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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2022

Commission File Number 001-16407

 

ZIMMER BIOMET HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

13-4151777

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

345 East Main Street, Warsaw, IN 46580

(Address of principal executive offices)

Telephone: (574) 267-6131

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

ZBH

New York Stock Exchange

1.414% Notes due 2022

ZBH 22A

New York Stock Exchange

2.425% Notes due 2026

ZBH 26

New York Stock Exchange

1.164% Notes due 2027

ZBH 27

New York Stock Exchange

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

 

 

Accelerated filer

☐

 

 

 

 

 

Non-accelerated filer

☐

Smaller reporting company

☐

 

 

 

 

Emerging growth company

☐

 

 

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 26, 2022, 209,852,392 shares of the registrant’s $.01 par value common stock were outstanding.

 

 

 

ZIMMER BIOMET HOLDINGS, INC.

INDEX TO FORM 10-Q

September 30, 2022

 

 

 

 

 

Page

 

 

 

Part I - Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

3

 

 

Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2022 and 2021

 

3

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021

 

4

 

 

Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021

 

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021

 

7

 

 

Notes to Interim Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

28

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

37

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

37

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

38

 

 

 

 

 

Item 1A.

 

Risk Factors

 

38

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

39

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

39

 

 

 

 

 

Item 5.

 

Other Information

 

39

 

 

 

 

 

Item 6.

 

Exhibits

 

40

 

 

 

Signatures

 

41

 

2

 

Part I – Financial Information

Item 1. Financial Statements

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in millions, except per share amounts, unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net Sales

 

$

1,669.8

 

 

$

1,685.4

 

 

$

5,114.8

 

 

$

5,050.1

 

Cost of products sold, excluding intangible asset amortization

 

 

488.2

 

 

 

491.4

 

 

 

1,499.2

 

 

 

1,423.9

 

Intangible asset amortization

 

 

131.5

 

 

 

132.2

 

 

 

395.3

 

 

 

398.7

 

Research and development

 

 

101.7

 

 

 

93.8

 

 

 

298.0

 

 

 

339.8

 

Selling, general and administrative

 

 

654.9

 

 

 

684.4

 

 

 

2,034.6

 

 

 

2,038.2

 

Intangible asset impairment

 

 

-

 

 

 

-

 

 

 

3.0

 

 

 

16.3

 

Restructuring and other cost reduction initiatives

 

 

28.3

 

 

 

22.5

 

 

 

129.2

 

 

 

62.6

 

Quality remediation

 

 

8.1

 

 

 

11.7

 

 

 

22.4

 

 

 

32.8

 

Acquisition, integration, divestiture and related

 

 

11.8

 

 

 

6.4

 

 

 

8.5

 

 

 

11.3

 

Operating expenses, net

 

 

1,424.5

 

 

 

1,442.4

 

 

 

4,390.2

 

 

 

4,323.6

 

Operating Profit

 

 

245.3

 

 

 

243.0

 

 

 

724.6

 

 

 

726.5

 

Other (expense) income, net

 

 

(25.4

)

 

 

0.3

 

 

 

(124.1

)

 

 

16.0

 

Interest expense, net

 

 

(42.3

)

 

 

(52.6

)

 

 

(122.2

)

 

 

(159.6

)

Earnings from continuing operations before income taxes

 

 

177.6

 

 

 

190.7

 

 

 

478.3

 

 

 

582.9

 

(Benefit) provision for income taxes from continuing operations

 

 

(16.6

)

 

 

28.3

 

 

 

56.9

 

 

 

82.7

 

Net Earnings from continuing operations

 

 

194.2

 

 

 

162.4

 

 

 

421.4

 

 

 

500.2

 

Less: Net earnings attributable to noncontrolling interest

 

 

0.2

 

 

 

0.2

 

 

 

0.7

 

 

 

0.4

 

Net Earnings from Continuing Operations of Zimmer Biomet Holdings, Inc.

 

 

194.0

 

 

 

162.2

 

 

 

420.7

 

 

 

499.8

 

Loss from discontinued operations, net of taxes

 

 

-

 

 

 

(16.6

)

 

 

(58.8

)

 

 

(14.2

)

Net Earnings of Zimmer Biomet Holdings, Inc.

 

$

194.0

 

 

$

145.6

 

 

$

361.9

 

 

$

485.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share - Basic

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.92

 

 

$

0.78

 

 

$

2.01

 

 

$

2.40

 

Loss from discontinued operations

 

 

-

 

 

 

(0.08

)

 

 

(0.28

)

 

 

(0.07

)

Net Earnings Per Common Share - Basic

 

$

0.92

 

 

$

0.70

 

 

$

1.73

 

 

$

2.33

 

Earnings Per Common Share - Diluted

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.92

 

 

$

0.77

 

 

$

2.00

 

 

$

2.37

 

Loss from discontinued operations

 

 

-

 

 

 

(0.08

)

 

 

(0.28

)

 

 

(0.06

)

Net Earnings Per Common Share - Diluted

 

$

0.92

 

 

$

0.69

 

 

$

1.72

 

 

$

2.31

 

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

209.8

 

 

 

208.8

 

 

 

209.5

 

 

 

208.5

 

Diluted

 

 

210.3

 

 

 

210.6

 

 

 

210.2

 

 

 

210.5

 

 

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

3

 

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions, unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net Earnings of Zimmer Biomet Holdings, Inc.

 

$

194.0

 

 

$

145.6

 

 

$

361.9

 

 

$

485.6

 

Other Comprehensive (Loss) Income:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency cumulative translation adjustments, net of tax

 

 

(95.6

)

 

 

(36.9

)

 

 

(186.4

)

 

 

(69.6

)

Unrealized cash flow hedge gains, net of tax

 

 

53.9

 

 

 

18.5

 

 

 

133.2

 

 

 

60.6

 

Reclassification adjustments on hedges, net of tax

 

 

(14.4

)

 

 

1.6

 

 

 

(28.4

)

 

 

3.4

 

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

 

 

3.7

 

 

 

5.7

 

 

 

7.2

 

 

 

5.3

 

Total Other Comprehensive Loss

 

 

(52.4

)

 

 

(11.1

)

 

 

(74.4

)

 

 

(0.3

)

Comprehensive Income Attributable to

 

 

 

 

 

 

 

 

 

 

 

 

Zimmer Biomet Holdings, Inc.

 

$

141.6

 

 

$

134.5

 

 

$

287.5

 

 

$

485.3

 

 

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

4

 

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts, unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

545.4

 

 

$

378.1

 

Accounts receivable, less allowance for credit losses

 

 

1,278.5

 

 

 

1,259.6

 

Inventories

 

 

2,128.6

 

 

 

2,148.0

 

Prepaid taxes

 

 

234.6

 

 

 

326.7

 

Prepaid expenses and other current assets

 

 

347.3

 

 

 

271.0

 

Current assets of discontinued operations

 

 

-

 

 

 

501.6

 

Total Current Assets

 

 

4,534.4

 

 

 

4,885.0

 

Property, plant and equipment, net

 

 

1,801.6

 

 

 

1,836.6

 

Goodwill

 

 

8,798.8

 

 

 

8,919.4

 

Intangible assets, net

 

 

5,136.5

 

 

 

5,533.6

 

Other assets

 

 

1,062.0

 

 

 

1,005.0

 

Noncurrent assets of discontinued operations

 

 

-

 

 

 

1,276.8

 

Total Assets

 

$

21,333.3

 

 

$

23,456.4

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Accounts payable

 

$

333.9

 

 

$

306.5

 

Income taxes payable

 

 

30.4

 

 

 

62.0

 

Customer rebates

 

 

115.9

 

 

 

129.5

 

Other current liabilities

 

 

1,156.4

 

 

 

1,187.6

 

Current portion of long-term debt

 

 

659.1

 

 

 

1,605.1

 

Current liabilities of discontinued operations

 

 

-

 

 

 

177.2

 

Total Current Liabilities

 

 

2,295.7

 

 

 

3,467.9

 

Deferred income taxes, net

 

 

541.3

 

 

 

558.5

 

Long-term income tax payable

 

 

581.3

 

 

 

583.0

 

Other long-term liabilities

 

 

608.7

 

 

 

548.5

 

Long-term debt

 

 

5,055.2

 

 

 

5,463.7

 

Noncurrent liabilities of discontinued operations

 

 

-

 

 

 

168.4

 

Total Liabilities

 

 

9,082.2

 

 

 

10,790.0

 

Commitments and Contingencies (Note 16)

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

Zimmer Biomet Holdings, Inc. Stockholders' Equity:

 

 

 

 

 

 

Common stock, $0.01 par value, one billion shares authorized, 313.6 million shares in 2022 (312.8 million in 2021) issued

 

 

3.1

 

 

 

3.1

 

Paid-in capital

 

 

9,463.9

 

 

 

9,314.8

 

Retained earnings

 

 

9,739.9

 

 

 

10,292.2

 

Accumulated other comprehensive loss

 

 

(244.9

)

 

 

(231.6

)

Treasury stock, 103.8 million shares in 2022 and 2021

 

 

(6,717.3

)

 

 

(6,717.8

)

Total Zimmer Biomet Holdings, Inc. stockholders' equity

 

 

12,244.7

 

 

 

12,660.7

 

Noncontrolling interest

 

 

6.4

 

 

 

5.7

 

Total Stockholders' Equity

 

 

12,251.1

 

 

 

12,666.4

 

Total Liabilities and Stockholders' Equity

 

$

21,333.3

 

 

$

23,456.4

 

 

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

5

 

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions, except per share amounts, unaudited)

 

 

 

Zimmer Biomet Holdings, Inc. Stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Shares

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury Shares

 

 

Noncontrolling

 

 

Stockholders'

 

 

 

Number

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

(Loss) Income

 

 

Number

 

 

Amount

 

 

Interest

 

 

Equity

 

Balance July 1, 2022

 

 

313.4

 

 

$

3.1

 

 

$

9,418.8

 

 

$

9,606.5

 

 

$

(192.5

)

 

 

(103.8

)

 

$

(6,717.5

)

 

$

6.2

 

 

$

12,124.6

 

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

194.0

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

0.2

 

 

 

194.2

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(52.4

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(52.4

)

Cash dividends declared
($0.24 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(50.4

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(50.4

)

Spinoff of ZimVie Inc.

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(10.4

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(10.4

)

Stock compensation plans

 

 

0.2

 

 

 

-

 

 

 

45.1

 

 

 

0.2

 

 

 

-

 

 

 

-

 

 

 

0.2

 

 

 

-

 

 

 

45.5

 

Balance September 30, 2022

 

 

313.6

 

 

$

3.1

 

 

$

9,463.9

 

 

$

9,739.9

 

 

$

(244.9

)

 

 

(103.8

)

 

$

(6,717.3

)

 

$

6.4

 

 

$

12,251.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance July 1, 2021

 

 

312.5

 

 

$

3.1

 

 

$

9,248.6

 

 

$

10,331.0

 

 

$

(287.0

)

 

 

(103.8

)

 

$

(6,717.8

)

 

$

5.4

 

 

$

12,583.3

 

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

145.6

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

0.2

 

 

 

145.8

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11.1

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11.1

)

Cash dividends declared
($0.24 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(50.3

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(50.3

)

Stock compensation plans

 

 

0.2

 

 

 

-

 

 

 

46.5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

46.5

 

Balance September 30, 2021

 

 

312.7

 

 

$

3.1

 

 

$

9,295.1

 

 

$

10,426.3

 

 

$

(298.1

)

 

 

(103.8

)

 

$

(6,717.8

)

 

$

5.6

 

 

$

12,714.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2022

 

 

312.8

 

 

$

3.1

 

 

$

9,314.8

 

 

$

10,292.2

 

 

$

(231.6

)

 

 

(103.8

)

 

$

(6,717.8

)

 

$

5.7

 

 

$

12,666.4

 

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

361.9

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

0.7

 

 

 

362.6

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(74.4

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(74.4

)

Cash dividends declared
($0.72 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(151.1

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(151.1

)

Reclassifications of net investment hedges

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

25.9

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

25.9

 

Spinoff of ZimVie Inc.

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(763.4

)

 

 

35.2

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(728.2

)

Stock compensation plans

 

 

0.8

 

 

 

-

 

 

 

149.1

 

 

 

0.3

 

 

 

-

 

 

 

-

 

 

 

0.5

 

 

 

-

 

 

 

149.9

 

Balance September 30, 2022

 

 

313.6

 

 

$

3.1

 

 

$

9,463.9

 

 

$

9,739.9

 

 

$

(244.9

)

 

 

(103.8

)

 

$

(6,717.3

)

 

$

6.4

 

 

$

12,251.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2021

 

 

311.4

 

 

$

3.1

 

 

$

9,121.6

 

 

$

10,086.9

 

 

$

(297.8

)

 

 

(103.8

)

 

$

(6,719.6

)

 

$

5.2

 

 

$

12,199.4

 

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

485.6

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

0.4

 

 

 

486.0

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(0.3

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(0.3

)

Cash dividends declared
($0.72 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(150.3

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(150.3

)

Stock compensation plans

 

 

1.3

 

 

 

-

 

 

 

173.5

 

 

 

4.1

 

 

 

-

 

 

 

-

 

 

 

1.8

 

 

 

-

 

 

 

179.4

 

Balance September 30, 2021

 

 

312.7

 

 

$

3.1

 

 

$

9,295.1

 

 

$

10,426.3

 

 

$

(298.1

)

 

 

(103.8

)

 

$

(6,717.8

)

 

$

5.6

 

 

$

12,714.2

 

 

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

6

 

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions, unaudited)

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Cash flows provided by (used in) operating activities from continuing operations:

 

 

 

 

 

 

Net earnings from continuing operations

 

$

421.4

 

 

$

500.2

 

Adjustments to reconcile net earnings from continuing operations to
   cash provided by operating activities from continuing operations:

 

 

 

 

 

 

Depreciation and amortization

 

 

697.9

 

 

 

704.5

 

Share-based compensation

 

 

78.2

 

 

 

61.1

 

Intangible asset impairment

 

 

3.0

 

 

 

16.3

 

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

 

 

 

 

 

 

Income taxes

 

 

(12.4

)

 

 

(64.7

)

Receivables

 

 

(114.5

)

 

 

(2.0

)

Inventories

 

 

(63.5

)

 

 

(95.6

)

Accounts payable and accrued liabilities

 

 

(1.6

)

 

 

22.5

 

Other assets and liabilities

 

 

103.5

 

 

 

(75.6

)

       Net cash provided by operating activities from continuing operations

 

 

1,112.0

 

 

 

1,066.7

 

Cash flows provided by (used in) investing activities from continuing operations:

 

 

 

 

 

 

Additions to instruments

 

 

(192.2

)

 

 

(203.0

)

Additions to other property, plant and equipment

 

 

(124.5

)

 

 

(94.4

)

Net investment hedge settlements

 

 

71.2

 

 

 

(2.4

)

Business combination investments, net of acquired cash

 

 

(99.8

)

 

 

-

 

Other investing activities

 

 

(64.2

)

 

 

(19.5

)

              Net cash used in investing activities from continuing operations

 

 

(409.5

)

 

 

(319.3

)

Cash flows provided by (used in) financing activities from continuing operations:

 

 

 

 

 

 

Proceeds from revolving facility

 

 

220.0

 

 

 

-

 

Payments on revolving facility

 

 

(220.0

)

 

 

-

 

Redemption of senior notes

 

 

(750.0

)

 

 

(500.0

)

Proceeds from term loan

 

 

83.0

 

 

 

-

 

Payments on term loans

 

 

(242.9

)

 

 

-

 

Dividends paid to stockholders

 

 

(150.8

)

 

 

(149.9

)

Proceeds from employee stock compensation plans

 

 

63.2

 

 

 

117.3

 

Distribution from ZimVie, Inc.

