm orders is not considered material to an
understanding of our business.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
PRODUCTS
Our products include joint and dental reconstructive orthopaedic
implants, spinal implants, trauma products, and related
orthopaedic surgical products. Reconstructive orthopaedic
implants restore joint function lost due to disease or trauma in
joints such as knees, hips, shoulders and elbows. Dental
reconstructive implants restore function and aesthetics in
patients that have lost teeth due to trauma or disease.
Orthopaedic surgeons and neurosurgeons use spinal implants in
the treatment of degenerative diseases, deformities and trauma.
Trauma products are used primarily to reattach or stabilize
damaged bone and tissue to support the body’s natural
healing process. Our related orthopaedic surgical products
include supplies and instruments designed to aid in orthopaedic
surgical procedures and post-operation rehabilitation.
Information about product sales can be found in Item 7 of
this report.
Orthopaedic Reconstructive Implants
| Minimally Invasive Solutions Procedures and Technologies |
In 2006, we continued to expand our efforts to apply minimally
invasive surgical techniques to orthopaedic surgery, which we
refer to as Minimally Invasive
Solutionstm
(MIS) Procedures and Technologies. The principal goals of these
MIS Technology efforts are to reduce the hardships of having a
total joint replacement, such as the time a patient must spend
in rehabilitation, pain reduction and lost time from work. We
have used The Zimmer Institute, with its main facility located
at our global headquarters, and satellite centers, to facilitate
the training of over 6,200 surgeons on several MIS Procedures.
In 2006, we trained nearly 2,000 surgeons through The Zimmer
Institute network.
We work directly with several global medical centers to evaluate
and refine advanced minimally invasive knee and hip replacement
procedures. We have 25 existing partnerships to provide surgeon
education at The Zimmer Institute and its satellite locations.
We continue to work with our global network of medical centers
and leading surgeons to evaluate and refine our MIS procedures.
As refinements occur, they are incorporated into our course
curriculum. For example, in December 2006, we assembled a panel
of experts in the
Zimmer®
MIS
2-Incisiontm
Total Hip Replacement Procedure in Warsaw, Indiana to discuss
opportunities to further improve this already successful
procedure.
In the latter part of 2006, we introduced our MIS Anterior
Supine Total Hip Replacement Procedure. This procedure can be
performed using a traditional operating room table that
decreases surgical time and capital costs and allows for more
accurate assessment of leg length and joint stability.
Throughout 2006, we continued to develop navigation systems,
through the use of image-guided surgical technology, to aid in
the placement of instrumentation and implants where navigation
is difficult due to the small incisions necessary in
effectuating minimally invasive procedures. We trained nearly 50
surgeons in the use of electromagnetic Computer Assisted
Surgery-enabled knee replacement procedures. This technology
continues to improve.
We are focused on commercializing existing MIS Technique
approaches and investigating new ways to apply MIS Technology
principles to additional procedures and products.
| Knee Implants |
Total knee replacement surgeries typically include a femoral
component, a patella (knee cap), a tibial tray and an articular
surface (placed on the tibial tray). Knee replacement surgeries
include first-time, or primary, joint replacement procedures and
revision procedures for the replacement, repair or enhancement
of an implant or component from a previous procedure. Knee
implants are designed to accommodate different levels of
ligament stabilization of the joint. While some knee implant
designs, called cruciate retaining (CR) designs, require
the retention of the posterior cruciate ligament, other designs,
called posterior stabilized (PS) designs, provide joint
stability without the posterior cruciate ligament. There are
also procedures for partial reconstruction of the knee, which
treat limited knee degeneration and involve the replacement of
only one side, or compartment, of the knee with a
unicompartmental knee prosthesis.
Our portfolio of MIS Techniques includes the MIS Mini-Incision
Total Knee Procedures and the MIS
Quad-Sparingtm
Total Knee Replacement Procedure, with the incorporation of
Computer Assisted Surgery-enabled electromagnetic navigation
capability. The MIS Mini-Incision Total Knee Instruments feature
smaller instruments which accommodate a smaller incision and
less disruption of the surrounding soft tissues. The MIS
Quad-Sparing Total Knee Procedure features advanced
instrument concepts which allow surgeons to perform the total
knee arthroplasty through a 7-10 cm incision without cutting the
patient’s muscles or tendons.
We offer a wide range of products for specialized knee
procedures, including the following:
NexGen®
Complete Knee Solution. The NexGen Knee product
line is a comprehensive system for knee replacement surgery
which has had significant application in PS, CR and revision
procedures. The NexGen Knee System offers joint stability
and sizing that can be tailored to individual patient needs
while providing surgeons with a unified system of
interchangeable components. The NexGen Knee System
provides surgeons with complete and versatile knee instrument
options, including Zimmer MIS Quad-Sparing and MIS
Mini-Incision Instruments, milling and multiple traditional saw
blade cutting instrument systems. The breadth and versatility of
the NexGen Knee System allows surgeons to change from one
type of implant to another during surgery, according to the
needs of the patient, and to support current surgical
philosophies.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
The NexGen
Legacy®
Posterior Stabilized Knee product line provides stability in the
absence of the posterior cruciate ligament. The PS capabilities
were augmented through the introduction of the NexGen Legacy
Posterior Stabilized Flex Knee (the “LPS-Flex
Knee”), a high-flexion implant that has the potential to
accommodate knee flexion up to a 155-degree range of motion in
some patients.
The NexGen CR product line is designed to be used in
conjunction with a functioning posterior cruciate ligament. The
NexGen CR-Flex Fixed Bearing Knee is designed with
components to provide a greater range of motion for patients who
require deep bending in their daily activities. The NexGen
CR-Flex Femoral Components allow the surgeon to adjust
component sizing without removing additional bone.
The NexGen Revision Knee product line consists of several
different products that are designed to provide clinical
solutions to surgeons for various revision situations, including
a bone augmentation implant system made from our Trabecular
Metal Technology material. These augments are designed to
address significant bone loss in revision surgery.
We introduced NexGen Knee Gender
Solutionstm
Femorals in 2006. These represent the first knee implants
specifically shaped to offer fit and function optimized for
anatomic features that are more commonly seen in female
patients. This is our first Gender implant and is now an
important strategic focus for us, as more than half of total
knee arthroplasty patients are female. Gender Solutions
Femorals are available in both CR-Flex and LPS-Flex
configurations.
We offer improved polyethylene performance in the NexGen
Knee System with our conventional polyethylene and
Prolongtm
Highly Crosslinked Polyethylene, which offers reduced wear,
resistance to oxidation, pitting and cracking and is the only
insert cleared by the United States Food and Drug Administration
(FDA) for resistance to delamination. Prolong Highly
Crosslinked Polyethylene is available in both NexGen
CR-Flex and LPS-Flex designs.
The
Natural-Knee®
II System. The Natural-Knee II System consists of a range
of interchangeable, anatomically designed implants which include
a proprietary Cancellous-Structured
Titaniumtm
(CSTitm)
Porous Coating option for stable fixation in active patients and
Durasul®
Highly Crosslinked Polyethylene. We launched new Natural-Knee
II MIS instruments in December 2004 which are designed to
accommodate a smaller incision.
The
Innex®
Total Knee System. The Innex Knee System offers fixed
bearing and mobile bearing knee components all designed within
the same system philosophy. While the Innex Knee System
is best known for its mobile bearing knee offering, the
availability of differing levels of articular constraint and the
Innex Revision Knee components provide for a
comprehensive mobile and fixed bearing knee system. The Innex
Knee System is distributed in Europe and Asia Pacific, and
is not available for commercial distribution in the United
States.
The
Zimmer®
Unicompartmental High-Flex Knee System. The Zimmer
Unicompartmental High-Flex Knee System offers a high flexion
design to unicompartmental knee surgery. The high flexion
product was designed specifically for MIS Procedures and
Technologies. The system offers the surgeon the ability to
conserve bone by replacing only the compartment of the knee that
has had degenerative changes.
| Hip Implants |
Total hip replacement surgeries replace both the head of the
femur and the socket portion of the pelvis (acetabulum) of
the natural hip. Hip procedures include first time, or primary,
joint replacement as well as revision procedures. Approximately
40 percent of hip implant procedures involve the use of
bone cement to attach or affix the prosthetic components to the
surrounding bone. The remaining are press-fit into bone, which
means that they have a surface that bone affixes to through
either ongrowth or ingrowth technologies.
Our portfolio of MIS Techniques includes the Zimmer MIS
2-Incision, the Zimmer MIS Posterior, and the
Zimmer MIS Anterolateral Techniques. The incision for a
traditional open hip primary replacement may be approximately
12 inches long. Other less invasive approaches, such as a
“mini” incision for hips, have been in existence for
some time. Since January 2004, surgeons have been able to use a
computer image-guided MIS 2-Incision Hip Procedure with
technology and instrumentation co-developed by us and our MIS
Technologies computer navigation partner, Medtronic, Inc. We
received a U.S. patent for our MIS 2-Incision Hip
Procedure in 2004.
Our key hip replacement products include:
VerSys®
Hip System. The VerSys Hip System is supported by a
common instrumentation set and is an integrated family of hip
products with design-specific options to meet varying surgical
philosophies and patient needs. The VerSys Hip System
includes the following features: a variety of stem designs and
fixation options for both primary and revision situations, a
modular design that allows for a variety of femoral heads,
optimal sizing selections, and a common instrumentation set for
use with virtually all VerSys Stems.
Trabecular Metal Primary Hip Prosthesis. The
Trabecular Metal Primary Hip Prosthesis product was our
first utilization of Trabecular Metal Technology on a hip
prosthesis. The prosthesis utilizes a unique proximal design to
aggressively lock the prosthesis in the bone and provide for an
optimized environment for bony ingrowth to occur into the highly
porous Trabecular Metal material.
Zimmer®
M/ L Taper Prosthesis. The Zimmer M/ L Taper Prosthesis
offers a dual wedge and proximally porous coated design that was
based on long term clinically proven concepts. The M/ L Taper
has become widely used in MIS Procedures due to its overall
design and ease of use. Specific
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instruments have been developed to facilitate the insertion of
the Zimmer M/ L Taper Hip Prosthesis through the MIS
Anterolateral Technique.
Alloclassic®
Zweymüller®
Hip System. The Alloclassic Zweymüller Hip System
has become the most used, primary, cementless hip in the world.
This is one of the few stems available today that is practically
unchanged since its introduction in 1979. A new offset design
was added in 2004 and offers the surgeon increased capability to
restore the patient’s anatomical joint movement.
CLS®
Spotorno®
Hip Stem. The CLS SpotornoStem is one of our largest
selling hip prostheses, especially in the European markets.
Additions to the product line in 2004 provided the capability
for restoration of the physiological center of rotation. The
CLS Spotorno Stem has excellent clinical results,
confirmed by the 2004 Swedish Hip Registry with a
100 percent implant survivorship after 11 years.
Trilogy®
Acetabular System. The Trilogy Acetabular System,
including titanium alloy shells, polyethylene liners, screws and
instruments, is our primary acetabular cup system. The
Trilogy family of products offers versatile component
designs and instrumentation. One option, the
Longevity®
Highly Crosslinked Polyethylene Liner, is designed to address
the issue of wear and reduce the generation of debris in total
hip arthroplasty. Polyethylene debris may cause the degeneration
of bone surrounding reconstructive implants, a painful condition
called osteolysis. We began offering the Trabecular Metal
Modular Primary Acetabular System in 2004. This particular
product incorporates design features from the Trilogy
family of acetabular shells augmented with the advanced
fixation surface of Trabecular Metal Material. In
addition to the Trabecular Metal Acetabular System, we
also offer a Trabecular Metal Revision Acetabular Shell
for advanced fixation in acetabulae with insufficient bone.
Alternative Bearing Technology. We have a broad portfolio
of alternative bearing technologies which include Longevity
and
Durasul®
Highly Crosslinked Polyethylenes,
Metasul®
Metal-on-Metal
Articulation and
Cerasul®
and Trilogy
AB®
Ceramic-on-Ceramic
Articulation. Alternative bearings are designed to minimize wear
over time, potentially increasing the longevity of the implant.
In 2006, we received approval from the FDA to market the
Trilogy AB Acetabular System.
Durom®
Hip Resurfacing System. This product is particularly suited to
patients who are at risk of requiring multiple hip replacements
over their lifetimes since it preserves the patient’s
healthy bone stock. A primary objective of this system is to
allow the patient to return to an active lifestyle. The Durom
System uses the highly wear resistant Metasul
Metal-on-Metal
Technology as the bearing surface for the implant design. Since
1988, Metasul Technology has been used successfully for
total hip replacement. Today’s
metal-on-metal
technology is the result of nearly two decades of development,
research and clinical evaluation, which formed the foundation
for the Durom Hip Resurfacing System. The option of the
large diameter heads offers the advantage of a low-wear solution
while providing greater joint stability and high range of motion
in combination with the wide range of cemented and uncemented
femoral implants. We received 510(k) approval from the FDA on
the Durom Acetabular Shell and associated large diameter
Metasul Heads in 2006.
PALACOS®1Bone
Cement. In 2005, we acquired exclusive United States
distribution rights for the PALACOS line of bone cement
products manufactured by Heraeus Kulzer GmbH, a world leader in
the development and production of orthopaedic bone cement
products and other healthcare technologies. We also have
non-exclusive distribution rights in specific geographies
outside of the United States. Included in these brands are
PALACOS R and PALACOS R+G Bone Cements, as well as
PALACOS LV and PALACOS LV+G Bone Cements. The
PALACOS R+G and PALACOS LV+G products are bone
cements with the antibiotic gentamiacin pre-mixed in the
formulation, which is used by the orthopaedic surgeon to reduce
the risk of postoperative infection. The product’s handling
characteristics make it well-suited for minimally invasive
procedures.
| Extremity Implants |
Our extremity implants, primarily shoulder and elbow products,
are designed to treat arthritic conditions and fractures, as
well as to enhance the outcome of primary or revision surgery.
Bigliani/
Flatow®
Complete Shoulder Solution Family. The Bigliani/ Flatow
product line combined with the Trabecular Metal
Humeral Stem gives us a significant presence in the global
shoulder implant market.
Trabecular Metal Reverse Shoulder System. Introduced in
2006, the Trabecular Metal Reverse Shoulder System
incorporates advanced materials to offer improved
orthobiological ingrowth potential through the utilization of
Trabecular Metal Technology, while addressing significant
loss of rotator cuff function. The reverse shoulder system is
designed to restore function to patients who, because of
debilitating rotator cuff tears, are not candidates for
traditional shoulder surgery and have exhausted other means of
repair.
Anatomical
Shouldertm
System. The Anatomical Shoulder System can be tailored to
each patient’s individual anatomy. This portfolio of
products was further expanded into the United States in 2006 to
include the Anatomical Shoulder Inverse/Reverse System,
designed to address significant loss of rotator cuff function.
Additionally, we
1 Registered
Trademark of Heraeus Kulzer GmbH.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
introduced a fracture stem into this system in 2006. Both the
primary and fracture shoulder implants can be converted to a
reverse shoulder without removal of the initial implant.
Zimmer®
Collagen Repair Patch. This biological patch is used for the
repair of rotator cuff injuries in the shoulder. This product
can aid in reinforcing rotator cuff tears and help provide
predictable strength of repair. The underlying technology was
developed by Tissue Science Laboratories plc (TSL) of the
United Kingdom, with whom we have an exclusive distribution
agreement.
Coonrad/Morrey Total Elbow. The Coonrad/Morrey Total
Elbow product line is a family of elbow replacement implant
products.
| Dental Products |
Our Dental division, headquartered in Carlsbad, California,
manufactures and distributes (1) dental reconstructive
implants – for individuals who are totally without
teeth or are missing one or more teeth; (2) dental
restorative products – aimed at providing a more
natural restoration to mimic the original teeth; and
(3) dental regenerative products – for soft
tissue and bone rehabilitation.
In 2006, Zimmer Dental opened a specialized Zimmer Institute
training center dedicated to helping clinicians further their
knowledge, skills and confidence essential for the practice of
contemporary implant dentistry.
| Dental Reconstructive Implants |
Our dental reconstructive implant products and surgical and
restorative techniques include:
Tapered
Screw-Vent®
Implant System. Our highest selling dental product line provides
the clinician a tapered geometry which mimics the natural shape
of a tooth root. The Tapered Screw-Vent System, with its
two-stage design, was developed to minimize valuable chair time
for restorations. Featuring a patented internal hex connection,
multiple lead threads for reduced insertion time and selective
surface coatings, the Tapered Screw-Vent Product is a
technologically advanced dental implant offering features
designed to allow the clinician to meet the needs of patients
even in the most demanding circumstances. The introduction in
2006 of the
Zimmer®
One-Piece Implant System, designed to complement the success of
the Tapered Screw-Vent System, enhances this product line
by offering clinicians a fast, convenient restorative option.
AdVent®
Implant System. Utilizing many features of the Tapered
Screw-Vent System, the AdVent Product is a
transgingival, one stage design that utilizes the same surgical
system as the Tapered Screw-Vent System, allowing the
clinician to use both design concepts without incurring the
added cost of a second surgical system.
Tapered
SwissPlus®
Implant System. Designed to meet the needs of clinicians who
prefer a transgingival, one stage, dental implant, the
Tapered SwissPlus System incorporates multiple lead
threads for faster insertion time, and a tapered body to allow
it to be placed in tight interdental spaces. The Tapered
SwissPlus System also incorporates an internal connection.
| Dental Restorative Products |
We commercialize products for the aesthetic market aimed at
providing a more natural restoration. We offer a full line of
prosthetic devices for each of the above dental implant systems
as well as a custom solution, as follows:
Zimmer®
Hex-Locktm
Contour Abutment and Restorative Products. Designed to be used
with our Tapered Screw-Vent and One-Piece Implant
Systems, our contour lines are an
off-the-shelf solution
for immediately addressing the diversity of patients’
needs. Featuring prepared margins, titanium and ceramic options,
and snap-on impression caps, our abutments are designed to
simplify the restoration process, save time for clinicians and
technicians, and offer versatility.
Atlantis®2
Abutment. We market the Atlantis Abutment System through
an agreement with Atlantis Components, Inc. This product allows
for a custom made restoration improving aesthetic results in
dental implant procedures. The abutments use a patented process
that employs 3-D
optical scanning, automated design software and integrated
machining to manufacture individualized components for the
dental implant market. Atlantis Abutments are available
in titanium and ceramic.
| Dental Regenerative Products |
We market the following product lines for use in regenerative
techniques in oral surgery:
Puros®
Allograft Products. The Puros Material is an allograft
grafting material which utilizes the
Tutoplast®3
Tissue Processing Technique that provides exceptional bone and
soft tissue grafting material for use in oral surgery. Zimmer
Dental offers five distinct Puros Allograft products to
use together or separately for various bone and soft tissue
grafting needs: Puros Cancellous Particulate, Puros
Cortical Particulate, Puros Block Allografts,
Puros Pericardium Membranes, and Puros Dermis
Membranes. We market the Puros Allograft Products through
an agreement with Tutogen Medical, Inc.
During 2006, within our Dental division, we released the
Zimmer Hex-Lock Contour Abutment, Contour Ceramic
Abutment, Contour Restorative Components, and the Atlantis
Ceramic Abutment. Designed to mimic our successful
Tapered Screw-Vent and the new aesthetic Contour
restorative products, we introduced the Zimmer One-Piece
Implant System, a single-stage line which can make immediate
restoration easier and more convenient for the surgical
2 Trademark
of Atlantis Components, Inc.
3 Registered
Trademark of Tutogen Medical, Inc.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
and restorative team. In 2006, we expanded our regenerative product
portfolio, entering the soft tissue grafting market, with the
addition of Puros Pericardium and Dermis Membranes, and
we expanded distribution of the Puros product lines into
Canada and Latin America. We also introduced new, color-coded
packaging for all of our dental implant lines and a
Zimmer®
Surgical Motor System.
Spine Implants
Our Spine division, located in Minneapolis, Minnesota, designs,
manufactures and distributes medical devices and surgical
instruments that provide comprehensive spine care solutions for
patients with back pain, neck pain, degenerative disc conditions
and injuries due to trauma. Zimmer Spine offers orthopaedic
surgeons and neurosurgeons a full range of devices for posterior
and anterior applications, including products in Interbody
Fusion, Cervical, Thoracolumbar, Dynamic Stabilization and
Biologic applications.
Our spine product offerings include:
Dynesys®4
Dynamic Stabilization System. The Dynesys System is used
in the treatment of lower back and leg pain in skeletally mature
patients. Developed to bring the lumbar vertebrae into a more
natural anatomical position while stabilizing the affected
segments, the Dynesys System uses flexible materials
threaded through pedicle screws rather than rigid rods or bone
grafts alone or as an adjunct to fusion.
ST360°®
Spinal Fixation System. The ST360° Spinal Fixation
System combines polyaxial screws and lateral connectors into a
single system. The combination of polyaxial screws and lateral
connectors reduces the potential for transferring loads, during
assembly, between rods and screws that are not perfectly aligned.
Optimatm5
ZS Spinal Fixation System. The Optima ZS Spinal
Fixation System is a low-profile, in-line, polyaxial pedicle
screw design incorporating three-dimensional adjustability while
allowing for simple, stable construct assembly.
Trinica®
Select Anterior Cervical Plate System. The Trinica Select
Anterior Cervical Plate System and All-Through-One
instrumentation is designed to simplify the surgical procedure
while requiring less retraction and reducing the risk of
soft-tissue damage. The Trinica Select Self-Drilling
Screws are designed to provide the surgeon with the option to
reduce the amount of instruments, thereby potentially reducing
the amount of retraction and surgical time required to implant
the Trinica Select Plate.
Trabecular Metal Technology. Trabecular Metal
Technology has a wide range of orthopaedic applications. In
the United States, Trabecular Metal Material shapes are
cleared for Vertebral Body Replacement procedures as well as
bone void fillers.
Puros Allograft Products. We continue to sell traditional
and specialty Puros Allograft Bone Products through our
exclusive U.S. and Canadian distribution agreements with Tutogen
Medical, Inc. Puros Products consist of traditional and
specialty grafts which are produced from donated human tissues,
preserved with Tutogen’s patented
Tutoplast®6Process
of tissue preservation. The Tutoplast Process is a
proprietary tissue processing system designed to significantly
reduce the amount of cells, bone marrow and lipid components
from processed allograft bone and connective tissue while
preserving the extra-cellular matrix (collagen and mineral
components).
CopiOs®
Bone Void Filler. CopiOs Bone Void Filler is a
collagen-based synthetic bone graft material formed into pads of
various sizes for surgical implantation. It is intended for
filling bone voids resulting from trauma or created by a surgeon.
Trauma
Trauma products include devices used primarily to stabilize
damaged or broken bones and tissues to support the body’s
natural healing process. The most common surgical stabilization
of bone fracture involves the internal fixation of bone
fragments. This stabilization can involve the use of a wide
assortment of plates, screws, nails, wires and pins. In
addition, external fixation devices may be used to stabilize
fractures or correct deformities by applying them externally to
the limb. We are focusing on aligning our trauma products with
MIS Procedures and on integrating orthobiologics and other
next-generation technologies into our trauma solutions.
In 2005, we formed a standalone Zimmer Trauma division based in
Warsaw, Indiana in order to compete more effectively against the
companies that have been traditional market leaders in the
field. We offer a comprehensive line of trauma products,
including:
M/DN®
Intramedullary Fixation,
Sirus®
Intramedullary Nail System, and
I.T.S.T.®
Intertrochanteric/Subtrochanteric Fixation System. The M/DN,
Sirus and I.T.S.T. Intramedullary Nailing Systems are
utilized for the internal fixation of long bone fractures. The
systems include specialized instrumentation that allow the nails
to be put in using a minimally invasive approach that can help
improve patient recovery times. The I.T.S.T. Nail System
helps surgeons treat patients with fractures of the hip and
proximal femur. Most of these fractures occur in patients with
osteoporosis. In 2006, new instrumentation was introduced for
the I.T.S.T. System to enable the use of the nail through
an MIS approach, which helps encourage early patient ambulation.
Sirus Nails are highly anatomic, designed to match
patients of every size. The nails and associated implants are
made from titanium, a material which is preferred by many
surgeons. The Sirus Nails, originally sold only in Europe
and parts of Asia Pacific, have recently been
4 The
Dynesys Dynamic Stabilization Spinal System is indicated
for use as an adjunct to fusion.
5 Trademark
of U & J Corporation
6 Trademark
of Tutogen Medical, Inc.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
introduced into the United States, Japan and other key markets.
NCB®
Locking Plate System. The titanium NCB Locking Plates
deliver the ability for surgeons to target screws with polyaxial
freedom and utilize both conventional and locking technology in
the treatment of complex fractures of the distal femur, proximal
humerus and proximal tibia.
Zimmer®
Periarticular Locking Plate System. The Zimmer
Periarticular Locking Plate System combines the advanced design
techniques with locking screw technology to create constructs
for use in comminuted fractures or where deficient bone stock or
poor bone quality is encountered. By combining locking screw
holes with compression slots, the plates can be used as both
locking devices and fracture compression devices. With the
worldwide release of MIS instrumentation, these plates can be
applied using a minimally invasive technique which minimizes
additional trauma to the bones and soft tissues.
Zimmer®
Universal Locking System. The Zimmer Universal Locking
System is a comprehensive system of stainless steel plates,
screws and instruments for fracture fixation. The Universal
Locking System plates resemble standard plates, but have
figure-8 shaped holes that will accommodate standard or locking
screws on either side of the hole. As a result, the plate can be
used, depending upon the fracture situation, as a compression
plate, a locked internal fixator or as an internal fixation
system combining both techniques.
Orthopaedic Surgical Products
We develop, manufacture and market surgical products that
support our reconstructive, trauma, spinal and dental product
systems in the operating room environment with a focus on blood
management, surgical wound site management, pain management and
patient management products. Our orthopaedic surgical products
include:
A.T.S.®
Tourniquet Systems. The A.T.S. Tourniquet Systems Product
Line is a family of tourniquet machines and cuffs designed to
safely create a bloodless surgical field. The machines include
the A.T.S. 3000 Tourniquet, which utilizes patented
technology to determine a patient’s proper “Limb
Occlusion Pressure” based on the patient’s specific
physiology. The range of cuffs which complement the machines
provide the flexibility to occlude blood flow safely with
convenience and accuracy for limbs of virtually every size and
shape.
Surgical Power Tools and Consumables. In 2006, we
obtained United States distribution rights for the Brasseler
USAtm1
Orthopaedic Power System (BOPS) for large bone applications and
the
Pneumicro®1
system for small bone applications. In addition, we also market
a complete line of consumable blades and burs to be utilized
with the Brasseler Orthopaedic Power System and Pneumicro
system, as well as most competitive power tool Systems.
Zimmer®
Ambulatory Pump. This line of products in our portfolio is
designed to provide physicians an alternative method for
post-operative pain management. The elastomeric pump contained
in the kit is provided by Baxter Healthcare and delivers
non-systemic analgesic medications for surgical site infusions
or regional nerve blockades. In addition, certain models in this
portfolio offer the patient the ability to deliver a bolus of
medication in order to address break-through pain.
Pulsavac®
Plus, Pulsavac Plus AC and Pulsavac Plus LP Wound
Debridement Systems. These Pulsavac Systems are used for
cleaning and debridement of contaminants and foreign matter from
wounds using simultaneous irrigation and suction. All three
Pulsavac Systems are completely disposable to reduce the
risk of cross contamination.
ORTHOBIOLOGICS
Our research and development efforts include an Orthobiologics
group based in Austin, Texas, with its own full-time staff and
dedicated projects. We are working on orthobiological solutions
to repair and regenerate damaged or degenerated orthopaedic
tissues. These materials offer the possibility of treating
damaged joints by orthobiological repair rather than replacing
them with inert materials. A sampling of some of our key
projects in the Orthobiologics area is set forth below.
We are collaborating with ISTO Technologies, Inc. (ISTO) to
develop chondral and osteochondral cartilage grafts for
cartilage repair. ISTO is developing cartilage regeneration and
cell-based therapies using cartilage cells from juvenile donor
hyaline cartilage, with initial applications focused upon knee
joints and spinal discs. A Phase I clinical trial (IND) is
currently underway for Neocartilage, a living tissue-engineered
graft under investigation for the restoration of cartilage
defects, reestablishment of joint function and relief of pain in
the knee. We plan to market the product as
DeNovo®
ET Engineered Tissue Graft. The DeNovo NT Natural Tissue
Graft, another cartilage repair product we are developing in
conjunction with ISTO, consists of juvenile chondrocytes in the
form of minced cartilage tissue. We expect to begin marketing
this product in late 2007.
We have worldwide exclusive distribution rights for genetically
engineered xenogeneic porcine tissues for orthopaedic
applications from Revivicor, Inc., which has an advanced
transgenic technology platform for the production of tissues and
cells. We are centralizing our initial efforts on the
development of technologies for orthopaedic applications,
including the repair and replacement of damaged tendon,
ligament, meniscus, cartilage, bone and spinal nucleus tissues.
1 Trademarks
of Brasseler USA, Inc.
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As mentioned above under the caption “Extremity
Implants”, our orthobiological patch aids in repair of
rotator cuff injuries in the shoulder. The underlying technology
was developed by TSL and is being marketed by us as the
Zimmer Collagen Repair Patch.
Many orthopaedic surgical procedures use bone grafts to help
regenerate lost or damaged bone. As noted above, our Spine and
Trauma divisions introduced a technologically-advanced synthetic
bone graft material, CopiOs Bone Void Filler. This
synthetic material is similar to an individual’s cancellous
bone and is used to fill these bone voids or defects. It can be
soaked in an individual’s own bone marrow to localize
biologic components necessary for bone growth to aid in healing,
and it is completely replaced by natural bone during the healing
process.
RESEARCH AND DEVELOPMENT
We have extensive research and development activities to
introduce new surgical techniques, materials, orthobiologics and
product designs. The research and development functions work
closely with our strategic brand marketing function. The rapid
commercialization of innovative new materials, orthobiologics
products, implant and instrument designs, and surgical
techniques remains one of our core strategies and continues to
be an important driver of sales growth.
Among the numerous new product launches, we released the
industry’s first Gender Solutions Knee Femoral, the
Trabecular Metal Primary Hip Prosthesis, the
Trabecular Metal Acetabular Revision System, the Durom
Acetabular Cup with Metasul Large Diameter Heads, the
VerSys
Epoch®
Composite Hip Stem, the Trilogy AB
Ceramic-on-Ceramic
Acetabular System, the Zimmer Reverse and Inverse
Anatomical Shoulder Systems, the MIS Femoral Nailing
Solution, the NCB Plating System, the Trinica
Anterior Lumbar Plate System, the Dynesys Dynamic
Stabilization System with hydroxyapatite
(HA)-coated screws,
Trabecular Metal Thoracolumbar Components and the
CopiOs Bone Void Filler Sponge. Other new product,
surgical technique and instrument introductions in the
orthopaedic reconstructive implants, spine implants, trauma,
orthopaedic surgical products and orthobiologics product
categories are more fully described above under the captions
“PRODUCTS” and “ORTHOBIOLOGICS”. These and
other new products introduced in the last three years accounted
for approximately 24 percent of 2006 total sales, exceeding
our new products sales goal of 15 to 20 percent of total
sales on an annual basis.
We are broadening our product offerings in each of the product
categories and exploring new technologies that have applications
in multiple areas. For the years ended December 31, 2006,
2005 and 2004, we spent $188.3 million, $175.5 million
and $166.7 million, respectively, on research and
development. The increased research and development expenditures
have accelerated the output of new orthopaedic and dental
reconstructive implants, spine and trauma products, including
advanced new materials, product designs and surgical techniques.
Our primary research and development facility is located in
Warsaw, Indiana. In 2006, we made significant progress on our
research and development facility expansion project in Warsaw
and construction is nearly complete. We have other research and
development personnel based in, among other places, Winterthur,
Switzerland; Austin, Texas; Minneapolis, Minnesota; Carlsbad,
California; Dover, Ohio; and Parsippany, New Jersey. As of
December 31, 2006, we employed more than 550 research and
development employees worldwide.
We will continue to identify innovative technologies and
consider acquiring complementary products or businesses, or
establishing technology licensing arrangements or strategic
alliances.
GOVERNMENT REGULATION AND QUALITY SYSTEMS
We are subject to government regulation in the countries in
which we conduct business. It is our policy to comply with all
regulatory requirements governing our operations and products,
and we believe that the research, development, manufacturing and
quality control procedures that we employ are in material
compliance with all applicable regulations.
In the United States, numerous regulations govern the
development, testing, manufacturing, marketing and distribution
of medical devices, including, among others, the Federal Food,
Drug and Cosmetic Act and regulations issued or promulgated
thereunder. The FDA regulates product safety and efficacy,
laboratory, clinical and manufacturing practices, labeling and
record keeping for medical devices and post market surveillance
to identify potential problems with marketed medical devices. A
few of the devices we develop and market are in a category for
which the FDA has implemented stringent clinical investigation
and pre-market approval requirements. All of our products
marketed in the United States have been cleared or approved by
the FDA. The FDA has the authority to: halt the distribution of
certain medical devices; detain or seize adulterated or
misbranded medical devices; or order the repair, replacement or
refund of the costs of such devices. There are also certain
requirements of state, local and foreign governments that we
must comply with in the manufacture and marketing of our
products.
In many of the foreign countries in which we market our
products, we are subject to local regulations affecting, among
other things, design and product standards, packaging
requirements and labeling requirements. Many of the regulations
applicable to our devices and products in these countries are
similar to those of the FDA. The member countries of the
European Union have adopted the European Medical Device
Directive, which creates a single set of medical device
regulations for products marketed in all member countries. These
regulations require companies that wish to manufacture and
distribute medical devices in European Union member countries to
provide CE marking of their products. We maintain an ISO
certified quality system and comply with the requirements of the
Medical Device Directive which, together, enable us to apply the
CE mark to
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products in those jurisdictions that require it (Europe, Canada,
Australia and New Zealand).
We are subject to various government regulations pertaining to
healthcare fraud and abuse, including anti-kickback laws and
physician self-referral laws. Violations of these laws are
punishable by criminal and/or civil sanctions, including, in
some instances, fines, imprisonment and, within the United
States, exclusion from participation in government healthcare
programs, including Medicare, Medicaid, Veterans Administration
(VA) health programs and Civilian Health and Medical Program
Uniformed Service (CHAMPUS). The scope and enforcement of these
laws and regulations are uncertain and subject to rapid change.
We believe that our operations are in material compliance with
these laws.
We are committed to providing high quality products to our
customers and we have implemented modern quality systems and
concepts throughout the organization. The quality assurance
department supervises our quality systems. Senior management is
actively involved in setting quality policies and managing
internal and external quality performance. Our regulatory
affairs and compliance department is responsible for assuring
compliance with all applicable regulations, standards and
internal policies.
We have initiated numerous quality improvement programs and all
of our manufacturing operations are certified to ISO 13485:2003
global standard for quality management systems.
Our facilities and operations are also subject to various
government environmental and occupational health and safety
requirements of the United States and foreign countries,
including those relating to discharges of substances in the air,
water and land, the handling, storage and disposal of wastes and
the cleanup of properties by pollutants. We believe we are
currently in material compliance with such requirements.
COMPETITION
The orthopaedics industry is highly competitive. In the global
markets for reconstructive implants, trauma and orthopaedic
surgical products, our major competitors include: DePuy
Orthopaedics, Inc. (a subsidiary of Johnson & Johnson),
Stryker Corporation, Biomet, Inc., Synthes, Inc.,
Smith & Nephew plc, Wright Medical Group, Inc. and
Tornier Inc.
In the Americas geographic segment, we and DePuy Orthopaedics,
Inc., Stryker Corporation, Biomet, Inc., Smith &
Nephew, Inc. (a subsidiary of Smith & Nephew plc),
Wright Medical Group, Inc. and Synthes, Inc., account for a
large majority of the total reconstructive and trauma implant
sales.
The European reconstructive implant and trauma product markets
are more fragmented than the Americas or the Asia Pacific
segments. The variety of philosophies held by European surgeons
regarding hip reconstruction, for example, has fostered the
existence of many regional European companies, including Mathys
AG and Plus Orthopedics Holdings AG, which compete with us in
addition to the global competitors. Today most hip implants sold
in Europe are products developed specifically for Europe,
although global products are gaining acceptance. Therefore, we
will continue to develop and produce specially tailored products
to meet specific European needs.
In the Asia Pacific market for reconstructive implant and trauma
products, we compete primarily with DePuy Orthopaedics, Inc.,
Stryker Corporation, Synthes, Inc. and Smith & Nephew
plc, as well as regional companies, including Japan Medical
Materials Corporation and Japan Medical Dynamic Marketing, Inc.
Factors, such as the dealer system, complex regulatory
environments and the accompanying inability to compete on price,
make it difficult for smaller companies, particularly those that
are non-regional, to compete effectively with the market leaders
in the Asia Pacific region.
In the dental reconstructive implant category, we compete
primarily with Nobel Biocare Holding AG, Straumann Holding AG,
and Implant Innovations, Inc. (a subsidiary of Biomet, Inc.).
In the spinal implant category, we compete globally primarily
with Medtronic Sofamor Danek, Inc. (a subsidiary of Medtronic,
Inc.), DePuy Spine (a subsidiary of Johnson & Johnson),
Synthes, Inc., Stryker Corporation and EBI, L.P., now operating
as Biomet Trauma and Biomet Spine (a subsidiary of Biomet, Inc.).
Competition within the industry is primarily based on
technology, innovation, quality, reputation, customer
relationships and service. A key factor in our continuing
success in the future will be our ability to develop new
products and improve existing products and technologies. Where
possible, we will continue to seek patent, trademark and other
intellectual property protection concerning the surgical
techniques, materials, technologies and products we design and
develop.
MANUFACTURING AND RAW MATERIALS
We manufacture substantially all of our products at eight
locations, including Warsaw, Indiana; Winterthur, Switzerland;
Ponce, Puerto Rico; Dover, Ohio; Statesville, North Carolina;
Carlsbad, California; Parsippany, New Jersey; and Etupes,
France. As part of the execution of the Centerpulse integration
plan, we liquidated our Austin, Texas facility in 2006. Over the
past two years, we have expanded our other manufacturing sites
to accommodate increased demand, the transfer of production from
the Austin, Texas facility and the tripling of Trabecular
Metal Technology production capacity.
We believe that our manufacturing facilities set industry
standards in terms of automation and have the flexibility to
accommodate future growth. The manufacturing operations at these
facilities are designed to incorporate the cellular concept for
production and to implement tenets of a manufacturing philosophy
focused on continuous operational improvement. In addition, at
certain of our manufacturing facilities, many of the employees
are cross-trained.
We generally operate our manufacturing facilities at a targeted
goal of approximately 90 percent of total capacity.
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We continually evaluate the potential to in-source products
currently purchased from outside vendors to
on-site production.
Improving manufacturing productivity has been a major
contributor to improvement in profitability. Major areas of
improvement have included utilization of computer-assisted
robots and multi-axis grinders to precision polish medical
devices, automation of certain manufacturing and inspection
processes including on-machine inspection and process controls,
state-of-the-art
equipment purchases and upgrades, in-sourcing of core products,
such as castings and forgings, high-speed machining, and
negotiated reductions in third party supplier costs.
We use a diverse and broad range of raw materials in the design,
development and manufacturing of our products. We purchase all
of our raw materials and select components used in manufacturing
our products from external suppliers. In addition, we purchase
some supplies from single sources for reasons of quality
assurance, sole source availability, cost effectiveness or
constraints resulting from regulatory requirements. We work
closely with our suppliers to assure continuity of supply while
maintaining high quality and reliability. Although a change in
suppliers could require significant effort or investment by us
in circumstances where the items supplied are integral to the
performance of our products or incorporate unique technology, we
do not believe that the loss of any existing supply contract
would have a material adverse effect on our financial and
operational performance. To date, we have not experienced any
significant difficulty in locating and obtaining the materials
necessary to fulfill our production schedules.
INTELLECTUAL PROPERTY
Patents and other proprietary rights are important to the
continued success of our business. We also rely upon trade
secrets, know-how, continuing technological innovation and
licensing opportunities to develop and maintain our competitive
position. We protect our proprietary rights through a variety of
methods, including confidentiality agreements and proprietary
information agreements with vendors, employees, consultants and
others who may have access to proprietary information. We own or
control through licensing arrangements more than 4,000 issued
patents and patent applications throughout the world that relate
to aspects of the technology incorporated in many of our
products.
EMPLOYEES
We employ more than 6,900 employees worldwide, including more
than 550 employees dedicated to research and development. Nearly
4,200 employees are located within the United States and more
than 2,700 employees are located outside of the United States,
primarily throughout Europe and in Japan. We have over 2,200
employees dedicated to manufacturing our products worldwide. The
Warsaw, Indiana production facility employs more than 1,000
employees. Fewer than 200 North American employees are members
of a trade union covered by a collective bargaining agreement.
In May 2003, we renewed a collective bargaining agreement
with the United Steelworkers of America covering employees at
the Dover, Ohio, facility. This agreement will continue in
effect until May 15, 2007. We are in preliminary
negotiations with the union regarding the new agreement.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect
to our executive officers as of January 31, 2007.
| Name | Age | Position | ||||
| J. Raymond Elliott | 57 | Chairman, President and Chief Executive Officer | ||||
| Cheryl R. Blanchard, Ph.D. | 42 | Senior Vice President, Research and Development and Chief Scientific Officer | ||||
| Sheryl L. Conley | 46 | Group President, Americas and Global Marketing and Chief Marketing Officer | ||||
| James T. Crines | 47 | Senior Vice President, Finance, Operations and Corporate Controller and Chief Accounting Officer | ||||
| David C. Dvorak | 43 | Group President, Global Businesses and Chief Legal Officer | ||||
| Jon E. Kramer | 60 | President, U.S. Sales | ||||
| Sam R. Leno | 61 | Executive Vice President, Finance and Corporate Services and Chief Financial Officer | ||||
| Bruno A. Melzi | 59 | Chairman, Europe, Middle East and Africa | ||||
| Stephen H.L. Ooi | 53 | President, Asia Pacific | ||||
| Chad F. Phipps | 35 | Associate General Counsel and Corporate Secretary | ||||
Mr. Elliott was appointed Chairman of Zimmer
Holdings on August 6, 2001 and President and Chief
Executive Officer of Zimmer Holdings on March 20, 2001.
Mr. Elliott was appointed President of Zimmer, Inc., a
predecessor, in November 1997. Mr. Elliott has more
than 35 years of experience in orthopaedics, medical
devices and consumer products. He has served as a director on
more than 20 business-related boards in the U.S., Canada, Japan
and
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Europe and has served on five occasions as Chairman. He has
served as a member of the board of directors and chair of the
orthopaedic sector of the Advanced Medical Technology
Association (AdvaMed) and is currently a director of the State
of Indiana Workplace Development Board, the Indiana Chamber of
Commerce and the American Swiss Foundation. Mr. Elliott has
served as the Indiana representative on the President’s
State Scholars Program and as a trustee of the Orthopaedic
Research and Education Foundation (OREF). During the fourth
quarter of 2006, Mr. Elliott announced that he plans to
retire as President and Chief Executive Officer of Zimmer
Holdings during the first half of 2007, assuming that a
successor CEO has been named. He will remain Chairman through at
least November 2007.
Dr. Blanchard was appointed Senior Vice President,
Global Clinical Affairs, Global Regulatory Affairs, Research and
Development and Chief Scientific Officer of Zimmer Holdings in
December 2005. She is responsible for Global Research, Global
Development, Global Quality, Orthobiologics, External Research
and Emerging Technologies. From October 2003 to
December 2005, Dr. Blanchard served as Vice President,
Corporate Research and Clinical Affairs; from August 2002
to October 2003, she served as Vice President, Research and
Biologics; and from October 2000 to August 2002, she
served as Director, Research. Prior to joining us in
October 2000, Dr. Blanchard served in Manager,
Professor and Fellow roles at the Southwest Research Institute,
the University of Texas Health Science Center and Oak Ridge
National Laboratory, respectively.
Ms. Conley was appointed Group President, Americas
and Global Marketing and Chief Marketing Officer of Zimmer
Holdings in December 2005. She is responsible for all
Global Marketing and all Western Hemisphere operations,
including our business in the United States, Canada and Latin
America. She is our first Chief Marketing Officer. From
October 2003 to December 2005, Ms. Conley served as
President, Global Products Group. From September 2002 to
October 2003, Ms. Conley served as President, Zimmer
Reconstructive and from May 2000 to September 2002,
she served as Vice President, Global Brand Management and
Commercialization, where she was responsible for Zimmer’s
worldwide branding, marketing and new product development
efforts. Ms. Conley was General Manager, Zimmer Canada,
from 1998 to 2000. Ms. Conley joined Zimmer, Inc. in 1983
and has held various management positions in marketing,
operations and clinical research.
Mr. Crines was appointed Senior Vice President,
Finance, Operations and Corporate Controller and Chief
Accounting Officer of Zimmer Holdings in December 2005. He
is responsible for internal and external financial reporting,
corporate and business unit accounting, and operations and
logistics. From October 2003 to December 2005,
Mr. Crines served as Senior Vice President,
Finance/Controller and Information Technology. From
July 2001 to October 2003, Mr. Crines served as
Vice President, Finance/Controller and from September 2000
to July 2001, he served as Vice President, Finance and
Information Technology. Mr. Crines served Zimmer, Inc. as
Director of Finance and Logistics, Japan from May 1999
until September 2000. Mr. Crines served as Associate
Director, Accounting at Bristol-Myers Squibb, Zimmer’s
former parent, from September 1995 until he joined Zimmer,
Inc. in 1997 as Director of Finance. Mr. Crines has over
20 years of experience in corporate and operations finance
and accounting, including five years as an auditor.
Mr. Dvorak was appointed Group President, Global
Businesses and Chief Legal Officer of Zimmer Holdings in
December 2005. He is responsible for the existing Dental,
Spine, Trauma and Orthopaedic Surgical Products global
divisions. Additionally, Mr. Dvorak is the Chief Legal
Officer, with responsibility for the Global Legal, Intellectual
Property, Litigation and Risk Groups. From October 2003 to
December 2005, Mr. Dvorak served as Executive Vice
President, Corporate Services, Chief Counsel and Secretary, as
well as Chief Compliance Officer. From December 2001 to
October 2003, Mr. Dvorak served as Senior Vice
President, Corporate Affairs and General Counsel. He served as
Corporate Secretary from February 2003 to
December 2005. Prior to his appointment with us,
Mr. Dvorak served as Senior Vice President, General Counsel
and Corporate Secretary and was a member of the Executive
Committee of STERIS Corporation. Prior to joining STERIS in
June 1996, Mr. Dvorak practiced corporate law at two
large Cleveland, Ohio law firms, focusing on mergers and
acquisitions and on securities law.
Mr. Kramer was appointed President, U.S. Sales
of Zimmer Holdings in December 2005. He is responsible for
our sales activities throughout the United States. From
August 2004 to December 2005, Mr. Kramer served
as President, Americas. From October 2003 to
August 2004, Mr. Kramer served as Vice President,
U.S. Sales, and from 2001 to October 2003, he was our
Area Vice President for the Southeast region of the United
States. Prior to joining us, Mr. Kramer served as Vice
President of Sales for Implex Corp. We acquired Implex on
April 23, 2004, and the company formerly known as Implex is
now our wholly-owned subsidiary. Mr. Kramer has over
20 years of sales experience in the orthopaedics industry.
Mr. Leno was appointed Executive Vice President,
Finance and Corporate Services and Chief Financial Officer of
Zimmer Holdings in December 2005. He has overall
responsibility for Finance and Operations, as well as Global
Human Resources, Business Development and Strategic Planning,
and Global Information Technology. From October 2003 to
December 2005, Mr. Leno served as Executive Vice
President, Corporate Finance and Operations, and Chief Financial
Officer. From July 2001 to October 2003, Mr. Leno
served as Senior Vice President and Chief Financial Officer.
Prior to joining us, Mr. Leno served as Senior Vice
President and Chief Financial Officer of Arrow Electronics,
Inc., a global distributor of electronic components, a position
he held from March 1999 until he joined Zimmer. Between 1971 and
March 1999, Mr. Leno held various chief financial
officer
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
and other financial positions with several U.S. based
companies and he previously served as a U.S. Naval Officer.
Mr. Melzi was appointed Chairman, Europe, Middle
East and Africa of Zimmer Holdings in October 2003. He is
responsible for overall operations in the European, Middle
Eastern and African regions. From March 2000 to
October 2003, Mr. Melzi served as President,
Europe/MEA; from October 1997 to March 2000, he served
as Vice President and Managing Director of Italy, Germany and
Switzerland; and from 1990 to October 1997, he served as
Managing Director, Italy. Mr. Melzi has approximately
30 years of experience in the orthopaedics and medical
products industry, including serving as General Manager and
member of the Board of Directors of Johnson & Johnson
Italy from 1983 to 1990.
Mr. Ooi was appointed President, Asia Pacific of
Zimmer Holdings in December 2005. He is responsible for
overall operations in the Asia Pacific region, including
responsibility for Japan. Following our acquisition of
Centerpulse, Mr. Ooi served as President, Australasia from
September 2003 to December 2005, where he was
responsible for operations in Asia Pacific, excluding Japan.
From September 2002 to September 2003, Mr. Ooi
served as President, Asia Pacific region, and from
January 1992 to September 2002, Mr. Ooi served as
Vice President, Asia. Mr. Ooi joined us in March 1986
as Regional Manager and was promoted to General Manager, Asia in
February 1987.
Mr. Phipps was appointed Associate General Counsel
and Corporate Secretary of Zimmer Holdings in
December 2005. In addition to his role as Secretary to the
Board of Directors, he has responsibility for Zimmer’s
Global legal affairs, including general corporate and securities
law matters. From September 2003 to December 2005,
Mr. Phipps served as Associate Counsel and Assistant
Secretary. Prior to joining us, Mr. Phipps served as Vice
President and General Counsel of L&N Sales and Marketing,
Inc. in Pennsylvania, and prior to joining L&N Sales and
Marketing in 2002, Mr. Phipps practiced corporate law with
the firm of Morgan, Lewis & Bockius in Philadelphia,
Pennsylvania, focusing on corporate and securities law, mergers
and acquisitions, and financial transactions.
AVAILABLE INFORMATION
Our Internet website address is www.zimmer.com. Our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act are available or
may be accessed free of charge through the Investor Relations
section of our Internet website as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC. Our Internet website and the information
contained therein or connected thereto are not intended to be
incorporated by reference into this Annual Report on
Form 10-K.
The following corporate governance and related documents, among
others, are available through our website or may be obtained in
print form, without charge, by request to our Investor Relations
Department: Corporate Governance Guidelines, Code of Business
Conduct, Code of Ethics for Chief Executive Officer and Senior
Financial Officers, Audit Committee Charter, Compensation and
Management Development Committee Charter, Corporate Governance
Committee Charter, and Science and Technology Committee Charter.
We intend to post on our Internet website any substantive
amendment to, or waiver from, our Code of Ethics for Chief
Executive Officer and Senior Financial Officers or a provision
of our Code of Business Conduct that applies to any of our
directors or executive officers.
| ITEM 1A. | Risk Factors |
Risk factors which could cause actual results to differ from
our expectations and which could negatively impact our financial
condition and results of operations are discussed below and
elsewhere in this report. The risks and uncertainties described
below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that are currently
not believed to be significant to our business may also affect
our actual results and could harm our business, financial
condition and results of operations. If any of the risks or
uncertainties described below or any additional risks and
uncertainties actually occur, our business, results of
operations and financial condition could be materially and
adversely affected.
RISKS RELATED TO OUR INDUSTRY
Our success depends on our ability to effectively develop and
market our products against those of our competitors.
We operate in a highly competitive environment. Our present or
future products could be rendered obsolete or uneconomical by
technological advances by one or more of our present or future
competitors or by other therapies, including orthobiological
therapies. To remain competitive, we must continue to develop
and acquire new products and technologies.
In the global markets for reconstructive orthopaedic implants,
trauma products and other orthopaedic products, a limited number
of competitors, including DePuy Orthopaedics, Inc. (a subsidiary
of Johnson & Johnson), Stryker Corporation, Biomet,
Inc., Wright Medical Group, Inc., Synthes, Inc. and
Smith & Nephew plc, compete with us for the majority of
product sales. In the spinal implant category, we compete
globally primarily with Medtronic Sofamor Danek, Inc. (a
subsidiary of Medtronic, Inc.), DePuy Spine (a subsidiary of
Johnson & Johnson), Synthes, Inc., Stryker Corporation
and EBI, L.P. (a subsidiary of Biomet, Inc.). In the dental
reconstructive implant category, we compete primarily with Nobel
Biocare Holding AG, Straumann Holding AG, and Implant
Innovations, Inc. (a subsidiary of Biomet, Inc.). Competition is
primarily on the basis of:
| • | technology; |
| • | innovation; |
| • | quality; |
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
| • | reputation; |
| • | relationships with customers; and |
| • | service. |
In markets outside of the United States, other factors influence
competition as well, including:
| • | local distribution systems; |
| • | complex regulatory environments; and |
| • | differing medical philosophies and product preferences. |
Our competitors may:
| • | have greater financial, marketing and other resources than us; |
| • | respond more quickly to new or emerging technologies; |
| • | undertake more extensive marketing campaigns; |
| • | adopt more aggressive pricing policies; or |
| • | be more successful in attracting potential customers, employees and strategic partners. |
Any of these factors, alone or in combination, could cause us to
have difficulty maintaining or increasing sales of our products.
If third-party payors decline to reimburse our customers for
our products or reduce reimbursement levels, the demand for our
products may decline and our ability to sell our products
profitably may be harmed.
We sell our products and services to hospitals, doctors,
dentists and other health care providers, all of which receive
reimbursement for the health care services provided to their
patients from third-party payors, such as domestic and
international government programs, private insurance plans and
managed care programs. These third-party payors may deny
reimbursement if they determine that a device used in a
procedure was not in accordance with cost-effective treatment
methods, as determined by the third-party payor, or was used for
an unapproved indication. Third-party payors may also decline to
reimburse for experimental procedures and devices. If our
products are not considered cost-effective by third-party
payors, our customers may not be reimbursed for our products.
In addition, third-party payors are increasingly attempting to
contain health care costs by limiting both coverage and the
level of reimbursement for medical products and services. For
example, managed care programs often prescribe only those
orthopaedic recovery products that match a patient as to age,
need for mobility and other parameters in an effort to provide
more cost-effective care. If third-party payors reduce
reimbursement levels to hospitals and other health care
providers for our products, demand for our products may decline
or we may experience pressure to reduce the prices of our
products, which could have a material adverse effect on sales,
financial condition and results of operations.
In international markets, where the movement toward health care
reform and the development of managed care are generally not as
advanced as in the United States, we have experienced downward
pressure on product pricing and other effects of health care
reform. In Japan, for example, a government-operated insurance
system reimburses customers for our products. Under this system,
the Japanese government periodically reviews and reduces the
reimbursement levels for products. If the Japanese government
continues to reduce the reimbursement level for orthopaedic
products, our sales, financial condition and results of
operations may be adversely affected.
We are subject to cost-containment efforts of healthcare
purchasing organizations, which may have a material adverse
effect on our financial condition and results of operations.
Many customers for our products have formed group purchasing
organizations in an effort to contain costs. Group purchasing
organizations negotiate pricing arrangements with medical supply
manufacturers and distributors, and these negotiated prices are
made available to a group purchasing organization’s
affiliated hospitals and other members. If we are not one of the
providers selected by a group purchasing organization,
affiliated hospitals and other members may be less likely to
purchase our products, and if the group purchasing organization
has negotiated a strict compliance contract for another
manufacturer’s products, we may be precluded from making
sales to members of the group purchasing organization for the
duration of the contractual arrangement. Our failure to respond
to the cost-containment efforts of group purchasing
organizations may cause us to lose market share to our
competitors and could have a material adverse effect on our
sales, financial condition and results of operations.
We are involved in ongoing investigations by the United
States Department of Justice of companies in the orthopaedics
industry, the results of which may have a material adverse
effect on our sales, financial condition and results of
operations.
In March 2005, we received a subpoena and we have received
supplemental requests since that time from the United States
Department of Justice through the United States Attorney’s
Office in Newark, New Jersey, requesting documents and related
information for the period beginning January 1998 related to
consulting contracts, professional service agreements and other
agreements by which we may provide remuneration to orthopaedic
surgeons, including research and other grant agreements. In June
2006, we received a subpoena from the United States Department
of Justice, Antitrust Division, requesting documents for the
period beginning January 2001 through June 2006, pertaining to
an investigation of possible violations of federal criminal law,
including possible violations of the antitrust laws, involving
the manufacture and sale of orthopaedic implant devices. We are
cooperating fully with federal authorities with regard to these
investigations, which we understand involve a number of other
orthopaedic manufacturers as well. If, as a result of these
investigations, we are found to have violated one or more
applicable laws, our business, financial condition and results
of operations could be materially adversely affected. If some of
our existing business practices are challenged as unlawful, we
may have to change those practices, which could have a material
adverse effect on our business, financial condition and results
of operations.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
We and our customers are subject to various governmental
regulations and we may incur significant expenses to comply with
these regulations and develop products compatible with these
regulations.
The medical devices we design, develop, manufacture and market
are subject to rigorous regulation by the FDA and numerous other
Federal, state and foreign governmental authorities. The process
of obtaining regulatory approvals to market a medical device,
particularly from the FDA and certain foreign governmental
authorities, can be costly and time consuming and approvals
might not be granted for future products on a timely basis, if
at all. Delays in receipt of, or failure to obtain, approvals
for future products could result in delayed realization of
product revenues or in substantial additional costs which could
have a material adverse effect on our business or results of
operations.
In addition, if we fail to comply with applicable FDA medical
device or other material regulatory requirements, including, for
example, the Quality System Regulation, recordkeeping
regulations, labeling requirements and adverse event reporting
regulations, that failure could result in, among other things:
| • | warning letters; |
| • | fines or civil penalties; |
| • | injunctions; |
| • | repairs, replacements or refunds; |
| • | recalls or seizures of products; |
| • | total or partial suspension of production; |
| • | the FDA’s refusal to grant future premarket clearances or approvals; |
| • | withdrawals or suspensions of current product applications; and |
| • | criminal prosecution. |
Any of these actions, in combination or alone, could have a
material adverse effect on our business, financial condition and
results of operations.
In many of the foreign countries in which we market our
products, we are subject to regulations affecting, among other
things:
| • | clinical efficacy; |
| • | product standards; |
| • | packaging requirements; |
| • | labeling requirements; |
| • | import/export restrictions; |
| • | tariff regulations; |
| • | duties; and |
| • | tax requirements. |
Many of the regulations applicable to our devices and products
in these countries, such as the European Medical Devices
Directive, are similar to those of the FDA. In addition, in many
countries the national health or social security organizations
require our products to be qualified before they can be marketed
with the benefit of reimbursement eligibility. Failure to
receive or delays in the receipt of, relevant foreign
qualifications also could have a material adverse effect on our
business, financial condition and results of operations.
As both the FDA and foreign government regulators have become
increasingly stringent, we may be subject to more rigorous
regulation by governmental authorities in the future. Our
products and operations are also often subject to the rules of
industrial standards bodies, such as the International Standards
Organization. If we fail to adequately address any of these
regulations, our business will be harmed.
We are subject to health care fraud and abuse regulations
that could require us to change our business practices and
restrict our operations in the future.
Our industry is subject to various Federal and state laws
pertaining to health care fraud and abuse, including
anti-kickback laws and physician self-referral laws. Violations
of these laws are punishable by criminal and/or civil sanctions,
including, in some instances, fines, imprisonment and, within
the United States, exclusion from participation in government
healthcare programs, including Medicare, Medicaid, Veterans
Administration (VA) health programs and Civilian Health and
Medical Program Uniformed Service (CHAMPUS). The scope and
enforcement of these laws and regulations are uncertain and
subject to rapid change. Because of the far-reaching and
uncertain nature of these laws, we are required to monitor our
practices to remain in compliance with these laws. If we were to
violate one or more of these laws, our business, financial
condition and results of operations could be materially
adversely affected. If there is a change in law, regulation or
administrative or judicial interpretations, some of our existing
business practices could be challenged as unlawful and, as a
result, we may have to change those practices, which could have
a material adverse effect on our business, financial condition
and results of operations.
We may incur product liability losses, and insurance coverage
may be inadequate or unavailable to cover these losses.
Our business is subject to potential product liability risks
that are inherent in the design, development, manufacture and
marketing of medical devices. Our products are often used in
surgical and intensive care settings. In addition, some of the
medical devices we manufacture and sell are designed to be
implanted in the human body for long periods of time. In the
ordinary course of business, we are the subject of product
liability lawsuits alleging that component failures,
manufacturing flaws, design defects or inadequate disclosure of
product-related risks or product-related information resulted in
an unsafe condition or injury to patients. Product liability
lawsuits and claims, safety alerts or product recalls,
regardless of their ultimate outcome, could have a material
adverse effect on our business and reputation and on our ability
to attract and retain customers.
As part of our risk management policy, we maintain third-party
product liability insurance coverage. However, product liability
claims against us may exceed the coverage limits of our
insurance policies or cause us to record a self-insured loss.
Even if any product liability loss is covered by an insurance
policy, these policies may have substantial retentions or
deductibles that provide that we will not receive insurance
proceeds until the losses incurred exceed
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
the amount of those retentions or deductibles. We will be
responsible for paying any losses that are below those
retentions or deductibles. A product liability claim in excess
of applicable insurance could have a material adverse effect on
our business, financial position and results of operations.
RISKS RELATED TO OUR BUSINESS
If we fail to effectively utilize the skills and knowledge of
orthopaedic surgeons, customers may not buy our products and our
revenue and profitability may decline.
We maintain professional relationships with a number of
orthopaedic surgeons who assist in product research and
development and advise us on how to satisfy the full range of
surgeon and patient needs. These professionals speak about our
products at medical seminars, assist in the training of other
professionals in the use of our products and provide us with
feedback on the industry’s acceptance of our new products.
The failure of our products to retain the support of orthopaedic
surgeons, who frequently recommend products or are involved in
product selection decisions, or the failure of our new products
to secure and retain similar support from surgeons, could have a
material adverse effect on our business, financial condition and
results of operations.
If we fail to retain the independent agents and distributors
upon whom we rely heavily to market our products, customers may
not buy our products and our revenue and profitability may
decline.
Our marketing success in the United States and abroad depends
largely upon our agents’ and distributors’ sales and
service expertise in the marketplace. Many of these agents have
developed professional relationships with existing and potential
customers because of their detailed knowledge of products and
instruments. Many commonly provide operating room personnel with
implant and instrument product training as well as product
support in the operating room. A loss of a significant number of
these agents could have a material adverse effect on our
business, financial condition and results of operations. If some
of the business practices of our independent sales agents and
distributors are challenged as unlawful, they may have to change
these practices, which could have a material adverse effect on
our business, financial condition and results of operations.
If we do not introduce new products in a timely manner, our
products may become obsolete over time, customers may not buy
our products and our revenue and profitability may decline.
Demand for our products may change, in certain cases, in ways we
may not anticipate because of:
| • | evolving customer needs; |
| • | changing demographics; |
| • | slowing industry growth rates; |
| • | declines in the reconstructive implant market; |
| • | the introduction of new products and technologies; |
| • | evolving surgical philosophies; and |
| • | evolving industry standards. |
Without the timely introduction of new products and
enhancements, our products may become obsolete over time. If
that happens, our revenue and operating results would suffer.