 

 

540.6

 

 

 

-

 

Business combination contingent consideration payments

 

 

-

 

 

 

(6.5

)

Deferred business combination payments

 

 

-

 

 

 

(100.0

)

Other financing activities

 

 

(5.4

)

 

 

(11.1

)

               Net cash used in financing activities from continuing operations

 

 

(462.3

)

 

 

(650.2

)

Cash flows provided by (used in) discontinued operations:

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

 

(71.5

)

 

 

66.8

 

Net cash used in investing activities

 

 

(7.2

)

 

 

(38.1

)

Net cash used in financing activities

 

 

(68.1

)

 

 

-

 

               Net cash (used in) provided by discontinued operations

 

 

(146.8

)

 

 

28.7

 

Effect of exchange rates on cash and cash equivalents

 

 

(26.5

)

 

 

(8.4

)

                      Increase in cash and cash equivalents

 

 

66.9

 

 

 

117.5

 

Cash and cash equivalents, beginning of year (includes $100.4 and $27.4 at January 1, 2022 and 2021, respectively, of discontinued operations cash)

 

 

478.5

 

 

 

802.1

 

Cash and cash equivalents, end of period (includes $24.1 at September 30, 2021 of discontinued operations cash)

 

$

545.4

 

 

$

919.6

 

 

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

7

 

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.

In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The December 31, 2021 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). Results for interim periods should not be considered indicative of results for the full year.

 

Risks and Uncertainties - Our results have been and are expected to continue to be impacted by the COVID-19 global pandemic. The vast majority of our net sales are derived from products used in elective surgical procedures which continue to be deferred due to precautions in certain markets and staffing shortages. The consequences of COVID-19 continue to be extremely fluid and there are many market dynamics that are difficult to predict. Although the effects of the COVID-19 pandemic on our operating results continue to subside, the pandemic could still have an unfavorable effect on our financial position, results of operations and cash flows in the near term.

 

Spinoff - On March 1, 2022, we completed the previously announced separation of our spine and dental businesses into a new public company through the distribution by Zimmer Biomet of 80.3% of the outstanding shares of common stock of ZimVie Inc. (“ZimVie”) to Zimmer Biomet’s stockholders. The historical results of our spine and dental businesses that were contributed to ZimVie in the spinoff have been reflected as discontinued operations in our condensed consolidated financial statements through the date of the spinoff and in the prior year periods as the spinoff represents a strategic shift in our business that has a major effect on operations and financial results. As of December 31, 2021, the assets and liabilities associated with these businesses are classified as assets and liabilities of discontinued operations in the condensed consolidated balance sheet. The disclosures presented in our notes to the interim condensed consolidated financial statements are presented on a continuing operations basis.

 

The words “we,” “us,” “our” and similar words, “Zimmer Biomet” and “the Company” refer to Zimmer Biomet Holdings, Inc. and its subsidiaries. “Zimmer Biomet Holdings” refers to the parent company only.

 

2. Discontinued Operations and Related ZimVie Matters

 

On March 1, 2022, we completed the previously announced separation of our spine and dental businesses through the distribution of 80.3% of the outstanding shares of common stock of ZimVie to our stockholders at the close of business on February 15, 2022 (the “Record Date”). The distribution was made in the amount of one share of ZimVie common stock for every ten shares of our common stock owned by our stockholders at the close of business on the Record Date. Fractional shares of ZimVie common stock were not issued but instead were aggregated and sold in the open market with the proceeds being distributed pro rata in lieu of such fractional shares.

 

In the fourth quarter of 2021, ZimVie entered into a credit agreement with a financial institution providing for revolving loans of up to $175.0 million and term loan borrowings of up to $595.0 million. On February 28, 2022, prior to separation, ZimVie borrowed the entire $595.0 million available under the term loan. Approximately $540.6 million of this amount was paid by ZimVie to Zimmer Biomet in the form of a dividend at separation which is included in our cash flows from financing activities in the condensed consolidated statements of cash flows. We used proceeds from the dividend, along with cash on hand and proceeds from a draw on our revolving credit facility, to repay our 3.150% Senior Notes due 2022 which had an outstanding principal balance of $750.0 million.

 

Also, in connection with the spinoff, we entered into definitive agreements with ZimVie that, among other things, set forth the terms and conditions of the separation and distribution. The agreements set forth the principles and actions taken or to be taken in connection with the separation and the distribution and provide a framework for our relationship with ZimVie from and after the separation and the distribution. The agreements include a Separation and Distribution Agreement, a Tax Matters Agreement, an Employee Matters Agreement, a Transition Services Agreement (the “TSA”), an Intellectual Property Matters Agreement, a Stockholder and Registration Rights Agreement, a Transition Manufacturing and Supply Agreement (the “TMA”), a Reverse

8

 

Transition Manufacturing and Supply Agreement (the “Reverse TMA”) and a Transitional Trademark License Agreement, each dated as of March 1, 2022.

 

Pursuant to the TSA, both we and ZimVie agree to provide certain services to each other, on an interim, transitional basis from and after the separation and the distribution. The services include certain regulatory services, commercial services, operational services, tax services, clinical affairs services, information technology services, finance and accounting services and human resource and employee benefits services. The remuneration to be paid for such services is generally intended to allow the company providing the services to recover all of its costs and expenses of providing such services. The TSA will terminate on the expiration of the term of the last service provided thereunder, which will generally be no later than March 31, 2025. However, we expect most TSA services will be completed by the end of 2023.

 

Pursuant to the TMA and the Reverse TMA, Zimmer Biomet or ZimVie, as the case may be, will manufacture or cause to be manufactured certain products for the other party, on an interim, transitional basis. Pursuant to such agreements, Zimmer Biomet or ZimVie, as the case may be, will be required to purchase certain minimum amounts of products from the other party. Each of the TMA and the Reverse TMA has a two-year term, with a one-year extension possible upon mutual agreement of the parties.

 

We recognize any gains or losses from the TSA and TMA agreements in the Acquisition, integration, divestiture and related line item in our condensed consolidated statements of earnings. Amounts included in the condensed consolidated statements of earnings related to these agreements for the three and nine-month periods ended September 30, 2022 and 2021 were immaterial. Amounts due to and due from ZimVie were also immaterial as of September 30, 2022.

 

We retained approximately 5.1 million common shares of ZimVie, representing approximately 19.7 percent of ZimVie's outstanding common shares on the separation date. Given our inability to exert significant influence over ZimVie, we recognize this investment at fair value in prepaid expenses and other current assets on our condensed consolidated balance sheet. We intend to dispose of these shares by the end of the first quarter of 2023. Changes to the fair value of the investment is recognized in non-operating other (expense) income, net.

 

On August 31, 2022, we borrowed an aggregate principal amount of $83.0 million under a short-term credit agreement (the "Short-Term Term Loan”) with a third-party financial institution, the proceeds of which will be used to repay certain of our existing indebtedness. On September 1, 2022, we entered into a forward exchange agreement and pledge agreement (collectively the “Forward Exchange Agreement”) with the same financial institution to deliver to them our 5.1 million shares of ZimVie common stock in the first quarter of 2023. It is likely that the financial institution has entered into hedging transactions, which may include selling the ZimVie shares in the market, in anticipation of receiving the shares in the first quarter of 2023. We have pledged our 5.1 million shares of ZimVie common stock to the financial institution as collateral for our obligations under the Short-Term Term Loan and the Forward Exchange Agreement.

 

Upon settlement of the Short-Term Term Loan, which is expected to be in the first quarter of 2023, we will transfer our ZimVie common shares to the financial institution counterparty to settle the Forward Exchange Agreement and we will either receive or pay an amount primarily depending upon the difference between the average of the daily volume-weighted average price of the ZimVie shares over the outstanding term of the Forward Exchange Agreement and the principal amount of $83.0 million.

 

The Forward Exchange Agreement is accounted for at fair value, with changes in fair value recognized in non-operating other (expense) income, net. The most significant input into the valuation of the Forward Exchange Agreement is the price of ZimVie shares. The fair value of the Forward Exchange Agreement at September 30, 2022 was $3.0 million and is included within prepaid expenses and other current assets on our condensed consolidated balance sheet. For the three and nine-month periods ended September 30, 2022, an unrealized gain of $3.0 million was recorded in non-operating other (expense) income, net in our condensed consolidated statements of earnings.

 

As discussed in Note 1, Basis of Presentation, the results of our spine and dental businesses have been reflected as discontinued operations in the current year period through the date of the spinoff and in the prior year period. Details of earnings (loss) from discontinued operations included in our condensed consolidated statements of earnings are as follows (in millions):

 

9

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2021

 

 

2022

 

 

2021

 

Net Sales

 

$

238.5

 

 

$

147.8

 

 

$

748.1

 

Cost of products sold, excluding intangible asset amortization

 

 

90.1

 

 

 

53.5

 

 

 

255.6

 

Intangible asset amortization

 

 

21.5

 

 

 

14.0

 

 

 

65.0

 

Research and development

 

 

15.0

 

 

 

10.5

 

 

 

43.9

 

Selling, general and administrative

 

 

118.1

 

 

 

89.4

 

 

 

351.7

 

Restructuring and other cost reduction initiatives

 

 

0.9

 

 

 

0.4

 

 

 

2.3

 

Acquisition, integration, divestiture and related

 

 

20.9

 

 

 

40.9

 

 

 

54.9

 

Other expense, net

 

 

0.1

 

 

 

0.3

 

 

 

0.4

 

Loss from discontinued operations before income taxes

 

 

(28.1

)

 

 

(61.2

)

 

 

(25.7

)

Benefit for income taxes from discontinued operations

 

 

(11.5

)

 

 

(2.4

)

 

 

(11.5

)

Loss from discontinued operations, net of tax

 

$

(16.6

)

 

$

(58.8

)

 

$

(14.2

)

 

Details of assets and liabilities of discontinued operations are as follows (in millions):

 

 

 

December 31,

 

 

 

2021

 

Cash and cash equivalents

 

$

100.4

 

Accounts receivable, less allowance for credit losses

 

 

145.3

 

Inventories

 

 

246.5

 

Prepaid expenses and other current assets

 

 

9.4

 

Total Current Assets of Discontinued Operations

 

$

501.6

 

Property, plant and equipment, net

 

$

179.9

 

Goodwill

 

 

272.8

 

Intangible assets, net

 

 

766.2

 

Other assets

 

 

57.9

 

Total Noncurrent Assets of Discontinued Operations

 

$

1,276.8

 

Accounts payable

 

$

44.7

 

Income taxes payable

 

 

3.1

 

Other current liabilities

 

 

129.4

 

Total Current Liabilities of Discontinued Operations

 

$

177.2

 

Deferred income taxes, net

 

$

107.1

 

Other long-term liabilities

 

 

61.3

 

Total Noncurrent Liabilities of Discontinued Operations

 

$

168.4

 

 

In a pro rata spinoff of consolidated subsidiaries, the distribution of the assets and liabilities are recognized through equity instead of net earnings. Accordingly, we have recognized the distribution of net assets to ZimVie in retained earnings. Additionally, the dividend we received from ZimVie at the separation was also recognized in retained earnings.

 

During the three-month period ended September 30, 2022, we recorded an out-of-period adjustment related to an accounts receivable balance from ZimVie that we continued to recognize after the separation date for which we should not have expected to receive payment. As a result, our Accounts receivable, less allowance for credit losses and our Retained earnings balances were overstated by $10.4 million in our condensed consolidated balance sheets as of March 31, 2022 and June 30, 2022. This adjustment did not have any effect on our condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income or condensed consolidated statements of cash flows. We concluded this adjustment was not material to the interim condensed consolidated financial statements (unaudited) for either the current or prior periods.

3. Significant Accounting Policies

Use of Estimates - The accompanying unaudited condensed consolidated financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We have made our best estimates, as appropriate under GAAP, in the recognition of our assets and liabilities. These estimates have considered the impact the COVID-19 pandemic may have on our financial position, results of operations and cash flows. Such estimates included, but were not limited to, variable consideration to our customers, our allowance for doubtful accounts

10

 

for expected credit losses, the net realizable value of our inventory, the fair value of our goodwill and the recoverability of other long-lived assets. Actual results could differ materially from these estimates.