The success of our new product offerings will depend on several
factors, including our ability to:
| • | properly identify and anticipate customer needs; |
| • | commercialize new products in a timely manner; |
| • | manufacture and deliver instruments and products in sufficient volumes on time; |
| • | differentiate our offerings from competitors’ offerings; |
| • | achieve positive clinical outcomes for new products; |
| • | satisfy the increased demands by healthcare payors, providers and patients for shorter hospital stays, faster post-operative recovery and lower-cost procedures; |
| • | innovate and develop new materials, product designs and surgical techniques; and |
| • | provide adequate medical education relating to new products and attract key surgeons to advocate these new products. |
In addition, new materials, product designs and surgical
techniques that we develop may not be accepted quickly, in some
or all markets, because of, among other factors:
| • | entrenched patterns of clinical practice; |
| • | the need for regulatory clearance; and |
| • | uncertainty with respect to third-party reimbursement. |
Moreover, innovations generally require a substantial investment
in research and development before we can determine their
commercial viability and we may not have the financial resources
necessary to fund the production. In addition, even if we are
able to successfully develop enhancements or new generations of
our products, these enhancements or new generations of products
may not produce revenue in excess of the costs of development
and they may be quickly rendered obsolete by changing customer
preferences or the introduction by our competitors of products
embodying new technologies or features.
We conduct a significant amount of our sales activity outside
of the United States, which subjects us to additional business
risks and may cause our profitability to decline due to
increased costs.
Because we sell our products in more than 100 countries,
our business is subject to risks associated with doing business
internationally. In 2006, we derived approximately
$1,532.9 million, or 44% of our total revenue, from sales
of our products outside of the United States. We intend to
continue to pursue growth opportunities in sales
internationally, which could expose us to additional risks
associated with international sales and operations. Our
international operations are, and will continue to be, subject
to a number of risks and potential costs, including:
| • | changes in foreign medical reimbursement policies and programs; |
| • | unexpected changes in foreign regulatory requirements; |
| • | differing local product preferences and product requirements; |
| • | fluctuations in foreign currency exchange rates; |
| • | diminished protection of intellectual property in some countries outside of the United States; |
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
| • | trade protection measures and import or export licensing requirements; |
| • | difficulty in staffing and managing foreign operations; |
| • | labor force instability; |
| • | differing labor regulations; |
| • | potentially negative consequences from changes in tax laws; and |
| • | political and economic instability. |
Any of these factors may, individually or as a group, have a
material adverse effect on our business, financial condition and
results of operations.
We are subject to risks arising from currency exchange rate
fluctuations, which can increase our costs and may cause our
profitability to decline.
A substantial portion of our foreign generated revenues are
generated in Europe and Japan. The United States dollar value of
our foreign-generated revenues varies with currency exchange
rate fluctuations. Significant increases in the value of the
United States dollar relative to the Euro or the Japanese Yen,
as well as other currencies, could have a material adverse
effect on our results of operations. We address currency risk
management through regular operating and financing activities,
and on a limited basis, through the use of derivative financial
instruments. The derivative financial instruments we enter into
are in the form of foreign exchange forward contracts with major
financial institutions. The forward contracts are designed to
hedge anticipated foreign currency transactions, primarily
intercompany sale and purchase transactions, for periods
consistent with commitments. Realized and unrealized gains and
losses on these contracts that qualify as cash flow hedges are
temporarily recorded in other comprehensive income, then
recognized in earnings when the hedged item affects net earnings.
We may fail to adequately protect our proprietary technology
and other intellectual property, which would allow competitors
or others to take advantage of our research and development
efforts.
Our long-term success largely depends on our ability to market
technologically competitive products. If we fail to obtain or
maintain adequate intellectual property protection, we may not
be able to prevent third parties from using our proprietary
technologies. Also, our currently pending or future patent
applications may not result in issued patents. In the United
States, patent applications are confidential for 18 months
following their filing, and because third parties may have filed
patent applications for technology covered by our pending patent
applications without our being aware of those applications, our
patent applications may not have priority over patent
applications of others. In addition, our issued patents may not
contain claims sufficiently broad to protect us against third
parties with similar technologies or products, or provide us
with any competitive advantage. If a third party initiates
litigation regarding our patents, our collaborators’
patents, or those patents for which we have license rights, and
is successful, a court could declare our patents invalid or
unenforceable or limit the scope of coverage of those patents.
The United States Patent and Trademark Office (USPTO) and
the courts have not consistently treated the breadth of claims
allowed or interpreted in orthopaedic reconstructive implant and
biotechnology patents. If the USPTO or the courts begin to allow
or interpret claims more broadly, the incidence and cost of
patent interference proceedings and the risk of infringement
litigation will likely increase. On the other hand, if the USPTO
or the courts begin to allow or interpret claims more narrowly,
the value of our proprietary rights may be reduced. Any changes
in, or unexpected interpretations of, the patent laws may
adversely affect our ability to enforce our patent position.
In addition, intellectual property rights may be unavailable or
limited in some foreign countries, which could make it easier
for competitors to capture market position. Competitors may also
capture market share from us by designing products that mirror
the capabilities of our products or technology without
infringing our intellectual property rights. If we do not obtain
sufficient international protection for our intellectual
property, our competitiveness in international markets could be
impaired, which would limit our growth and future revenue.
We also rely upon trade secrets, proprietary know-how, and
continuing technological innovation to remain competitive. We
attempt to protect this information with security measures,
including the use of confidentiality agreements with our
employees, consultants, and corporate collaborators. These
individuals may breach these agreements and any remedies
available to us may be insufficient to compensate our damages.
Furthermore, our trade secrets, know-how and other technology
may otherwise become known or be independently discovered by our
competitors.
We may be subject to intellectual property litigation and
infringement claims, which could cause us to incur significant
expenses or prevent us from selling our products.
A successful claim of patent or other intellectual property
infringement against us could adversely affect our growth and
profitability, in some cases materially. From time to time, we
receive notices from third parties of potential infringement and
receive claims of potential infringement. We may be unaware of
intellectual property rights of others that may cover some of
our technology. If someone claims that our products infringed
their intellectual property rights, any resulting litigation
could be costly and time consuming and would divert the
attention of management and key personnel from other business
issues. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these
risks. Claims of intellectual property infringement also might
require us to enter into costly royalty or license agreements.
However, we may be unable to obtain royalty or license
agreements on terms acceptable to us or at all. We also may be
subject to significant damages or an injunction preventing us
from manufacturing, selling or using some of our products in the
event of a successful claim of patent or other intellectual
property infringement. Any of these adverse consequences could
have a material adverse effect on our business, financial
condition and results of operations.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
We may complete additional acquisitions, which could increase
our costs or liabilities or be disruptive.
We intend to continue to look for additional strategic
acquisitions. We may not be able to complete additional
acquisitions or to integrate successfully any acquired
businesses without substantial expense, delay or other
operational or financial problems. Acquiring and integrating new
businesses involves risk, including the following:
| • | we may need to divert more management resources to integration than we planned, which may adversely affect our ability to pursue other more profitable activities; |
| • | the difficulties of integration may be increased if we need to integrate geographically separated organizations, personnel with disparate business backgrounds and companies with different corporate cultures; |
| • | we may not eliminate as many redundant costs as we anticipated in selecting our acquisition candidates; and |
| • | one or more of our acquisition candidates also may have liabilities or adverse operating issues that we failed to discover through our diligence prior to the acquisition. |
If we are unable to form strategic alliances, or if our
strategic alliances fail to achieve their objectives, our
operating results will be negatively impacted.
Several of our strategic initiatives involve alliances with
other orthopaedic and biotechnology companies. These include our
agreement with Revivicor, Inc. relating to orthopaedic tissue
technology, our collaboration with ISTO Technologies, Inc.
relating to regenerative cartilage technology and our
distribution agreement with Heraeus relating to orthopaedic bone
cement products. The success of these and similar arrangements
is largely dependent on technology and other intellectual
property contributed by our strategic partners or the resources,
efforts, and skills of these partners. Disputes and difficulties
in such relationships are common, often due to conflicting
priorities or conflicts of interest. Merger and acquisition
activity may exacerbate these conflicts. The benefits of these
alliances are reduced or eliminated when strategic partners:
| • | terminate the agreements or limit our access to the underlying intellectual property; |
| • | fail to devote financial or other resources to the alliances and thereby hinder or delay development, manufacturing or commercialization activities; |
| • | fail to successfully develop, manufacture or commercialize any products; or |
| • | fail to maintain the financial resources necessary to continue financing their portion of the development, manufacturing, or commercialization costs or their own operations. |
Furthermore, under some of our strategic alliances, we may make
milestone payments well in advance of commercialization of
products with no assurance that we will ever recoup these
payments. We also may make equity investments in our strategic
partners. These investments may decline in value and result in
our incurring financial statement charges in the future.
If we are unable to timely complete our search for a new
Chief Executive Officer and successfully transition to new
leadership, our business could be adversely affected.
In November 2006, J. Raymond Elliott, our Chairman, President
and Chief Executive Officer, informed our Board of Directors
that he plans to retire from his positions as President and
Chief Executive Officer in the first half of 2007, assuming a
successor CEO has been named. He will remain as Chairman through
at least November 2007. Our Board of Directors, with the
assistance of Spencer Stuart, a global executive recruiting
firm, has begun a search for a successor, which includes both
internal and external candidates. We cannot assure you when we
will find a suitable candidate for this position and what
effect, if any, a new CEO may have on our business and our
ability to retain our senior executives and other key
scientific, technical, sales, marketing and other personnel. The
loss of the services of such senior executives or key personnel
or any general instability in the composition of our senior
management team could have a negative impact on our ability to
execute our business and operating strategies. Once we hire a
new CEO, our success will be dependent upon his or her ability
to gain proficiency in leading our company; his or her ability
to implement or adapt our corporate strategies and initiatives
and his or her ability to develop key professional
relationships, including relationships with our team members,
the independent distributors who market our products, the
orthopaedic surgeons who assist and advise us and our key
suppliers and other business partners.
We depend on a limited number of suppliers for some key raw
materials and outsourced activities.
We use a number of suppliers for raw materials we need to
manufacture our products and to outsource some key manufacturing
activities. These suppliers must provide the materials and
perform the activities to our standards for us to meet our
quality and regulatory requirements. Some key raw materials and
outsourced activities can only be obtained from a single source
or a limited number of sources. A prolonged disruption or other
inability to obtain these materials or activities could
materially and adversely affect our ability to satisfy demand
for our products, which could have a material adverse effect on
our business, financial condition and results of operations.
Our future profitability may be affected by changes to our
product category and region sales mix.
Reconstructive implants produce the highest operating profit
margins among our product categories. These products accounted
for approximately 84 percent of 2006 net sales. Sales
in our Americas region accounted for approximately
60 percent of 2006 net sales. Sales in the Americas
region produce the highest operating profit margins in the
geographic markets in which we operate. While we expect net
sales of reconstructive implants and net sales in the Americas
region to remain strong, changes to our product category mix or
our region sales mix could adversely affect our future
profitability.
| ITEM 1B. | Unresolved Staff Comments |
Not Applicable.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
| ITEM 2. | Properties |
We have the following properties:
| Location | Use | Owned/ Leased | Square Feet | |||||
|
Warsaw, Indiana
|
Research & Development, Manufacturing, Warehousing, Marketing & Administration | Owned | 1,232,000 | |||||
|
Warsaw, Indiana
|
Corporate Headquarters and The Zimmer Institute | Owned | 117,000 | |||||
|
Warsaw, Indiana
|
Offices, Manufacturing & Warehousing | Leased | 117,000 | |||||
|
Carlsbad, California
|
Offices, Research & Development, Manufacturing & The Zimmer Dental Institute | Leased | 118,000 | |||||
|
Minneapolis, Minnesota
|
Offices & Research & Development | Owned | 42,000 | |||||
|
Statesville, North Carolina
|
Manufacturing & Warehousing | Owned | 156,000 | |||||
|
Dover, Ohio
|
Research & Development, Manufacturing | Owned | 140,000 | |||||
|
Wooster, Ohio
|
Warehousing | Leased | 61,000 | |||||
|
Cedar Knolls, New Jersey
|
Manufacturing & Warehousing | Leased | 23,000 | |||||
|
Parsippany, New Jersey
|
Research & Development, Manufacturing & Warehousing | Leased | 115,000 | |||||
|
Memphis, Tennessee
|
Offices & Warehousing | Leased | 30,000 | |||||
|
Austin, Texas
|
Research & Development | Leased | 25,000 | |||||
|
Sydney, Australia
|
Offices & Warehousing | Leased | 36,000 | |||||
|
Mödling, Austria
|
Offices & Warehousing | Owned | 14,000 | |||||
|
Wemmel, Belgium
|
Offices & Warehousing | Leased | 15,000 | |||||
|
Mississauga, Canada
|
Offices & Warehousing | Leased | 52,000 | |||||
|
Shanghai, China
|
Offices & Warehousing | Leased | 18,000 | |||||
|
Etupes, France
|
Offices, Manufacturing & Warehousing | Owned | 90,000 | |||||
|
Freiburg, Germany
|
Offices & Warehousing | Leased | 51,000 | |||||
|
Kiel, Germany
|
Offices & Warehousing | Leased | 21,000 | |||||
|
Milan, Italy
|
Offices & Warehousing | Leased | 47,000 | |||||
|
Gotemba, Japan
|
Offices, Service Center & Warehousing | Owned | 87,000 | |||||
|
Tokyo, Japan
|
Offices & Warehousing | Leased | 24,000 | |||||
|
Seoul, Korea
|
Offices & Warehousing | Leased | 22,000 | |||||
|
Utrecht, Netherlands
|
Offices & Warehousing | Leased | 16,000 | |||||
|
Ponce, Puerto Rico
|
Offices, Manufacturing & Warehousing | Owned | 213,000 | |||||
|
Singapore
|
Offices & Warehousing | Leased | 10,000 | |||||
|
Barcelona, Spain
|
Offices & Warehousing | Leased | 16,000 | |||||
|
Baar, Switzerland
|
Warehousing | Leased | 40,000 | |||||
|
Winterthur, Switzerland
|
Offices, Research & Development & Manufacturing | Leased | 265,000 | |||||
|
Münsingen, Switzerland
|
Offices & Warehousing | Owned | 76,000 | |||||
|
Swindon, United Kingdom
|
Offices & Warehousing | Leased | 70,000 | |||||
| 3,359,000 | ||||||||
We believe the current facilities, including manufacturing,
warehousing, research and development and office space, together
with the planned expansions provide sufficient capacity to meet
ongoing demands. Once a facility reaches 85 percent
utilization, we examine alternatives for either expanding that
facility or acquiring new facilities to meet our ongoing demands.
In addition to the above, we maintain more than 100 other
offices and warehouse facilities in more than 24 countries
around the world, including the United States, Japan, Australia,
France, Russia, India, Germany, Italy, Switzerland and China. We
believe that all of the facilities and equipment are in good
condition, well maintained and able to operate at present levels.
| ITEM 3. | Legal Proceedings |
Information pertaining to legal proceedings can be found in
Note 15 to the Consolidated Financial Statements, which are
included in this report under Item 8.
| ITEM 4. | Submission of Matters to a Vote of Security Holders |
Not Applicable.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Part II
| ITEM 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is traded on the New York Stock Exchange and
the SWX Swiss Exchange under the symbol “ZMH.” The
high and low sales prices for our common stock on the New York
Stock Exchange for the calendar quarters of fiscal years 2006
and 2005 are set forth as follows:
| Quarterly High-low Share Prices | High | Low | ||||||
|
Year Ended December 31, 2006:
|
||||||||
|
First Quarter
|
$ | 72.87 | $ | 64.87 | ||||
|
Second Quarter
|
$ | 68.80 | $ | 55.68 | ||||
|
Third Quarter
|
$ | 69.44 | $ | 52.20 | ||||
|
Fourth Quarter
|
$ | 79.11 | $ | 66.93 | ||||
|
Year Ended December 31, 2005:
|
||||||||
|
First Quarter
|
$ | 89.10 | $ | 74.25 | ||||
|
Second Quarter
|
$ | 83.70 | $ | 72.71 | ||||
|
Third Quarter
|
$ | 85.10 | $ | 67.62 | ||||
|
Fourth Quarter
|
$ | 71.60 | $ | 60.19 | ||||
We have not declared or paid dividends on our common stock since
becoming a public company on August 6, 2001. Currently, we
do not anticipate paying any cash dividends on the common stock
in the foreseeable future. Our credit facility also restricts
the payment of dividends under certain circumstances.
The number of beneficial owners of our common stock on
February 13, 2007 was approximately 466,200. On
February 13, 2007, the closing price of the common stock,
as reported on the New York Stock Exchange, was $84.18 per
share.
The information required by this Item concerning equity
compensation plans is incorporated by reference to Item 12
of this report.
The following table summarizes repurchases of common stock
settled during the three months ended December 31, 2006:
| Total Number of Shares | Approximate Dollar Value of | |||||||||||
| Purchased as Part of | Shares that May Yet Be | |||||||||||
| Total Number of | Average Price | Publicly Announced Plans | Purchased Under Plans | |||||||||
| Shares Purchased | Paid per Share | or Programs(1) | or Programs | |||||||||
| October 2006 | — | — | 9,951,500 | 365,212,620 | ||||||||
|
November 2006
|
— | — | 9,951,500 | 365,212,620 | ||||||||
|
December 2006
|
2,194,300 | $76.49 | 12,145,800 | $1,197,361,995 | ||||||||
|
Total
|
2,194,300 | $76.49 | 12,145,800 | $1,197,361,995 | ||||||||
| (1) | In December 2005, our Board of Directors authorized the repurchase of up to $1 billion of common stock through December 31, 2007. In December 2006, our Board of Directors authorized an additional repurchase of up to $1 billion of common stock through December 31, 2008. Prior to December 2005, we did not have a share repurchase program. |
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
| ITEM 6. | Selected Financial Data |
The financial information for each of the past five years ended
December 31, is set forth below (in millions, except per
share amounts):
| Summary of Operations | |||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003(1) | 2002 | |||||||||||||||||
|
Net sales
|
$ | 3,495.4 | $ | 3,286.1 | $ | 2,980.9 | $ | 1,901.0 | $ | 1,372.4 | |||||||||||
|
Net earnings
|
834.5 | 732.5 | 541.8 | 346.3 | 257.8 | ||||||||||||||||
|
Pro forma net earnings assuming change in accounting principle
for instruments is applied
retroactively(2)
|
834.5 | 732.5 | 541.8 | 291.2 | 260.8 | ||||||||||||||||
|
Earnings per common share
|
|||||||||||||||||||||
|
Basic
|
$ | 3.43 | $ | 2.96 | $ | 2.22 | $ | 1.67 | $ | 1.33 | |||||||||||
|
Diluted
|
3.40 | 2.93 | 2.19 | 1.64 | 1.31 | ||||||||||||||||
|
Pro forma earnings per common share assuming change in
accounting principle for instruments is applied
retroactively(2)
|
|||||||||||||||||||||
|
Basic
|
$ | 1.40 | $ | 1.34 | |||||||||||||||||
|
Diluted
|
1.38 | 1.33 | |||||||||||||||||||
|
Average common shares outstanding
|
|||||||||||||||||||||
|
Basic
|
243.0 | 247.1 | 244.4 | 207.7 | 194.5 | ||||||||||||||||
|
Diluted
|
245.4 | 249.8 | 247.8 | 211.2 | 196.8 | ||||||||||||||||
|
Balance Sheet Data
|
|||||||||||||||||||||
|
Total assets
|
$ | 5,974.4 | $ | 5,721.9 | $ | 5,695.5 | $ | 5,156.0 | $ | 858.9 | |||||||||||
|
Short-term debt
|
– | – | 27.5 | 101.3 | 156.7 | ||||||||||||||||
|
Long-term debt
|
99.6 | 81.6 | 624.0 | 1,007.8 | – | ||||||||||||||||
|
Other long-term obligations
|
323.4 | 348.3 | 420.9 | 352.6 | 91.8 | ||||||||||||||||
|
Stockholders’ equity
|
4,920.5 | 4,682.8 | 3,942.5 | 3,143.3 | 366.3 | ||||||||||||||||
| (1) | Includes the results of Centerpulse subsequent to October 2, 2003 and Centerpulse balance sheet data as of December 31, 2003. |
| (2) | Pro forma net earnings for the year ended December 31, 2003 are before the cumulative effect of an accounting change of $55.1 million. The year ended December 31, 2002 reflects the retroactive application of a new accounting method for instruments. Effective January 1, 2003, we changed the method of accounting for instruments which we own and are used by orthopaedic surgeons during total joint replacement and other surgical procedures. Instruments are recognized as long-lived assets and are included in property, plant and equipment and are depreciated using the straight-line method based on estimated useful lives, determined principally in reference to associated product life cycles, primarily five years. In prior periods, undeployed instruments were carried as a prepaid cost and recognized in selling, general and administrative expense in the year in which the instruments were placed into service. |
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
| ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and the
corresponding notes included elsewhere in this
Form 10-K. This
discussion and analysis contains forward-looking statements.
OVERVIEW
We are a global leader in the design, development, manufacture
and marketing of reconstructive orthopaedic implants, including
joint and dental, spinal implants, trauma products and related
orthopaedic surgical products (sometimes referred to in this
report as “OSP”). We also provide hospital-focused
consulting services to help member institutions design,
implement and manage successful orthopaedic programs of
distinction, which account for less than one percent of sales.
Reconstructive orthopaedic implants restore joint function lost
due to disease or trauma in joints such as knees, hips,
shoulders and elbows. Dental reconstructive implants restore
function and aesthetics in patients that have lost teeth due to
trauma or disease. Spinal implants are utilized by orthopaedic
surgeons and neurosurgeons in the treatment of degenerative
diseases, deformities and trauma in all regions of the spine.
Trauma products are devices used primarily to reattach or
stabilize damaged bone and tissue to support the body’s
natural healing process. OSP include supplies and instruments
designed to aid in orthopaedic surgical procedures and
post-operation rehabilitation. Through our consulting services,
we provide hospitals and other orthopaedic practices resource
capabilities in the areas of business development, marketing,
in/outpatient rehab practice, clinical pathways, care mapping
and space design, community relations, customer service,
delivery models, cost accounting, staff utilization and more in
order to improve the profit environment. We have operations in
more than 24 countries and market products in more than 100
countries. We manage operations through three reportable
geographic segments — the Americas, Europe and Asia
Pacific.
We believe the following developments or trends are important in
understanding our financial condition, results of operations and
cash flows for the year ended December 31, 2006.
Demand (Volume and Mix) Trends
Increased volume and changes in the mix of product sales
contributed 6 percentage points of 2006 sales growth, which
is 3 percentage points below the rate of growth from 2005
compared to 2004. A slowdown in procedure growth at acute care
institutions in our largest operating segment as well as first
half competitive losses in hips contributed to the slower growth
in product sales. We believe the market for orthopaedic
procedure volume on a global basis will continue to rise at mid
to high single digit rates driven by an aging global population,
obesity, proven clinical benefits, new material technologies,
advances in surgical techniques (such as our MIS Procedures and
Technologies) and more active lifestyles, among other factors.
In addition, the continued shift in demand to premium products,
such as Longevity, Durasul and Prolong Highly
Crosslinked Polyethylenes, Trabecular Metal Technology
products, high-flex knees, knee revision products and porous hip
stems, continue to positively affect sales growth. For example,
during 2006, sales of products incorporating Trabecular Metal
Technology were over $165 million, a year-over-year
increase of over 40 percent.
We believe the most effective way to address rising health care
costs without affecting patient access or treatment options is a
systemic approach. This year we acquired HMI which specializes
in helping hospitals to improve their business processes. HMI
will be part of a new Zimmer business unit specifically focused
on health economic issues. This will include: developing new
clinical/economic data; expanding our current Pathways Program;
and helping to develop improved office management processes and
technology. We believe innovative surgical approaches will
continue to significantly affect the orthopaedics industry. We
continued our significant progress in the development and
introduction of MIS Implants, Procedures and technologies.
During the year ended December 31, 2006, The Zimmer
Institute and its satellite locations trained nearly 2,000
surgeons on advanced techniques, including over 1,300 surgeons
on MIS Procedures.
Pricing Trends
Selling prices were up modestly during 2006 compared with a
1 percentage point increase during 2005 when compared to
2004. Asia Pacific selling prices decreased 2 percentage
points for the year ended December 31, 2006, compared to a
negligible change in 2005 when compared to 2004. Effective
April 1, 2006, the Japanese government reduced
reimbursement rates, which contributed to a reduction of our
selling prices in Japan by approximately 4 percent during
2006. Japan represents approximately 8 percent of our
sales. Effective January 1, 2007, the Japanese government
reduced reimbursement rates again. We estimate this action will
affect Japan sales negatively by approximately 3.5 percent
for 2007. The Americas experienced a 2 percent increase in
selling prices during 2006, compared to a 1 percent
increase in 2005. In Europe, selling prices for 2006 decreased
1 percent, the same decrease we saw in 2005 as compared to
2004. Within Europe, Germany, which constitutes approximately
6 percent of our sales, experienced a 4 percent
decrease in selling prices in 2006, as a result of reductions in
government implant reimbursement rates. The United Kingdom,
which comprises 3 percent of our sales, reported a similar
4 percent decline in selling prices for the year. The price
declines in Germany and the United Kingdom were partially offset
by increased selling prices in other European markets. With
continuing pressure from governmental healthcare cost
containment efforts and group purchasing organizations, we
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
estimate global sales could be adversely affected by 1 to
2 percent in 2007 due to changes in selling prices.
Foreign Currency Exchange Rates
For 2006, foreign currency exchange rates had a modest negative
effect on global sales growth. A weaker U.S. Dollar
compared to most foreign currencies in the three month period
ended December 31, 2006, compared to the same 2005 period,
increased sales by 2 percentage points. If foreign currency
exchange rates remain consistent with the year end rates, we
estimate that the weaker dollar versus foreign currency exchange
rates will have a positive effect in 2007 of approximately
0.8 percent on sales. We address currency risk through
regular operating and financing activities, and under
appropriate circumstances and subject to proper authorization,
through the use of forward contracts 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.
New Product Sales
New products, which we define as products or stock keeping units
(“SKU’s”) introduced within the prior
36-month period to a
particular market, accounted for 24 percent, or
$828 million, of 2006 sales. Adoption rates for new
technologies are a key indicator of performance in our industry.
Our sales have grown with the introduction of new products, such
as the Gender Solutions Knee, Durom Acetabular
System with Metasul Technology, Trabecular Metal
Primary Hip Prosthesis, Versys Epoch Composite Hip
Stem, Acetabular Revision system, Zimmer NCB Plating
System, Anatomical Shoulder Inverse/Reverse Systems and
Zimmer Universal Locking Plates.
We expect new products in our current pipeline will favorably
affect our future operating performance. Products we expect to
contribute to new product sales in 2007 include, in addition to
those listed above, an MIS
Porolock®
Stem, Durom Hemi Femoral with Metasul Technology,
Porolock®
Titanium Surface Stem with
Kinectivtm
Technology, Natural-Knee II High-Flex Gender,
NexGen LPS High-Flex Mobile Bearing Knee, Dynesys
Top Loading Dynamic Stabilization and
BRIGITtm
Bone Resection Instrument Guide.
Strategic Initiatives — ENABLE, INNOVATE and
GROW
Our refined corporate strategies now focus on our ability to
ENABLE, to INNOVATE, and to GROW. Each of these corporate
strategies has three initiatives linked with it; in total these
initiatives will guide our business plan for the foreseeable
future. We believe these initiatives will enable us to
effectively respond to key trends in the orthopaedics industry
while continuing to build upon our strengths. Some of these are
further discussed below.
We will ENABLE growth by, among other actions, reaching out to
new audiences. Historically our focus has been primarily on the
surgeon health care provider and the orthopaedic wing of the
hospital. More decision makers are now involved. These include
consumers with specific focus on special consumer groups such as
women; the obese; ethnic groups; age-specific groups;
governments; general practitioners and nurses; insurance
companies and other payors; and professional societies. A
Direct-To-Patient campaign we are conducting in the United
States to support the Gender Solutions Knee product
launch, and the Back in the
Groovetm
Community Healthcare Program aimed at providing African American
arthritis sufferers increased access to information about knee
and hip replacement options, are examples of how we can reach
out to these new audiences.
We will INNOVATE new and unique solutions for orthopaedic
patients. Biologics is the new frontier of orthopaedics with
enormous potential to provide new treatment approaches for
patients. We already have a strong foundation in this area. For
example, through an agreement with Revivicor, Inc. we obtained
exclusive worldwide distribution rights for genetically
engineered tissues for regenerative therapies, including soft
tissue biological repair and replacement. In partnership with
ISTO Technologies, we are developing cartilage regeneration and
cell-based therapies called Neocartilage Technology.
We will GROW through appropriately planned investment.
Infrastructure investments are planned to support future growth
which include but are not limited to, the substantial
investments we are making to our facilities around the world.
They also include improvements to our organizational
infrastructure, such as vertical integration in-sourcing;
expanded quality systems; Information Technology efficiency;
leading-edge compliance;
state-of-the-art
automation; and advanced education.
Acquisitions of Centerpulse and Implex
We are near completion of our integration plans for Centerpulse
and Implex. We incurred an aggregate of $322 million in
acquisition and integration costs and expenses from October 2003
through December 2006. Although the vast majority of the
integration activities are behind us, a few items still remain.
Some of those items include continued IT systems conversions,
continued manufacturing in-sourcing and some warehouse
consolidations in a few countries.
New Accounting Pronouncements
On January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123(R), “Share-Based
Payment” (“SFAS 123(R)”). We adopted this
accounting standard using the modified prospective method and
will not restate prior periods. Share-based payment expense had
the effect of reducing diluted earnings per share by $0.22
during the year ended December 31, 2006. Our share-based
payment expense is primarily derived from awards of stock
options and equity share units. We did not grant any equity
share units until 2006. Prior to January 1, 2006 under
Accounting Principle Board Opinion No. 25
(“APB 25”), share-based payment expense was not
significant because the exercise price of the stock options we
granted generally equaled the market price
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
of the underlying stock on the measurement date of the stock
options and no equity share units had been awarded. Share-based
payment expense is a non-cash expense and therefore had no
effect on our net cash flows.
As of December 31, 2006, we adopted Statement of Financial
Accounting Standards No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans — an amendment of FASB Statements No. 87,
88, 106 and 132(R)” (“SFAS 158”). This
Statement requires recognition of the funded status of a benefit
plan in the statement of financial position. As a result, our
liabilities increased by $31.3 million. However, this had
no effect on our results of operations or cash flows. For more
information on the effect of this standard, see Note 10 to
the Consolidated Financial Statements, which are included in
this report under Item 8.
RESULTS OF OPERATIONS
Year Ended December 31, 2006 Compared to Year Ended
December 31, 2005
| Net Sales by Operating Segment |
The following table presents net sales by operating segment and
the components of the percentage changes (dollars in millions):
| Year Ended December 31, | ||||||||||||||||||||||||
| Volume/ | Foreign | |||||||||||||||||||||||
| 2006 | 2005 | % Inc | Mix | Price | Exchange | |||||||||||||||||||
|
Americas
|
$ | 2,076.5 | $ | 1,941.8 | 7 | % | 5 | % | 2 | % | – | % | ||||||||||||
|
Europe
|
931.1 | 874.8 | 6 | 7 | (1 | ) | – | |||||||||||||||||
|
Asia Pacific
|
487.8 | 469.5 | 4 | 9 | (2 | ) | (3 | ) | ||||||||||||||||
| $ | 3,495.4 | $ | 3,286.1 | 6 | 7 | – | (1 | ) | ||||||||||||||||
“Foreign Exchange” as used in the tables in this
report represents the effect of changes in foreign exchange
rates on sales growth.
| Net Sales by Product Category |
The following table presents net sales by product category and
the components of the percentage changes (dollars in millions):
| Year Ended December 31, | |||||||||||||||||||||||||
| Volume/ | Foreign | ||||||||||||||||||||||||
| 2006 | 2005 | % Inc | Mix | Price | Exchange | ||||||||||||||||||||
|
Reconstructive
|
|||||||||||||||||||||||||
|
Knees
|
$ | 1,461.5 | $ | 1,366.2 | 7 | % | 7 | % | – | % | – | % | |||||||||||||
|
Hips
|
1,189.4 | 1,140.6 | 4 | 5 | (1 | ) | – | ||||||||||||||||||
|
Dental
|
179.0 | 148.1 | 21 | 16 | 4 | 1 | |||||||||||||||||||
|
Extremities
|
77.6 | 66.1 | 17 | 13 | 4 | – | |||||||||||||||||||
|
Total
|
2,907.5 | 2,721.0 | 7 | 7 | – | – | |||||||||||||||||||
|
Trauma
|
194.7 | 179.8 | 8 | 7 | 1 | – | |||||||||||||||||||
|
Spine
|
177.4 | 160.4 | 11 | 10 | 1 | – | |||||||||||||||||||
|
OSP and other
|
215.8 | 224.9 | (4 | ) | (3 | ) | – | (1 | ) | ||||||||||||||||
|
Total
|
$ | 3,495.4 | $ | 3,286.1 | 6 | 7 | – | (1 | ) | ||||||||||||||||
The NexGen Complete Knee Solution product line including
the NexGen LPS-Flex Gender Knee, NexGen CR-Flex
Gender Knee, NexGen Trabecular Metal Tibial Components
and the NexGen MIS Stemmed Tibial Plate, as well as
Prolong Highly Cross-linked Polyethylene articular
surface components, led knee sales. In addition, strong growth
in the Zimmer Unicompartmental High Flex Knee and the
Innex Total Knee System was offset, in part, by declining
sales of the Natural-Knee II System.
Growth in porous stems, including the new Trabecular Metal
Primary Hip Stem, Zimmer M/ L Taper Stem, and the
CLS Spotorno Stem from the CLS Hip System led hip
sales. Trabecular Metal Acetabular Cups and Metasul
LDHtm
Large Diameter Heads experienced strong growth offset by
declining sales of Cemented Stems.
Orthobiologicals and prosthetic implants, including strong
growth of the Tapered Screw-Vent and Internal Hex Implant
Systems, led dental sales. Trabecular Metal Shoulder
Stems led extremities sales. Zimmer Periarticular Plates,
the Zimmer NCB Plating System, the Sirus IM Nail
and I.T.S.T. Intertrochanteric/ Subtrochanteric Fixation
System experienced strong growth while sales of Compression Hip
Screws continued to decline. The Dynesys Dynamic
Stabilization System and Spinal Trabecular Metal Spacers
led the growth in spine sales while sales of cages for interbody
fusion declined. As a result of the termination of the
OrthoPAT®5
Autotransfusion System distribution arrangement, sales for this
device fell by over $25 million,
5 Trademark
of Haemonetics Corporation.
26
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
accounting for the decline in OSP product sales. The
distribution arrangement ended February, 2006.
The following table presents estimated* 2006 global market size
and market share information (dollars in billions):
| Global | Global | Zimmer | Zimmer | ||||||||||||||
| Market | Market | Market | Market | ||||||||||||||
| Size | % Growth** | Share | Position | ||||||||||||||
|
Reconstructive
|
|||||||||||||||||
|
Knees
|
$ | 5.2 | 8 | % | 28 | % | 1 | ||||||||||
|
Hips
|
4.5 | 6 | 27 | 1 | |||||||||||||
|
Dental
|
2.2 | 22 | 8 | 4 | |||||||||||||
|
Extremities
|
0.4 | 13 | 19 | 2 | |||||||||||||
|
Total
|
$ | 12.3 | 10 | 24 | 1 | ||||||||||||
|
Trauma
|
$ | 3.3 | 10 | 6 | 5 | ||||||||||||
|
Spine***
|
$ | 5.3 | 15 | 3 | 6 | ||||||||||||
| * | Estimates based on company annual filings, Wall Street equity research and Zimmer management |
| ** | Excludes the effect of changes in foreign exchange rates on sales growth |
| *** | Spine includes related orthobiologics |
| Americas Net Sales |
The following table presents Americas net sales (dollars in
millions):
| Year Ended December 31, | |||||||||||||
| % Inc | |||||||||||||
| 2006 | 2005 | (Dec) | |||||||||||
|
Reconstructive
|
|||||||||||||
|
Knees
|
$ | 940.8 | $ | 880.5 | 7 | % | |||||||
|
Hips
|
579.4 | 538.1 | 8 | ||||||||||
|
Dental
|
105.4 | 88.8 | 19 | ||||||||||
|
Extremities
|
54.2 | 46.2 | 17 | ||||||||||
|
Total
|
1,679.8 | 1,553.6 | 8 | ||||||||||
|
Trauma
|
117.1 | 107.5 | 9 | ||||||||||
|
Spine
|
146.9 | 132.7 | 11 | ||||||||||
|
OSP and other
|
132.7 | 148.0 | (10 | ) | |||||||||
|
Total
|
$ | 2,076.5 | $ | 1,941.8 | 7 | ||||||||
The period was characterized by balanced growth in hips and
knees augmented by strong growth in other product lines. Growth
in porous stems, including the new Trabecular Metal
Primary Hip Stem and the Zimmer M/ L Taper Stem, led
hip sales. Trabecular Metal Acetabular Cups, and
Metasul LDH Heads experienced strong growth offset by
declining sales of Cemented Stems. The NexGen Complete
Knee Solution product line including the NexGen LPS-Flex
Gender Knee, NexGen CR-Flex Gender Knee, NexGen
Trabecular Metal Tibial Components and the NexGen MIS
Stemmed Tibial Plate as well as Prolong Highly
Crosslinked Polyethylene articular surface components led knee
sales offset, in part, by declining sales of the
Natural-Knee II System.
Dental, extremities and spine experienced double digit
percentage growth compared to the prior year. The Tapered
Screw-Vent Implant System led dental sales. The
Trabecular Metal Shoulder Stems led extremities sales.
The Dynesys Dynamic Stabilization System and Spinal
Trabecular Metal Spacers led spine sales while trauma
sales returned to solid growth behind Zimmer
Periarticular Plates, the Zimmer NCB Plating system, the
Sirus IM Nail and I.T.S.T. Intertrochanteric/
Subtrochanteric Fixation System.
| Europe Net Sales |
The following table presents Europe net sales (dollars in
millions):
| Year Ended December 31, | |||||||||||||
| 2006 | 2005 | % Inc | |||||||||||
|
Reconstructive
|
|||||||||||||
|
Knees
|
$ | 353.2 | $ | 327.0 | 8 | % | |||||||
|
Hips
|
418.3 | 410.3 | 2 | ||||||||||
|
Dental
|
47.2 | 40.1 | 18 | ||||||||||
|
Extremities
|
18.0 | 13.7 | 31 | ||||||||||
|
Total
|
836.7 | 791.1 | 6 | ||||||||||
|
Trauma
|
38.1 | 33.1 | 15 | ||||||||||
|
Spine
|
24.8 | 22.4 | 11 | ||||||||||
|
OSP and other
|
31.5 | 28.2 | 12 | ||||||||||
|
Total
|
$ | 931.1 | $ | 874.8 | 6 | ||||||||
Strong knee sales continued to drive growth in Europe. Eight
percent volume and mix growth was offset by a 2 percent
drop in average selling prices for knees in Europe. The
NexGen Complete Knee Solution product line and the
Innex Total Knee System led knee sales. Hip sales growth
was negatively affected by reduced selling prices in Germany,
Italy, Portugal and the United Kingdom. The CLS Spotorno
Stem, Longevity Highly Crosslinked Polyethylene
Liners, Metasul LDH Heads and Trabecular Metal
Acetabular Cups led hip sales.
Dental, extremities, trauma, spine and OSP again experienced
double digit percentage growth compared to the prior year.
Dental sales were led by the Tapered Screw-Vent Implant
System. The Anatomical Shoulder System led extremities
sales. Zimmer Periarticular Plates and the Zimmer NCB
Plating System led trauma sales. Trabecular Metal
Spacers led spine sales. Strong sales of wound management
products contributed to the OSP sales performance.
27
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
| Asia Pacific Net Sales |
The following table presents Asia Pacific net sales (dollars in
millions):
| Year Ended December 31, | |||||||||||||
| 2006 | 2005 | % Inc | |||||||||||
|
Reconstructive
|
|||||||||||||
|
Knees
|
$ | 167.5 | $ | 158.7 | 6 | % | |||||||
|
Hips
|
191.7 | 192.2 | – | ||||||||||
|
Dental
|
26.4 | 19.2 | 37 | ||||||||||
|
Extremities
|
5.4 | 6.2 | (13 | ) | |||||||||
|
Total
|
391.0 | 376.3 | 4 | ||||||||||
|
Trauma
|
39.5 | 39.2 | 1 | ||||||||||
|
Spine
|
5.7 | 5.3 | 9 | ||||||||||
|
OSP
|
51.6 | 48.7 | 6 | ||||||||||
|
Total
|
$ | 487.8 | $ | 469.5 | 4 | ||||||||
A stronger U.S. dollar in the first half of the year
resulted in a negative 3 percent effect on sales for Asia
Pacific, including a 3 percent drop in knee sales and a
negative 4 percent impact on hip sales. A reduction in
reimbursement prices for orthopaedic implants in Japan went into
effect April 1, 2006. Together with other price changes in
this segment this action led to a negative 2 percent effect
on sales, including negative 2 percent on knees and
negative 4 percent on hips. Volume and mix growth more than
offset the negative effects of price and currency in knees while
netting out to result in flat sales in hips. Strong knee sales
drove growth in Asia Pacific. The NexGen CR-Flex Knee and
the NexGen LPS-Flex Knee led knee sales. The continued
conversion to porous stems, including the VerSys Hip
System and the CLS Spotorno Stem led hip sales. Sales of
Longevity Highly Crosslinked Polyethylene Liners and
Trabecular Metal Acetabular Cups also exhibited strong
growth.
Dental experienced double digit percentage growth compared to
the prior year. The Tapered Screw-Vent Implant System and
the
Spline®
Implant System led dental sales. Extremity sales were impacted
by lower sales of the Bigliani/ Flatow Shoulder System.
Strong powered instrument sales contributed to the OSP sales
performance.
| Gross Profit |
Gross profit as a percentage of net sales was 77.7 percent
in 2006, compared to 77.5 percent in 2005. The following
table reconciles the gross margin for 2005 to 2006:
|
Year ended December 31, 2005 gross margin
|
77.5 | % | ||
|
Increased selling prices
|
0.1 | |||
|
Share-based compensation
|
(0.3 | ) | ||
|
Other
|
0.4 | |||
|
Year ended December 31, 2006 gross margin
|
77.7 | % | ||
Higher average selling prices in our largest operating segment
offset by lower prices in Europe and Asia Pacific contributed to
the modest improvement in gross margin. Other primary
contributors to the improvement in gross profit margin were the
net favorable effect of year over year changes in foreign
currency hedge gains and losses and manufacturing productivity
gains offset by underlying exposure gains and losses, increased
inventory charges due to the impact of our newer products on
aging product lines and increased royalty expenses as a
percentage of sales due to a higher mix of royalty bearing sales.
| Operating Expenses |
Research and Development, or R&D, as a percentage of net
sales was 5.4 percent for 2006, compared to
5.3 percent in 2005. R&D increased to
$188.3 million for 2006 from $175.5 million in 2005,
reflecting increased spending on projects focused on our
redefined corporate strategies and $8.7 million of share-based
payment expense. In 2006, we expanded our Biologics group based
in Austin, Texas. We continued working with our third party
partners on genetically engineered tissues for regenerative
therapies, including soft tissue biological repair and
replacement. We also worked to develop sophisticated tools for
surgeons. The Zimmer BRIGIT Bone Resection Instrument
Guide is an example of these sophisticated tools. Other examples
include new sensor technologies, Computer Assisted Solutions
personalized for specific surgeons, digital instruments, and
digital/electronic templating. Currently, our product pipeline
consists of approximately 100 active new product development
projects. We are also investing in additional Gender implant
designs following on the successful launch of our Zimmer
Gender Solutions Knee, MIS Procedures and Technologies,
material technologies, including woven materials and drug/device
combinations and intelligence technologies, including sensor
technology. New products, which we define as those introduced
into a market in the preceding thirty-six months, accounted for
approximately 24 percent of net sales in 2006 compared with
21 percent in 2005. In the second half of 2006, we launched
twenty new products. Twelve of those represented major launches,
such as the Gender Solutions Knee, DuromAcetabular
System with Metasul Technology, VerSys Epoch
Composite Hip Stem and the Trabecular Metal
Acetabular Revision System. We continue to target our
R&D spending at the high end of what we believe to be an
industry average of 4-6 percent.
Selling, general and administrative, or SG&A, as a
percentage of net sales was 38.8 percent for 2006, compared
to 38.3 percent in 2005. Share-based compensation added
$55.9 million of expense for the year ended
December 31, 2006, or an additional 1.6 percentage
points when compared with 2005. Absent share-based compensation,
SG&A as a percentage of net sales decreased. The decrease
was primarily due to sales growth, realized expense synergies
and well controlled spending.
Acquisition, integration and other items for 2006 were
$6.1 million compared to $56.6 million in 2005, and
included $27.7 million of income related to three unrelated
matters — the sale of the former Centerpulse Austin
land and facilities for a gain of $5.1 million and the
favorable settlement of two pre-acquisition contingent
liabilities. A reduction in product liability accounted for
$4.9 million of income. Expense items included a
$13.4 million impairment charge for certain Centerpulse
tradename and trademark intangibles based principally in our
Europe operating segment, $8.8 million of integration
consulting expenses, $3.3 million of employee
28
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
severance and retention costs, $3.0 million of costs
related to integrating our information technology systems,
$2.9 million of
in-process research and
development, $2.5 million of personnel expenses and travel
for full-time integration team members and $4.8 million of
other expenses.
| Operating Profit, Income Taxes and Net Earnings |
Operating profit for 2006 increased 10 percent to
$1,165.2 million, from $1,055.0 million in 2005.
Increased sales, improved gross profit margins, realized
operating expense synergies, controlled operating expenses and
decreased acquisition and integration expenses offset
$76.0 million of share-based compensation expense to drive
the increase in operating profit.
The effective tax rate on earnings before income taxes and
minority interest decreased to 28.6 percent for 2006, down
from 29.5 percent in 2005. The reasons for the lower
effective tax rate were the implementation of several European
restructuring initiatives, the successful negotiation of a lower
ongoing Swiss tax rate (from approximately 24 percent to
12.5 percent) and the continued expansion of operations in
lower tax jurisdictions, including Puerto Rico.
Net earnings increased 14 percent to $834.5 million
for 2006, compared to $732.5 million in 2005. The increase
was due to higher operating profit, lower acquisition,
integration and other expenses, decreased interest expense due
to a lower average outstanding debt balance and a lower
effective tax rate, offset by $54.5 million of share-based
compensation expense, net of tax. Basic and diluted earnings per
share increased 16 percent to $3.43 and $3.40,
respectively, from $2.96 and $2.93 in 2005.
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004
| Net Sales by Operating Segment |
The following table presents net sales by operating segment and
the components of the percentage changes (dollars in millions):
| Year Ended December 31, | ||||||||||||||||||||||||
| Volume/ | Foreign | |||||||||||||||||||||||
| 2005 | 2004 | % Inc | Mix | Price | Exchange | |||||||||||||||||||
|
Americas
|
$ | 1,941.8 | $ | 1,741.3 | 12 | % | 10 | % | 1 | % | 1 | % | ||||||||||||
|
Europe
|
874.8 | 808.3 | 8 | 9 | (1 | ) | – | |||||||||||||||||
|
Asia Pacific
|
469.5 | 431.3 | 9 | 8 | – | 1 | ||||||||||||||||||
| $ | 3,286.1 | $ | 2,980.9 | 10 | 9 | 1 | – | |||||||||||||||||
“Foreign Exchange” as used in the tables in this
report represents the effect of changes in foreign exchange
rates on sales growth.
| Net Sales by Product Category |
The following table presents net sales by product category and
the components of the percentage changes (dollars in millions):
| Year Ended December 31, | |||||||||||||||||||||||||
| Volume/ | Foreign | ||||||||||||||||||||||||
| 2005 | 2004 | % Inc | Mix | Price | Exchange | ||||||||||||||||||||
|
Reconstructive
|
|||||||||||||||||||||||||
|
Knees
|
$ | 1,366.2 | $ | 1,194.5 | 14 | % | 13 | % | 1 | % | – | % | |||||||||||||
|
Hips
|
1,140.6 | 1,079.0 | 6 | 5 | – | 1 | |||||||||||||||||||
|
Dental
|
148.1 | 124.7 | 19 | 16 | 2 | 1 | |||||||||||||||||||
|
Extremities
|
66.1 | 58.1 | 14 | 10 | 4 | – | |||||||||||||||||||
|
Total
|
2,721.0 | 2,456.3 | 11 | 10 | – | 1 | |||||||||||||||||||
|
Trauma
|
179.8 | 172.9 | 4 | 2 | 2 | – | |||||||||||||||||||
|
Spine
|
160.4 | 134.2 | 20 | 19 | 1 | – | |||||||||||||||||||
|
OSP
|
224.9 | 217.5 | 3 | 2 | 1 | – | |||||||||||||||||||
|
Total
|
$ | 3,286.1 | $ | 2,980.9 | 10 | 9 | 1 | – | |||||||||||||||||
The NexGen Complete Knee Solution product line including
the NexGen LPS-Flex Knee, NexGen Trabecular Metal
Tibial Components, the NexGen CR-Flex Knee, the
NexGen Rotating Hinge Knee and the NexGen LCCK
Revision Knee led knee sales. In addition, the Zimmer
Unicompartmental High Flex Knee and the Innex Total
Knee System exhibited strong growth.
Growth in porous stems, including the Fiber Metal Taper Stem
from the VerSys Hip System, Zimmer M/ L Taper
Stem, the CLS Spotorno Stem from the CLS Hip
System, and the Alloclassic Zweymüller Hip
System led hip sales. Trabecular Metal Acetabular Cups,
Durom Hip Resurfacing System products internationally,
and Longevity and Durasul Highly Crosslinked
Polyethylene Liners also had strong growth.
Orthobiologicals and prosthetic implants, including strong
growth of the Tapered Screw-Vent Implant System, led
dental sales. The Bigliani/ Flatow Shoulder Solution led
extremities sales. Zimmer Periarticular Plates,
Zimmer Plates and Screws and I.T.S.T.
29
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Intertrochanteric/Subtrochanteric Fixation System led trauma
sales. The Dynesys Dynamic Stabilization System, the
ST360° Spinal Fixation System and Spinal
Trabecular Metal Spacers led spine sales. The growth of
the
OrthoPAT®
Autotransfusion System and wound management products led OSP
sales. On August 30, 2005, Haemonetics Corporation
announced they were ending an exclusive distribution agreement
with us. We sold the OrthoPAT Autotransfusion System
through February 2006.
| Americas Net Sales |
The following table presents Americas net sales (dollars in
millions):
| Year Ended December 31, | |||||||||||||
| 2005 | 2004 | % Inc (Dec) | |||||||||||
|
Reconstructive
|
|||||||||||||
|
Knees
|
$ | 880.5 | $ | 762.0 | 16 | % | |||||||
|
Hips
|
538.1 | 499.6 | 8 | ||||||||||
|
Dental
|
88.8 | 75.3 | 18 | ||||||||||
|
Extremities
|
46.2 | 41.1 | 12 | ||||||||||
|
Total
|
1,553.6 | 1,378.0 | 13 | ||||||||||
|
Trauma
|
107.5 | 105.7 | 2 | ||||||||||
|
Spine
|
132.7 | 111.0 | 20 | ||||||||||
|
OSP
|
148.0 | 146.6 | 1 | ||||||||||
|
Total
|
$ | 1,941.8 | $ | 1,741.3 | 12 | ||||||||
Strong knee sales drove growth in the Americas. The NexGen
Complete Knee Solution product line, including the NexGen
LPS-Flex Knee, NexGen Trabecular Metal Tibial
Components, the NexGen LCCK Revision Knee and the
NexGen CR-Flex Knee led knee sales. The Zimmer
Unicompartmental High Flex Knee also made a strong
contribution. We also benefited from strong hip sales in a
relatively softer market compared to the prior year. Growth in
porous stems, including growth of the Zimmer M/ L Taper
Stem and Alloclassic Zweymüller Hip System led hip
sales, but were partially offset by weaker sales of cemented
stems. Trabecular Metal Acetabular Cups and Longevity
and Durasul Highly Crosslinked Polyethylene Liners
also exhibited strong growth.
Dental, extremities and spine experienced double digit
percentage growth compared to the prior year. The Tapered
Screw-Vent Implant System led dental sales. The Bigliani/
Flatow Shoulder System led extremities sales. The Dynesys
Dynamic Stabilization System and the ST360°
Spinal Fixation System led spine sales.
| Europe Net Sales |
The following table presents Europe net sales (dollars in
millions):
| Year Ended | |||||||||||||
| December 31, | |||||||||||||
| 2005 | 2004 | % Inc | |||||||||||
|
Reconstructive
|
|||||||||||||
|
Knees
|
$ | 327.0 | $ | 292.0 | 12 | % | |||||||
|
Hips
|
410.3 | 398.4 | 3 | ||||||||||
|
Dental
|
40.1 | 34.8 | 15 | ||||||||||
|
Extremities
|
13.7 | 11.6 | 20 | ||||||||||
|
Total
|
791.1 | 736.8 | 7 | ||||||||||
|
Trauma
|
33.1 | 29.5 | 12 | ||||||||||
|
Spine
|
22.4 | 19.8 | 13 | ||||||||||
|
OSP
|
28.2 | 22.2 | 27 | ||||||||||
|
Total
|
$ | 874.8 | $ | 808.3 | 8 | ||||||||
Strong knee sales drove growth in Europe. The NexGen
Complete Knee Solution product line and the Innex
Total Knee System led knee sales. Hip sales growth was
negatively affected by reduced selling prices in Germany, Italy,
Spain, Portugal and the United Kingdom. The CLS Spotorno
Stem, Longevity and Durasul Highly Crosslinked
Polyethylene Liners, Durom Hip Resurfacing System and
Trabecular Metal Acetabular Cups led hip sales.
Dental, extremities, trauma, spine and OSP experienced double
digit percentage growth compared to the prior year. Dental sales
were led by the Tapered Screw-Vent Implant System. The
Bigliani/ Flatow Shoulder System led extremities sales.
Cable-Ready®
Cable Grip System and Zimmer Periarticular Plates led
trauma sales. The
Silhouettetm
Spinal
System®(7)
and Trabecular Metal Spacers led spine sales. Wound
management products led OSP sales.
| Asia Pacific Net Sales |
The following table presents Asia Pacific net sales (dollars in
millions):
| Year Ended | |||||||||||||
| December 31, | |||||||||||||
| 2005 | 2004 | % Inc | |||||||||||
|
Reconstructive
|
|||||||||||||
|
Knees
|
$ | 158.7 | $ | 140.5 | 13 | % | |||||||
|
Hips
|
192.2 | 181.0 | 6 | ||||||||||
|
Dental
|
19.2 | 14.6 | 31 | ||||||||||
|
Extremities
|
6.2 | 5.4 | 15 | ||||||||||
|
Total
|
376.3 | 341.5 | 10 | ||||||||||
|
Trauma
|
39.2 | 37.7 | 4 | ||||||||||
|
Spine
|
5.3 | 3.4 | 57 | ||||||||||
|
OSP
|
48.7 | 48.7 | – | ||||||||||
|
Total
|
$ | 469.5 | $ | 431.3 | 9 | ||||||||
Strong knee and hip sales drove growth in Asia Pacific.
NexGen Trabecular Metal Tibial Components, the NexGen
CR-Flex Knee and the NexGen LPS-Flex Knee led knee
sales. The continued conversion to porous stems, including the
VerSys Hip System, the Alloclassic Zweymüller
Hip
7 The Silhouette Spinal System is licensed from
Spinal Innovations, LLC.
30
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
System and the CLS Spotorno Stem led hip sales, partially
offset by weaker sales of revision stems. Sales of Longevity
and Durasul Highly Crosslinked Polyethylene Liners
and Trabecular Metal Acetabular Cups also exhibited
strong growth.
Dental, extremities and spine experienced double digit
percentage growth compared to the prior year. The Tapered
Screw-Vent Implant System and the Spline Implant
System led dental sales. The Bigliani/ Flatow Shoulder
System led extremities sales. The ST360° Spinal
System led spine sales.
| Gross Profit |
Gross profit as a percentage of net sales was 77.5 percent
in 2005, compared to 73.8 percent in 2004. The following
table reconciles the gross margin for 2004 to 2005:
|
Year ended December 31, 2004 gross margin
|
73.8 | % | ||
|
Reduction in inventory step-up charge
|
1.8 | |||
|
Improved inventory management
|
0.8 | |||
|
Increased selling prices
|
0.2 | |||
|
Resolution of certain legal and other matters
|
0.2 | |||
|
Other
|
0.7 | |||
|
Year ended December 31, 2005 gross margin
|
77.5 | % | ||
Inventory step-up costs
in the year ended December 31, 2005, decreased to
$5.0 million, or 0.2 percent of sales, compared to
$59.4 million, or 2.0 percent of sales, in 2004. We
define “inventory
step-up” as the
difference between the cost basis and the fair value of acquired
Centerpulse and Implex inventories. Other primary contributors
to the improvement in gross profit margin were reduced inventory
charges due to improved inventory management, increased selling
prices, favorable resolution of certain legal and other matters
and reduced royalties. Royalty expenses as a percentage of sales
declined due to a favorable mix of non-royalty bearing sales.
| Operating Expenses |
R&D as a percentage of net sales was 5.3 percent for
2005, compared to 5.6 percent in 2004. R&D increased to
$175.5 million for 2005 from $166.7 million in 2004,
reflecting increased spending on projects focused on areas of
strategic significance, including orthobiologics. In 2005, we
doubled the number of internal people and project-related
orthobiological investments. At the end of 2005, our product
pipeline consisted of more than 160 active projects. We also
invested in MIS Procedures and Technologies, material
technologies, including woven materials and drug/device
combinations and intelligence technologies, including sensor
technology. We delivered more than 79 projects to the market in
2005.
SG&A as a percentage of net sales was 38.3 percent for
2005, compared to 39.9 percent in 2004. The decrease was
primarily due to sales growth and realized expense synergies. In
addition, lower product liability claims and well controlled
general and administrative spending reduced SG&A as a
percentage of sales.
Acquisition, integration and other expenses for 2005 were
$56.6 million compared to $81.1 million in 2004, and
included $13.3 million of employee severance and retention
expenses, $12.7 million of sales agent contract termination
expenses, $6.9 million of costs related to integrating our
information technology systems, $6.2 million of facility
relocation expenses, $5.6 million of integration consulting
expenses, $3.2 million related to the impairment loss on
the Austin facility, $3.1 million of personnel expenses and
travel for full-time integration team members and
$5.6 million of other expenses.
| Operating Profit, Income Taxes and Net Earnings |
Operating profit for 2005 increased 38 percent to
$1,055.0 million, from $763.2 million in 2004.
Increased sales, improved gross profit margins, realized
operating expense synergies, controlled operating expenses and
decreased acquisition and integration expenses drove operating
profit.
The effective tax rate on earnings before income taxes, minority
interest and cumulative effect of change in accounting principle
increased to 29.5 percent for 2005, from 25.9 percent
in 2004. The provision for income taxes in 2004 included a
$34.5 million benefit (4.7 percent) as a result of
revaluing deferred taxes of acquired Centerpulse operations due
to a reduction in the ongoing Swiss tax rate. Even without this
one time benefit, we realized a lower effective tax rate for
2005. The reasons for the lower effective tax rate were the
implementation of several European restructuring initiatives,
the successful negotiation of a lower ongoing Swiss tax rate
(from approximately 24 percent to 12.5 percent) and
the continued expansion of operations in lower tax
jurisdictions, including Puerto Rico. In 2004, the successful
negotiation of the lower Swiss tax rate was effective for the
last five months of the year, whereas in 2005 the benefit was
recognized for the entire year.
Net earnings increased 35 percent to $732.5 million
for 2005, compared to $541.8 million in 2004. The increase
was primarily due to higher operating profit and decreased
interest expense due to a lower average outstanding debt
balance, offset by a higher effective tax rate. Basic and
diluted earnings per share increased 33 and 34 percent to
$2.96 and $2.93, respectively, from $2.22 and $2.19 in 2004.
OPERATING PROFIT BY SEGMENT
Management evaluates operating segment performance based upon
segment operating profit exclusive of operating expenses
pertaining to global operations and corporate expenses,
share-based compensation expense, acquisition, integration and
other expenses, inventory
step-up, in-process
research and development write-offs and intangible asset
amortization expense. Global operations include research,
development engineering, medical education, brand management,
corporate legal, finance, and human resource functions, and U.S.
and Puerto Rico based manufacturing operations and logistics.
Intercompany transactions have been eliminated from segment
operating profit. For more information regarding our segments,
see Note 13 to the consolidated financial statements
included in Item 8 of this
Form 10-K.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
The following table sets forth the operating profit as a
percentage of sales by segment for 2006, 2005 and 2004:
Percent of net sales
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
|
Americas
|
53.1 | % | 52.6 | % | 51.3 | % | ||||||
|
Europe
|
41.6 | 36.3 | 35.1 | |||||||||
|
Asia Pacific
|
47.5 | 45.2 | 42.3 | |||||||||
Year Ended December 31, 2006 Compared to Year Ended
December 31, 2005
In the Americas, operating profit as a percentage of sales
increased due to the effective control of operating expenses,
including realized expense synergies and controlled selling,
general and administrative spending.
European operating profit as a percentage of net sales improved
due to improved gross margin and the realization of expense
synergies related to the elimination of redundant functions and
controlled selling, general and administrative spending.
Asia Pacific operating profit as a percentage of net sales
increased primarily due to product category mix, and controlled
selling, general and administrative spending.
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004
In the Americas, operating profit as a percentage of sales
increased due to an improved product category mix and controlled
operating expenses, including realized expense synergies and
controlled selling, general and administrative spending.
European operating profit as a percentage of net sales improved
due to the realization of expense synergies related to the
elimination of redundant functions and controlled selling,
general and administrative spending.
Asia Pacific operating profit as a percentage of net sales
increased primarily due to an improved product category mix,
lower royalty expenses as a percentage of sales and improved
inventory management.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were
$1,040.7 million in 2006 compared to $878.2 million in
2005. The principal source of cash was net earnings of
$834.5 million. Non-cash charges included in net earnings
accounted for another $273.4 million of operating cash. All
other items of operating cash flows accounted for a use of
$67.2 million of cash pertaining principally to investments
in working capital in support of sales growth.
We continue to focus on working capital management. At
December 31, 2006, we had 55 days of sales outstanding
in trade accounts receivable, an increase of 4 days when
compared to December 31, 2005. A modest slowdown in
payments from health care institutions occurred in all reporting
segments. At December 31, 2006, we had 277 days of
inventory on hand, favorable to December 31, 2005 by
6 days. Our inventory levels have improved from a third
quarter high of 310 days as a result of seasonal demand
patterns and internal efforts to redeploy inventory to eliminate
unnecessary safety stocks and improve inventory turns.
Cash flows used in investing activities were $287.0 million
in 2006, compared to $311.1 million in 2005. In 2006, we
made a final payment of $28.1 million pursuant to the terms
of the Implex acquisition agreement for contingent earn-out
payments. This compares with a payment of $44.1 million in
2005. Additions to instruments during 2006 were
$126.2 million compared to $150.0 million in 2005.
Certain of our 2006 product launches such as our Gender
Solutions Knee demanded lower relative instrument purchases
as we were able to leverage existing instrument systems for this
new product. In 2007, we expect to spend approximately
$120 – $130 million on instruments to support new
products, sales growth and MIS Procedures. We have realized
benefits from in-sourcing instruments at a lower cost. Additions
to other property, plant and equipment during 2006 were
$142.1 million compared to $105.3 million in 2005.