Other Expense (Income), Net - Other expense (income), net includes gains/(losses) on changes in fair value of our investments, gains/(losses) on remeasurement of monetary assets and liabilities denominated in a currency other than an entity’s functional currency and the related gains/(losses) on derivative instruments that are not designated as hedging instruments that we use to manage the currency exposures of these assets and liabilities, certain components of pension expense, and other non-operating gains/(losses). In the three and nine-month periods ended September 30, 2022, we recognized losses of $30.0 million and $114.3 million, respectively, related to our investment in ZimVie. The initial value of our investment was based upon our 19.7 percent share of the carrying value of net assets transferred to ZimVie on the separation date. At September 30, 2022 we valued our investment at fair value based upon ZimVie’s share price on that date, less a discount to reflect that the shares are not registered.

Accounting Pronouncements Recently Adopted

 

In July 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-05 Lessors – Certain Leases with Variable Lease Payments which is an amendment to Accounting Standards Codification Topic 842 – Leases (“ASC 842”). Under the prior ASC 842 guidance, variable payments were excluded from the measurement of the initial net investment in the lease if the payments do not depend on an index or a rate. For sales-type or direct financing leases, this could result in the recognition of a day-one loss for leases with entire or partial variable payments. ASU 2021-05 requires lessors to classify leases with entire or partial variable payments as operating leases if otherwise a day-one loss would be recognized. The ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those years. Early adoption of this ASU is permitted. The ASU can either be applied retrospectively to leases that were commenced or modified on or after the adoption of ASC 842 or applied prospectively to leases that commence or are modified after the adoption of ASU 2021-05. We adopted this standard as of January 1, 2022. The adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.

 

Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848). ASU 2020-04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. Early adoption of this ASU is permitted, and we may elect to apply the amendments prospectively through December 31, 2022. We are currently evaluating the impact this ASU will have on our financial statements.

There are no recently issued accounting pronouncements that we have not yet adopted that are expected to have a material effect on our financial position, results of operations or cash flows.

4. Revenue

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

United States

 

$

973.0

 

 

$

942.6

 

 

$

2,931.8

 

 

$

2,835.9

 

International

 

 

696.8

 

 

 

742.8

 

 

 

2,183.0

 

 

 

2,214.2

 

Total

 

$

1,669.8

 

 

$

1,685.4

 

 

$

5,114.8

 

 

$

5,050.1

 

 

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Knees

 

$

657.0

 

 

$

647.9

 

 

$

2,024.7

 

 

$

1,927.8

 

Hips

 

 

468.0

 

 

 

453.9

 

 

 

1,406.2

 

 

 

1,375.4

 

S.E.T.

 

 

409.4

 

 

 

437.6

 

 

 

1,272.6

 

 

 

1,317.3

 

Other

 

 

135.4

 

 

 

146.0

 

 

 

411.3

 

 

 

429.6

 

Total

 

$

1,669.8

 

 

$

1,685.4

 

 

$

5,114.8

 

 

$

5,050.1

 

 

S.E.T. includes sales from our Sports Medicine, Extremities, Trauma, Craniomaxillofacial and Thoracic ("CMFT") product categories. Other includes sales from our Technology, Surgical and Bone Cement product categories.

 

11

 

This net sales presentation differs from our reportable operating segments, which are based upon our senior management organizational structure and how we allocate resources toward achieving operating profit goals. Each of our reportable operating segments sells all the product categories noted above. Accordingly, the only difference from the presentation above and our reportable operating segments are the geographic groupings.

 

5. Restructuring

 

In December 2021, we initiated a new global restructuring program (the “2021 Restructuring Plan”) to reorganize our operations in preparation for the planned spinoff of ZimVie with an objective of reducing costs. The 2021 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $220 million and reduce gross annual pre-tax operating expenses by approximately $190 million by the end of 2024 as program benefits are realized. The pre-tax restructuring charges consist of employee termination benefits; contract terminations for sales agents; and other charges, such as consulting fees and project management expenses. The restructuring charges incurred in the three and nine-month periods ended September 30, 2022 primarily related to employee termination benefits, sales agent contract terminations, consulting fees and project management expenses. The following table summarizes the liabilities recognized related to the 2021 Restructuring Plan (in millions):

 

 

 

Employee

 

 

 

 

 

 

 

 

 

 

 

 

Termination

 

 

Contract

 

 

 

 

 

 

 

 

 

Benefits

 

 

Terminations

 

 

Other

 

 

Total

 

Expenses incurred in the three months ended September 30, 2022

 

$

10.4

 

 

$

10.7

 

 

$

1.4

 

 

$

22.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2021

 

$

19.5

 

 

$

2.3

 

 

$

10.3

 

 

$

32.1

 

Expenses incurred in the nine months ended September 30, 2022

 

 

41.0

 

 

 

39.2

 

 

 

12.6

 

 

 

92.8

 

Cash payments

 

 

(48.3

)

 

 

(22.7

)

 

 

(20.1

)

 

 

(91.1

)

Foreign currency exchange rate changes

 

 

(0.2

)

 

 

(0.1

)

 

 

-

 

 

 

(0.3

)

Balance, September 30, 2022

 

$

12.0

 

 

$

18.7

 

 

$

2.8

 

 

$

33.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense incurred since the start of the 2021 Restructuring Plan

 

$

60.5

 

 

$

41.5

 

 

$

22.9

 

 

$

124.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense estimated to be recognized for the 2021 Restructuring Plan

 

$

70.0

 

 

$

100.0

 

 

$

50.0

 

 

$

220.0

 

 

In December 2019, we initiated a global restructuring program (the “2019 Restructuring Plan”) with an objective of reducing costs to allow us to further invest in higher priority growth opportunities. The 2019 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $350 million to $400 million and reduce gross annual pre-tax operating expenses by approximately $180 million to $280 million by the end of 2023 as program benefits are realized. The pre-tax restructuring charges consist of employee termination benefits; contract terminations for facilities and sales agents; and other charges, such as consulting fees, project management and relocation costs. The restructuring charges incurred in the three and nine-month periods ended September 30, 2022 primarily related to distributor contract terminations, consulting and project management. The following table summarizes the liabilities recognized related to the 2019 Restructuring Plan (in millions):

 

 

 

Employee

 

 

 

 

 

 

 

 

 

 

 

 

Termination

 

 

Contract

 

 

 

 

 

 

 

 

 

Benefits

 

 

Terminations

 

 

Other

 

 

Total

 

Expenses incurred in the three months ended September 30, 2022

 

$

1.8

 

 

$

0.1

 

 

$

6.6

 

 

$

8.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2021

 

$

14.8

 

 

$

16.5

 

 

$

-

 

 

$

31.3

 

Expenses incurred in the nine months ended September 30, 2022

 

 

1.5

 

 

 

1.3

 

 

 

26.2

 

 

 

29.0

 

Cash payments

 

 

(2.9

)

 

 

(6.6

)

 

 

(12.4

)

 

 

(21.9

)

Foreign currency exchange rate changes

 

 

(2.3

)

 

 

(0.9

)

 

 

(1.0

)

 

 

(4.2

)

Balance, September 30, 2022

 

$

11.1

 

 

$

10.3

 

 

$

12.8

 

 

$

34.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense incurred since the start of the 2019 Restructuring Plan

 

$

80.7

 

 

$

35.6

 

 

$

120.7

 

 

$

237.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense estimated to be recognized for the 2019 Restructuring Plan

 

$

160.0

 

 

$

35.0

 

 

$

180.0

 

 

$

375.0

 

 

We do not include restructuring charges in the operating profit of our reportable segments.

In our condensed consolidated statement of earnings, we report restructuring charges in our “Restructuring and other cost reduction initiatives” financial statement line item. We report the expenses for other cost reduction initiatives with restructuring

12

 

expenses because these activities also have the goal of reducing costs across the organization. However, since the cost reduction initiative expenses are not considered restructuring, they have been excluded from the amounts presented in this note.

 

6. Inventories

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in millions)

 

Finished goods

 

$

1,677.8

 

 

$

1,729.2

 

Work in progress

 

 

222.1

 

 

 

175.5

 

Raw materials

 

 

228.7

 

 

 

243.3

 

Inventories

 

$

2,128.6

 

 

$

2,148.0

 

 

7. Property, Plant and Equipment

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in millions)

 

Land

 

$

19.1

 

 

$

20.1

 

Buildings and equipment

 

 

2,068.4

 

 

 

2,086.0

 

Capitalized software costs

 

 

503.6

 

 

 

454.9

 

Instruments

 

 

3,615.1

 

 

 

3,460.4

 

Construction in progress

 

 

138.2

 

 

 

116.3

 

 

 

 

6,344.4

 

 

 

6,137.7

 

Accumulated depreciation

 

 

(4,542.8

)

 

 

(4,301.1

)

Property, plant and equipment, net

 

$

1,801.6

 

 

$

1,836.6

 

 

We had $20.3 million and $10.3 million of property, plant and equipment included in accounts payable as of September 30, 2022 and December 31, 2021, respectively.

 

8. Acquisitions

 

On April 18, 2022, we completed the acquisition of all the outstanding shares of a privately held sternal closure company. The acquisition was completed primarily to expand our product offerings in the CMFT market. The total aggregate cash consideration paid at closing was $100.0 million, with an additional $11.0 million of deferred payments to be made over the next two years.

 

The goodwill related to this acquisition represents the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill is related to the operational synergies we expect to achieve from combining the companies and the cash flows from future, undefined, development projects. The goodwill is included in the Americas operating segment and the Americas CMFT reporting unit. A portion of the goodwill is expected to be deductible for U.S. income tax purposes. This goodwill was the only significant activity for our consolidated goodwill balance in the nine-month period ended September 30, 2022 other than changes related to foreign currency exchange rate translation adjustments.

 

The purchase price allocation as of September 30, 2022 is preliminary. We need additional time to evaluate the tax attributes of the transaction, which may change the recognized assets and liabilities. There may be differences between the preliminary estimates of fair value and the final acquisition accounting. The final estimates of fair value are expected to be completed as soon as possible, but no later than one year after the acquisition date.

 

The following table summarizes the preliminary estimates of fair value of the assets acquired and liabilities assumed related to this acquisition (in millions):

 

13

 

Current assets

 

$

3.8

 

Intangible assets subject to amortization:

 

 

 

   Technology

 

 

42.8

 

   Customer relationships

 

 

12.3

 

Goodwill

 

 

50.8

 

Other assets

 

 

2.4

 

Total assets acquired

 

 

112.1

 

Current liabilities

 

 

1.1

 

Total liabilities assumed

 

 

1.1

 

Net assets acquired

 

$

111.0

 

 

The amortization periods selected for technology and customer relationships were 10 years and 4 years, respectively.

 

We have not included pro forma information and certain other information under GAAP for this acquisition because it did not have a material impact on our financial position or results of operations.

9. Debt

Our debt consisted of the following (in millions):

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Current portion of long-term debt

 

 

 

 

 

 

3.150% Senior Notes due 2022

 

$

-

 

 

$

750.0

 

Japan Term Loan A due 2022

 

 

-

 

 

 

101.6

 

Japan Term Loan B due 2022

 

 

-

 

 

 

184.9

 

1.414% Euro Notes due 2022

 

 

489.8

 

 

 

568.6

 

Short-Term Term Loan

 

 

83.0

 

 

 

-

 

3.700% Senior Notes due 2023

 

 

86.3

 

 

 

-

 

Total current portion of long-term debt

 

$

659.1

 

 

$

1,605.1

 

Long-term debt

 

 

 

 

 

 

3.700% Senior Notes due 2023

 

 

-

 

 

 

86.3

 

1.450% Senior Notes due 2024

 

 

850.0

 

 

 

850.0

 

3.550% Senior Notes due 2025

 

 

863.0

 

 

 

863.0

 

3.050% Senior Notes due 2026

 

 

600.0

 

 

 

600.0

 

3.550% Senior Notes due 2030

 

 

257.5

 

 

 

257.5

 

2.600% Senior Notes due 2031

 

 

750.0

 

 

 

750.0

 

4.250% Senior Notes due 2035

 

 

253.4

 

 

 

253.4

 

5.750% Senior Notes due 2039

 

 

317.8

 

 

 

317.8

 

4.450% Senior Notes due 2045

 

 

395.4

 

 

 

395.4

 

2.425% Euro Notes due 2026

 

 

489.8

 

 

 

568.6

 

1.164% Euro Notes due 2027

 

 

489.8

 

 

 

568.6

 

Debt discount and issuance costs

 

 

(31.7

)

 

 

(36.4

)

Adjustment related to interest rate swaps

 

 

(179.8

)

 

 

(10.5

)

Total long-term debt

 

$

5,055.2

 

 

$

5,463.7

 

 

At September 30, 2022, our total current and non-current debt of $5.7 billion consisted of $5.8 billion aggregate principal amount of our senior notes, which included €1.5 billion Euro-denominated senior notes (“Euro Notes”), and an $83.0 million borrowing under a short-term credit agreement (the "Short-Term Term Loan"), partially offset by debt discount and issuance costs of $31.7 million and fair value adjustments related to interest rate swaps totaling $179.8 million.

 

On September 22, 2022, we used cash on hand to redeem the full ¥11.7 billion and ¥21.3 billion outstanding principal amounts of our Japanese Term Loan A and Japanese Term Loan B, respectively.

 

On August 31, 2022, we borrowed an aggregate principal amount of $83.0 million under the Short-Term Term Loan with a third-party financial institution, the proceeds of which will be used to redeem a portion of the 1.414% Euro Notes that mature on December 13, 2022. As more fully described in Note 2, the Short-Term Term Loan is expected to be settled in the first quarter of 2023.