Increases were related to facility expansions in Warsaw,
Indiana; Ponce, Puerto Rico; and Parsippany, New Jersey. These
facility expansions improved working conditions and capabilities
for our research and development organization, and responded to
increased demand, the transfer of production to our other
manufacturing sites as a result of the closure of the Austin,
Texas facility and the tripling of Trabecular Metal
Technology production capacity. During 2007, we expect to
purchase approximately $170 – $180 million in
other property, plant and equipment, as a result of ongoing
facility expansions in Warsaw, Indiana; Ponce, Puerto Rico;
Winterthur, Switzerland; and investment in new information
technology systems and further productivity-related initiatives.
Cash flows used in financing activities were $730.7 million
for 2006, compared to $484.6 million in 2005. In December
2005, our Board of Directors approved a $1 billion stock
repurchase program. We repurchased $798.8 million of our
common stock in 2006 as compared with $4.1 million in 2005.
In December 2006, our Board of Directors approved a new stock
repurchase program, authorizing us to repurchase up to an
additional $1 billion of our common stock through
December 31, 2008. We utilized cash generated from
operating activities and $41.3 million in cash proceeds
received from employee stock compensation plans to fund the
repurchases. We expect to use excess cash to fund future
purchases, if any, under these programs.
We have a five year $1,350 million revolving,
multi-currency, senior unsecured credit facility maturing
March 31, 2010 (the “Senior Credit Facility”). We
had $99.6 million outstanding under the Senior Credit
Facility at December 31, 2006, and an availability of
$1,250.4 million. The $99.6 million is for use in
Japan and carries a low interest rate. The Senior Credit
Facility contains a provision by which we can increase the line
to $1,750 million.
We and certain of our wholly owned foreign and domestic
subsidiaries are the borrowers, and our wholly
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
owned domestic subsidiaries are the guarantors, of the Senior
Credit Facility. Borrowings under the Senior Credit Facility are
used for general corporate purposes and bear interest at a
LIBOR-based rate plus an applicable margin determined by
reference to our senior unsecured long-term credit rating and
the amounts drawn under the Senior Credit Facility, at an
alternate base rate, or at a fixed rate determined through a
competitive bid process. The Senior Credit Facility contains
customary affirmative and negative covenants and events of
default for an unsecured financing arrangement, including, among
other things, limitations on consolidations, mergers and sales
of assets. Financial covenants include a maximum leverage ratio
of 3.0 to 1.0 and a minimum interest coverage ratio of 3.5 to
1.0. If we fall below an investment grade credit rating,
additional restrictions would result, including restrictions on
investments, payment of dividends and stock repurchases. We were
in compliance with all covenants under the Senior Credit
Facility as of December 31, 2006. Commitments under the
Senior Credit Facility are subject to certain fees, including a
facility and a utilization fee. The Senior Credit Facility is
rated BBB+ by Standard & Poor’s Ratings Services
and is not rated by Moody’s Investors’ Service, Inc.
We also have available uncommitted credit facilities totaling
$60.9 million.
Management believes that cash flows from operations, together
with available borrowings under the Senior Credit Facility, are
sufficient to meet our expected working capital, capital
expenditure and debt service needs. Should investment
opportunities arise, we believe that our earnings, balance sheet
and cash flows will allow us to obtain additional capital, if
necessary.
CONTRACTUAL OBLIGATIONS
We have entered into contracts with various third parties in the
normal course of business which will require future payments.
The following table illustrates our contractual obligations (in
millions):
| 2008 | 2010 | |||||||||||||||||||
| and | and | 2012 and | ||||||||||||||||||
| Contractual Obligations | Total | 2007 | 2009 | 2011 | Thereafter | |||||||||||||||
|
Long-term debt
|
$ | 99.6 | $ | – | $ | – | $ | 99.6 | $ | – | ||||||||||
|
Operating leases
|
104.3 | 24.2 | 34.4 | 20.6 | 25.1 | |||||||||||||||
|
Purchase Obligations
|
22.1 | 21.1 | 1.0 | – | – | |||||||||||||||
|
Other long-term liabilities
|
323.4 | – | 82.3 | 19.4 | 221.7 | |||||||||||||||
|
Total contractual obligations
|
$ | 549.4 | $ | 45.3 | $ | 117.7 | $ | 139.6 | $ | 246.8 | ||||||||||
CRITICAL ACCOUNTING ESTIMATES
Our financial results are affected by the selection and
application of accounting policies and methods. Significant
accounting policies which require management’s judgment are
discussed below.
Excess Inventory and Instruments – We must
determine as of each balance sheet date how much, if any, of our
inventory may ultimately prove to be unsaleable or unsaleable at
our carrying cost. Similarly, we must also determine if
instruments on hand will be put to productive use or remain
undeployed as a result of excess supply. Reserves are
established to effectively adjust inventory and instruments to
net realizable value. To determine the appropriate level of
reserves, we evaluate current stock levels in relation to
historical and expected patterns of demand for all of our
products and instrument systems and components. The basis for
the determination is generally the same for all inventory and
instrument items and categories except for
work-in-progress
inventory, which is recorded at cost. Obsolete or discontinued
items are generally destroyed and completely written off.
Management evaluates the need for changes to valuation reserves
based on market conditions, competitive offerings and other
factors on a regular basis.
Income Taxes – We estimate income tax expense
and income tax liabilities and assets by taxable jurisdiction.
Realization of deferred tax assets in each taxable jurisdiction
is dependent on our ability to generate future taxable income
sufficient to realize the benefits. We evaluate deferred tax
assets on an ongoing basis and provide valuation allowances if
it is determined to be “more likely than not” that the
deferred tax benefit will not be realized. Federal income taxes
are provided on the portion of the income of foreign
subsidiaries that is expected to be remitted to the U.S. We
operate within numerous taxing jurisdictions. We are subject to
regulatory review or audit in virtually all of those
jurisdictions and those reviews and audits may require extended
periods of time to resolve. We make use of all available
information and make reasoned judgments regarding matters
requiring interpretation in establishing tax expense,
liabilities and reserves. We believe adequate provisions exist
for income taxes for all periods and jurisdictions subject to
review or audit.
Commitments and Contingencies – Accruals for
product liability and other claims are established with internal
and external legal counsel based on current information and
historical settlement information for claims, related fees and
for claims incurred but not reported. We use an actuarial model
to assist management in determining an appropriate level of
accruals for product liability claims. Historical patterns of
claim loss development over time are statistically analyzed to
arrive at factors which are then applied to loss estimates in
the actuarial model. The amounts established equate to less than
5% of total liabilities and represent management’s best
estimate of the ultimate costs that we will incur under the
various contingencies.
Goodwill and Intangible Assets – We evaluate
the carrying value of goodwill and indefinite life intangible
assets annually, or whenever events or circumstances indicate
the carrying value may not be recoverable. We evaluate the
carrying value of finite life intangible assets whenever events
or circumstances indicate the carrying value may not be
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
recoverable. Significant assumptions are required to estimate
the fair value of goodwill and intangible assets, most notably
estimated future cash flows generated by these assets. As such,
these fair valuation measurements use significant unobservable
inputs as defined under Statement of Financial Accounting
Standards No. 157, Fair Value Measurements. Changes to
these assumptions could require us to record impairment charges
on these assets.
Share-based Payment – We account for
share-based payment expense in accordance with the fair value
recognition provisions of SFAS 123(R). Under the fair value
recognition provisions of SFAS 123(R), share-based payment
expense is measured at the grant date based on the fair value of
the award and is recognized over the requisite service period.
Determining the fair value of share-based awards at the grant
date requires judgment, including estimating the expected life
of stock options and the expected volatility of our stock.
Additionally, we must estimate the amount of share-based awards
that are expected to be forfeited. We estimate expected
volatility based upon the implied volatility of our actively
traded options. The expected life of stock options and estimated
forfeitures are based upon our employees’ historical
exercise and forfeiture behaviors. The assumptions used in
determining the grant date fair value and the expected
forfeitures represent management’s best estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
Information about recent accounting pronouncements is included
in Note 2 to the Consolidated Financial Statements, which
are included in this report under Item 8.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
| ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk |
MARKET RISK
We are exposed to certain market risks as part of our ongoing
business operations, including risks from changes in foreign
currency exchange rates, interest rates and commodity prices
that could affect our financial condition, results of operations
and cash flows. We manage our exposure to these and other market
risks through regular operating and financing activities, and
through the use of derivative financial instruments. We use
derivative financial instruments solely as risk management tools
and not for speculative investment purposes.
FOREIGN CURRENCY EXCHANGE RISK
We operate on a global basis and are exposed to the risk that
our financial condition, results of operations and cash flows
could be adversely affected by changes in foreign currency
exchange rates. We are primarily exposed to foreign currency
exchange rate risk with respect to transactions and net assets
denominated in Euros, Swiss Francs, Japanese Yen, British
Pounds, Canadian Dollars and Australian Dollars. We manage the
foreign currency exposure centrally, on a combined basis, which
allows us to net exposures and to take advantage of any natural
offsets. To reduce the uncertainty of foreign exchange rate
movements on transactions denominated in foreign currencies, we
enter into derivative financial instruments in the form of
foreign exchange forward contracts with major financial
institutions. These forward contracts are designed to hedge
anticipated foreign currency transactions, primarily
intercompany sale and purchase transactions, for periods
consistent with commitments. Realized and unrealized gains and
losses on these contracts that qualify as cash flow hedges are
temporarily recorded in other comprehensive income, then
recognized in cost of products sold when the hedged item affects
net earnings.
For contracts outstanding at December 31, 2006, we had
obligations to purchase U.S. Dollars and sell Euros,
Japanese Yen, British Pounds, Canadian Dollars, Australian
Dollars and Korean Won or purchase Swiss Francs and sell
U.S. Dollars at set maturity dates ranging from January
2007 through June 2009. The notional amounts of outstanding
forward contracts entered into with third parties to purchase
U.S. Dollars at December 31, 2006 and 2005, were
$1,374.3 million and $1,142 million, respectively. The
notional amounts of outstanding forward contracts entered into
with third parties to purchase Swiss Francs at December 31,
2006, were $205 million. The weighted average contract
rates outstanding are Euro:USD 1.29, USD:Swiss
Franc 1.20, USD:Japanese Yen 106, British
Pound:USD 1.82, USD:Canadian Dollar 1.15, Australian
Dollar:USD 0.74 and USD:Korean Won 954.
We maintain written policies and procedures governing our risk
management activities. Our policy requires that critical terms
of hedging instruments are the same as hedged forecasted
transactions. On this basis, with respect to cash flow hedges,
changes in cash flows attributable to hedged transactions are
generally expected to be completely offset by changes in the
fair value of hedge instruments. As part of our risk management
program, we also perform sensitivity analyses to assess
potential changes in revenue, operating results, cash flows and
financial position relating to hypothetical movements in
currency exchange rates. A sensitivity analysis of changes in
the fair value of foreign exchange forward contracts outstanding
at December 31, 2006, indicated that, if the
U.S. Dollar uniformly changed in value by 10 percent
relative to the Euro, Swiss Franc, Japanese Yen, British Pound,
Canadian Dollar, Australian Dollar and Korean Won, with no
change in the interest differentials, the fair value of those
contracts would increase or decrease earnings before income
taxes in periods through 2009, depending on the direction of the
change, by an average approximate amount of $73.7 million,
$21.4 million, $18.9 million, $13.8 million,
$6.5 million, $6.9 million and $2.3 million for
the Euro, Swiss Franc, Japanese Yen, British Pound, Canadian
Dollar, Australian Dollar and Korean Won contracts,
respectively. Any change in the fair value of foreign exchange
forward contracts as a result of a fluctuation in a currency
exchange rate is expected to be largely offset by a change in
the value of the hedged transaction. Consequently, foreign
exchange contracts would not subject us to material risk due to
exchange rate movements because gains and losses on these
contracts offset gains and losses on the assets, liabilities,
and transactions being hedged.
We had net investment exposures to net foreign currency
denominated assets and liabilities of approximately
$1,672 million at December 31, 2006, primarily in
Swiss Francs, Japanese Yen and Euros. Approximately
$1,102 million of the net asset exposure at
December 31, 2006 relates to goodwill recorded in the
Europe and Asia Pacific geographic segments.
We enter into foreign currency forward exchange contracts with
terms of one month to manage currency exposures for assets and
liabilities denominated in a currency other than an
entity’s functional currency. As a result, foreign currency
translation gains/losses recognized in earnings under
SFAS No. 52, “Foreign Currency Translation”
are generally offset with gain/losses on the foreign currency
forward exchange contracts in the same reporting period.
COMMODITY PRICE RISK
We purchase raw material commodities such as cobalt chrome,
titanium, tantalum, polymer and sterile packaging. We enter into
12 to 24 month supply contracts, where available, on these
commodities to alleviate the effect of market fluctuation in
prices. As part of our risk management program, we perform
sensitivity analyses related to potential commodity price
changes. A 10 percent price change across all these
commodities would not have a material effect on our consolidated
financial position, results of operations or cash flows.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
INTEREST RATE RISK
In the normal course of business, we are exposed to market risk
from changes in interest rates that could affect our results of
operations and financial condition. We manage our exposure to
interest rate risks through our regular operations and financing
activities.
Presently, we invest our cash and equivalents in money market
and investment-grade short-term debt instruments. The primary
investment objective is to ensure capital preservation of our
invested principal funds by limiting default and market risk.
Currently, we do not use derivative financial instruments in our
investment portfolio.
Our principal exposure to interest rate risk arises from the
variable rates associated with our credit facilities. We are
subject to interest rate risk through movements in interest
rates on the committed Senior Credit Facility and our
uncommitted credit facilities. Presently, all of our debt
outstanding bears interest at short-term rates. We currently do
not hedge our interest rate exposure, but may do so in the
future. Based upon our overall interest rate exposure as of
December 31, 2006, a change of 10 percent in interest
rates, assuming the amount outstanding remains constant, would
not have a material effect on interest expense. However, because
the effects of any method selected to mitigate the risk of
interest rate changes are uncertain, this analysis assumes that
management will take no action to mitigate interest rate risk.
Further, this analysis does not consider the effect of the
change in the level of overall economic activity that could
exist in such an environment.
CREDIT RISK
Financial instruments, which potentially subject us to
concentrations of credit risk, are primarily cash, cash
equivalents, counterparty transactions, and accounts receivable.
We place our investments in highly rated financial institutions
and money market instruments, and limit the amount of credit
exposure to any one entity. We believe we do not have any
significant credit risk on our cash and equivalents and
investments.
We are exposed to credit loss if the financial institutions with
which we conduct business fail to perform. However, this loss is
limited to the amounts, if any, by which the obligations of the
counterparty to the financial instrument contract exceed our
obligation. We also minimize exposure to credit risk by dealing
with a diversified group of major financial institutions. We
manage credit risk by monitoring the financial condition of our
counterparties using standard credit guidelines. We do not
anticipate any nonperformance by any of the counterparties.
Concentration of credit risk with respect to trade accounts
receivable is limited due to the large number of customers and
their dispersion across a number of geographic areas and by
frequent monitoring of the creditworthiness of the customers to
whom credit is granted in the normal course of business.
However, essentially all of our trade receivables are
concentrated in the public and private hospital and healthcare
industry in the U.S. and internationally or with distributors or
dealers who operate in international markets and, accordingly,
are exposed to their respective business, economic and country
specific variables. Repayment is dependent upon the financial
stability of these industry sectors and the respective
countries’ national economic and health care systems.
Exposure to credit risk is controlled through credit approvals,
credit limits and monitoring procedures and we believe that
reserves for losses are adequate. There is no significant net
exposure due to any individual customer or other major
concentration of credit risk.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Management’s Report on Internal Control Over Financial
Reporting
The management of Zimmer Holdings, Inc. is responsible for
establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting
is defined in
Rules 13a-15(f) or
15d-15(f) promulgated
under the Securities Exchange Act of 1934 as a process designed
by, or under the supervision of, the company’s principal
executive and principal financial officers and effected by the
company’s Board of Directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles and includes
those policies and procedures that:
| • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; | |
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and | |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, the company’s internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
The company’s management assessed the effectiveness of the
company’s internal control over financial reporting as of
December 31, 2006. In making this assessment, the
company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.
Based on that assessment, management has concluded that, as of
December 31, 2006, the company’s internal control over
financial reporting is effective based on those criteria.
The company’s independent registered public accounting firm
has audited management’s assessment of the effectiveness of
the company’s internal control over financial reporting as
of December 31, 2006, as stated in their report which
appears in Item 8 of this Annual Report on
Form 10-K.
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
| ITEM 8. | Financial Statements and Supplementary Data |
Zimmer Holdings, Inc.
| Index to Consolidated Financial Statements | Page |
|
FINANCIAL STATEMENTS:
|
||||
| 39 | ||||
| 41 | ||||
| 42 | ||||
| 43 | ||||
| 44 | ||||
| 45 | ||||
| 46 | ||||
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Zimmer Holdings,
Inc.:
We have completed integrated audits of Zimmer Holdings,
Inc.’s consolidated financial statements and of its
internal control over financial reporting as of
December 31, 2006, in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
| Consolidated financial statements and financial statement schedule |
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Zimmer
Holdings, Inc. and its subsidiaries at December 31, 2006
and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a) (2), presents fairly, in
all material respects, the information set forth therein when
read in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 3 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation in 2006.
As discussed in Note 10 to the consolidated financial
statements, the Company changed the manner in which it accounts
for defined benefit pension and other postretirement plans
effective December 31, 2006.
| Internal control over financial reporting |
Also, in our opinion, management’s assessment, included in
Management’s Report on Internal Control Over Financial
Reporting appearing at the conclusion of Item 7A, that the
Company maintained effective internal control over financial
reporting as of December 31, 2006 based on criteria
established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, based on criteria
established in Internal Control – Integrated
Framework issued by the COSO. The Company’s management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on
the effectiveness of the Company’s internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
39
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Report of Independent Registered Public Accounting Firm (Continued)
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
 |
|
| PricewaterhouseCoopers LLP | |
| Chicago, Illinois | |
| February 26, 2007 |
40
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Consolidated Statements of Earnings
| (in millions, except per share amounts) | |||||||||||||
| For the Years Ended December 31, | 2006 | 2005 | 2004 | ||||||||||
|
Net Sales
|
$ | 3,495.4 | $ | 3,286.1 | $ | 2,980.9 | |||||||
|
Cost of products sold
|
780.1 | 739.4 | 779.9 | ||||||||||
|
Gross Profit
|
2,715.3 | 2,546.7 | 2,201.0 | ||||||||||
|
Research and development
|
188.3 | 175.5 | 166.7 | ||||||||||
|
Selling, general and administrative
|
1,355.7 | 1,259.6 | 1,190.0 | ||||||||||
|
Acquisition, integration and other
|
6.1 | 56.6 | 81.1 | ||||||||||
|
Operating expenses
|
1,550.1 | 1,491.7 | 1,437.8 | ||||||||||
|
Operating Profit
|
1,165.2 | 1,055.0 | 763.2 | ||||||||||
|
Interest income (expense)
|
3.8 | (14.3 | ) | (31.7 | ) | ||||||||
|
Earnings before income taxes and minority interest
|
1,169.0 | 1,040.7 | 731.5 | ||||||||||
|
Provision for income taxes
|
334.0 | 307.3 | 189.6 | ||||||||||
|
Minority interest
|
(0.5 | ) | (0.9 | ) | (0.1 | ) | |||||||
|
Net Earnings
|
$ | 834.5 | $ | 732.5 | $ | 541.8 | |||||||
|
Earnings Per Common Share – Basic
|
$ | 3.43 | $ | 2.96 | $ | 2.22 | |||||||
|
Earnings Per Common Share – Diluted
|
$ | 3.40 | $ | 2.93 | $ | 2.19 | |||||||
|
Weighted Average Common Shares Outstanding
|
|||||||||||||
|
Basic
|
243.0 | 247.1 | 244.4 | ||||||||||
|
Diluted
|
245.4 | 249.8 | 247.8 | ||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
41
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Consolidated Balance Sheets
| (in millions, except share amounts) | ||||||||||
| December 31, | 2006 | 2005 | ||||||||
|
ASSETS
|
||||||||||
|
Current Assets:
|
||||||||||
|
Cash and equivalents
|
$ | 265.7 | $ | 233.2 | ||||||
|
Restricted cash
|
2.4 | 12.1 | ||||||||
|
Accounts receivable, less allowance for doubtful accounts
|
625.5 | 524.2 | ||||||||
|
Inventories, net
|
638.3 | 583.7 | ||||||||
|
Prepaid expenses
|
55.1 | 68.7 | ||||||||
|
Deferred income taxes
|
159.2 | 153.7 | ||||||||
|
Total Current Assets
|
1,746.2 | 1,575.6 | ||||||||
|
Property, plant and equipment, net
|
807.1 | 708.8 | ||||||||
|
Goodwill
|
2,515.6 | 2,428.8 | ||||||||
|
Intangible assets, net
|
712.6 | 756.6 | ||||||||
|
Other assets
|
192.9 | 252.1 | ||||||||
|
Total Assets
|
$ | 5,974.4 | $ | 5,721.9 | ||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||||
|
Current Liabilities:
|
||||||||||
|
Accounts payable
|
$ | 158.0 | $ | 123.6 | ||||||
|
Income taxes payable
|
106.5 | 82.1 | ||||||||
|
Other current liabilities
|
363.7 | 401.2 | ||||||||
|
Total Current Liabilities
|
628.2 | 606.9 | ||||||||
|
Other long-term liabilities
|
323.4 | 348.3 | ||||||||
|
Long-term debt
|
99.6 | 81.6 | ||||||||
|
Total Liabilities
|
1,051.2 | 1,036.8 | ||||||||
|
Commitments and Contingencies (Note 15)
|
||||||||||
|
Minority Interest
|
2.7 | 2.3 | ||||||||
|
Stockholders’ Equity:
|
||||||||||
|
Common stock, $0.01 par value, one billion shares
authorized, 248.9 million (247.8 million in 2005)
issued
|
2.5 | 2.5 | ||||||||
|
Paid-in capital
|
2,743.2 | 2,601.1 | ||||||||
|
Retained earnings
|
2,768.5 | 1,934.0 | ||||||||
|
Accumulated other comprehensive income
|
209.2 | 149.3 | ||||||||
|
Treasury stock, 12.1 million shares (0.1 million
shares in 2005)
|
(802.9 | ) | (4.1 | ) | ||||||
|
Total Stockholders’ Equity
|
4,920.5 | 4,682.8 | ||||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 5,974.4 | $ | 5,721.9 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
42
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Consolidated Statements of Stockholders’ Equity
| (in millions) | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Common Shares | Other | Treasury Shares | Total | |||||||||||||||||||||||||||||
| Paid-in | Retained | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||||
| Number | Amount | Capital | Earnings | Income | Number | Amount | Equity | |||||||||||||||||||||||||
|
Balance January 1, 2004
|
242.4 | $ | 2.4 | $ | 2,342.5 | $ | 659.7 | $ | 138.7 | – | $ | – | $ | 3,143.3 | ||||||||||||||||||
|
Net earnings
|
– | – | – | 541.8 | – | – | – | 541.8 | ||||||||||||||||||||||||
|
Other comprehensive income
|
– | – | – | – | 114.6 | – | – | 114.6 | ||||||||||||||||||||||||
|
Centerpulse and InCentive compulsory acquisition
|
0.6 | – | 28.1 | – | – | – | – | 28.1 | ||||||||||||||||||||||||
|
Stock compensation plans, including tax benefits
|
2.5 | 0.1 | 107.5 | – | – | – | – | 107.6 | ||||||||||||||||||||||||
|
Other
|
– | – | 7.1 | – | – | – | – | 7.1 | ||||||||||||||||||||||||
|
Balance December 31, 2004
|
245.5 | 2.5 | 2,485.2 | 1,201.5 | 253.3 | – | – | 3,942.5 | ||||||||||||||||||||||||
|
Net earnings
|
– | – | – | 732.5 | – | – | – | 732.5 | ||||||||||||||||||||||||
|
Other comprehensive loss
|
– | – | – | – | (104.0 | ) | – | – | (104.0 | ) | ||||||||||||||||||||||
|
Stock compensation plans, including tax benefits
|
2.3 | – | 111.0 | – | – | – | – | 111.0 | ||||||||||||||||||||||||
|
Share repurchases
|
– | – | – | – | – | (0.1 | ) | (4.1 | ) | (4.1 | ) | |||||||||||||||||||||
|
Other
|
– | – | 4.9 | – | – | – | – | 4.9 | ||||||||||||||||||||||||
|
Balance December 31, 2005
|
247.8 | 2.5 | 2,601.1 | 1,934.0 | 149.3 | (0.1 | ) | (4.1 | ) | 4,682.8 | ||||||||||||||||||||||
|
Net earnings
|
– | – | – | 834.5 | – | – | – | 834.5 | ||||||||||||||||||||||||
|
Other comprehensive income
|
– | – | – | – | 95.3 | – | – | 95.3 | ||||||||||||||||||||||||
|
Impact of adoption of FAS 158
|
– | – | – | – | (35.4 | ) | – | – | (35.4 | ) | ||||||||||||||||||||||
|
Stock compensation plans, including tax benefits
|
1.1 | – | 137.9 | – | – | – | – | 137.9 | ||||||||||||||||||||||||
|
Share repurchases
|
– | – | – | – | – | (12.0 | ) | (798.8 | ) | (798.8 | ) | |||||||||||||||||||||
|
Other
|
– | – | 4.2 | – | – | – | – | 4.2 | ||||||||||||||||||||||||
|
Balance December 31, 2006
|
248.9 | $ | 2.5 | $ | 2,743.2 | $ | 2,768.5 | $ | 209.2 | (12.1 | ) | $ | (802.9 | ) | $ | 4,920.5 | ||||||||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
43
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Consolidated Statements Of Cash Flows
| (in millions) | ||||||||||||||||
| For the Years Ended December 31, | 2006 | 2005 | 2004 | |||||||||||||
|
Cash flows provided by (used in) operating activities:
|
||||||||||||||||
|
Net earnings
|
$ | 834.5 | $ | 732.5 | $ | 541.8 | ||||||||||
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
||||||||||||||||
|
Depreciation and amortization
|
197.4 | 185.7 | 181.3 | |||||||||||||
|
Share based compensation
|
76.0 | – | – | |||||||||||||
|
Inventory step-up
|
– | 5.0 | 59.4 | |||||||||||||
|
Income tax benefit from stock option exercises
|
11.6 | 34.3 | 42.5 | |||||||||||||
|
Excess income tax benefit from stock option exercises
|
(8.0 | ) | – | – | ||||||||||||
|
Changes in operating assets and liabilities, net of acquired
assets and liabilities
|
||||||||||||||||
|
Income taxes
|
68.7 | 85.0 | 96.7 | |||||||||||||
|
Receivables
|
(76.9 | ) | (35.3 | ) | (10.6 | ) | ||||||||||
|
Inventories
|
(39.2 | ) | (79.2 | ) | (44.7 | ) | ||||||||||
|
Accounts payable and accrued liabilities
|
(29.9 | ) | (40.1 | ) | (3.1 | ) | ||||||||||
|
Other assets and liabilities
|
6.5 | (9.7 | ) | (1.1 | ) | |||||||||||
|
Net cash provided by operating activities
|
1,040.7 | 878.2 | 862.2 | |||||||||||||
|
Cash flows provided by (used in) investing activities:
|
||||||||||||||||
|
Additions to instruments
|
(126.2 | ) | (150.0 | ) | (139.6 | ) | ||||||||||
|
Additions to other property, plant and equipment
|
(142.1 | ) | (105.3 | ) | (100.8 | ) | ||||||||||
|
Centerpulse and InCentive acquisitions, net of acquired cash
|
– | – | (18.2 | ) | ||||||||||||
|
Implex acquisition, net of acquired cash
|
(28.1 | ) | (44.1 | ) | (153.1 | ) | ||||||||||
|
Proceeds from note receivable
|
– | – | 25.0 | |||||||||||||
|
Proceeds from sale of property, plant and equipment
|
16.2 | – | – | |||||||||||||
|
Investments in other assets
|
(6.8 | ) | (11.7 | ) | (1.6 | ) | ||||||||||
|
Net cash used in investing activities
|
(287.0 | ) | (311.1 | ) | (388.3 | ) | ||||||||||
|
Cash flows provided by (used in) financing activities:
|
||||||||||||||||
|
Net proceeds (payments) on lines of credit
|
18.8 | (5.3 | ) | (561.4 | ) | |||||||||||
|
Proceeds from term loans
|
– | – | 100.0 | |||||||||||||
|
Payments on term loans
|
– | (550.0 | ) | – | ||||||||||||
|
Proceeds from employee stock compensation plans
|
41.3 | 76.7 | 65.0 | |||||||||||||
|
Excess income tax benefit from stock option exercises
|
8.0 | – | – | |||||||||||||
|
Debt issuance costs
|
– | (1.9 | ) | (0.6 | ) | |||||||||||
|
Repurchase of common stock
|
(798.8 | ) | (4.1 | ) | – | |||||||||||
|
Equity issuance costs
|
– | – | (5.0 | ) | ||||||||||||
|
Net cash used in financing activities
|
(730.7 | ) | (484.6 | ) | (402.0 | ) | ||||||||||
|
Effect of exchange rates on cash and equivalents
|
9.5 | (3.9 | ) | 5.2 | ||||||||||||
|
Increase in cash and equivalents
|
32.5 | 78.6 | 77.1 | |||||||||||||
|
Cash and equivalents, beginning of year
|
233.2 | 154.6 | 77.5 | |||||||||||||
|
Cash and equivalents, end of year
|
$ | 265.7 | $ | 233.2 | $ | 154.6 | ||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
44
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Consolidated Statements of Comprehensive Income
| (in millions) | ||||||||||||||
| For the Years Ended December 31, | 2006 | 2005 | 2004 | |||||||||||
|
Net Earnings
|
$ | 834.5 | $ | 732.5 | $ | 541.8 | ||||||||
|
Other Comprehensive Income (Loss):
|
||||||||||||||
|
Foreign currency cumulative translation adjustments
|
143.8 | (201.3 | ) | 145.5 | ||||||||||
|
Unrealized foreign currency hedge gains/(losses), net of tax
effects of $7.6 in 2006, $(17.8) in 2005 and $10.0 in 2004
|
(56.7 | ) | 71.2 | (48.7 | ) | |||||||||
|
Reclassification adjustments on foreign currency hedges, net of
tax effects of $(1.8) in 2006, $(12.7) in 2005 and $(9.6) in 2004
|
8.7 | 27.6 | 15.7 | |||||||||||
|
Unrealized gains/(losses) on securities, net of tax effects of
$0.9 in 2006, $0.9 in 2005 and $(1.5) in 2004
|
(1.4 | ) | (1.5 | ) | 2.4 | |||||||||
|
Minimum pension liability, net of tax effects of $(0.6) in 2006
and $0.2 in 2004
|
0.9 | – | (0.3 | ) | ||||||||||
|
Other comprehensive income (loss)
|
95.3 | (104.0 | ) | 114.6 | ||||||||||
|
Comprehensive Income
|
$ | 929.8 | $ | 628.5 | $ | 656.4 | ||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
45
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
| 1. | BUSINESS |
We design, develop, manufacture and market reconstructive
orthopaedic implants, including joint and dental, spinal
implants, trauma products and related orthopaedic surgical
products. Joint reconstructive implants restore function lost
due to disease or trauma in joints such as knees, hips,
shoulders and elbows. Dental reconstructive implants restore
function and aesthetics in patients that have lost teeth due to
trauma or disease. Spinal implants are utilized by orthopaedic
surgeons and neurosurgeons in the treatment of degenerative
diseases, deformities and trauma in all regions of the spine.
Trauma products are devices used primarily to reattach or
stabilize damaged bone and tissue to support the body’s
natural healing process. Our related orthopaedic surgical
products include surgical supplies and instruments designed to
aid in orthopaedic surgical procedures and post-operation
rehabilitation. We also provide hospital-focused consulting
services to help member institutions design, implement and
manage successful orthopaedic programs of distinction. We
provide hospitals and other orthopaedic practices resource
capabilities in the areas of business development, marketing,
in/outpatient rehab practice, clinical pathways, care mapping
and space design, community relations, customer service,
delivery models, cost accounting, staff utilization and more in
order to improve the profit environment.
We have operations in more than 24 countries and market our
products in more than 100 countries. We operate in a single
industry but have three reportable geographic segments, the
Americas, Europe and Asia Pacific.
The words “we”, “us”, “our” and
similar words refer to Zimmer Holdings, Inc. and its
subsidiaries. Zimmer Holdings refers to the parent company only.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation – The consolidated
financial statements include the accounts of Zimmer Holdings and
its subsidiaries in which it holds a controlling equity
position. Investments in companies in which we exercise
significant influence over the operating and financial affairs,
but do not control, are accounted for under the equity method.
Under the equity method, we record the investment at cost and
adjust the carrying amount of the investment by our
proportionate share of the investee’s net earnings or
losses. All significant intercompany accounts and transactions
are eliminated.
Use of Estimates – The consolidated financial
statements are prepared in conformity with accounting principles
generally accepted in the United States and include amounts that
are based on management’s best estimates and judgments.
Actual results could differ from those estimates.
Foreign Currency Translation – The financial
statements of our foreign subsidiaries are translated into
U.S. dollars using period-end exchange rates for assets and
liabilities and average exchange rates for operating results.
Unrealized translation gains and losses are included in
accumulated other comprehensive income in stockholders’
equity. When a transaction is denominated in a currency other
than the subsidiary’s functional currency, we recognize a
transaction gain or loss when the transaction is settled.
Foreign currency transaction gains and losses included in net
earnings for the years ended December 31, 2006, 2005 and
2004 were not significant.
Revenue Recognition – We sell product through
three principal channels: 1) direct to health care
institutions, referred to as direct channel accounts,
2) through stocking distributors and healthcare dealers and
3) directly to dental practices and dental laboratories.
The direct channel accounts represent more than 80 percent
of our net sales. Through this channel, inventory is generally
consigned to sales agents or customers so that products are
available when needed for surgical procedures. No revenue is
recognized upon the placement of inventory into consignment as
we retain title and maintain the inventory on our balance sheet.
Upon implantation, we issue an invoice and revenue is
recognized. Pricing for products is generally predetermined by
contracts with customers, agents acting on behalf of customer
groups or by government regulatory bodies, depending on the
market. Price discounts under group purchasing contracts are
generally linked to volume of implant purchases by customer
health care institutions within a specified group. At negotiated
thresholds within a contract buying period, price discounts may
increase. Revenue is recognized on sales to stocking
distributors, healthcare dealers, dental practices and dental
laboratories, which account for less than 20 percent of our
net sales, when title to product passes to them, generally upon
shipment. Product is generally sold to distributors at fixed
prices for specified periods. A distributor may return product
in the event that we terminate the relationship. Under those
circumstances, we record an estimated sales return in the period
in which constructive notice of termination is given to a
distributor.
The reserves for doubtful accounts were $20.4 million and
$23.3 million as of December 31, 2006 and 2005,
respectively.
Shipping and Handling – Amounts billed to
customers for shipping and handling of products are reflected in
net sales, and are not significant. Expenses incurred related to
shipping and handling of products are reflected in selling,
general and administrative and were $95.5 million,
$91.6 million and $86.3 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
Acquisition, Integration and Other – We
recognize incremental expenses resulting directly from the
acquisitions of Centerpulse and Implex and significant
nonrecurring items as “Acquisition, integration and
other” expenses. Acquisition,
46
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
integration and other expenses for the years ended
December 31, 2006, 2005 and 2004, included (in millions):
| For the Years Ended December 31, | 2006 | 2005 | 2004 | |||||||||
|
(Gain)/loss on acquired assets and obligations
|
$ | (19.2 | ) | $ | 3.2 | $ | – | |||||
|
Consulting and professional fees
|
8.8 | 5.6 | 32.0 | |||||||||
|
Employee severance and retention
|
3.3 | 13.3 | 9.4 | |||||||||
|
Information technology integration
|
3.0 | 6.9 | 4.3 | |||||||||
|
In-process research & development
|
2.9 | – | – | |||||||||
|
Integration personnel
|
2.5 | 3.1 | 5.2 | |||||||||
|
Facility and employee relocation
|
1.0 | 6.2 | 3.4 | |||||||||
|
Sales agent and lease contract terminations
|
0.2 | 12.7 | 24.4 | |||||||||
|
Other
|
3.6 | 5.6 | 2.4 | |||||||||
| $ | 6.1 | $ | 56.6 | $ | 81.1 | |||||||
Included in the gain/loss on acquired assets and obligations is
the sale of the former Centerpulse Austin land and facilities
for a gain of $5.1 million and the favorable settlement of
two pre-acquisition contingent liabilities. These gains were
offset by a $13.4 million impairment charge for certain
Centerpulse tradename and trademark intangibles based
principally in our Europe operating segment.
Cash and Equivalents – We consider all highly
liquid investments with an original maturity of three months or
less to be cash equivalents. The carrying amounts reported in
the balance sheet for cash and equivalents are valued at cost,
which approximates their fair value. Restricted cash is
primarily composed of cash held in escrow related to certain
insurance coverage.
Inventories – Inventories, net of allowances
for obsolete and slow-moving goods, are stated at the lower of
cost or market, with cost determined on a
first-in first-out
basis.
Property, Plant and Equipment – Property, plant
and equipment is carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based on
estimated useful lives of ten to forty years for buildings and
improvements, three to eight years for machinery and equipment
and generally five years for instruments. Maintenance and
repairs are expensed as incurred. In accordance with Statement
of Financial Accounting Standards (“SFAS”)
No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” we review property, plant and equipment
for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be
recoverable. An impairment loss would be recognized when
estimated future undiscounted cash flows relating to the asset
are less than its carrying amount. An impairment loss is
measured as the amount by which the carrying amount of an asset
exceeds its fair value.
Instruments – Instruments are hand held devices
used by orthopaedic surgeons during total joint replacement and
other surgical procedures. Instruments are recognized as
long-lived assets and are included in property, plant and
equipment. Undeployed instruments are carried at cost, net of
allowances for excess and obsolete instruments. Instruments in
the field are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based on
average estimated useful lives, determined principally in
reference to associated product life cycles, primarily five
years. We review instruments for impairment in accordance with
SFAS No. 144. Depreciation of instruments is
recognized as selling, general and administrative expense.
Goodwill – We account for goodwill in
accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets”. Goodwill is not amortized but is
subject to annual impairment tests. Goodwill has been assigned
to reporting units, which are consistent with our operating
segments. We perform annual impairment tests by comparing each
reporting unit’s fair value to its carrying amount to
determine if there is potential impairment. If the fair value of
the reporting unit is less than its carrying value, an
impairment loss is recorded to the extent that the implied fair
value of the reporting unit goodwill is less than the carrying
value of the reporting unit goodwill. The fair value of the
reporting unit and the implied fair value of goodwill are
determined based upon discounted cash flows, market multiples or
appraised values as appropriate.
Intangible Assets – We account for intangible
assets in accordance with SFAS No. 142. Intangible
assets with an indefinite life, including certain trademarks and
trade names, are not amortized. The useful lives of indefinite
life intangible assets are assessed annually to determine
whether events and circumstances continue to support an
indefinite life. Intangible assets with a finite life, including
core and developed technology, certain trademarks and trade
names, customer related intangibles and patents and licenses are
amortized on a straight-line basis over their estimated useful
life, ranging from seven to thirty years. Intangible assets with
an indefinite life are tested for impairment annually, or
whenever events or circumstances indicate that the carrying
amount may not be recoverable. An impairment loss is recognized
if the carrying amount exceeds the estimated fair value of the
asset. The amount of the impairment loss to be recorded would be
determined based upon the excess of the asset’s carrying
value over its fair value. Intangible assets with a finite life
are tested for impairment whenever events or circumstances
indicate that the carrying amount may not be recoverable.
The useful lives of intangible assets range from 3 to
40 years. In determining the useful lives of intangible
assets, we consider the expected use of the assets and the
effects of obsolescence, demand, competition, anticipated
technological advances, changes in surgical techniques, market
influences and other economic factors. For technology based
intangible assets, we consider the expected life cycles of
products, absent unforeseen technological advances, which
incorporate the corresponding technology. Trademarks and trade
names that do not have a wasting characteristic (i.e., there are
no legal, regulatory, contractual, competitive, economic or
other factors which limit the useful life) are assigned an
indefinite
47
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
life. Trademarks and trade names that are related to products
expected to be phased out are assigned lives consistent with the
period in which the products bearing each brand are expected to
be sold. For customer relationship intangible assets, we assign
useful lives based upon historical levels of customer attrition.
Research and Development – We expense all
research and development costs as incurred. Research and
development costs include salaries, prototypes, depreciation of
equipment used in research and development, consultant fees and
amounts paid to collaborative partners.
Income Taxes – We account for income taxes in
accordance with SFAS No. 109, “Accounting for
Income Taxes”. Deferred tax assets and liabilities are
determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the
enacted tax rates in effect for the years in which the
differences are expected to reverse. Federal income taxes are
provided on the portion of the income of foreign subsidiaries
that is expected to be remitted to the U.S.
Derivative Financial Instruments – We account
for all derivative financial instruments in accordance with
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended by
SFAS No. 138, “Accounting for Certain Derivative
Instruments and Certain Hedging Activities (an amendment of FASB
Statement No. 133)” and SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments
and Hedging Activities”. SFAS No. 133 requires
that all derivative instruments be reported as assets or
liabilities on the balance sheet and measured at fair value. We
maintain written policies and procedures that permit, under
appropriate circumstances and subject to proper authorization,
the use of derivative financial instruments solely for hedging
purposes. The use of derivative financial instruments for
trading or speculative purposes is prohibited by our policy. We
are exposed to market risk due to changes in currency exchange
rates. As a result, we utilize foreign exchange forward
contracts to offset the effect of exchange rate fluctuations on
anticipated foreign currency transactions, generally
intercompany sales and purchases expected to occur within the
next twelve to thirty months. Derivative instruments that
qualify as cash flow hedges are designated as such from
inception. We maintain formal documentation regarding our
objectives, the nature of the risk being hedged, identification
of the instrument, the hedged transaction, the hedging
relationship and how effectiveness of the hedging instrument
will be assessed. Our policy requires that critical terms of a
hedging instrument are effectively the same as a hedged
forecasted transaction. On this basis, with respect to a cash
flow hedge, changes in cash flows attributable to the hedged
transaction are generally expected to be completely offset by
the cash flows attributable to hedge instruments. We, therefore,
perform quarterly assessments of hedge effectiveness by
verifying and documenting those critical terms of the hedge
instrument and that forecasted transactions have not changed. We
also assess on a quarterly basis whether there have been adverse
developments regarding the risk of a counterparty default. For
derivatives which qualify as hedges of future cash flows, the
effective portion of changes in fair value is temporarily
recorded in other comprehensive income and then recognized in
cost of products sold when the hedged item affects net earnings.
The ineffective portion of a derivative’s change in fair
value, if any, is reported in cost of products sold immediately.
The net amount recognized in earnings during the years ended
December 31, 2006, 2005 and 2004, due to ineffectiveness
and amounts excluded from the assessment of hedge effectiveness,
was not significant.
For contracts outstanding at December 31, 2006, we have an
obligation to purchase U.S. Dollars and sell Euros,
Japanese Yen, British Pounds, Canadian Dollars, Australian
Dollars and Korean Won and purchase Swiss Francs and sell
U.S. Dollars at set maturity dates ranging from January
2007 through June 2009. The notional amounts of outstanding
forward contracts entered into with third parties to purchase
U.S. Dollars at December 31, 2006 were
$1,374.3 million. The notional amounts of outstanding
forward contracts entered into with third parties to purchase
Swiss Francs at December 31, 2006, were $205 million.
The fair value of outstanding derivative instruments recorded on
the balance sheet at December 31, 2006, together with
settled derivatives where the hedged item has not yet affected
earnings, was a net unrealized loss of $22.4 million, or
$22.6 million net of taxes, which is deferred in other
comprehensive income, of which, $12.8 million, or
$13.4 million, net of taxes, is expected to be reclassified
to earnings over the next twelve months.
We also enter into foreign currency forward exchange contracts
with terms of one month to manage currency exposures for assets
and liabilities denominated in a currency other than an
entity’s functional currency. As a result, any foreign
currency translation gains/losses recognized in earnings under
SFAS No. 52, “Foreign Currency Translation”
are generally offset with gains/losses on the foreign currency
forward exchange contracts in the same reporting period.
Other Comprehensive Income – Other
comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are
included in comprehensive income but are excluded from net
earnings as these amounts are recorded directly as an adjustment
to stockholders’ equity. Other comprehensive income is
comprised of foreign currency translation adjustments,
unrealized foreign currency hedge gains and losses, and
unrealized gains and losses on available-for-sale securities. We
adopted SFAS No. 158, as described further below in
“Accounting Pronouncements” and as further described
in Note 10, “Retirement and Postretirement Benefit
Plans”. The cumulative effect of the adoption is also
included in accumulated other comprehensive income.
48
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
The components of accumulated other comprehensive income are as
follows (in millions):
| Balance at | Other | Balance at | ||||||||||||||
| January 1, | Comprehensive | Adoption of | December 31, | |||||||||||||
| 2006 | Income (Loss) | SFAS 158 | 2006 | |||||||||||||
|
Foreign currency translation
|
$ | 123.9 | $ | 143.8 | $ | – | $ | 267.7 | ||||||||
|
Foreign currency hedges
|
25.4 | (48.0 | ) | – | (22.6 | ) | ||||||||||
|
Unrealized gains (losses) on securities
|
0.9 | (1.4 | ) | – | (0.5 | ) | ||||||||||
|
Unrecognized actuarial loss – adoption of SFAS 158
|
– | – | (37.4 | ) | (37.4 | ) | ||||||||||
|
Unrecognized prior service cost – adoption of
SFAS 158
|
– | – | 2.0 | 2.0 | ||||||||||||
|
Minimum pension liability
|
(0.9 | ) | 0.9 | – | – | |||||||||||
|
Accumulated other comprehensive income
|
$ | 149.3 | $ | 95.3 | $ | (35.4 | ) | $ | 209.2 | |||||||
Treasury Stock – We account for repurchases of
common stock under the cost method and present treasury stock as
a reduction of shareholders equity. We may reissue common stock
held in treasury only for limited purposes.
Accounting Pronouncements – In December 2004,
the FASB issued SFAS No. 123(R), “Share-Based
Payment”, which is a revision to SFAS No. 123.
SFAS 123(R) requires all share-based payments to employees,
including stock options, to be expensed based on their fair
values. We have disclosed the effect on net earnings and
earnings per share if we had applied the fair value recognition
provisions of SFAS 123 in the years ended December 31,
2005 and 2004. We adopted SFAS 123(R) on January 1,
2006 using the modified prospective method and did not restate
prior periods. SFAS 123(R) applies to new awards and to
awards that are outstanding as of January 1, 2006.
Compensation expense for outstanding awards for which the
requisite service has not been rendered as of January 1,
2006, will be recognized over the remaining service period using
the compensation cost calculated for pro forma disclosure
purposes under SFAS 123.
In June 2006, the Financial Accounting Standards Board issued
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FAS 109, Accounting for Income
Taxes (FIN 48), to create a single model to address
accounting for uncertainty in tax positions. FIN 48
clarifies the accounting for income taxes, by prescribing a
minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. We have adopted FIN 48
as of January 1, 2007, as required. The cumulative effect
of adopting FIN 48 will be recorded in retained earnings
and other balance sheet accounts as applicable. We are currently
evaluating the impact of adoption of FIN 48 and do not
expect that the adoption will have a significant impact on our
financial position and results of operations. We anticipate the
vast majority of the adoption impact to be reflected in balance
sheet reclassifications associated with (a) showing the
liabilities for tax uncertainties and their associated tax
impacts gross versus the historical net presentation and
(b) adjusting liabilities associated with transactions
accounted for under purchase accounting through goodwill. In any
event, the FASB has indicated that additional interpretive
guidance will be issued in March 2007.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements,” which defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about
fair value measurements. This Statement does not require any new
fair value measurements, but provides guidance on how to measure
fair value by providing a fair value hierarchy used to classify
the source of the information. SFAS No. 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. The adoption of
SFAS No. 157 is not expected to have a material impact
on our consolidated financial statements or results of
operations.
In September 2006, the FASB also issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106 and 132(R). “This Statement
requires recognition of the funded status of a benefit plan in
the statement of financial position. SFAS No. 158 also
requires recognition in other comprehensive income of certain
gains and losses that arise during the period but are deferred
under pension accounting rules, as well as modifies the timing
of reporting and adds certain disclosures. The Statement
provides recognition and disclosure elements to be effective as
of the end of the fiscal year after December 15, 2006 and
measurement elements to be effective for fiscal years ending
after December 15, 2008. We adopted SFAS No. 158
on December 31, 2006. See our pension and other
postretirement disclosures in Note 10.
Also in September 2006, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 108
(“SAB 108”), which outlines the staff’s
views regarding the process of quantifying financial statement
misstatements. The issuance of SAB 108 had no effect on our
financial statements.
| 3. | SHARE-BASED COMPENSATION |
We adopted Statement of Financial Accounting Standard
(“SFAS”) No. 123 (revised 2004),
“Share-Based Payment,” (“SFAS 123(R)”)
effective January 1, 2006. SFAS 123(R) is a revision
of SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). SFAS 123(R)
requires the recognition of the fair value of share-based
payments in net earnings over the related service period. Our
share-based
49
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
payments primarily consist of stock options, equity share units
and an employee stock purchase plan. We did not grant any equity
share units until 2006. Prior to January 1, 2006, we
accounted for share-based payments under APB Opinion
No. 25, “Accounting for Stock Issued to
Employees,” and related Interpretations
(“APB 25”). Under APB 25, share-based
payment expense was not significant because the exercise price
of the stock options generally equaled the market price of the
underlying stock on the measurement date of the stock options
and no equity share units had been awarded. No share-based
payment expense was reflected in net income for the employee
stock purchase plan under the provisions of APB 25, as the
employee purchase price discount met the acceptable thresholds
under Section 423 of the Internal Revenue Code.
We have elected the modified prospective method for adopting
SFAS 123(R). Under the modified prospective method, the
provisions of SFAS 123(R) apply to all share-based payments
granted or modified after the date of adoption. For share-based
payments granted prior to the date of the adoption, the
unrecognized expense related to the unvested portion at the date
of adoption will be recognized in net earnings under the grant
date fair value provisions used for our pro forma disclosures
under SFAS 123. For the year ended December 31, 2006,
share-based payment expense was $76.0 million or
$54.5 million net of the related tax benefits. Share-based
payment expense for the year ended December 31, 2005 under
APB 25 was not significant. The following is the pro forma
expense disclosure under SFAS 123 for the years ended
December 31, 2005 and 2004 (in millions, except per share
amounts):
| 2005 | 2004 | ||||||||
|
Net earnings, as reported
|
$ | 732.5 | $ | 541.8 | |||||
|
Deduct: Total share-based payment expense determined under
SFAS 123 for all awards, net of tax
|
(46.1 | ) | (26.0 | ) | |||||
|
Pro forma net earnings
|
$ | 686.4 | $ | 515.8 | |||||
|
Earnings per share:
|
|||||||||
|
Basic – as reported
|
$ | 2.96 | $ | 2.22 | |||||
|
Basic – pro forma
|
2.78 | 2.11 | |||||||
|
Diluted – as reported
|
2.93 | 2.19 | |||||||
|
Diluted – pro forma
|
2.75 | 2.08 | |||||||
Prior to adopting SFAS 123(R), we classified all tax
benefits of deductions resulting from the exercise of
non-qualified stock options as operating cash flows.
SFAS 123(R) requires the cash flows resulting from excess
tax benefits (i.e., tax deductions realized for stock options
exercised in excess of the tax benefit recognized on the related
share-based payment expense) to be classified as financing cash
flows.
Stock Options
We had three stock option plans in effect at December 31,
2006: the 2006 Stock Incentive Plan (the “2006 Plan”),
the TeamShare Stock Option Plan and the Stock Plan for
Non-Employee Directors. The 2006 Plan was adopted by the Board
of Directors on February 17, 2006 and became effective on
May 1, 2006. The 2006 Plan replaced the 2001 Stock
Incentive Plan (the “2001 Plan”), which by its terms
expired on August 5, 2006. Following stockholder approval
of the 2006 Plan, no further grants were made under the 2001
Plan. We have reserved the maximum number of shares of common
stock available for award under the terms of each of these plans
and have registered 42.9 million shares of common stock.
The 2006 Plan provides for the grant of nonqualified stock
options and incentive stock options, long-term performance
awards, restricted stock awards, equity share units and stock
appreciation rights. The Compensation and Management Development
Committee of the Board of Directors determines the grant date
for annual grants under our stock option plans. The date for
annual grants under the 2006 Plan to our executive officers is
expected to occur in February of each year following the
earnings announcements for the previous quarter and full year.
The TeamShare Stock Option Plan provides for the grant of
non-qualified stock options and, in certain jurisdictions, stock
appreciation rights, while the Stock Plan for Non-Employee
Directors provides for awards of stock options, restricted stock
and restricted stock units to non-employee directors. It has
been our practice to issue shares of common stock upon exercise
of stock options from previously unissued shares. The total
number of awards which may be granted in a given year and/or
over the life of the plan under each of our stock option plans
is limited. At December 31, 2006, an aggregate of
18.2 million shares were available for future grants and
awards under these three plans.
Stock options granted to date under our plans generally vest
over four years, although in no event in less than one year, and
expire ten years from the date of grant. Stock options are
granted with an exercise price equal to the market price of our
common stock on the date of grant, except in limited
circumstances where local law may dictate otherwise. In the
past, certain options have had price thresholds, which affect
exercisability. All such price thresholds have been satisfied.
The total number of awards which may be granted in a given year
and/or over the life of the plan under each of our stock option
plans is limited to control dilution.
A summary of stock option activity for the year ended
December 31, 2006 is as follows (options in thousands):
| Stock | Weighted Average | |||||||
| Options | Exercise Price | |||||||
|
Outstanding at December 31, 2005
|
12,562 | 55.66 | ||||||
|
Options granted
|
3,492 | 69.16 | ||||||
|
Options exercised
|
(1,093 | ) | 31.37 | |||||
|
Options cancelled
|
(777 | ) | 74.85 | |||||
|
Outstanding at December 31, 2006
|
14,184 | $ | 59.75 | |||||
50
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
The following table summarizes information about stock options
outstanding at December 31, 2006 (options in thousands):
| Outstanding | ||||||||||||||||||||
| Exercisable | ||||||||||||||||||||
| Weighted | ||||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||
| Range of Exercise Prices | Options | Contractual Life | Exercise Price | Options | Exercise Price | |||||||||||||||
|
$10.50 – $17.00
|
2 | 0.03 | $ | 16.53 | 2 | $ | 16.53 | |||||||||||||
|
$19.50 – $27.50
|
808 | 2.88 | 24.80 | 808 | 24.80 | |||||||||||||||
|
$27.51 – $37.50
|
2,424 | 4.23 | 30.78 | 2,416 | 30.78 | |||||||||||||||
|
$39.50 – $51.00
|
1,587 | 6.15 | 42.81 | 1,135 | 42.54 | |||||||||||||||
|
$55.00 – $70.50
|
3,984 | 7.89 | 68.84 | 1,464 | 70.21 | |||||||||||||||
|
$71.00 – $87.50
|
5,379 | 4.87 | 47.43 | 921 | 79.68 | |||||||||||||||
| 14,184 | 5.64 | 59.75 | 6,746 | 47.27 | ||||||||||||||||
We use a Black-Scholes option-pricing model to determine the
fair value of our stock options. For stock options granted
during the year ended December 31, 2006, expected
volatility was derived from the implied volatility of our traded
options that were actively traded around the grant date of the
stock options with exercise prices similar to the stock options
and maturities of over one year. In periods prior to
January 1, 2006, expected volatility was derived based upon
historical volatility of our common stock. The change in
determining the expected volatility assumption was based upon
our traded options with maturities over one year being more
actively traded than in the past along with the guidance
provided by the Securities and Exchange Commission in Staff
Accounting Bulletin No. 107. The expected term of the
stock options has been derived from historical employee exercise
behavior. The risk-free interest rate is determined using the
implied yield currently available for zero-coupon
U.S. government issues with a remaining term equal to the
expected life of the options. A dividend yield of zero percent
has been used as we have not paid a dividend since becoming a
public company in 2001.
The weighted average fair value of the options granted in the
years ended December 31, 2006, 2005 and 2004 were
determined using the following assumptions:
| 2006 | 2005 | 2004 | ||||||||||
|
Dividend Yield
|
– | % | – | % | – | % | ||||||
|
Volatility
|
25.7 | % | 30.2 | % | 28.0 | % | ||||||
|
Risk-free interest rate
|
4.5 | % | 4.1 | % | 3.4 | % | ||||||
|
Expected life (years)
|
5.1 | 5.3 | 5.0 | |||||||||
The weighted average fair value for options granted during 2006,
2005 and 2004 were $22.32, $28.11 and $21.85, respectively. The
total intrinsic value of stock options exercised during the year
ended December 31, 2006, 2005 and 2004 were
$40.5 million, $109.2 million and $129.6 million,
respectively. For the year ended December 31, 2006,
share-based payment expense related to stock options was
$66.3 million or $47.7 million net of the related tax
benefits. For the year ended December 31, 2006, the impact
on basic and diluted EPS related to share-based payment expense
on stock options was $0.19. Since prior to adoption of
SFAS 123(R) the exercise price of stock options granted
generally equaled the market price of the underlying stock on
the measurement date, the expense related to stock options
represents the impact of adopting this standard.
Summarized information about outstanding stock options as of
December 31, 2006 that are already vested and that we
expect to vest, as well as stock options that are currently
exercisable, is as follows:
| Outstanding Stock | ||||||||
| Options Already | Options | |||||||
| Vested and Expected | That Are | |||||||
| to Vest* | Exercisable | |||||||
|
Number of outstanding options (in thousands)
|
13,517 | 6,746 | ||||||
|
Weighted average remaining contractual life
|
7.2 years | 5.8 years | ||||||
|
Weighted average exercise price per share
|
$ | 59.11 | $47.27 | |||||
|
Intrinsic value (in millions)
|
$ | 164.5 | $151.7 | |||||
| * | Includes effects of estimated forfeitures |
As of December 31, 2006, there was $89.4 million of
unrecognized share-based payment expense related to nonvested
stock options granted under our plans. That expense is expected
to be recognized over a weighted average period of
2.3 years.
Equity Share Units
Our equity share units generally will vest at the end of the
three year period ending December 31, 2008. Each equity
share unit will be converted into one share of our common stock
upon vesting. The number of equity share units that will be
awarded, if any, varies depending on the achievement of certain
performance targets over the three year period.
A summary of nonvested equity share units activity for the year
ended December 31, 2006 is as follows (units in thousands):
| Weighted Average | ||||||||
| Equity | Grant Date | |||||||
| Share Units | Fair Value | |||||||
|
Outstanding at January 1, 2006
|
– | $ | – | |||||
|
Granted
|
930 | 67.86 | ||||||
|
Forfeited
|
(25 | ) | 67.86 | |||||
|
Outstanding at December 31, 2006
|
905 | $ | 67.86 | |||||
The fair value of the equity share units was determined based
upon the fair market value of our common stock on
51
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
the date of grant. SFAS 123(R) requires us to estimate the
number of equity share units that will vest, and recognize
share-based payment expense on a straight line basis over the
requisite service period. As of December 31, 2006, we
estimate that approximately 430,100 equity share units will
vest. If our estimate were to change in the future, the
cumulative effect of the change in estimate will be recorded in
that period. Based upon the number of equity share units that we
expect to vest, the unrecognized share-based payment expense as
of December 31, 2006 was $19.5 million, and is
expected to be recognized over a period of 2.0 years. For
the year ended December 31, 2006, pre-tax expense related
to equity share units was $9.7 million or $6.8 million
net of the related tax benefits. For the year ended
December 31, 2006, the impact on basic and diluted EPS
related to equity share units was $0.03.
| 4. | ACQUISITIONS |
Musculoskeletal Management Systems, LLC
On June 2, 2006, we acquired Musculoskeletal Management
Systems, LLC, more commonly known as the Human Motion Institute
(HMI), a privately-held, hospital-focused consulting company
based in Pennsylvania for a cash purchase price of
$15.0 million. We recorded $12.1 million of goodwill
in connection with the acquisition. The acquisition did not have
a material impact on our financial position or results of
operations for the year ended December 31, 2006.
Implex Corp.
On April 23, 2004, we acquired Implex Corp., a privately
held orthopaedics company based in New Jersey, pursuant to an
Amended and Restated Merger Agreement. We acquired
100 percent of the shares of Implex for an initial cash
consideration of approximately $108.0 million, before
adjustments for debt repayment, certain payments previously made
by us to Implex pursuant to a pre-existing strategic alliance
and other items. The aggregate cash consideration paid by us
through December 31, 2006 was $225.3 million,
consisting of a $98.6 million payment at closing,
$2.6 million of direct acquisition costs and
$124.1 million of earn-out payments made pursuant to the
merger agreement. The acquisition resulted from the strategic
alliance agreement we had with Implex since 2000 for the
development and distribution of reconstructive implant and
trauma products incorporating Trabecular Metal Technology.
The merger agreement contained provisions for annual cash
earn-out payments to the selling stockholders based on
year-over-year sales growth through 2006 of certain products
that incorporate Trabecular Metal Technology. Pursuant to
SFAS No. 141 and EITF 95-8 “Accounting for
Contingent Consideration Paid to the Shareholders of an Acquired
Enterprise in a Purchase Business Combination”, the
earn-out payments are recorded as an additional cost of the
transaction upon resolution of the contingency and therefore
increase goodwill. As of December 31, 2006, the earn-out
period under the merger agreement ended and we do not expect any
further amounts will be payable to the selling stockholders. See
Note 7 for additional information on goodwill.
Centerpulse AG
In connection with our acquisition of Centerpulse AG
(“Centerpulse”) in October 2003, we recorded a
$75.7 million integration liability consisting of
$53.1 million of employee termination and relocation costs
and $22.6 million of sales agent and lease contract
termination costs. In accordance with Emerging Issues Task Force
(“EITF”) 95-3 “Recognition of Liabilities Assumed
in a Purchase Business Combination”, these liabilities were
included in the allocation of the purchase price. Increases to
the liability subsequent to the completion of the allocation
period are expensed in the financial statements, and were not
significant. Reductions in the liability subsequent to the
completion of the allocation period are recorded as adjustments
to goodwill.
Our integration plan covers all functional business areas,
including sales force, research and development, manufacturing
and administrative. Approximately 830 Centerpulse employees were
expected to be involuntarily terminated through our integration
plan. As of December 31, 2006, practically all had been
involuntarily terminated. We completed the production phase-out
of our Austin, Texas manufacturing facility in the fourth
quarter of 2005. The vast majority of our integration plan was
complete at the end of 2006.