 

14

 

On March 18, 2022, we redeemed the full $750.0 million outstanding principal amount of our 3.150% Senior Notes due April 1, 2022. A $100.0 million draw under the 2021 Five-Year Revolving Facility (as defined below), together with cash on hand, were used to redeem these notes. $540.6 million of this cash on hand came from the dividend paid by ZimVie to Zimmer Biomet at separation. In total, in the nine-month period ended September 30, 2022 we borrowed and subsequently repaid $220.0 million under the 2021 Five-Year Revolving Facility to pay off debt, complete an acquisition and for other obligations.

 

In the nine-month period ended September 30, 2021, we redeemed $200.0 million outstanding principal amount of our floating rate notes due 2021 and $300.0 million on senior notes due 2021.

 

On August 19, 2022, we entered into a new five-year revolving credit agreement (the “2022 Five-Year Credit Agreement”) and a new 364-day revolving credit agreement (the “2022 364-Day Revolving Credit Agreement”), as described below. Borrowings under these credit agreements will be used for general corporate purposes.

 

The 2022 Five-Year Credit Agreement contains a five-year unsecured revolving facility of $1.5 billion (the “2022 Five-Year Revolving Facility”). The 2022 Five-Year Credit Agreement replaces the previous revolving credit agreement (the “2021 Five-Year Credit Agreement”), which contained a five-year unsecured multicurrency revolving facility of $1.5 billion (the “2021 Five-Year Revolving Facility”). There were no borrowings outstanding under the 2021 Five-Year Credit Agreement at the time it was terminated.

 

The 2022 Five-Year Credit Agreement will mature on August 19, 2027, with two one-year extensions exercisable at our discretion and subject to required lender consent. The 2022 Five-Year Credit Agreement also includes an uncommitted incremental feature allowing us to request an increase of the facility by an aggregate amount of up to $500.0 million.

 

Borrowings under the 2022 Five-Year Credit Agreement bear interest at floating rates, based upon either an adjusted Term secured overnight financing rate (“SOFR”) for the applicable interest period or an alternate base rate, in each case, plus an applicable margin determined by reference to our senior unsecured long-term debt credit rating. We pay a facility fee on the aggregate amount of the 2022 Five-Year Revolving Facility at a rate determined by reference to our senior unsecured long-term debt credit rating. The 2022 Five-Year Credit Agreement contains customary affirmative and negative covenants and events of default for unsecured financing arrangements, including, among other things, limitations on consolidations, mergers, and sales of assets. The 2022 Five-Year Credit Agreement also requires us to maintain a consolidated indebtedness to consolidated EBITDA ratio of no greater than 4.5 to 1.0 as of the last day of any period of four consecutive fiscal quarters (with such ratio subject to increase to 5.0 to 1.0 for a period of time in connection with a qualified material acquisition and certain other restrictions). We were in compliance with all covenants under the 2022 Five-Year Credit Agreement as of September 30, 2022. As of September 30, 2022, there were no outstanding borrowings under the 2022 Five-Year Credit Agreement.

 

The 2022 364-Day Revolving Credit Agreement is an unsecured revolving credit facility in the principal amount of $1.0 billion (the “2022 364-Day Revolving Facility”). The 2022 364-Day Revolving Credit Agreement replaced a credit agreement entered into on August 20, 2021, which was also a 364- day unsecured revolving credit facility of $1.0 billion (the “2021 364-Day Revolving Facility”). There were no borrowings outstanding under the 2021 364-Day Revolving Facility when it was terminated.

 

The 2022 364-Day Revolving Facility will mature on August 18, 2023. Borrowings under the 2022 364-Day Revolving Credit Agreement bear interest at floating rates based upon either an adjusted Term SOFR for the applicable interest period or an alternate base rate, in each case, plus an applicable margin determined by reference to our senior unsecured long-term debt credit rating. We pay a facility fee on the aggregate amount of the 2022 364-Day Revolving Facility at a rate determined by reference to our senior unsecured long-term debt credit rating. The 2022 364-Day Revolving Credit Agreement contains customary affirmative and negative covenants and events of default for an unsecured financing arrangement including, among other things, limitations on consolidations, mergers, and sales of assets. The 2022 364-Day Revolving Credit Agreement also requires us to maintain a consolidated indebtedness to consolidated EBITDA ratio of no greater than 4.5 to 1.0 as of the last day of any period of four consecutive fiscal quarters (with such ratio subject to increase to 5.0 to 1.0 in connection with a qualified material acquisition and certain other restrictions). We were in compliance with all covenants under the 2022 364-Day Revolving Credit Agreement as of September 30, 2022. As of September 30, 2022, there were no outstanding borrowings under the 2022 364-Day Revolving Credit Agreement.

 

The estimated fair value of our senior notes, which includes our Euro notes, as of September 30, 2022, based on quoted prices for the specific securities from transactions in over-the-counter markets (Level 2), was $5,263.3 million.

 

10. Accumulated Other Comprehensive Income

Accumulated other comprehensive income (loss) (“AOCI”) refers to certain gains and losses that under GAAP are included in comprehensive income but are excluded from net earnings as these amounts are initially recorded as an adjustment to stockholders’ equity. Amounts in AOCI may be reclassified to net earnings upon the occurrence of certain events.

Our AOCI is comprised of foreign currency translation adjustments, unrealized gains and losses on cash flow hedges and unrecognized prior service costs and gains and losses in actuarial assumptions related to our defined benefit plans. Foreign currency translation adjustments are reclassified to net earnings upon sale or upon a complete or substantially complete liquidation of an

15

 

investment in a foreign entity. In the nine-month period ended September 30, 2022, due to the spinoff of ZimVie, certain foreign entities were completely liquidated. In a pro rata spinoff of consolidated subsidiaries’ assets and liabilities, the distribution of these net assets is recognized through equity instead of net earnings. Therefore, the foreign currency translation adjustments of those entities that were completely liquidated were reclassified to retained earnings. Similarly, we had entered into instruments designated as net investment hedges against certain of these same foreign entities. We reclassified the portion of the net investment hedge gains (losses) deferred in foreign currency translation adjustments related to those entities to retained earnings. Unrealized gains and losses on cash flow hedges are reclassified to net earnings when the hedged item affects net earnings. Amounts related to defined benefit plans that are in AOCI are reclassified over the service periods of employees in the plan.

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

 

 

 

Foreign

 

 

Cash

 

 

Defined

 

 

 

 

 

 

Currency

 

 

Flow

 

 

Benefit

 

 

Total

 

 

 

Translation

 

 

Hedges

 

 

Plan Items

 

 

AOCI

 

Balance at December 31, 2021

 

$

(107.1

)

 

$

32.1

 

 

$

(156.6

)

 

$

(231.6

)

AOCI before reclassifications

 

 

(186.4

)

 

 

133.2

 

 

 

-

 

 

 

(53.2

)

Reclassifications to statements of earnings

 

 

-

 

 

 

(28.4

)

 

 

7.2

 

 

 

(21.2

)

Spinoff of ZimVie Inc.

 

 

35.2

 

 

 

-

 

 

 

-

 

 

 

35.2

 

Reclassifications of net investment hedges to retained earnings

 

 

25.9

 

 

 

-

 

 

 

-

 

 

 

25.9

 

Balance at September 30, 2022

 

$

(232.4

)

 

$

136.9

 

 

$

(149.4

)

 

$

(244.9

)

 

The following table shows the reclassification adjustments from AOCI (in millions):

 

 

 

Amount of Gain (Loss)

 

 

 

 

 

Reclassified from AOCI

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

 

September 30,

 

 

Location on

Component of AOCI

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

Statements of Earnings

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

17.0

 

 

$

(1.6

)

 

$

33.6

 

 

$

(3.2

)

 

Cost of products sold

Forward starting interest rate swaps

 

 

(0.2

)

 

 

(0.2

)

 

 

(0.6

)

 

 

(0.5

)

 

Interest expense, net

 

 

 

16.8

 

 

 

(1.8

)

 

 

33.0

 

 

 

(3.7

)

 

Total before tax

 

 

 

2.4

 

 

 

(0.2

)

 

 

4.6

 

 

 

(0.3

)

 

Provision (benefit) for income taxes

 

 

$

14.4

 

 

$

(1.6

)

 

$

28.4

 

 

$

(3.4

)

 

Net of tax

Defined benefit plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost and unrecognized actuarial loss

 

$

(4.7

)

 

$

(7.4

)

 

$

(9.4

)

 

$

(7.1

)

 

Other (expense) income, net

 

 

 

(1.0

)

 

 

(1.7

)

 

 

(2.2

)

 

 

(1.8

)

 

(Benefit) provision for income taxes

 

 

$

(3.7

)

 

$

(5.7

)

 

$

(7.2

)

 

$

(5.3

)

 

Net of tax

Total reclassifications

 

$

10.7

 

 

$

(7.3

)

 

$

21.2

 

 

$

(8.7

)

 

Net of tax

 

The following table shows the tax effects on each component of AOCI recognized in our condensed consolidated statements of comprehensive income (in millions):

 

 

 

Three Months Ended September 30, 2022

 

 

Nine Months Ended September 30, 2022

 

 

 

Before Tax

 

 

Tax

 

 

Net of Tax

 

 

Before Tax

 

 

Tax

 

 

Net of Tax

 

Foreign currency cumulative translation adjustments

 

$

(71.0

)

 

$

24.6

 

 

$

(95.6

)

 

$

(109.9

)

 

$

76.5

 

 

$

(186.4

)

Unrealized cash flow hedge gains

 

 

64.2

 

 

 

10.3

 

 

 

53.9

 

 

 

164.4

 

 

 

31.2

 

 

 

133.2

 

Reclassification adjustments on cash flow hedges

 

 

(16.8

)

 

 

(2.4

)

 

 

(14.4

)

 

 

(33.0

)

 

 

(4.6

)

 

 

(28.4

)

Adjustments to prior service cost and unrecognized actuarial assumptions

 

 

4.7

 

 

 

1.0

 

 

 

3.7

 

 

 

9.4

 

 

 

2.2

 

 

 

7.2

 

Total Other Comprehensive (Loss) Income

 

$

(18.9

)

 

$

33.5

 

 

$

(52.4

)

 

$

30.9

 

 

$

105.3

 

 

$

(74.4

)

 

16

 

 

 

 

Three Months Ended September 30, 2021

 

 

Nine Months Ended September 30, 2021

 

 

 

Before Tax

 

 

Tax

 

 

Net of Tax

 

 

Before Tax

 

 

Tax

 

 

Net of Tax

 

Foreign currency cumulative translation adjustments

 

$

(25.2

)

 

$

11.7

 

 

$

(36.9

)

 

$

(42.9

)

 

$

26.7

 

 

$

(69.6

)

Unrealized cash flow hedge gains

 

 

23.0

 

 

 

4.5

 

 

 

18.5

 

 

 

70.9

 

 

 

10.3

 

 

 

60.6

 

Reclassification adjustments on cash flow hedges

 

 

1.8

 

 

 

0.2

 

 

 

1.6

 

 

 

3.7

 

 

 

0.3

 

 

 

3.4

 

Adjustments to prior service cost and unrecognized actuarial assumptions

 

 

7.4

 

 

 

1.7

 

 

 

5.7

 

 

 

7.1

 

 

 

1.8

 

 

 

5.3

 

Total Other Comprehensive Income (Loss)

 

$

7.0

 

 

$

18.1

 

 

$

(11.1

)

 

$

38.8

 

 

$

39.1

 

 

$

(0.3

)

 

11. Fair Value Measurement of Assets and Liabilities

The following financial assets and liabilities related to continuing operations are recorded at fair value on a recurring basis (in millions):

 

 

 

As of September 30, 2022

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using:

 

Description

 

Recorded
Balance

 

 

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

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedges, current and long-term

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

160.7

 

 

$

-

 

 

$

160.7

 

 

$

-

 

Cross-currency interest rate swaps

 

 

33.2

 

 

 

-

 

 

 

33.2

 

 

 

-

 

Derivatives not designated as hedges, current and long-term

 

 

 

 

 

 

 

 

 

 

 

 

Forward Exchange Agreement

 

 

3.0

 

 

 

-

 

 

 

3.0

 

 

 

-

 

Investment in ZimVie

 

 

48.1

 

 

 

48.1

 

 

 

-

 

 

 

-

 

Total Assets

 

$

245.0

 

 

$

48.1

 

 

$

196.9

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedges, current and long-term

 

 

 

 

 

 

 

 

 

 

 

 

Cross-currency interest rate swaps

 

$

2.4

 

 

$

-

 

 

$

2.4

 

 

$

-

 

Interest rate swaps

 

 

179.8

 

 

 

-

 

 

 

179.8

 

 

 

-

 

Derivatives not designated as hedges, current and long-term

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

 

2.5

 

 

 

-

 

 

 

2.5

 

 

 

-

 

Contingent payments related to acquisitions

 

 

21.1

 

 

 

-

 

 

 

-

 

 

 

21.1

 

Total Liabilities

 

$

205.8

 

 

$

-

 

 

$

184.7

 

 

$

21.1

 

 

17

 

 

 

 

As of December 31, 2021

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using:

 

Description

 

Recorded
Balance

 

 

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

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedges, current and long-term

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

52.4

 

 

$

-

 

 

$

52.4

 

 

$

-

 

Cross-currency interest rate swaps

 

 

23.0

 

 

 

-

 

 

 

23.0

 

 

 

-

 

Derivatives not designated as hedges, current and long-term

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

 

1.1

 

 

 

-

 

 

 

1.1

 

 

 

-

 

Total Assets

 

$

76.5

 

 

$

-

 

 

$

76.5

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedges, current and long-term

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

0.3

 

 

$

-

 

 

$

0.3

 

 

$

-

 

Cross-currency interest rate swaps

 

 

3.4

 

 

 

-

 

 

 

3.4

 

 

 

-

 

Interest rate swaps

 

 

10.5

 

 

 

-

 

 

 

10.5

 

 

 

-

 

Derivatives not designated as hedges, current and long-term

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

 

1.5

 

 

 

-

 

 

 

1.5

 

 

 

-

 

Contingent payments related to acquisitions

 

 

35.6

 

 

 

-

 

 

 

-

 

 

 

35.6

 

Total Liabilities

 

$

51.3

 

 

$

-

 

 

$

15.7

 

 

$

35.6

 

 

We value our foreign currency forward contracts using a market approach based on foreign currency exchange rates obtained from active markets, and we perform ongoing assessments of counterparty credit risk.

We value our interest rate swaps using a market approach based on publicly available market yield curves and the terms of our swaps, and we perform ongoing assessments of counterparty credit risk. The valuation of our cross-currency interest rate swaps also includes consideration of foreign currency exchange rates.

In connection with the spinoff, we retained approximately 5.1 million unregistered common shares of ZimVie, representing 19.7 percent of ZimVie's common stock on the separation date. At each reporting date, we value these shares based upon the market share price of ZimVie less a discount to reflect that the shares are not registered.

The value of the Forward Exchange Agreement is based upon the historical volume-weighted average price of ZimVie stock since the inception of the agreement with simulations of how the ZimVie stock might perform until the settlement date.

Contingent payments related to acquisitions consist of sales-based payments, and are valued using discounted cash flow techniques. The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and increases as revenue estimates increase.

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

 

 

 

Level 3 - Liabilities

 

Contingent payments related to acquisitions

 

 

 

Beginning balance December 31, 2021

 

$

35.6

 

Change in estimates

 

 

(7.5

)

Settlements

 

 

(7.0

)

Ending balance September 30, 2022

 

$

21.1

 

 

18

 

Changes in estimates for contingent payments related to acquisitions included in continuing operations are recognized in the Acquisition, integration, divestiture and related line item on our condensed consolidated statements of earnings.

 

12. Derivative Instruments and Hedging Activities

We are exposed to certain market risks relating to our ongoing business operations, including foreign currency exchange rate risk, commodity price risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risks that we manage through the use of derivative instruments are interest rate risk and foreign currency exchange rate risk.

Interest Rate Risk

Derivatives Designated as Fair Value Hedges

We currently use fixed-to-variable interest rate swaps to manage our exposure to interest rate risk from our cash investments and debt portfolio. These derivative instruments are designated as fair value hedges under GAAP. Changes in the fair value of the derivative instrument are recorded in current earnings and are offset by gains or losses on the underlying debt instrument.

As of September 30, 2022 and December 31, 2021, the following amounts were recorded on our condensed consolidated balance sheets related to cumulative basis adjustments for fair value hedges (in millions):

 

 

 

Carrying Amount of the Hedged Liabilities

 

 

 

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

 

Balance Sheet Line Item

 

September 30, 2022

 

 

December 31, 2021

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Long-term debt

 

$

816.0

 

 

$

985.2

 

 

 

$

(179.8

)

 

$

(10.5

)

 

Derivatives Designated as Cash Flow Hedges

In 2014, we entered into forward starting interest rate swaps that were designated as cash flow hedges of our thirty-year tranche of senior notes due 2045 we expected to issue in 2015. The forward starting interest rate swaps mitigated the risk of changes in interest rates prior to the completion of the notes offering. The interest rate swaps were settled, and the remaining loss to be recognized at September 30, 2022 was $24.8 million, which will be recognized using the effective interest rate method over the remaining maturity period of the hedged notes.

Foreign Currency Exchange Rate Risk

We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. We also designated our Euro Notes as net investment hedges of investments in foreign subsidiaries. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Swiss Francs, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, Indian Rupees, Turkish Lira, Polish Zloty, Danish Krone, and Norwegian Krone. We do not use derivative financial instruments for trading or speculative purposes.

Derivatives Designated as Net Investment Hedges

We are exposed to the impact of foreign exchange rate fluctuations in the investments in our wholly-owned foreign subsidiaries that are denominated in currencies other than the U.S. Dollar. In order to mitigate the volatility in foreign exchange rates, we issued Euro Notes in December 2016 and November 2019 and designated 100 percent of the Euro Notes to hedge our net investment in certain wholly-owned foreign subsidiaries that have a functional currency of the Euro. All changes in the fair value of a hedging instrument designated as a net investment hedge are recorded as a component of AOCI in the condensed consolidated balance sheets.

At September 30, 2022, we had receive-fixed-rate, pay-fixed-rate cross-currency interest swaps with notional amounts outstanding of Euro 300 million, Japanese Yen 24.1 billion and Swiss Franc 125 million. These transactions further hedge our net investment in certain wholly-owned foreign subsidiaries that have a functional currency of Euro, Japanese Yen and Swiss Franc. All changes in the fair value of a derivative instrument designated as a net investment hedge are recorded as a component of AOCI in the condensed consolidated balance sheets. The portion of this change related to the excluded component will be amortized into earnings over the life of the derivative while the remainder will be recorded in AOCI until the hedged net investment is sold or substantially liquidated. We recognize the excluded component in interest expense, net on our condensed consolidated statements of earnings. The net cash received related to the receive-fixed-rate, pay-fixed-rate component of the cross-currency interest rate swaps is reflected in investing cash flows in our condensed consolidated statements of cash flows. In the nine-month period ended September 30, 2022,

19

 

€525 million of these cross-currency interest rate swaps matured at a gain of $52.1 million. In the nine-month period ended September 30, 2022, ¥7 billion of these cross-currency swaps were terminated at a gain of $12.8 million. The settlement of these gains with the counterparties is reflected in investing cash flows in our condensed consolidated statements of cash flows and will remain in AOCI on our condensed consolidated balance sheet until the hedged net investment is sold or substantially liquidated.

Derivatives Designated as Cash Flow Hedges

Our revenues are generated in various currencies throughout the world. However, a significant amount of our inventory is produced in U.S. Dollars. Therefore, movements in foreign currency exchange rates may have different proportional effects on our revenues compared to our cost of products sold. To minimize the effects of foreign currency exchange rate movements on cash flows, we hedge intercompany sales of inventory expected to occur within the next 30 months with foreign currency exchange forward contracts. We designate these derivative instruments as cash flow hedges.

We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and confirming that forecasted transactions have not changed significantly. We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default. For derivatives which qualify as hedges of future cash flows, the gains and losses are temporarily recorded in AOCI and then recognized in cost of products sold when the hedged item affects net earnings. On our condensed consolidated statements of cash flows, the settlements of these cash flow hedges are recognized in operating cash flows.

For foreign currency exchange forward contracts and options outstanding at September 30, 2022, we had obligations to purchase U.S. Dollars and sell Euros, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, Indian Rupees, Polish Zloty, Danish Krone, and Norwegian Krone and obligations to purchase Swiss Francs and sell U.S. Dollars. These derivatives mature at dates ranging from October 2022 through February 2025. As of September 30, 2022, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase U.S. Dollars were $1,102.9 million. As of September 30, 2022, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase Swiss Francs were $368.5 million.

Derivatives Not Designated as Hedging Instruments

We enter into foreign currency forward exchange contracts with terms of one to three months to manage currency exposures for monetary assets and liabilities denominated in a currency other than an entity’s functional currency. As a result, any foreign currency remeasurement gains/losses recognized in earnings are generally offset with gains/losses on the foreign currency forward exchange contracts in the same reporting period. The net amount of these offsetting gains/losses is recorded in other expense, net. Any outstanding contracts are recorded on the balance sheet at fair value as of the end of the reporting period. The notional amounts of these contracts are typically in a range of $1.5 billion to $2.0 billion per quarter.

As discussed in Note 2, we entered into the Forward Exchange Agreement as part of our pledge to transfer our ZimVie shares to a third-party financial institution in the first quarter of 2023.

Income Statement Presentation

Derivatives Designated as Cash Flow Hedges

Derivative instruments designated as cash flow hedges had the following effects, before taxes, on AOCI and net earnings on our condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income and condensed consolidated balance sheets (in millions):

 

 

 

Amount of Gain (Loss)

 

 

 

 

Amount of Gain (Loss)

 

 

 

Recognized in AOCI

 

 

 

 

Reclassified from AOCI

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

Location on

 

September 30,

 

 

September 30,

 

Derivative Instrument

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

Statements of Earnings

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Foreign exchange
   forward contracts

 

$

64.2

 

 

$

23.0

 

 

$

164.4

 

 

$

70.9

 

 

Cost of products sold

 

$

17.0

 

 

$

(1.6

)

 

$

33.6

 

 

$

(3.2

)

Forward starting
   interest rate swaps

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

Interest expense, net

 

 

(0.2

)

 

 

(0.2

)

 

 

(0.6

)

 

 

(0.5

)

 

 

$

64.2

 

 

$

23.0

 

 

$

164.4

 

 

$

70.9

 

 

 

 

$

16.8

 

 

$

(1.8

)

 

$

33.0

 

 

$

(3.7

)

 

20

 

The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on our condensed consolidated balance sheet at September 30, 2022, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized gain of $165.1 million, or $136.9 million after taxes, which is deferred in AOCI. A gain of $109.0 million, or $91.4 million after taxes, is expected to be reclassified to earnings in cost of products sold and a loss of $0.7 million, or $0.5 million after taxes, is expected to be reclassified to earnings in interest expense, net over the next twelve months.

 

The following table presents the effect of fair value, cash flow and net investment hedge accounting on our condensed consolidated statements of earnings (in millions):

 

 

 

Location and Amount of Gain/(Loss) Recognized in Income on Fair Value, Cash Flow and Net Investment Hedging Relationships

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2022

 

 

September 30, 2021

 

 

September 30, 2022

 

 

September 30, 2021

 

 

 

Cost of

 

 

Interest

 

 

Cost of

 

 

Interest

 

 

Cost of

 

 

Interest

 

 

Cost of

 

 

Interest

 

 

 

Products

 

 

Expense,

 

 

Products

 

 

Expense,

 

 

Products

 

 

Expense,

 

 

Products

 

 

Expense,

 

 

 

Sold

 

 

Net

 

 

Sold

 

 

Net

 

 

Sold

 

 

Net

 

 

Sold

 

 

Net

 

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

 

$

488.2

 

 

$

(42.3

)

 

$

491.4

 

 

$

(52.6

)

 

$

1,499.2

 

 

$

(122.2

)

 

$

1,423.9

 

 

$

(159.6

)

        The effects of fair value, cash flow and net investment hedging:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on fair value hedging
                  relationships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued interest rate swaps

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1.5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3.1

 

Interest rate swaps

 

 

-

 

 

 

(2.0

)

 

 

-

 

 

 

3.2

 

 

 

-

 

 

 

2.0

 

 

 

-

 

 

 

3.2

 

Gain (loss) on cash flow hedging
                  relationships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

 

17.0

 

 

 

-

 

 

 

(1.6

)

 

 

-

 

 

 

33.6

 

 

 

-

 

 

 

(3.2

)

 

 

-

 

Forward starting interest rate swaps

 

 

-

 

 

 

(0.2

)

 

 

-

 

 

 

(0.2

)

 

 

-

 

 

 

(0.6

)

 

 

-

 

 

 

(0.5

)

Gain on net investment hedging
                  relationships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cross-currency interest rate swaps

 

 

-

 

 

 

3.4

 

 

 

-

 

 

 

7.2

 

 

 

-

 

 

 

15.3

 

 

 

-

 

 

 

31.0

 

 

Derivatives Not Designated as Hedging Instruments

The following gains / (losses) from these derivative instruments were recognized on our condensed consolidated statements of earnings (in millions):

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Location on

 

September 30,

 

 

September 30,

 

Derivative Instrument

 

Statements of Earnings

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Foreign exchange forward contracts

 

Other (expense) income, net

 

$

(10.0

)

 

$

4.5

 

 

$

(25.2

)

 

$

(3.2

)

Forward Exchange Agreement

 

Other (expense) income, net

 

 

3.0

 

 

 

-

 

 

 

3.0

 

 

 

-

 

 

These gains/(losses) do not reflect offsetting gains of $5.4 million in the three-month period ended September 30, 2022, offsetting losses of $5.3 million in the three-month period ended September 30, 2021, offsetting gains of $13.9 million in the nine-month period ended September 30, 2022, and offsetting losses of $1.0 million in the nine-month period ended September 30, 2021, recognized in other (expense) income, net as a result of foreign currency remeasurement of monetary assets and liabilities denominated in a currency other than an entity’s functional currency.