Reconciliation of the integration liability, as of
December 31, 2006, is as follows (in millions):
| Employee | ||||||||||||
| Termination | ||||||||||||
| and Relocation | Contract | |||||||||||
| Costs | Terminations | Total | ||||||||||
|
Balance, Closing Date
|
$ | 53.1 | $ | 22.6 | $ | 75.7 | ||||||
|
Cash Payments
|
(20.7 | ) | (0.2 | ) | (20.9 | ) | ||||||
|
Balance, December 31, 2003
|
32.4 | 22.4 | 54.8 | |||||||||
|
Cash Payments
|
(20.5 | ) | (2.3 | ) | (22.8 | ) | ||||||
|
Additions/(Reductions), net
|
3.7 | (11.8 | ) | (8.1 | ) | |||||||
|
Balance, December 31, 2004
|
15.6 | 8.3 | 23.9 | |||||||||
|
Cash Payments
|
(8.8 | ) | (2.4 | ) | (11.2 | ) | ||||||
|
Additions/(Reductions), net
|
(0.3 | ) | (1.1 | ) | (1.4 | ) | ||||||
|
Balance, December 31, 2005
|
6.5 | 4.8 | 11.3 | |||||||||
|
Cash Payments
|
(4.5 | ) | (2.6 | ) | (7.1 | ) | ||||||
|
Additions/(Reductions), net
|
(1.2 | ) | (1.3 | ) | (2.5 | ) | ||||||
|
Balance, December 31, 2006
|
$ | 0.8 | $ | 0.9 | $ | 1.7 | ||||||
| 5. | INVENTORIES |
Inventories at December 31, 2006 and 2005, consist of the
following (in millions):
| 2006 | 2005 | |||||||
|
Finished goods
|
$ | 489.1 | $ | 444.0 | ||||
|
Work in progress
|
46.4 | 40.1 | ||||||
|
Raw materials
|
102.8 | 99.6 | ||||||
|
Inventories, net
|
$ | 638.3 | $ | 583.7 | ||||
52
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
Reserves for excess and obsolete inventory were
$129.5 million and $121.0 million at December 31,
2006 and 2005, respectively.
| 6. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment at December 31, 2006 and
2005, was as follows (in millions):
| 2006 | 2005 | |||||||
|
Land
|
$ | 17.6 | $ | 20.7 | ||||
|
Building and equipment
|
783.7 | 706.5 | ||||||
|
Instruments
|
768.5 | 649.2 | ||||||
|
Construction in progress
|
105.3 | 61.4 | ||||||
| 1,675.1 | 1,437.8 | |||||||
|
Accumulated depreciation
|
(868.0 | ) | (729.0 | ) | ||||
|
Property, plant and equipment, net
|
$ | 807.1 | $ | 708.8 | ||||
Depreciation expense was $155.0 million,
$144.0 million and $142.2 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
| 7. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The following table summarizes the changes in the carrying
amount of goodwill for the years ended December 31, 2006
and 2005 (in millions):
| Asia | ||||||||||||||||||
| Americas | Europe | Pacific | Total | |||||||||||||||
|
Balance at January 1, 2005
|
$ | 1,389.1 | $ | 1,023.2 | $ | 116.6 | $ | 2,528.9 | ||||||||||
|
Change in fair value estimates of Centerpulse related to:
|
||||||||||||||||||
|
Income taxes
|
(7.8 | ) | 0.5 | – | (7.3 | ) | ||||||||||||
|
Integration liability
|
(0.2 | ) | (1.4 | ) | – | (1.6 | ) | |||||||||||
|
Change in fair value estimates of Implex related to:
|
||||||||||||||||||
|
Earn-out payment liability
|
44.1 | – | – | 44.1 | ||||||||||||||
|
Income taxes
|
0.6 | – | – | 0.6 | ||||||||||||||
|
Integration liability
|
(0.1 | ) | – | – | (0.1 | ) | ||||||||||||
|
Inventories
|
0.7 | – | – | 0.7 | ||||||||||||||
|
Other
|
(0.2 | ) | – | – | (0.2 | ) | ||||||||||||
|
Purchase of Allo Systems Srl minority interest
|
– | 2.0 | – | 2.0 | ||||||||||||||
|
Currency translation
|
– | (127.4 | ) | (10.9 | ) | (138.3 | ) | |||||||||||
|
Balance at December 31, 2005
|
1,426.2 | 896.9 | 105.7 | 2,428.8 | ||||||||||||||
|
Change in fair value estimates of Centerpulse related to:
|
||||||||||||||||||
|
Income taxes
|
(51.5 | ) | – | – | (51.5 | ) | ||||||||||||
|
Integration liability
|
(0.2 | ) | (1.7 | ) | (0.2 | ) | (2.1 | ) | ||||||||||
|
Change in fair value estimates of Implex related to:
|
||||||||||||||||||
|
Earn-out payment liability
|
28.0 | – | – | 28.0 | ||||||||||||||
|
Integration liability
|
(0.5 | ) | – | – | (0.5 | ) | ||||||||||||
|
Purchase of Musculoskeletal
|
– | – | – | – | ||||||||||||||
|
Management Systems
|
12.1 | – | – | 12.1 | ||||||||||||||
|
Currency translation
|
– | 98.7 | 2.1 | 100.8 | ||||||||||||||
|
Balance at December 31, 2006
|
$ | 1,414.1 | $ | 993.9 | $ | 107.6 | $ | 2,515.6 | ||||||||||
During the year ended December 31, 2006, goodwill was
reduced by $51.5 million related to changes in the fair
value estimates of Centerpulse. $46.0 million of this
reduction was a decrease to the long term tax liability related
to the expiration of the applicable statute of limitations. The
remaining reduction primarily relates to the release of
valuation allowances.
53
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
The components of identifiable intangible assets are as follows
(in millions):
| Trademarks | |||||||||||||||||||||||||
| Core | Developed | and Trade | Customer | ||||||||||||||||||||||
| Technology | Technology | Names | Relationships | Other | Total | ||||||||||||||||||||
|
As of December 31, 2006:
|
|||||||||||||||||||||||||
|
Intangible assets subject to amortization:
|
|||||||||||||||||||||||||
|
Gross carrying amount
|
$ | 119.1 | $ | 417.3 | $ | 33.4 | $ | 35.5 | $ | 48.7 | $ | 654.0 | |||||||||||||
|
Accumulated amortization
|
(20.5 | ) | (88.1 | ) | (9.8 | ) | (4.0 | ) | (20.4 | ) | (142.8 | ) | |||||||||||||
|
Intangible assets not subject to amortization:
|
|||||||||||||||||||||||||
|
Gross carrying amount
|
– | – | 201.2 | – | – | 201.2 | |||||||||||||||||||
|
Total identifiable intangible assets
|
$ | 98.6 | $ | 329.2 | $ | 224.8 | $ | 31.5 | $ | 28.5 | $ | 712.6 | |||||||||||||
|
As of December 31, 2005:
|
|||||||||||||||||||||||||
|
Intangible assets subject to amortization:
|
|||||||||||||||||||||||||
|
Gross carrying amount
|
$ | 118.9 | $ | 417.3 | $ | 31.7 | $ | 34.4 | $ | 39.7 | $ | 642.0 | |||||||||||||
|
Accumulated amortization
|
(14.2 | ) | (60.0 | ) | (6.8 | ) | (2.4 | ) | (17.0 | ) | (100.4 | ) | |||||||||||||
|
Intangible assets not subject to amortization:
|
|||||||||||||||||||||||||
|
Gross carrying amount
|
– | – | 215.0 | – | – | 215.0 | |||||||||||||||||||
|
Total identifiable intangible assets
|
$ | 104.7 | $ | 357.3 | $ | 239.9 | $ | 32.0 | $ | 22.7 | $ | 756.6 | |||||||||||||
Total amortization expense for finite-lived intangible assets
was $42.4 million, $41.7 million and
$39.1 million for the years ended December 31, 2006,
2005 and 2004, respectively, and was recorded as part of
selling, general and administrative. Estimated annual
amortization expense for the years ending December 31, 2007
through 2011 is $41.5 million, $41.5 million,
$41.5 million, $40.2 million and $38.5 million,
respectively.
| 8. | OTHER CURRENT AND LONG-TERM LIABILITIES |
Other current and long-term liabilities at December 31,
2006 and 2005, consist of the following (in millions):
| 2006 | 2005 | ||||||||
|
Other current liabilities:
|
|||||||||
|
License and service agreements
|
$ | 115.0 | $ | 112.3 | |||||
|
Salaries, wages and benefits
|
49.3 | 54.9 | |||||||
|
Accrued liabilities
|
199.4 | 234.0 | |||||||
|
Total other current liabilities
|
$ | 363.7 | $ | 401.2 | |||||
|
Other long-term liabilities:
|
|||||||||
|
Long-term income tax payable
|
$ | 102.1 | $ | 150.1 | |||||
|
Other long-term liabilities
|
221.3 | 198.2 | |||||||
|
Total other long-term liabilities
|
$ | 323.4 | $ | 348.3 | |||||
| 9. | DEBT |
We have a five year $1,350 million senior credit agreement
(the “Senior Credit Facility”). The Senior Credit
Facility is a revolving, multi-currency, senior unsecured credit
facility maturing March 31, 2010. Available borrowings
under the Senior Credit Facility at December 31, 2006, were
$1,250.4 million. The Senior Credit Facility contains a
provision whereby borrowings may be increased to
$1,750 million.
We and certain of our wholly owned foreign and domestic
subsidiaries are the borrowers, and our wholly owned domestic
subsidiaries are the guarantors, of the Senior Credit Facility.
Borrowings under the Senior Credit Facility bear interest at a
LIBOR-based rate plus an applicable margin determined by
reference to our senior unsecured long-term credit rating and
the amounts drawn under the Senior Credit Facility, at an
alternate base rate, or at a fixed rate determined through a
competitive bid process. The Senior Credit Facility contains
customary affirmative and negative covenants and events of
default for an unsecured financing arrangement, including, among
other things, limitations on consolidations, mergers and sales
of assets. Financial covenants include a maximum leverage ratio
of 3.0 to 1.0 and a minimum interest coverage ratio of 3.5 to
1.0. If we fall below an investment grade credit rating,
additional restrictions would result, including restrictions on
investments, payment of dividends and stock repurchases. We were
in compliance with all covenants under the Senior Credit
Facility as of December 31, 2006. Commitments under the
Senior Credit Facility are subject to certain fees, including a
facility and a utilization fee.
Outstanding long-term debt as of December 31, 2006 was
$99.6 million and $81.6 million as of
December 31, 2005. We had no current debt as of
December 31, 2006 or 2005.
We also have available uncommitted credit facilities totaling
$60.9 million.
The weighted average interest rate for borrowings under the
Senior Credit Facility was 0.61 percent at
December 31, 2006. Borrowings under the Senior Credit
Facility at December 31, 2006 and 2005 are Japanese Yen
based borrowings. We paid $5.8 million, $15.3 million
and $27.9 million in interest during 2006, 2005 and 2004,
respectively.
Debt issuance costs of $22.4 million were incurred to
obtain the Senior Credit Facility arrangement. These costs were
capitalized and are amortized to interest expense over the lives
of the related facilities. At December 31, 2006,
unamortized debt issuance costs were $6.3 million.
54
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
| 10. | RETIREMENT AND POSTRETIREMENT BENEFIT PLANS |
We have defined benefit pension plans covering certain U.S. and
Puerto Rico employees who were hired before September 2,
2002. Employees hired after September 2, 2002 are not part
of the U.S. and Puerto Rico defined benefit plans, but do
receive additional benefits under our defined contribution
plans. Plan benefits are primarily based on years of credited
service and the participant’s average eligible
compensation. In addition to the U.S. and Puerto Rico defined
benefit pension plans, we sponsor various
non-U.S. pension
arrangements, including retirement and termination benefit plans
required by local law or coordinated with government sponsored
plans.
We also provide comprehensive medical and group life insurance
benefits to certain U.S. and Puerto Rico eligible retirees who
elect to participate in our comprehensive medical and group life
plans. The medical plan is contributory, and the life insurance
plan is non-contributory. No similar plans exist for employees
outside the U.S. and Puerto Rico. Employees hired after
September 2, 2002, are not eligible for retiree medical and
life insurance benefits.
We use a December 31 measurement date for our benefit plans.
We adopted SFAS 158 (see Note 2 – Accounting
Pronouncements) as of December 31, 2006. The adoption of
SFAS 158 had the following effects on our consolidated
balance sheet as of December 31, 2006 as we recognized the
funded status of our defined benefit and postretirement benefit
plans with a corresponding adjustment to Accumulated Other
Comprehensive Income:
| Prior to | ||||||||||||||||
| Additional Minimum | Additional | |||||||||||||||
| Liability Adjustment | Minimum | |||||||||||||||
| and SFAS 158 | Liability | SFAS 158 | Post | |||||||||||||
| Adoption | Adjustments | Adjustments | SFAS 158 | |||||||||||||
|
Prepaid pension
|
$ | 21.1 | $ | 3.0 | $ | (23.0 | ) | $ | 1.1 | |||||||
|
Other assets
|
173.8 | 0.0 | 19.1 | 192.9 | ||||||||||||
|
Short-term accrued benefit liability
|
(10.5 | ) | 0.0 | 8.9 | (1.6 | ) | ||||||||||
|
Long-term accrued benefit liability
|
(34.8 | ) | 0.0 | (40.2 | ) | (75.0 | ) | |||||||||
|
Accumulated other comprehensive income
|
3.0 | (3.0 | ) | 35.4 | 35.4 | |||||||||||
Defined Benefit Plans
The components of net pension expense for the years ended
December 31, 2006, 2005 and 2004 for our defined benefit
retirement plans are as follows (in millions):
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||||||||||
| 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
|
Service cost
|
$ | 13.1 | $ | 11.4 | $ | 9.7 | $ | 10.2 | $ | 8.7 | $ | 9.6 | ||||||||||||
|
Interest cost
|
7.4 | 5.6 | 4.2 | 4.8 | 4.9 | 4.8 | ||||||||||||||||||
|
Expected return on plan assets
|
(8.2 | ) | (6.4 | ) | (4.8 | ) | (6.6 | ) | (6.0 | ) | (5.8 | ) | ||||||||||||
|
Amortization of prior service cost
|
– | (0.1 | ) | (0.1 | ) | 0.1 | – | 0.4 | ||||||||||||||||
|
Amortization of unrecognized actuarial loss
|
3.7 | 2.1 | 0.9 | 0.2 | 0.6 | 0.6 | ||||||||||||||||||
|
Net periodic benefit cost
|
$ | 16.0 | $ | 12.6 | $ | 9.9 | $ | 8.7 | $ | 8.2 | $ | 9.6 | ||||||||||||
55
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
The weighted average actuarial assumptions used to determine
net pension expense for our defined benefit retirement plans
were as follows:
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||||||||||
| 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
|
Discount rate
|
5.84 | % | 6.25 | % | 6.75 | % | 3.20 | % | 3.78 | % | 3.81 | % | ||||||||||||
|
Rate of compensation increase
|
3.84 | % | 3.82 | % | 3.60 | % | 2.27 | % | 2.28 | % | 1.57 | % | ||||||||||||
|
Expected long-term return on plan assets
|
8.25 | % | 8.50 | % | 8.75 | % | 4.70 | % | 4.77 | % | 4.83 | % | ||||||||||||
The expected long-term rates of return on plan assets is based
on the period expected benefits will be paid and the historical
rates of return on the different asset classes held in the
plans. The expected long-term rate of return is the weighted
average of the target asset allocation of each individual asset
class. We believe that historical asset results approximate
expected market returns applicable to the funding of a long-term
benefit obligation.
Discount rates were determined for each of our defined benefit
retirement plans at their measurement date to reflect the yield
of a portfolio of high quality bonds matched against the timing
and amounts of projected future benefit payments.
Changes in projected benefit obligations and plan assets, for
the years ended December 31, 2006 and 2005 for our defined
benefit retirement plans, were (in millions):
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||||
|
Projected benefit obligation – beginning of year
|
$ | 130.4 | $ | 89.2 | $ | 146.5 | $ | 143.0 | ||||||||||
|
Plan amendments
|
0.6 | 0.2 | – | (0.3 | ) | |||||||||||||
|
Service cost
|
13.1 | 11.4 | 10.2 | 8.7 | ||||||||||||||
|
Interest cost
|
7.4 | 5.6 | 4.8 | 4.9 | ||||||||||||||
|
Employee contributions
|
– | – | 10.4 | 9.8 | ||||||||||||||
|
Benefits paid
|
(1.5 | ) | (0.8 | ) | (17.3 | ) | (14.2 | ) | ||||||||||
|
Actuarial (gain) loss
|
(5.8 | ) | 24.8 | 1.5 | 13.6 | |||||||||||||
|
Translation (gain) loss
|
– | – | 11.8 | (19.0 | ) | |||||||||||||
|
Projected benefit obligation – end of year
|
$ | 144.2 | $ | 130.4 | $ | 167.9 | $ | 146.5 | ||||||||||
|
Plan assets at fair market value – beginning of year
|
$ | 85.6 | $ | 66.1 | $ | 135.7 | $ | 137.2 | ||||||||||
|
Actual return on plan assets
|
11.2 | 3.4 | 10.5 | 11.4 | ||||||||||||||
|
Company contributions
|
20.0 | 17.4 | 9.9 | 9.8 | ||||||||||||||
|
Employee contributions
|
– | – | 10.4 | 9.8 | ||||||||||||||
|
Benefits paid
|
(1.5 | ) | (0.8 | ) | (17.3 | ) | (14.2 | ) | ||||||||||
|
Expenses
|
– | (0.5 | ) | – | – | |||||||||||||
|
Translation gain (loss)
|
– | – | 10.5 | (18.3 | ) | |||||||||||||
|
Plan assets at fair market value – end of year
|
$ | 115.3 | $ | 85.6 | $ | 159.7 | $ | 135.7 | ||||||||||
|
Funded status
|
$ | (28.9 | ) | $ | (44.8 | ) | $ | (8.1 | ) | $ | (10.8 | ) | ||||||
|
Unrecognized prior service cost
|
(0.3 | ) | – | |||||||||||||||
|
Unrecognized actuarial loss
|
52.6 | 9.3 | ||||||||||||||||
|
Net amount recognized
|
$ | 7.5 | $ | (1.5 | ) | |||||||||||||
|
Amounts recognized in consolidated balance sheet:
|
||||||||||||||||||
|
Prepaid pension
|
$ | 1.1 | $ | 12.2 | $ | – | $ | 4.6 | ||||||||||
|
Short-term accrued benefit liability
|
(0.7 | ) | – | – | – | |||||||||||||
|
Long-term accrued benefit liability
|
(29.3 | ) | (6.2 | ) | (8.1 | ) | (6.1 | ) | ||||||||||
|
Accumulated other comprehensive income:
|
||||||||||||||||||
|
Minimum pension liability
|
– | 1.5 | – | – | ||||||||||||||
|
Unrecognized prior service cost
|
0.2 | – | – | – | ||||||||||||||
|
Unrecognized actuarial loss
|
39.8 | – | 7.3 | – | ||||||||||||||
|
Net amount recognized
|
$ | 11.1 | $ | 7.5 | $ | (0.8 | ) | $ | (1.5 | ) | ||||||||
56
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
We estimate the following amounts recorded as part of
accumulated other comprehensive income will be recognized as
part of our net pension expense during 2007:
| U.S. and | ||||||||
| Puerto Rico | Non-U.S. | |||||||
|
Unrecognized prior service cost
|
$ | – | $ | (0.1 | ) | |||
|
Unrecognized actuarial loss
|
2.9 | 0.4 | ||||||
| $ | 2.9 | $ | 0.3 | |||||
The weighted average actuarial assumptions used to determine the
projected benefit obligation for our defined benefit retirement
plans were as follows:
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||||||||||
| 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
|
Discount rate
|
6.14 | % | 5.84 | % | 6.25 | % | 3.23 | % | 3.15 | % | 3.75 | % | ||||||||||||
|
Rate of compensation increase
|
3.84 | % | 3.82 | % | 3.84 | % | 2.28 | % | 2.27 | % | 2.22 | % | ||||||||||||
Plans with projected benefit obligations in excess of plan
assets as of December 31, 2006 and 2005 were as follows (in
millions):
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
|
Benefit obligation
|
$ | 136.8 | $ | 122.6 | $ | 152.0 | $ | 131.6 | ||||||||
|
Plan assets at fair market value
|
106.7 | 77.3 | 140.3 | 118.1 | ||||||||||||
Plans with accumulated benefit obligations in excess of plan
assets as of December 31, 2006 and 2005 were as follows (in
millions):
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
|
Accumulated benefit obligation
|
$ | 9.2 | $ | 7.1 | $ | 22.6 | $ | 16.9 | ||||||||
|
Plan assets at fair market value
|
– | – | 18.3 | 13.2 | ||||||||||||
The accumulated benefit obligation for U.S. and Puerto Rico
defined benefit retirement pension plans was $94.5 million
and $80.3 million as of December 31, 2006 and 2005,
respectively. The accumulated benefit obligation for
non-U.S. defined
benefit retirement plans was $150.3 million and
$131.8 million as of December 31, 2006 and 2005,
respectively.
The benefits expected to be paid out in each of the next five
years and for the five years combined thereafter are as follows
(in millions):
| U.S. and | ||||||||
| For the Years Ending December 31, | Puerto Rico | Non-U.S. | ||||||
|
2007
|
$ | 2.4 | $ | 10.9 | ||||
|
2008
|
2.7 | 11.6 | ||||||
|
2009
|
3.5 | 13.1 | ||||||
|
2010
|
4.2 | 12.4 | ||||||
|
2011
|
5.7 | 10.5 | ||||||
|
2012 – 2016
|
46.4 | 58.6 | ||||||
Our weighted-average asset allocations at December 31, 2006
and 2005, by asset category are as follows:
| U.S. and Puerto | ||||||||||||||||
| Rico | Non-U.S. | |||||||||||||||
| Asset Category | 2006 | 2005 | 2006 | 2005 | ||||||||||||
|
Equity Securities
|
65 | % | 65 | % | 34 | % | 35 | % | ||||||||
|
Debt Securities
|
35 | 35 | 38 | 38 | ||||||||||||
|
Real Estate
|
– | – | 15 | 14 | ||||||||||||
|
Cash Funds
|
– | – | 4 | 5 | ||||||||||||
|
Other
|
– | – | 9 | 8 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
The U.S. and Puerto Rico defined benefit retirement plans’
overall investment strategy is to maximize total returns by
emphasizing long-term growth of capital while avoiding risk. We
have established target ranges of assets held by the plans of 50
to 75 percent for equity securities and 25 to
50 percent for debt securities. The plans strive to have
sufficiently diversified assets so that adverse or unexpected
results from one asset class will not have an unduly detrimental
impact on the entire portfolio. The investments in the plans are
rebalanced quarterly based upon the target asset allocation of
the plans.
The investment strategies of
non-U.S. based
plans vary according to the plan provisions and local laws. The
majority
57
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
of the assets in
non-U.S. based
plans are located in Switzerland based plans. These assets are
held in trusts and are commingled with the assets of other Swiss
companies, with representatives of all the companies making the
investment decisions. The overall strategy is to maximize total
returns while avoiding risk. The trustees of the assets have
established target ranges of assets held by the plans of 30 to
50 percent in debt securities, 20 to 37 percent in
equity securities, 15 to 24 percent in real estate, 3 to
15 percent in cash funds and 0 to 12 percent in other
funds.
As of December 31, 2006 and 2005, our defined benefit
pension plans’ assets did not hold any direct investment in
Zimmer Holdings common stock.
We expect that we will have no minimum funding requirements by
law in 2007 for the U.S. and Puerto Rico defined benefit
retirement plans. However, we expect to voluntarily contribute
between $26 million to $28 million to these plans
during 2007. Contributions to
non-U.S. defined
benefit plans are estimated to be approximately $12 million
in 2007. We do not expect the plan assets in any of our plans to
be returned to us in the next year.
Defined Contribution Plans
We also sponsor defined contribution plans for substantially all
of the U.S. and Puerto Rico employees and certain employees in
other countries. The benefits of these plans relate to local
customs and practices in the countries concerned. We expensed
$12.6 million, $11.3 million and $6.4 million
related to these plans for the years ended December 31,
2006, 2005 and 2004, respectively.
Postretirement Benefit Plans
The components of net periodic expense for the year ended
December 31, 2006, 2005 and 2004 for our unfunded
postretirement benefit plans are as follows (in millions):
| December 31, | 2006 | 2005 | 2004 | |||||||||
|
Service cost
|
$ | 1.6 | $ | 1.6 | $ | 1.4 | ||||||
|
Interest cost
|
2.2 | 2.0 | 1.7 | |||||||||
|
Amortization of unrecognized actuarial loss
|
0.4 | 0.3 | 0.2 | |||||||||
|
Net periodic benefit cost
|
$ | 4.2 | $ | 3.9 | $ | 3.3 | ||||||
The weighted average actuarial assumptions used in accounting
for our postretirement benefit plans were as follows:
| December 31, 2006 | 2005 | 2004 | ||||||||||
|
Discount rate – Benefit obligation
|
6.14 | % | 5.84 | % | 6.25 | % | ||||||
|
Discount rate – Net periodic benefit cost
|
5.84 | % | 6.25 | % | 6.75 | % | ||||||
|
Initial health care cost trend rate
|
8.50 | % | 9.00 | % | 9.50 | % | ||||||
|
Ultimate health care cost trend rate
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||
|
First year of ultimate trend rate
|
2014 | 2014 | 2014 | |||||||||
Changes in benefit obligations for our postretirement benefit
plans were (in millions):
| December 31, | 2006 | 2005 | ||||||||
|
Benefit obligation – beginning of year
|
$ | 39.8 | $ | 31.2 | ||||||
|
Plan amendments
|
(3.6 | ) | – | |||||||
|
Service cost
|
1.6 | 1.6 | ||||||||
|
Interest cost
|
2.2 | 2.0 | ||||||||
|
Employee contributions
|
0.1 | – | ||||||||
|
Benefits paid
|
(0.6 | ) | (0.5 | ) | ||||||
|
Actuarial (gain) loss
|
(1.0 | ) | 5.5 | |||||||
|
Benefit obligation – end of year
|
$ | 38.5 | $ | 39.8 | ||||||
|
Funded status
|
$ | (38.5 | ) | $ | (39.8 | ) | ||||
|
Unrecognized prior service cost
|
(3.3 | ) | (0.1 | ) | ||||||
|
Unrecognized actuarial loss
|
10.5 | 12.2 | ||||||||
|
Net amount recognized
|
$ | (31.3 | ) | $ | (27.7 | ) | ||||
|
Amounts recognized in consolidated balance sheet:
|
||||||||||
|
Short-term accrued benefit liability
|
$ | (0.9 | ) | $ | – | |||||
|
Long-term accrued benefit liability
|
(37.6 | ) | (27.7 | ) | ||||||
|
Accumulated other comprehensive income:
|
||||||||||
|
Unrecognized prior service cost
|
(3.3 | ) | – | |||||||
|
Unrecognized actuarial loss
|
10.5 | – | ||||||||
|
Net amount recognized
|
$ | (31.3 | ) | $ | (27.7 | ) | ||||
A one percentage point change in the assumed health care cost
trend rates would have no significant effect on the service and
interest cost components of net postretirement benefit expense
and the accumulated postretirement benefit obligation. The
effect of a change in the healthcare cost trend rate is tempered
by an annual cap that limits medical costs we pay.
We estimate the following amounts recorded as part of
accumulated other comprehensive income will be recognized as
part of our net pension expense during 2007:
|
Unrecognized prior service cost
|
$ | (0.4 | ) | |
|
Unrecognized actuarial loss
|
0.7 | |||
| $ | 0.3 | |||
The benefits expected to be paid out in each of the next five
years and for the five years combined thereafter are as follows
(in millions):
| For the Years Ending December 31, | ||||
|
2007
|
$ | 0.9 | ||
|
2008
|
1.6 | |||
|
2009
|
2.0 | |||
|
2010
|
2.5 | |||
|
2011
|
2.9 | |||
|
2012 – 2016
|
17.9 | |||
58
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
| 11. | Income Taxes |
The components of earnings before taxes consist of the following
(in millions):
| 2006 | 2005 | 2004 | |||||||||||
|
United States operations
|
$ | 727.3 | $ | 706.5 | $ | 385.7 | |||||||
|
Foreign operations
|
441.7 | 334.2 | 345.8 | ||||||||||
|
Total
|
$ | 1,169.0 | $ | 1,040.7 | $ | 731.5 | |||||||
| The provision for income taxes consists of (in millions): | |||||||||||||
|
Current:
|
|||||||||||||
|
Federal
|
$ | 178.5 | $ | 150.5 | $ | 122.7 | |||||||
|
State
|
22.2 | 22.7 | 17.1 | ||||||||||
|
Foreign
|
89.5 | 80.3 | 114.9 | ||||||||||
| 290.2 | 253.5 | 254.7 | |||||||||||
|
Deferred:
|
|||||||||||||
|
Federal
|
31.7 | 63.0 | (20.2 | ) | |||||||||
|
State
|
5.0 | – | (9.6 | ) | |||||||||
|
Foreign
|
7.1 | (9.2 | ) | (35.3 | ) | ||||||||
| 43.8 | 53.8 | (65.1 | ) | ||||||||||
| $ | 334.0 | $ | 307.3 | $ | 189.6 | ||||||||
Income taxes paid during 2006, 2005 and 2004 were
$257.6 million, $189.2 million and
$143.3 million, respectively.
A reconciliation of the U.S. statutory income tax rate to
our effective tax rate is as follows:
| 2006 | 2005 | 2004 | ||||||||||
|
U.S. statutory income tax rate
|
35.0% | 35.0% | 35.0% | |||||||||
|
State taxes, net of federal deduction
|
1.3 | 0.9 | 0.7 | |||||||||
|
Foreign income taxes at rates different from the
U.S. statutory rate, net of foreign tax credits
|
(4.3 | ) | (3.9 | ) | (2.3 | ) | ||||||
|
Tax benefit from decreased deferred taxes of acquired
Centerpulse operations; due to Swiss tax rate reduction
|
– | – | (4.7 | ) | ||||||||
|
Tax benefit relating to operations in Puerto Rico
|
(2.0 | ) | (1.3 | ) | (1.7 | ) | ||||||
|
Tax benefit relating to U.S. export sales
|
(1.2 | ) | (0.8 | ) | (1.3 | ) | ||||||
|
R&D credit
|
(0.1 | ) | (0.5 | ) | (0.7 | ) | ||||||
|
Non-deductible expenses
|
0.1 | 0.1 | 0.6 | |||||||||
|
Other
|
(0.2 | ) | – | 0.3 | ||||||||
|
Effective income tax rate
|
28.6% | 29.5% | 25.9% | |||||||||
During 2004, our tax provision included a deferred tax benefit
of $34.5 million as a result of revaluing deferred taxes of
acquired Centerpulse operations due to a reduction in the
ongoing Swiss tax rate (from approximately 24 percent to
12.5 percent).
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. We have established valuation
allowances for deferred tax assets when the amount of expected
future taxable income is not likely to support the use of the
deduction or credit.
The components of deferred taxes consisted of the following (in
millions):
| 2006 | 2005 | ||||||||
|
Deferred tax assets:
|
|||||||||
|
Inventory
|
$ | 114.7 | $ | 102.9 | |||||
|
Fixed assets
|
1.8 | 7.1 | |||||||
|
Net operating loss carryover
|
138.6 | 214.8 | |||||||
|
Tax credit carryover
|
88.4 | 87.2 | |||||||
|
Capital loss carryover
|
1.7 | 11.2 | |||||||
|
Accrued liabilities
|
95.3 | 111.3 | |||||||
|
Share-based compensation
|
21.4 | – | |||||||
|
Other
|
57.3 | 32.5 | |||||||
|
Total deferred tax assets
|
519.2 | 567.0 | |||||||
|
Less: Valuation allowances
|
(35.5 | ) | (57.5 | ) | |||||
|
Total deferred tax assets after valuation
|
483.7 | 509.5 | |||||||
|
Deferred tax liabilities:
|
|||||||||
|
Fixed assets
|
$ | (26.9 | ) | $ | (30.0 | ) | |||
|
Intangible assets
|
(167.7 | ) | (174.5 | ) | |||||
|
Accrued liabilities
|
(5.4 | ) | (0.3 | ) | |||||
|
Other
|
(0.9 | ) | (4.9 | ) | |||||
|
Total deferred tax liabilities
|
(200.9 | ) | (209.7 | ) | |||||
|
Total net deferred tax assets
|
$ | 282.8 | $ | 299.8 | |||||
59
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
The vast majority of the net operating loss carryover is
available to reduce future federal and state taxable earnings.