21

 

Balance Sheet Presentation

As of September 30, 2022 and December 31, 2021, all derivatives designated as fair value hedges, cash flow hedges and net investment hedges are recorded at fair value on our condensed consolidated balance sheets. On our condensed consolidated balance sheets, we recognize individual forward contracts with the same counterparty on a net asset/liability basis if we have a master netting agreement with the counterparty. Under these master netting agreements, we are able to settle derivative instrument assets and liabilities with the same counterparty in a single transaction, instead of settling each derivative instrument separately. We have master netting agreements with substantially all of our counterparties. The fair value of derivative instruments on a gross basis is as follows (in millions):

 

 

 

As of September 30, 2022

 

 

As of December 31, 2021

 

 

 

Balance

 

 

 

 

Balance

 

 

 

 

 

Sheet

 

Fair

 

 

Sheet

 

Fair

 

 

 

Location

 

Value

 

 

Location

 

Value

 

Asset Derivatives Designated as Hedges

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Other current assets

 

$

131.4

 

 

Other current assets

 

$

42.3

 

Cross-currency interest rate swaps

 

Other current assets

 

 

22.8

 

 

Other current assets

 

 

16.3

 

Foreign exchange forward contracts

 

Other assets

 

 

49.7

 

 

Other assets

 

 

20.9

 

Cross-currency interest rate swaps

 

Other assets

 

 

10.4

 

 

Other assets

 

 

6.7

 

Total asset derivatives

 

 

 

$

214.3

 

 

 

 

$

86.2

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives Not Designated as Hedges

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Other current assets

 

$

-

 

 

Other current assets

 

$

1.4

 

Forward Exchange Agreement

 

Other current assets

 

 

3.0

 

 

Other current assets

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Liability Derivatives Designated as Hedges

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Other current liabilities

 

$

16.0

 

 

Other current liabilities

 

$

9.6

 

Cross-currency interest rate swaps

 

Other current liabilities

 

 

0.2

 

 

Other current liabilities

 

 

0.1

 

Foreign exchange forward contracts

 

Other long-term liabilities

 

 

4.4

 

 

Other long-term liabilities

 

 

1.5

 

Cross-currency interest rate swaps

 

Other long-term liabilities

 

 

2.2

 

 

Other long-term liabilities

 

 

3.3

 

Interest rate swaps

 

Other long-term liabilities

 

 

179.8

 

 

Other long-term liabilities

 

 

10.5

 

Total liability derivatives

 

 

 

$

202.6

 

 

 

 

$

25.0

 

 

 

 

 

 

 

 

 

 

 

 

Liability Derivatives Not Designated as Hedges

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Other current liabilities

 

$

2.5

 

 

Other current liabilities

 

$

1.8

 

 

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

 

 

 

 

 

As of September 30, 2022

 

 

As of December 31, 2021

 

Description

 

Location

 

Gross
Amount

 

 

Offset

 

 

Net Amount in
Balance Sheet

 

 

Gross
Amount

 

 

Offset

 

 

Net Amount in
Balance Sheet

 

Asset Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

Other current assets

 

$

131.4

 

 

$

16.0

 

 

$

115.4

 

 

$

42.3

 

 

$

9.5

 

 

$

32.8

 

Cash flow hedges

 

Other assets

 

 

49.7

 

 

 

4.4

 

 

 

45.3

 

 

 

20.9

 

 

 

1.3

 

 

 

19.6

 

Derivatives Not Designated as Hedges

 

Other current assets

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1.4

 

 

 

0.3

 

 

 

1.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

Other current liabilities

 

 

16.0

 

 

 

16.0

 

 

 

-

 

 

 

9.6

 

 

 

9.5

 

 

 

0.1

 

Cash flow hedges

 

Other long-term liabilities

 

 

4.4

 

 

 

4.4

 

 

 

-

 

 

 

1.5

 

 

 

1.3

 

 

 

0.2

 

Derivatives Not Designated as Hedges

 

Other current liabilities

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1.8

 

 

 

0.3

 

 

 

1.5

 

 

22

 

The following net investment hedge gains (losses) were recognized on our condensed consolidated statements of comprehensive income (in millions):

 

 

 

Amount of Gain (Loss)

 

 

 

Recognized in AOCI

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

Derivative Instrument

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Euro Notes

 

$

98.7

 

 

$

40.5

 

 

$

236.4

 

 

$

96.9

 

Cross-currency interest rate swaps

 

 

24.3

 

 

 

16.4

 

 

 

76.0

 

 

 

54.0

 

 

 

$

123.0

 

 

$

56.9

 

 

$

312.4

 

 

$

150.9

 

 

 

13. Income Taxes

We operate on a global basis and are subject to numerous and complex tax laws and regulations. Additionally, tax laws continue to undergo rapid changes in both application and interpretation by various countries, including state aid interpretations and initiatives led by the Organization for Economic Cooperation and Development. Our income tax filings are subject to examinations by taxing authorities throughout the world. Income tax audits may require an extended period of time to reach resolution and may result in significant income tax adjustments when interpretation of tax laws or allocation of company profits is disputed. Although ultimate timing is uncertain, the net amount of tax liability for unrecognized tax benefits may change within the next twelve months due to changes in audit status, expiration of statutes of limitations, settlements of tax assessments and other events. Management’s best estimate of such change is within the range of a $130 million decrease to a $20 million increase.

We are under continuous audit by the IRS and other taxing authorities. During the course of these audits, we receive proposed adjustments from taxing authorities that may be material. Therefore, there is a possibility that an adverse outcome in these audits could have a material effect on our results of operations and financial condition. Our U.S. Federal income tax returns have been audited through 2015 and are currently under audit for years 2016-2019.

In October 2020, we reached agreement with the IRS for tax years 2006-2012 related to the reallocation of profits between the U.S. and Puerto Rico as well as other miscellaneous adjustments.

The IRS has proposed adjustments for tax years 2010-2012, primarily related to reallocating profits between certain of our U.S. and foreign subsidiaries, which remain unsettled. We have disputed these adjustments and intend to continue to vigorously defend our positions as we pursue resolution through the administrative process with the IRS Independent Office of Appeals.

The IRS has proposed adjustments for tax years 2013-2015 relating to transfer pricing involving our cost sharing agreement between the U.S. and Switzerland affiliated companies and reallocating profits between certain of our U.S. and foreign subsidiaries. This includes a proposed increase to our U.S. Federal taxable income, which would result in additional tax expense related to 2013 of approximately $370 million, subject to interest and penalties related to our cost sharing agreement. We strongly believe that the position of the IRS, with regard to this matter, is inconsistent with the applicable U.S. Treasury regulations governing our cost sharing agreement. We do not expect changes to our reserves relative to these matters within the next twelve months. We are vigorously contesting the adjustment, and we will pursue all available administrative and, if necessary, judicial remedies. If we pursue judicial remedies in the U.S. Tax Court for years 2013-2015, a number of years will likely elapse before such matters are finally resolved. No payment of any amount related to this matter is required to be made, if at all, until all applicable proceedings have been completed.

A public referendum held in Switzerland passed the Federal Act on Tax Reform and AHV Financing (“TRAF”), effective January 1, 2020. The TRAF provides transitional relief measures for companies that are losing the tax benefit of a ruling, including a "step-up" for amortizable goodwill, equal to the amount of future tax benefit they would have received under their existing ruling, subject to certain limitations. This resulted in the recording of a deferred tax asset for future deductions of tax goodwill. In the three- month period ended September 30, 2022 we reached final agreement with Swiss authorities for certain tax years. The result of this agreement was an increase in the TRAF deferred tax asset and a corresponding net $59 million tax benefit. We also recognized a net $22 million tax benefit associated with closing certain tax years.

The Inflation Reduction Act of 2022 (the "2022 IRA") was signed into law on August 16, 2022, and includes a new U.S. federal alternative minimum tax, stock buyback excise tax, and tax incentives for energy and climate initiatives, among other provisions. We considered the applicable tax law changes, and there is no material impact to our tax provision for the three and nine-month periods ended September 30, 2022. We will continue to evaluate the impact of these tax law changes on future periods.

In the three and nine-month periods ended September 30, 2022, our effective tax rate (“ETR”) was negative 9.3 percent and positive 11.9 percent, respectively, compared to positive 14.8 percent and positive 14.2 percent in the three and nine-month periods ended September 30, 2021, respectively. The negative 9.3 percent and 11.9 percent ETR in the three and nine-month periods ended September 30, 2022, respectively, was primarily driven by a favorable tax audit settlement and finalization of the Swiss TRAF step-up, which was partially offset by the loss on our investment in ZimVie which is not deductible for tax purposes. The 14.8 percent ETR in the three-month period ended September 30, 2021, was primarily driven by the foreign rate differential as our foreign locations have lower tax rates than the U.S. and favorable return to provision changes in estimate, partially offset by unfavorable tax rate

23

 

changes. The 14.2 percent ETR in the nine-month period ended September 30, 2021, was the result of the foreign rate differential, favorable return to provision changes in estimate, unfavorable tax rate changes, favorable discrete adjustments from the filing of Swiss tax returns and an excess tax benefit related to stock-based compensation. Absent discrete tax events, we expect our future ETR will be lower than the U.S. corporate income tax rate of 21.0 percent due to our mix of earnings between U.S. and foreign locations, which have lower corporate income tax rates. Our ETR in future periods could also potentially be impacted by: changes in our mix of pre-tax earnings; changes in tax rates, tax laws or their interpretation; the outcome of various federal, state and foreign audits; and the expiration of certain statutes of limitations. Currently, we cannot reasonably estimate the impact of these items on our financial results.

 

14. Earnings Per Share

The following is a reconciliation of weighted average shares for the basic and diluted shares computations (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Weighted average shares outstanding for basic net earnings per share

 

 

209.8

 

 

 

208.8

 

 

 

209.5

 

 

 

208.5

 

Effect of dilutive stock options and other equity awards

 

 

0.5

 

 

 

1.8

 

 

 

0.7

 

 

 

2.0

 

Weighted average shares outstanding for diluted net earnings per share

 

 

210.3

 

 

 

210.6

 

 

 

210.2

 

 

 

210.5

 

 

During the three and nine-month periods ended September 30, 2022, an average of 6.4 million options and 4.4 million options, respectively, to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would have been antidilutive. During each of the three and nine-month periods ended September 30, 2021, an average of 2.0 million options and 0.9 million options, respectively, to purchase shares of common stock were not included for the same reason.

15. Segment Information

We design, manufacture and market orthopedic reconstructive products; sports medicine, biologics, extremities and trauma products; craniomaxillofacial and thoracic products (“CMFT”); and related surgical products. Our chief operating decision maker (“CODM”) allocates resources to achieve our operating profit goals through three operating segments. These operating segments, which also constitute our reportable segments, are Americas; EMEA; and Asia Pacific.

Our CODM evaluates performance based upon segment operating profit exclusive of operating expenses and income pertaining to intangible asset amortization, certain inventory and manufacturing-related charges, goodwill and intangible asset impairment, restructuring and other cost reduction initiatives, quality remediation, acquisition, integration, divestiture and related, litigation, certain European Union Medical Device Regulation (“EU MDR”) expenses, certain research and development ("R&D") agreements, other charges and corporate functions (collectively referred to as “Corporate items”). Corporate functions include corporate legal, finance, information technology, human resources and other corporate departments as well as certain operations, distribution, quality assurance and regulatory assurance expenses. Intercompany transactions have been eliminated from segment operating profit.

Our Americas operating segment is comprised principally of the U.S. and includes other North, Central and South American markets. This segment also includes research, development engineering, medical education, and brand management for our product category headquarter locations. Our EMEA operating segment is comprised principally of Europe and includes the Middle East and African markets. Our Asia Pacific operating segment is comprised principally of Japan, China and Australia and includes other Asian and Pacific markets. The EMEA and Asia Pacific operating segments include the commercial operations as well as regional headquarter expenses to operate in those markets. Since the Americas segment includes additional costs related to centralized product category headquarter expenses, profitability metrics in this operating segment are not comparable to the EMEA and Asia Pacific operating segments.

Our CODM does not review asset information by operating segment. Instead, our CODM reviews cash flow and other financial ratios by operating segment.

24

 

Net sales and operating profit by segment are as follows (in millions):

 

 

 

Net Sales

 

 

Operating Profit

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Americas

 

$

1,045.1

 

 

$

1,009.3

 

 

$

430.8

 

 

$

422.2

 

EMEA

 

 

319.3

 

 

 

354.5

 

 

 

80.2

 

 

 

86.9

 

Asia Pacific

 

 

305.4

 

 

 

321.6

 

 

 

100.5

 

 

 

106.7

 

Total

 

$

1,669.8

 

 

$

1,685.4

 

 

 

 

 

 

 

Corporate items

 

 

 

 

 

 

 

 

(234.7

)

 

 

(240.6

)

Intangible asset amortization

 

 

 

 

 

 

 

 

(131.5

)

 

 

(132.2

)

Operating profit

 

 

 

 

 

 

 

$

245.3

 

 

$

243.0

 

 

 

 

 

Net Sales

 

 

Operating Profit

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Americas

 

$

3,142.1

 

 

$

3,013.7

 

 

$

1,309.6

 

 

$

1,254.7

 

EMEA

 

 

1,079.1

 

 

 

1,065.7

 

 

 

284.3

 

 

 

261.0

 

Asia Pacific

 

 

893.6

 

 

 

970.7

 

 

 

301.8

 

 

 

325.9

 

Total

 

$

5,114.8

 

 

$

5,050.1

 

 

 

 

 

 

 

Corporate items

 

 

 

 

 

 

 

 

(772.8

)

 

 

(700.1

)

Intangible asset amortization

 

 

 

 

 

 

 

 

(395.3

)

 

 

(398.7

)

Intangible asset impairment

 

 

 

 

 

 

 

 

(3.0

)

 

 

(16.3

)

Operating profit

 

 

 

 

 

 

 

$

724.6

 

 

$

726.5

 

 

16. Commitments and Contingencies

We are involved in various legal proceedings, including product liability, intellectual property, stockholder matters, tax disputes, commercial, employment, governmental proceedings and investigations, and other legal matters that arise in the normal course of our business, including those described below. On a quarterly and annual basis, we review relevant information with respect to loss contingencies and update our accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews. We establish liabilities for loss contingencies on an undiscounted basis when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. For matters where a loss is believed to be reasonably possible, but not probable, or if no reasonable estimate of known or probable loss is available, no accrual has been made. We recognize litigation-related charges and gains in Selling, general and administrative expense on our condensed consolidated statement of earnings. The ultimate cost of litigation could be materially different than the amount of the current estimates and accruals and could have a material adverse impact on our financial condition and results of operations.

When determining the estimated loss or range of loss, significant judgment is required. Estimates of probable losses resulting from litigation and other contingences are inherently difficult to predict, particularly when the matters are in early procedural stages with incomplete facts or legal discovery, involve unsubstantiated or indeterminate claims for damages, and/or potentially involve penalties, fines or punitive damages. In addition to the matters described herein, we remain subject to the risk of future governmental, regulatory and legal actions. Governmental and regulatory actions may lead to product recalls, injunctions and other restrictions on our operations and monetary sanctions, which may include substantial civil or criminal penalties. Actions involving intellectual property could result in a loss of patent protection or the ability to market products, which could lead to significant sales reductions or cost increases, or otherwise materially affect the results of our operations.

During the three and nine-month periods ended September 30, 2022, we recognized an insignificant amount and a loss of $34.7 million, respectively, of net litigation-related accrual adjustments. For the three and nine-month periods ended September 30, 2021, net litigation related-charges were $47.8 million and $58.5 million, respectively. At September 30, 2022 and December 31, 2021, accrued litigation liabilities were $373.0 million and $409.3 million, respectively. These litigation-related charges and accrued liabilities reflect all of our litigation-related contingencies and not just the matters discussed below.

25

 

Litigation

Durom Cup-related claims: On July 22, 2008, we temporarily suspended marketing and distribution of the Durom Cup in the U.S. Subsequently, a number of product liability lawsuits were filed against us in various U.S. and foreign jurisdictions. The plaintiffs seek damages for personal injury, and they generally allege that the Durom Cup contains defects that result in complications and revision of the device. We have settled the majority of the claims in the U.S., but lawsuits are still pending in various foreign jurisdictions and additional claims may be asserted in the future. The majority of claims outside the U.S. are pending in Germany, Netherlands and Italy.

We rely on significant estimates in determining the provisions for Durom Cup-related claims, including our estimate of the number of claims that we will receive and the average amount we will pay per claim. The actual number of claims and the actual amount we pay per claim may differ from our estimates. For various reasons, we cannot reasonably estimate the possible loss or range of loss that may result from Durom Cup-related claims in excess of the losses we have accrued. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain. We accrued a litigation-related charge in this matter based on an estimate of the reasonably possible loss, as discussed above.

Zimmer M/L Taper, M/L Taper with Kinectiv Technology, and Versys Femoral Head-related claims (“Metal Reaction” claims): We are a defendant in a number of product liability lawsuits relating to our M/L Taper and M/L Taper with Kinectiv Technology hip stems, and Versys Femoral Head implants. The plaintiffs seek damages for personal injury, alleging that defects in the products lead to corrosion at the head/stem junction resulting in, among other things, pain, inflammation and revision surgery.

The majority of the cases are consolidated in an MDL that was created on October 3, 2018 in the U.S. District Court for the Southern District of New York (In Re: Zimmer M/L Taper Hip Prosthesis or M/L Taper Hip Prosthesis with Kinectiv Technology and Versys Femoral Head Products Liability Litigation). Other related cases are pending in various state and federal courts, and additional lawsuits may be filed. The parties attended a mediation in February 2022, at which a settlement in principle was reached that would resolve substantially all MDL cases and certain state court cases. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain. We accrued a litigation-related charge in this matter based on an estimate of the reasonably possible loss, as discussed above.

Biomet metal-on-metal hip implant claims: Biomet is a defendant in a number of product liability lawsuits relating to metal-on-metal hip implants, most of which involve the M2a-Magnum hip system. Cases were originally consolidated in an MDL in the U.S. District Court for the Northern District of Indiana (In Re: Biomet M2a Magnum Hip Implant Product Liability Litigation), but the majority of the claims in the U.S. have been settled. Trials may still occur in the future, and although each case will be tried on its particular facts, a verdict and subsequent final judgment for the plaintiff in one or more of these cases could have a substantial impact on our potential liability. Lawsuits are pending in various foreign jurisdictions and additional claims are expected to be asserted. We continue to refine our estimates of the potential liability to resolve the remaining claims and lawsuits. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain. We accrued a litigation-related charge in this matter based on an estimate of the reasonably possible loss, as discussed above.

Heraeus trade secret misappropriation lawsuits: In December 2008, Heraeus Kulzer GmbH (together with its affiliates, “Heraeus”) initiated legal proceedings in Germany against Biomet, Inc., Biomet Europe BV (now Zimmer Biomet Nederland BV), certain other entities and certain employees alleging that the defendants misappropriated Heraeus trade secrets when developing Biomet Europe’s Refobacin and Biomet Bone Cement line of cements. Heraeus and Zimmer Biomet subsequently filed additional trade secret misappropriation and related actions against one another variously in the United States and numerous European countries. As previously disclosed, on March 3, 2022, Zimmer Biomet and Heraeus entered into a confidential settlement agreement to fully resolve all global disputes between and among them relating to both Heraeus’ alleged technical trade secrets misappropriation relating to bone cement and Zimmer Biomet’s alleged business trade secrets misappropriation relating to bone cement. Our accrued litigation expense was adjusted in the fourth quarter of 2021 to reflect the portion of the settlement in excess of existing accruals, and our settlement payment to Heraeus will be made in agreed installments over an approximately three-year period, which began upon the execution of the settlement agreement.

Shareholder Derivative Actions: On June 14, 2019 and July 29, 2019, two shareholder derivative actions, Green v. Begley et al. and Detectives Endowment Association Annuity Fund v. Begley et al., were filed in the Court of Chancery in the State of Delaware. On October 2, 2019 and October 11, 2019, two additional shareholder derivative actions, Karp v. Begley et al. and DiGaudio v. Begley et al., were filed in the U.S. District Court for the District of Delaware. The plaintiff in each action seeks to maintain the action purportedly on our behalf against certain of our current and former directors and officers (the “individual defendants”) and certain former stockholders of ours who sold shares of our common stock in various secondary public offerings in 2016 (the “private equity fund defendants”). The plaintiff in each action alleges, among other things, breaches of fiduciary duties against the individual defendants and insider trading against two individual defendants and the private equity fund defendants based on allegations that the defendants violated federal securities laws by making materially false and/or misleading statements and/or omissions about our compliance with U.S. Food and Drug Administration (“FDA”) regulations and our ability to continue to accelerate our organic revenue growth rate in the second half of 2016. On June 4, 2020, the plaintiffs in the Chancery Court actions filed a consolidated amended complaint adding three new counts and expanding the scope of the alleged materially false statements. On September 14,

26

 

2020, the defendants filed motions to dismiss the Chancery Court actions. On August 15, 2021, the Chancery Court granted the defendants’ motion to dismiss and dismissed the Chancery Court actions with prejudice. On June 16, 2022, the Delaware Supreme Court affirmed the Chancery Court's dismissal. On September 14, 2020, the plaintiffs in the U.S. District Court actions filed a consolidated amended complaint adding certain details to their allegations. On October 9, 2020, the U.S. District Court granted the parties’ joint motion to stay the U.S. District Court actions pending resolution of the Chancery Court actions. Following the decision by the Delaware Supreme Court, on June 24, 2022, the plaintiffs in the U.S. District Court actions filed a notice of dismissal without prejudice. We have not recorded an expense related to damages in connection with these matters because any potential loss is not currently probable or reasonably estimable, and we are unable to reasonably estimate the range of loss, if any, that may result from these matters.

Regulatory Matters, Government Investigations and Other Matters

FDA warning letter: In August 2018, we received a warning letter from the FDA related to observed non-conformities with current good manufacturing practice requirements of the Quality System Regulation (21 CFR Part 820) (“QSR”) at our legacy Biomet manufacturing facility in Warsaw, Indiana (this facility is sometimes referred to in this report as the “Warsaw North Campus”). We have provided detailed responses to the FDA as to our corrective actions and will continue to work expeditiously to address the issues identified by the FDA during inspections in Warsaw. As of September 30, 2022, the Warsaw warning letter remained pending. Until the violations cited in the pending warning letter are corrected, we may be subject to additional regulatory action by the FDA, as described more fully below. Additionally, requests for Certificates to Foreign Governments may not be granted and premarket approval applications for Class III devices to which the QSR deviations are reasonably related will not be approved until the violations have been corrected. In addition to responding to the warning letter described above, we are in the process of addressing various FDA Form 483 inspectional observations at certain of our manufacturing facilities, including observations issued by the FDA following an inspection of the Warsaw North Campus in January 2020, which inspection the FDA has classified as Voluntary Action Indicated (“VAI”). The ultimate outcome of these matters is presently uncertain. Among other available regulatory actions, the FDA may impose operating restrictions, including a ceasing of operations, at one or more facilities, enjoining and restraining certain violations of applicable law pertaining to products, seizure of products and assessing civil or criminal penalties against our officers, employees or us. The FDA could also issue a corporate warning letter or a recidivist warning letter or negotiate the entry of a consent decree of permanent injunction with us. The FDA may also recommend prosecution by the U.S. Department of Justice. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and selling our products and could have a material adverse effect on our business, financial condition and results of operations.

Other Contingencies

Indemnifications: As part of the ZimVie spinoff, we agreed to indemnify ZimVie for certain legal and tax matters. Our responsibilities for legal indemnification are for specifically identified matters and are subject to a maximum amount, which is not significant for us. We have made an accrual based on an estimate of the possible loss for any legal indemnification. For tax matters, our indemnification is related to tax periods prior to the spinoff and any tax liabilities that may be incurred as part of the spinoff. We have maintained accruals based upon an estimate of any possible tax indemnifications.

Contractual obligations: We have entered into development, distribution and other contractual arrangements that may result in future payments dependent upon various events such as the achievement of certain product R&D milestones, sales milestones, or, at our discretion, maintenance of exclusive rights to distribute a product. Since there is uncertainty on the timing or whether such payments will have to be made, they have not been recognized on our condensed consolidated balance sheets. These estimated payments could range from $0 to approximately $400 million.

 

27

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the interim condensed consolidated financial statements and corresponding notes included elsewhere in this Form 10-Q. Certain percentages presented in this discussion and analysis are calculated from the underlying whole-dollar amounts and, therefore, may not recalculate from the rounded numbers used for disclosure purposes.

On March 1, 2022, we completed the spinoff of our spine and dental businesses into ZimVie. The historical results of our spine and dental businesses have been reflected as discontinued operations in our condensed consolidated financial statements through the date of the spinoff and in the prior year periods. In addition, as of December 31, 2021, the assets and liabilities associated with these businesses are classified as assets and liabilities of discontinued operations in our condensed consolidated balance sheet. See Note 2 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report for additional information. The discussions in the following discussion and analysis are presented on a continuing operations basis.

Executive Level Overview

Impact of the COVID-19 Global Pandemic

Our results continue to be impacted by the COVID-19 global pandemic. The vast majority of our net sales are derived from products used in elective surgical procedures that have typically declined during surges of the virus as governments and healthcare systems take actions in an effort to prevent the spread and provide sufficient hospital beds and other resources for COVID-19 patients. Additionally, we believe that staffing shortages at hospitals have contributed to the deferral of elective surgical procedures. In the nine-month period ended September 30, 2022, the Omicron variant resulted in fewer elective surgical procedures earlier in the year, but then we saw recovery in procedures as the surge began to subside later in the first quarter and through the second quarter. In the third quarter of 2022, we continued to see improved recovery in the number of elective surgical procedures performed.

Results for the Three and Nine-Month Periods ended September 30, 2022

Our net sales decreased by 0.9 percent and increased by 1.3 percent in the three and nine-month periods ended September 30, 2022, respectively, when compared to the same prior year periods. Our net sales in the three and nine-month periods ended September 30, 2022 were tempered by a negative 5.9 percent and a negative 4.7 percent effect, respectively, from changes in foreign currency exchange rates on year-over-year sales. We continued to see the return of elective surgical procedures across most markets when compared to the prior year three-month period being negatively affected by the Delta variant and staffing shortages at hospitals and the prior year nine-month period being negatively affected by a surge of the COVID-19 virus in early 2021 before vaccines were widely available and later in the period by the Delta variant. Our net earnings were $194.0 million and $361.9 million in the three and nine-month periods ended September 30, 2022, respectively, compared to $145.6 million and $485.6 million in the same prior year periods, respectively. The increase in net earnings in the three-month period ended September 30, 2022 when compared to the same prior year period was driven by a decline in litigation-related expenses of $48.8 million in the three-month period ended September 30, 2022 when compared to the same 2021 period, and a tax benefit of approximately $81 million recognized in the 2022 period from a final agreement with Swiss authorities for certain tax years. The decline in net earnings in the nine-month period ended September 30, 2022 when compared to the same prior year period was primarily due to losses from discontinued operations from costs related to the ZimVie spinoff, an unrealized investment loss of $114.3 million due to a decline in the value of our investment in ZimVie, higher restructuring charges, and higher spending in travel, medical training and education and other areas as certain activities started to return to pre-pandemic levels. These favorable factors were partially offset by the fact that the 2021 period included $65.0 million of charges related to certain agreements we entered into to gain access to or acquire third-party in-process research and development (“IPR&D”) projects.

2022 Outlook

In the fourth quarter, we believe that COVID-19 and staffing shortages will continue to negatively affect net sales, but to a lesser degree than what we experienced in 2021 and early 2022. However, we estimate that if foreign currency exchange rates stay at recent levels, net sales in the fourth quarter when compared to the same prior year period will be negatively affected in the mid-single digits. For expenses, we expect that supply chain and inflation pressures will result in higher expenses when compared to 2021. However, we anticipate these higher expenses will be partially offset by savings from our restructuring programs. We continue to monitor for further consequences of continuing uncertainty relating to the Russian invasion of Ukraine, China-Taiwan relations and other adverse global events, any of which could change our outlook.

 

28

 

Results of Operations

We review sales by two geographies, the United States and International, and by the following product categories: Knees; Hips; S.E.T. (Sports Medicine, Extremities, Trauma, Craniomaxillofacial and Thoracic); and Other. This sales analysis differs from our reportable operating segments, which are based upon our senior management organizational structure and how we allocate resources toward achieving operating profit goals. We review sales by these geographies because the underlying market trends in any particular geography tend to be similar across product categories, because we primarily sell the same products in all geographies and many of our competitors publicly report in this manner. Our business is seasonal in nature to some extent, as many of our products are used in elective surgical procedures, which typically decline during the summer months and can increase at the end of the year once annual deductibles have been met on health insurance plans. This seasonal pattern was disrupted in 2020 and 2021 due to COVID-19 as our net sales were influenced by the infection levels and precautions taken to prevent the spread in a particular location. We estimate our 2022 results have started to return to pre-pandemic seasonal patterns.

Net Sales by Geography

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

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2022

 

 

2021

 

 

% Inc / (Dec)

 

 

United States

 

$

973.0

 

 

$

942.6

 

 

 

3.2

 

 %

International

 

 

696.8

 

 

 

742.8

 

 

 

(6.2

)

 

Total

 

$

1,669.8

 

 

$

1,685.4

 

 

 

(0.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2022

 

 

2021

 

 

% Inc / (Dec)

 

 

United States

 

$

2,931.8

 

 

$

2,835.9

 

 

 

3.4

 

 %

International

 

 

2,183.0

 

 

 

2,214.2

 

 

 

(1.4

)

 

Total

 

$

5,114.8

 

 

$

5,050.1

 

 

 

1.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales by Product Category

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

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2022

 

 

2021

 

 

% Inc / (Dec)

 

 

Knees

 

$

657.0

 

 

$

647.9

 

 

 

1.4

 

%

Hips

 

 

468.0

 

 

 

453.9

 

 

 

3.1

 

 

S.E.T.