At December 31, 2006, these net operating loss carryovers
generally expire within a period of 1 to 17 years.
Valuation allowances for net operating loss carryovers have been
established in the amount of $10.4 million and
$22.4 million at December 31, 2006 and
December 31, 2005, respectively. The tax credit carryovers
are entirely available to offset future federal and state tax
liabilities. At December 31, 2006, these tax credit
carryovers generally expire within a period of 1 to
16 years. We have established valuation allowances for
certain tax credit carryovers in the amount of
$15.0 million and $11.3 million at December 31,
2006 and December 31, 2005, respectively. The capital loss
carryover is also available to reduce future federal taxable
earnings; however, the entire capital loss carryover is subject
to a valuation allowance and expires in 3 years. The
remaining valuation allowances of $8.4 million and
$12.6 million at December 31, 2006 and
December 31, 2005, respectively, relate to other deferred
tax positions. We have established valuation allowances related
to certain business combination transactions that, if not
ultimately required, will result in a reduction of goodwill.
These allowances were approximately $29.0 million and
$55.0 million at December 31, 2006 and
December 31, 2005, respectively.
We have a long term tax liability of $102.1 million at
December 31, 2006 for expected settlement of various
federal, state and foreign income tax liabilities that is
reflected net of the corollary tax impacts of these expected
settlements. This long term tax liability includes reserves for
uncertain tax positions of $70.3 million pertaining to
certain business combination transactions. Realization of tax
benefits related to the $70.3 million shall be applied to
reduce goodwill related to these business combination
transactions, and as such would have no impact to the effective
income tax rate upon settlement. The long term tax liability was
reduced by $48.0 million from the December 31, 2005
balance of $150.1 million. The primary reason for this
reduction is the expiration of the applicable statute of
limitations.
At December 31, 2006, we had an aggregate of approximately
$313 million of unremitted earnings of foreign subsidiaries
that have been, or are intended to be, permanently reinvested
for continued use in foreign operations. If the total
undistributed earnings of foreign subsidiaries were remitted, a
significant amount of the additional tax would be offset by the
allowable foreign tax credits. It is impractical for us to
determine the additional tax of remitting these earnings.
| 12. | CAPITAL STOCK AND EARNINGS PER SHARE |
We have 2 million shares of Series A Participating
Cumulative Preferred Stock authorized for issuance, none of
which were outstanding as of December 31, 2006.
The numerator for both basic and diluted earnings per share is
net earnings available to common stockholders. The denominator
for basic earnings per share is the weighted average number of
common shares outstanding during the period. The denominator for
diluted earnings per share is weighted average shares
outstanding adjusted for the effect of dilutive stock options
and other equity awards. The following is a reconciliation of
weighted average shares for the basic and diluted share
computations for the years ending December 31 (in millions):
| 2006 | 2005 | 2004 | ||||||||||
|
Weighted average shares outstanding for basic net earnings per
share
|
243.0 | 247.1 | 244.4 | |||||||||
|
Effect of dilutive stock options
|
2.4 | 2.7 | 3.4 | |||||||||
|
Weighted average shares outstanding for diluted net earnings per
share
|
245.4 | 249.8 | 247.8 | |||||||||
For the year ended December 31, 2006, an average of
7.6 million options to purchase shares of common stock were
not included in the computation of diluted earnings per share as
the exercise prices of these options were greater than the
average market price of the common stock. For the year ended
December 31, 2005, an average of 2.9 million options
to purchase shares of common stock were not included. There were
no anti-dilutive options excluded from the computation of
diluted earnings per share for the year ended December 31,
2004.
In December 2005, our Board of Directors authorized a stock
repurchase program of up to $1 billion through
December 31, 2007. In December 2006, our Board of Directors
authorized an additional stock repurchase program of up to
$1 billion through December 31, 2008. As of
December 31, 2006 we had acquired approximately
12,145,800 shares at a cost of $802.9 million.
| 13. | SEGMENT DATA |
We design, develop, manufacture and market reconstructive
orthopaedic implants, including joint and dental, spinal
implants, trauma products and related orthopaedic surgical
products which include surgical supplies and instruments
designed to aid in orthopaedic surgical procedures and
post-operation rehabilitation. We also provide hospital-focused
consulting services to help member institutions design,
implement and manage successful orthopaedic programs of
distinction. We manage operations through three major geographic
segments – the Americas, which is comprised
principally of the United States and includes other North,
Central and South American markets; Europe, which is comprised
principally of Europe and includes the Middle East and Africa;
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 operating segment performance based upon
segment operating profit exclusive of operating expenses
pertaining to
60
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
global operations and corporate expenses, share-based
compensation expense, acquisition, integration and other
expenses, inventory
step-up, in-process
research and development write-offs and intangible asset
amortization expense. Global operations include research,
development engineering, medical education, brand management,
corporate legal, finance, and human resource functions, and U.S.
and Puerto Rico based manufacturing operations and logistics.
Intercompany transactions have been eliminated from segment
operating profit. Management reviews accounts receivable,
inventory, property, plant and equipment, goodwill and
intangible assets by reportable segment exclusive of U.S. and
Puerto Rico based manufacturing operations and logistics and
corporate assets.
Net sales, segment operating profit and year-end assets are as
follows (in millions):
| Net Sales | Operating Profit | Year-End Assets | ||||||||||||||||||||||||||||||
| 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | 2006 | 2005 | |||||||||||||||||||||||||
|
Americas
|
$ | 2,076.5 | $ | 1,941.8 | $ | 1,741.3 | $ | 1,101.7 | $ | 1,020.8 | $ | 893.1 | $ | 2,444.9 | $ | 2,408.6 | ||||||||||||||||
|
Europe
|
931.1 | 874.8 | 808.3 | 387.3 | 317.9 | 283.9 | 1,864.7 | 1,695.4 | ||||||||||||||||||||||||
|
Asia Pacific
|
487.8 | 469.5 | 431.3 | 231.5 | 212.4 | 182.3 | 314.1 | 290.5 | ||||||||||||||||||||||||
|
Net sales
|
$ | 3,495.4 | $ | 3,286.1 | $ | 2,980.9 | ||||||||||||||||||||||||||
|
Share-based payment expense
|
(74.8 | ) | – | – | ||||||||||||||||||||||||||||
|
Inventory step-up
|
– | (5.0 | ) | (59.4 | ) | |||||||||||||||||||||||||||
|
Acquisition and integration
|
(6.1 | ) | (56.6 | ) | (81.1 | ) | ||||||||||||||||||||||||||
|
Global operations and corporate functions
|
(474.4 | ) | (434.5 | ) | (455.6 | ) | 1,350.7 | 1,327.4 | ||||||||||||||||||||||||
|
Operating profit
|
$ | 1,165.2 | $ | 1,055.0 | $ | 763.2 | ||||||||||||||||||||||||||
|
Total assets
|
$ | 5,974.4 | $ | 5,721.9 | ||||||||||||||||||||||||||||
U.S. sales were $1,962.5 million,
$1,845.6 million and $1,664.5 million for the years
ended December 31, 2006, 2005 and 2004, respectively. Sales
to any individual country outside of the U.S. were not
significant. Sales are attributable to a country based upon the
customer’s country of domicile.
Net sales by product category are as follows (in millions):
| 2006 | 2005 | 2004 | ||||||||||||
|
Reconstructive implants
|
||||||||||||||
|
Knees
|
$ | 1,461.5 | $ | 1,366.2 | $ | 1,194.5 | ||||||||
|
Hips
|
1,189.4 | 1,140.6 | 1,079.0 | |||||||||||
|
Dental
|
179.0 | 148.1 | 124.7 | |||||||||||
|
Extremities
|
77.6 | 66.1 | 58.1 | |||||||||||
|
Total
|
2,907.5 | 2,721.0 | 2,456.3 | |||||||||||
|
Trauma
|
194.7 | 179.8 | 172.9 | |||||||||||
|
Spine
|
177.4 | 160.4 | 134.2 | |||||||||||
|
Orthopaedic surgical products and other
|
215.8 | 224.9 | 217.5 | |||||||||||
|
Total
|
$ | 3,495.4 | $ | 3,286.1 | $ | 2,980.9 | ||||||||
Long-lived tangible assets as of December 31, 2006 and 2005
are as follows:
| 2006 | 2005 | |||||||
|
Americas
|
$ | 558.5 | $ | 501.3 | ||||
|
Europe
|
203.6 | 172.9 | ||||||
|
Asia Pacific
|
45.0 | 34.6 | ||||||
| $ | 807.1 | $ | 708.8 | |||||
The Americas long-lived tangible assets are located primarily in
the U.S. Approximately $183.8 million of Europe long-lived
tangible assets are located in Switzerland.
Capital expenditures by operating segment for the years ended
December 31, 2006, 2005 and 2004 were as follows (in
millions):
| 2006 | 2005 | 2004 | |||||||||||
|
Americas
|
|||||||||||||
|
Additions to other property, plant and equipment
|
$ | 0.7 | $ | 0.7 | $ | 0.3 | |||||||
|
Europe
|
|||||||||||||
|
Additions to instruments
|
20.0 | 8.3 | 14.0 | ||||||||||
|
Additions to other property, plant and equipment
|
25.9 | 20.0 | 24.4 | ||||||||||
|
Asia Pacific
|
|||||||||||||
|
Additions to instruments
|
1.7 | 2.4 | 1.4 | ||||||||||
|
Additions to other property, plant and equipment
|
2.5 | 1.0 | 3.2 | ||||||||||
|
Global operations and corporate functions
|
|||||||||||||
|
Additions to instruments
|
104.5 | 139.3 | 124.2 | ||||||||||
|
Additions to other property, plant and equipment
|
113.0 | 83.6 | 72.9 | ||||||||||
For segment reporting purposes, deployed instruments are
included in the measurement of operating segment assets while
undeployed instruments at U.S. and Puerto Rico based
manufacturing operations and logistics are included in global
operations and corporate functions. The majority of instruments
are purchased by U.S. and Puerto Rico based manufacturing
operations and logistics and are deployed to the operating
segments as needed for the business.
61
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
Depreciation and amortization used in determining operating
segment profit for the years ended December 31, 2006, 2005
and 2004 was as follows (in millions):
| 2006 | 2005 | 2004 | ||||||||||
|
Americas
|
$ | 56.7 | $ | 51.0 | $ | 45.9 | ||||||
|
Europe
|
46.5 | 40.8 | 45.5 | |||||||||
|
Asia Pacific
|
18.7 | 14.8 | 12.3 | |||||||||
|
Global operations and corporate functions
|
75.5 | 79.1 | 77.6 | |||||||||
| $ | 197.4 | $ | 185.7 | $ | 181.3 | |||||||
| 14. | LEASES |
Future minimum rental commitments under non-cancelable operating
leases in effect as of December 31, 2006 were
$24.2 million for 2007, $20.1 million for 2008,
$14.3 million for 2009, $11.6 million for 2010,
$9.0 million for 2011 and $25.1 million thereafter.
Total rent expense for the years ended December 31, 2006,
2005 and 2004 aggregated $26.7 million, $27.9 million
and $24.2 million, respectively.
| 15. | COMMITMENTS AND CONTINGENCIES |
As a result of the Centerpulse transaction, we acquired the
entity involved in Centerpulse’s hip and knee implant
litigation matter. The litigation was a result of a voluntary
recall of certain hip and knee implants manufactured and sold by
Centerpulse. On March 13, 2002, a
U.S. Class Action Settlement Agreement
(“Settlement Agreement”) was entered into by
Centerpulse that resolved U.S. claims related to the
affected products and a settlement trust (“Settlement
Trust”) was established and funded for the most part by
Centerpulse. The court approved the settlement arrangement on
May 8, 2002. Under the terms of the Settlement Agreement,
we will reimburse the Settlement Trust a specified amount for
each revision surgery over 4,000 and revisions on reprocessed
shells over 64. As of January 4, 2007, the claims
administrator has received 4,133 likely valid claims for hips
(cut-off date June 5, 2003) and knees (cut-off date
November 17, 2003) and 200 claims for reprocessed shells
(cut-off date September 8, 2004). We believe the litigation
liability recorded as of December 31, 2006 is adequate to
provide for any future claims regarding the hip and knee implant
litigation.
On February 15, 2005, Howmedica Osteonics Corp.
(“Howmedica”) filed an action against us and an
unrelated party in the United States District Court for the
District of New Jersey alleging infringement by the defendants
of U.S. Patent Nos. 6,174,934; 6,372,814; 6,664,308; and
6,818,020. Howmedica’s complaint seeks unspecified damages
and injunctive relief. On April 14, 2005, we filed our
answer to the complaint denying Howmedica’s allegations.
Discovery is ongoing. We believe that our defenses are valid and
meritorious and we intend to defend the Howmedica lawsuit
vigorously.
We are also subject to product liability and other claims and
lawsuits arising in the ordinary course of business, for which
we maintain insurance, subject to self-insured retention limits.
We establish accruals for product liability and other claims in
conjunction with outside counsel based on current information
and historical settlement information for open claims, related
fees and for claims incurred but not reported. While it is not
possible to predict with certainty the outcome of these cases,
it is the opinion of management that, upon ultimate resolution,
these cases will not have a material adverse effect on our
consolidated financial position, results of operations or cash
flows.
In July 2003, the Staff of the Securities and Exchange
Commission informed Centerpulse that it was conducting an
informal investigation of Centerpulse relating to certain
accounting issues. We are continuing to fully cooperate with the
Securities and Exchange Commission in this matter.
In March 2005, we received a subpoena and we have received
supplemental requests since that time from the United States
Department of Justice through the United States Attorney’s
Office in Newark, New Jersey, requesting that we produce
documents and related information for the period beginning
January 1998 pertaining to consulting contracts, professional
service agreements and other agreements by which we may provide
remuneration to orthopaedic surgeons, including research and
other grant agreements. We are cooperating fully with federal
authorities with regard to this matter. We understand that
similar inquiries were directed to at least four other companies
in the orthopaedics industry.
In June 2006, we received a subpoena from the United States
Department of Justice, Antitrust Division, requesting that we
produce documents for the period beginning January 2001 through
June 2006, pertaining to an investigation of possible violations
of federal criminal law, including possible violations of the
antitrust laws, involving the manufacture and sale of
orthopaedic implant devices. We are cooperating fully with
federal authorities with regard to this matter. We understand
that similar inquiries were directed to at least four other
companies in the orthopaedics industry.
Following the commencement of the Department of Justice,
Antitrust Division’s investigation, we and several other
major orthopaedic manufacturers were named as defendants in six
putative class action lawsuits as of December 31, 2006.
These lawsuits were brought by direct and indirect purchasers of
orthopaedic products alleging violations of Federal and state
antitrust laws and certain state consumer protection statutes.
In each of these lawsuits, the plaintiffs allege that the
defendants engaged in a conspiracy to fix prices of orthopaedic
implant devices. The direct purchaser cases, South Central
Surgical Center, LLC v. Zimmer Holdings, Inc.
et al. and Chaiken DDS, P.C. v. Biomet, Inc.
et al., were filed in the United States District Court
for the Southern District of Indiana on July 13, 2006 and
in the United States District Court for the Northern District of
Indiana on July 26, 2006, respectively. The indirect
purchaser cases, Morganti v. Johnson & Johnson
et al., Thomas v. Biomet, Inc. et al.,
Kirschner v. Biomet, Inc.
62
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
et al. and Williams v. Biomet, Inc.
et al., were filed in the United States District Court
for the District of New Jersey on July 19, 2006 and in the
United States District Court for the Western District of
Tennessee on July 18, 2006, July 24, 2006 and
July 27, 2006, respectively.
On December 29, 2006, the plaintiff in Morganti v.
Johnson & Johnson et al. filed a letter with
the United States District Court for the District of New Jersey
advising that plaintiff was voluntarily withdrawing her
complaint and had no objection to the court entering an order
dismissing the complaint without prejudice. On January 12,
2007, we and the other defendants in the five remaining cases
delivered a Motion for Transfer and Consolidation of Pretrial
Proceedings under 28 U.S.C. §1407 to the Judicial
Panel on Multidistrict Litigation, requesting the court to
transfer the cases to the United States District Court for the
Southern District of Indiana for coordinated or consolidated
pretrial proceedings. The motion was filed by the Panel on
January 18, 2007. The plaintiffs did not oppose a stay of
proceedings pending resolution of this motion. On
January 15, 2007, the plaintiff in Thomas v.
Biomet, Inc. et al. filed a Notice of Voluntary
Dismissal Without Prejudice in the United States District Court
for the Western District of Tennessee. In each of the four
remaining cases, the plaintiffs seek damages of unspecified
amounts, in some cases to be trebled under applicable law,
attorneys’ fees and injunctive or other unspecified relief.
We believe these lawsuits are without merit and we intend to
defend them vigorously.
| 16. | QUARTERLY FINANCIAL INFORMATION (UNAUDITED) |
(in millions, except per share data)
| 2006 Quarter Ended | 2005 Quarter Ended | ||||||||||||||||||||||||||||||||
| Mar | Jun | Sep | Dec | Mar | Jun | Sep | Dec | ||||||||||||||||||||||||||
|
Net sales
|
$ | 860.4 | $ | 881.6 | $ | 819.8 | $ | 933.6 | $ | 828.5 | $ | 846.8 | $ | 762.5 | $ | 848.3 | |||||||||||||||||
|
Gross profit
|
671.0 | 681.6 | 636.6 | 726.1 | 638.2 | 658.0 | 588.0 | 662.5 | |||||||||||||||||||||||||
|
Net earnings
|
205.6 | 200.9 | 183.3 | 244.7 | 173.6 | 190.7 | 168.6 | 199.6 | |||||||||||||||||||||||||
|
Net earnings per common share
|
|||||||||||||||||||||||||||||||||
|
Basic
|
0.83 | 0.82 | 0.76 | 1.03 | 0.71 | 0.77 | 0.68 | 0.81 | |||||||||||||||||||||||||
|
Diluted
|
0.82 | 0.81 | 0.76 | 1.02 | 0.70 | 0.76 | 0.67 | 0.80 | |||||||||||||||||||||||||
| 17. | SUBSEQUENT EVENTS |
On February 9, 2007, we announced the agreement to acquire
Endius, Inc., a privately-held Massachusetts company, in a cash
transaction. Under the agreement, Endius will become a wholly
owned subsidiary of the Company. We expect the transaction to
close in the second quarter of 2007.
63
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| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Notes to Consolidated Financial Statements
(Continued)
| ITEM 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None
| ITEM 9A. | Controls and Procedures |
We have established disclosure controls and procedures and
internal controls over financial reporting to provide reasonable
assurance that material information relating to us, including
our consolidated subsidiaries, is made known on a timely basis
to management and the Board of Directors. However, no control
system, no matter how well designed and operated, can provide
absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if
any, within a company have been detected.
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of our disclosure controls and
procedures (as defined in
Rule 13a-15(e) of
the Securities Exchange Act of 1934). Based upon that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures as
of the end of the period covered by this report are effective.
There was no change in our internal control over financial
reporting (as defined in
Rule 13a-15(f) of
the Securities Exchange Act of 1934) that occurred during the
quarter ended December 31, 2006, that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting. Management’s
report on internal control over financial statement reporting
appears in this report at the conclusion of Part II,
Item 7A.
| ITEM 9B. | Other Information |
During the fourth quarter of 2006, the Audit Committee of the
Board of Directors was not asked to and did not approve the
engagement of PricewaterhouseCoopers LLP, our independent
registered public accounting firm, to perform any non-audit
services. This disclosure is made pursuant to
Section 10A(i)(2) of the Securities Exchange Act of 1934,
as added by Section 202 of the Sarbanes-Oxley Act of 2002.
64
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
PART III
| ITEM 10. | Directors, Executive Officers and Corporate Governance |
The information required by this Item concerning our directors
and executive officers is incorporated herein by reference from
our definitive Proxy Statement for our 2007 Annual Meeting of
Stockholders which will be filed with the Commission pursuant to
Regulation 14A within 120 days after the end of our
most recent fiscal year and the information included under the
caption “Executive Officers” in Part I of this
report.
| ITEM 11. | Executive Compensation |
The information required by this Item concerning remuneration of
our officers and directors and information concerning material
transactions involving such officers and directors is
incorporated herein by reference from our definitive Proxy
Statement for our 2007 Annual Meeting of Stockholders which will
be filed with the Commission pursuant to Regulation 14A
within 120 days after the end of our most recent fiscal
year.
| ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item concerning the stock
ownership of management and five percent beneficial owners and
related stockholder matters, including equity compensation plan
information, is incorporated herein by reference from our
definitive Proxy Statement for our 2007 Annual Meeting of
Stockholders which will be filed with the Commission pursuant to
Regulation 14A within 120 days after the end of our
most recent fiscal year.
| ITEM 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item concerning certain
relationships and related transactions is incorporated herein by
reference from our definitive Proxy Statement for our 2007
Annual Meeting of Stockholders which will be filed with the
Commission pursuant to Regulation 14A within 120 days
after the end of our most recent fiscal year.
| ITEM 14. | Principal Accounting Fees and Services |
The information required by this Item concerning principal
accounting fees and services is incorporated herein by reference
from our definitive Proxy Statement for our 2007 Annual Meeting
of Stockholders which will be filed with the Commission pursuant
to Regulation 14A within 120 days after the end of our
most recent fiscal year.
65
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
PART IV
| ITEM 15. | Exhibits and Financial Statement Schedules |
(a) 1. Financial Statements
The following consolidated financial statements of Zimmer
Holdings, Inc. and its subsidiaries are set forth in
Part II, Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings for the Years Ended
December 31, 2006, 2005 and 2004
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Stockholders’ Equity for the
Years Ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
| Schedule II. Valuation and Qualifying Accounts | |
| Other financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. |
3. Exhibits
| A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference. |
66
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
| Zimmer Holdings, Inc. |
| By: | /s/ J. RAYMOND ELLIOTT |
|
|
|
| J. Raymond Elliott | |
|
Chairman of the Board President and Chief Executive Officer |
Dated: February 27, 2007
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Title | Date | ||
|
/s/ J. Raymond Elliott |
Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer) | February 27, 2007 | ||
|
/s/ Sam R. Leno |
Executive Vice President, Finance and Corporate Services and Chief Financial Officer (Principal Financial Officer) | February 27, 2007 | ||
|
/s/ James T. Crines |
Senior Vice President, Finance, Operations and Corporate Controller and Chief Accounting Officer (Principal Accounting Officer) | February 27, 2007 | ||
|
/s/ Stuart M. Essig |
Director | February 27, 2007 | ||
|
/s/ Larry C. Glasscock |
Director | February 27, 2007 | ||
|
/s/ Arthur J. Higgins |
Director | February 27, 2007 | ||
|
/s/ John L. McGoldrick |
Director | February 27, 2007 | ||
|
/s/ Augustus A. White, III |
Director | February 27, 2007 | ||
67
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Index to Exhibits
| Exhibit No | Description | |
|
3.1
|
Restated Certificate of Incorporation of Zimmer Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated November 13, 2001) | |
|
3.2
|
Certificate of Designations of Series A Participating Cumulative Preferred Stock of Zimmer Holdings, Inc., dated as of August 6, 2001 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K dated November 13, 2001) | |
|
3.3
|
Restated By-Laws of Zimmer Holdings, Inc., together with Amendment No. 1 and Amendment No. 2 to the Restated By-Laws of Zimmer Holdings, Inc. (incorporated by reference to Exhibit 3 to the Registrant’s Quarterly Report on Form 10-Q filed November 8, 2006) | |
|
4.1
|
Specimen Common Stock certificate (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-8 filed January 20, 2006) | |
|
10.1*
|
Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Appendix B to the Registrant’s definitive Proxy Statement on Schedule 14A dated March 24, 2003) | |
|
10.2*
|
First Amendment to the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 15, 2005) | |
|
10.3*
|
Zimmer Holdings, Inc. 2006 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | |
|
10.4*
|
Zimmer Holdings, Inc. Executive Performance Incentive Plan, effective August 6, 2001 (incorporated by reference to Appendix C to the Registrant’s definitive Proxy Statement on Schedule 14A dated March 24, 2003) | |
|
10.5*
|
Zimmer Holdings, Inc. Supplemental Performance Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q dated August 5, 2004) | |
|
10.6*
|
Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors, effective August 6, 2001 (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K dated August 6, 2001) | |
|
10.7*
|
First Amendment to the Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed December 15, 2005) | |
|
10.8*
|
Restated Zimmer Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors, effective January 1, 2005 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed December 15, 2005) | |
|
10.9*
|
Restated Zimmer, Inc. Long-Term Disability Income Plan for Highly Compensated Employees | |
|
10.10*
|
Employment Agreement with J. Raymond Elliott (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 20, 2006) | |
|
10.11*
|
Change in Control Severance Agreement with J. Raymond Elliott (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q dated May 8, 2002) | |
|
10.12*
|
Change in Control Severance Agreement with Sam R. Leno, Bruno A. Melzi and David C. Dvorak (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q dated May 8, 2002) | |
|
10.13*
|
Change in Control Severance Agreement with Sheryl L. Conley (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q dated August 8, 2003) | |
|
10.14*
|
Change in Control Severance Agreement with Jon E. Kramer (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q dated November 8, 2004) | |
|
10.15*
|
Change in Control Severance Agreement with James T. Crines (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q dated May 8, 2002) | |
|
10.16*
|
Change in Control Severance Agreement with Cheryl R. Blanchard (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q dated August 9, 2005) | |
|
10.17*
|
Change in Control Severance Agreement with Stephen Hong Liang, Ooi (incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K filed March 12, 2003) | |
|
10.18*
|
Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Savings and Investment Program (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q dated August 9, 2005) | |
|
10.19*
|
Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q dated August 9, 2005) | |
68
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Index to Exhibits
(Continued)
| Exhibit No | Description | |
|
10.20*
|
First Amendment of Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliate Corporations Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q dated August 9, 2005) | |
|
10.21*
|
Second Amendment of Benefit Equalization Plan of Zimmer Holdings, Inc. and its Subsidiary or Affiliate Corporations Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed May 4, 2006) | |
|
10.22*
|
Form of Non-Disclosure, Non-Competition and Non-Solicitation Employment Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 27, 2006) | |
|
10.23*
|
Non-Disclosure, Non-Competition and Non-Solicitation Employment Agreement with Stephen Hong Liang, Ooi (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed March 27, 2006) | |
|
10.24*
|
Confidentiality, Non-Competition and Non-Solicitation Agreement with Bruno A. Melzi (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed March 27, 2006) | |
|
10.25*
|
Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated January 11, 2006) | |
|
10.26*
|
Form of Restricted Stock Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated January 12, 2005) | |
|
10.27*
|
Form of Nonqualified Performance-Conditioned Stock Option Grant Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 21, 2005) | |
|
10.28*
|
Form of Performance Share Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated January 11, 2006) | |
|
10.29*
|
Form of Performance Share Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (for Non-U.S. employees) (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated January 11, 2006) | |
|
10.30*
|
Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed April 5, 2005) | |
|
10.31*
|
Form of Restricted Stock Unit Award Letter under the Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 21, 2006) | |
|
10.32*
|
Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | |
|
10.33*
|
Form of Nonqualified Stock Option Award Letter for Non-U.S. Employees under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | |
|
10.34*
|
Form of Restricted Stock Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | |
|
10.35*
|
Form of Restricted Stock Unit Award Letter for Non-U.S. Employees under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | |
|
10.36*
|
Summary Compensation Sheet | |
|
10.37
|
$1,350,000,000 Amended and Restated Credit Agreement dated as of March 31, 2005 among Zimmer Holdings, Inc., Zimmer, Inc., Zimmer K.K., Zimmer Ltd., Zimmer Switzerland Holdings Ltd., Zimmer Investment Luxembourg S.C.A., Zimmer GmbH, the borrowing subsidiaries, the subsidiary guarantors, the lenders named therein, JPMorgan Chase Bank, N.A., as general administrative agent, JPMorgan Chase Bank, N.A., Tokyo Branch, as Japanese Administrative Agent, and J.P. Morgan Europe Limited, as European Administrative Agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed April 5, 2005) | |
69
Table of Contents
| ZIMMER HOLDINGS, INC. | 2006 FORM 10-K ANNUAL REPORT |
Index to Exhibits
(Continued)
| Exhibit No | Description | |
|
10.38
|
Amendment No. 1 dated as of April 15, 2005 to the Amended and Restated Credit Agreement dated as of March 31, 2005 among Zimmer Holdings, Inc., Zimmer, Inc., Zimmer K.K., Zimmer Ltd., Zimmer Switzerland Holdings Ltd., Zimmer Investment Luxembourg S.C.A., Zimmer GmbH, the borrowing subsidiaries, the subsidiary guarantors, the lenders named therein, JPMorgan Chase Bank, N.A., as general administrative agent, JPMorgan Chase Bank, N.A., Tokyo Branch, as Japanese Administrative Agent, and J.P. Morgan Europe Limited, as European Administrative Agent (incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K filed March 2, 2006) | |
|
21
|
List of Subsidiaries of Zimmer Holdings, Inc. | |
|
23
|
Consent of PricewaterhouseCoopers LLP | |
|
31.1
|
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
31.2
|
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
32
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
|
99.1
|
Annual CEO Certification filed with the New York Stock Exchange on May 24, 2006 | |
| * | indicates management contracts or compensatory plans or arrangements |
70
Table of Contents
| Valuation and Qualifying Accounts | Schedule II |
| (in millions) | ||||||||||||||||||||||||
| Additions | ||||||||||||||||||||||||
| Balance at | Charged | Effects of | Balance | Balance at | ||||||||||||||||||||
| Beginning | (Credited) to | Deductions | Foreign | Sheet | End of | |||||||||||||||||||
| Description | of Period | Expense | to Reserve | Currency | Reclass* | Period | ||||||||||||||||||
|
Doubtful Accounts:
|
||||||||||||||||||||||||
|
Year Ended December 31, 2004
|
$ | 29.5 | $ | 4.9 | $ | (7.4 | ) | $ | 1.4 | $ | – | $ | 28.4 | |||||||||||
|
Year Ended December 31, 2005
|
28.4 | (2.2 | ) | (1.5 | ) | (1.4 | ) | – | 23.3 | |||||||||||||||
|
Year Ended December 31, 2006
|
23.3 | (3.2 | ) | (1.0 | ) | 1.3 | – | 20.4 | ||||||||||||||||
|
Excess and Obsolete Inventory:
|
||||||||||||||||||||||||
|
Year Ended December 31, 2004
|
$ | 129.1 | $ | 30.8 | $ | (14.1 | ) | $ | 2.9 | $ | (24.6 | ) | $ | 124.1 | ||||||||||
|
Year Ended December 31, 2005
|
124.1 | 21.6 | (18.5 | ) | (6.2 | ) | – | 121.0 | ||||||||||||||||
|
Year Ended December 31, 2006
|
121.0 | 32.6 | (26.0 | ) | 1.9 | – | 129.5 | |||||||||||||||||
|
Excess and Obsolete Instruments:
|
||||||||||||||||||||||||
|
Year Ended December 31, 2004
|
$ | 35.7 | $ | 1.9 | $ | (1.6 | ) | $ | 0.4 | $ | – | $ | 36.4 | |||||||||||
|
Year Ended December 31, 2005
|
36.4 | 10.0 | (7.8 | ) | (0.9 | ) | – | 37.7 | ||||||||||||||||
|
Year Ended December 31, 2006
|
37.7 | 8.3 | (5.4 | ) | 0.1 | – | 40.7 | |||||||||||||||||
| * | In 2004, a balance sheet reclassification between gross inventory and the reserve for excess and obsolete inventory was recorded which had no effect on the net inventory balance. |
71