 

 

409.4

 

 

 

437.6

 

 

 

(6.4

)

 

Other

 

 

135.4

 

 

 

146.0

 

 

 

(7.2

)

 

Total

 

$

1,669.8

 

 

$

1,685.4

 

 

 

(0.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2022

 

 

2021

 

 

% Inc / (Dec)

 

 

Knees

 

$

2,024.7

 

 

$

1,927.8

 

 

 

5.0

 

 %

Hips

 

 

1,406.2

 

 

 

1,375.4

 

 

 

2.2

 

 

S.E.T.

 

 

1,272.6

 

 

 

1,317.3

 

 

 

(3.4

)

 

Other

 

 

411.3

 

 

 

429.6

 

 

 

(4.3

)

 

Total

 

$

5,114.8

 

 

$

5,050.1

 

 

 

1.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

 

The following table presents our net sales by geography for our Knees and Hips product categories, which represent our most significant product categories (dollars in millions):

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

2022

 

 

2021

 

 

% Inc / (Dec)

 

 

 

2022

 

 

2021

 

 

% Inc

 

 

Knees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

389.7

 

 

$

363.1

 

 

 

7.3

 

%

 

$

1,167.6

 

 

$

1,083.9

 

 

 

7.7

 

%

International

 

 

267.3

 

 

 

284.8

 

 

 

(6.2

)

 

 

 

857.1

 

 

 

843.9

 

 

 

1.6

 

 

Total

 

$

657.0

 

 

$

647.9

 

 

 

1.4

 

 

 

$

2,024.7

 

 

$

1,927.8

 

 

 

5.0

 

 

Hips

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

235.6

 

 

$

223.6

 

 

 

5.3

 

%

 

$

707.7

 

 

$

682.3

 

 

 

3.7

 

%

International

 

 

232.4

 

 

 

230.3

 

 

 

0.9

 

 

 

 

698.5

 

 

 

693.1

 

 

 

0.8

 

 

Total

 

$

468.0

 

 

$

453.9

 

 

 

3.1

 

 

 

$

1,406.2

 

 

$

1,375.4

 

 

 

2.2

 

 

 

Demand (Volume and Mix) Trends

 

Changes in volume and mix of product sales had positive effects of 6.4 percent and 7.4 percent on year-over-year sales during the three and nine-month periods ended September 30, 2022, respectively. We saw recovery of elective surgical procedures, most notably in international markets, driving volume growth.

Pricing Trends

Global selling prices had negative effects of 1.4 percent on year-over-year sales during both the three and nine-month periods ended September 30, 2022. The majority of countries in which we operate continue to experience pricing pressure from governmental healthcare cost containment efforts and from local hospitals and health systems. Additionally, pricing was negatively affected in China by a nationwide volume-based procurement (“VBP”) process being implemented.

Foreign Currency Exchange Rates

For the three and nine-month periods ended September 30, 2022, changes in foreign currency exchange rates had negative effects of 5.9 percent and 4.7 percent, respectively, on year-over-year sales. If foreign currency exchange rates remain at levels consistent with recent rates, we estimate there will be a negative impact of approximately 5.5 percent on full-year 2022 sales.

Geography

The 3.2 percent and 3.4 percent net sales growth in the U.S. in the three and nine-month periods ended September 30, 2022, respectively, was driven by recovery in surgical procedures as COVID-19 cases subsided, especially in the Knees and Hips categories. Internationally, net sales declined by 6.2 percent and 1.4 percent during the three and nine-month periods ended September 30, 2022, respectively. This decline was driven by the negative impacts on International sales of 13.5 percent and 10.6 percent in the three and nine-month periods ended September 30, 2022, respectively, due to changes in foreign currency exchange rates. Absent the effect of changes in foreign currency exchange rates, most of our markets internationally experienced demand (volume and mix) growth from recovery in surgical procedures.

Product Categories

Knees and Hips net sales grew 1.4 percent and 3.1 percent, respectively, in the three-month period ended September 30, 2022, respectively, when compared to the same prior year period. In the nine-month period ended September 30, 2022, Knees and Hips net sales grew 5.0 percent and 2.2 percent, respectively, when compared to the same prior year period. The net sales increases were due to the recovery in elective surgical procedures and new product introductions. Knees net sales were negatively affected by 5.8 percent and 4.8 percent in the three and nine-month periods ended September 30, 2022, respectively, due to changes in foreign currency exchange rates. Hips net sales were negatively affected by 7.4 percent and 5.7 percent in the three and nine-month periods ended September 30, 2022, respectively, due to changes in foreign currency exchange rates. S.E.T. net sales declines were due to the negative effects of changes in foreign currency exchange rates, lower trauma product net sales partially due to VBP implementation and unfavorable changes in reimbursement for certain restorative therapy products.

30

 

Expenses as a Percentage of Net Sales

 

 

Three Months Ended

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

% Inc /

 

 

September 30,

 

 

% Inc /

 

 

 

 

2022

 

 

 

2021

 

 

 

(Dec)

 

 

2022

 

 

2021

 

 

(Dec)

 

 

Cost of products sold, excluding intangible asset amortization

 

 

29.2

 

%

 

 

29.2

 

%

 

 

-

 

%

 

29.3

 

%

 

28.2

 

%

 

1.1

 

%

Intangible asset amortization

 

 

7.9

 

 

 

 

7.8

 

 

 

 

0.1

 

 

 

7.7

 

 

 

7.9

 

 

 

(0.2

)

 

Research and development

 

 

6.1

 

 

 

 

5.6

 

 

 

 

0.5

 

 

 

5.8

 

 

 

6.7

 

 

 

(0.9

)

 

Selling, general and administrative

 

 

39.2

 

 

 

 

40.6

 

 

 

 

(1.4

)

 

 

39.8

 

 

 

40.4

 

 

 

(0.6

)

 

Intangible asset impairment

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

0.1

 

 

 

0.3

 

 

 

(0.2

)

 

Restructuring and other cost reduction initiatives

 

 

1.7

 

 

 

 

1.3

 

 

 

 

0.4

 

 

 

2.5

 

 

 

1.2

 

 

 

1.3

 

 

Quality remediation

 

 

0.5

 

 

 

 

0.7

 

 

 

 

(0.2

)

 

 

0.4

 

 

 

0.6

 

 

 

(0.2

)

 

Acquisition, integration, divestiture and related

 

 

0.7

 

 

 

 

0.4

 

 

 

 

0.3

 

 

 

0.2

 

 

 

0.2

 

 

 

-

 

 

Operating profit

 

 

14.7

 

 

 

 

14.4

 

 

 

 

0.3

 

 

 

14.2

 

 

 

14.4

 

 

 

(0.2

)

 

 

Cost of products sold as a percentage of net sales was flat for the three-month period ended September 30, 2022 compared to the same prior year period. In the 2022 period, costs of products sold as a percentage of net sales increased due to inflationary cost pressures and lower average selling prices. However, these unfavorable items were partially offset by hedge gains recognized in the current year period as part of our hedging program compared to hedge losses in the prior year period, as well as the fact that the 2021 period experienced lower than normal production at certain facilities which resulted in fixed overhead costs being expensed immediately.

 

The increase in cost of products sold as a percentage of net sales for the nine-month period ended September 30, 2022 compared to the same prior year period was primarily due to inflationary cost pressures and lower average selling prices. These unfavorable items were partially offset by hedge gains recognized in the current year period as part of our hedging program compared to hedge losses in the prior year period.

 

Intangible asset amortization expense was similar in both amount and as a percentage of net sales in the three and nine-month periods ended September 30, 2022 when compared to the same prior year periods.

R&D expenses increased in amount and as a percentage of net sales in the three-month period ended September 30, 2022, but decreased in amount and as a percentage of sales in the nine-month period ended September 30, 2022 when compared to the same prior year periods. In the three-month period ended September 30, 2022, the increase was driven by higher personnel-related costs and higher spending on our initial compliance with the European Union Medical Device Regulation. In the nine-month period ended September 30, 2022, the decline was due to certain agreements we entered into in the prior year period to gain access to or acquire third-party IPR&D projects that resulted in charges of $65.0 million. We did not enter into any similar agreements in the current year period.

Selling, general and administrative (“SG&A”) expenses decreased in amount and as a percentage of net sales in the three and nine-month periods ended September 30, 2022 when compared to the same prior year periods. The decline in the three-month period ended September 30, 2022 was a result of a decline in litigation-related expenses of $48.8 million when compared to the 2021 period, and from savings from our 2021 Restructuring Plan.

The decline in the nine-month period ended September 30, 2022 was primarily due to a decline in litigation-related expenses of $23.8 million when compared to the 2021 period, and from savings from our 2021 Restructuring Plan. These favorable factors were partially offset by increased bad debt charges primarily caused by the Russia/Ukraine conflict, and higher travel and medical training and education costs in the 2022 period as some of such activities have resumed as the pandemic has receded.

As a result of the invasion of Ukraine by Russia, economic sanctions and export controls were imposed by much of the world on Russian financial institutions and businesses. Our operations in Russia consist primarily of local commercial activities, including sales and customer support. We do not have direct operations in Ukraine. Our net sales in Russia and Ukraine for the year ended December 31, 2021 and three and nine-month periods ended September 30, 2022 were less than 1 percent of our consolidated net sales. Therefore, the ongoing conflict and economic sanctions are not expected to have a significant effect on our results of operations or financial position. The bad debt charges for expected credit losses in Russia and Ukraine resulted in a significant portion of our accounts receivable from customers in these countries being impaired. In addition to accounts receivable, we also have inventory and

31

 

instruments that could require impairment if our business in Russia deteriorates more than our current expectations; however, any such amounts are not expected to be material. See Part II, Item 1A “Risk Factors” for additional risks related to this conflict.

In December of 2021 and 2019, we initiated restructuring programs. The December 2021 restructuring program is intended to reorganize our operations due to the spinoff of ZimVie with an objective of reducing costs. The December 2019 restructuring program has an objective of reducing costs to allow us to invest in higher priority growth opportunities. We recognized expenses of $28.3 million and $22.5 million in the three-month periods ended September 30, 2022 and 2021, respectively, and $129.2 million and $62.6 million in the nine-month periods ended September 30, 2022 and 2021, respectively, primarily related to employee termination benefits, sales agent contract terminations, and consulting and project management expenses associated with these programs. The expenses were higher in the 2022 periods due to additional expenses from the December 2021 restructuring program that had just been initiated. For more information regarding these charges, see Note 5 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report.

We continue to incur quality remediation expenses to complete our remediation milestones that address inspectional observations on Form 483 and a Warning Letter issued by the FDA at our Warsaw North Campus facility, among other matters.

Acquisition, integration, divestiture and related increased in the three-month period ended September 30, 2022 and decreased in the nine-month period ended September 30, 2022 when compared to the same prior year periods. The increase in the three-month period ended September 30, 2022 was primarily due to an impairment of a leased asset that was historically utilized by ZimVie, but was assigned back to us post-separation. The decline in the nine-month period ended September 30, 2022 was primarily due to a reduction in contingent consideration liabilities from previous acquisitions.

Other (Expense) Income, Net, Interest Expense, Net, and Income Taxes

In the three-month period ended September 30, 2022 we incurred a loss of $25.4 million in our other (expense) income, net financial statement line item compared to a gain of $0.3 million in the same prior year period. The loss was primarily due to a $30.0 million loss on our investment in ZimVie. In the nine-month period ended September 30, 2022 we incurred a loss of $124.1 million in our other (expense) income, net financial statement line item compared to a gain of $16.0 million in the same prior year period. The loss was primarily due to a $114.3 million loss on our investment in ZimVie.

Interest expense, net, decreased in the three and nine-month periods ended September 30, 2022 when compared to the same prior year periods. The declines were primarily from using debt that we issued in the fourth quarter of 2021, along with cash on hand, to repurchase portions of outstanding notes with higher interest rates. Additionally, interest expense, net was lower due to additional debt paydown.

In the three and nine-month periods ended September 30, 2022, our effective tax rate (“ETR”) was negative 9.3 percent and positive 11.9 percent, respectively, compared to positive 14.8 percent and positive 14.2 percent in the three and nine-month periods ended September 30, 2021, respectively. The negative 9.3 percent and 11.9 percent ETR in the three and nine-month periods ended September 30, 2022, respectively, was primarily driven by a favorable tax audit settlement and finalization of the Swiss TRAF step-up, which was partially offset by the loss on our investment in ZimVie which is not deductible for tax purposes. The 14.8 percent ETR in the three-month period ended September 30, 2021, was primarily driven by the foreign rate differential as our foreign locations have lower tax rates than the U.S. and favorable changes in our return to provision estimates, partially offset by unfavorable tax rate changes. The 14.2 percent ETR in the nine-month period ended September 30, 2021, was the result of the foreign rate differential, favorable return to provision changes in estimate, unfavorable tax rate changes, favorable discrete adjustments from the filing of Swiss tax returns and an excess tax benefit related to stock-based compensation. Absent discrete tax events, we expect our future ETR will be lower than the U.S. corporate income tax rate of 21.0 percent due to our mix of earnings between U.S. and foreign locations, which have lower corporate income tax rates. Our ETR in future periods could also potentially be impacted by: changes in our mix of pre-tax earnings; changes in tax rates, tax laws or their interpretation; the outcome of various federal, state and foreign audits; and the expiration of certain statutes of limitations. Currently, we cannot reasonably estimate the impact of these items on our financial results.

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Segment Operating Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit as a

 

 

 

 

Net Sales

 

 

Operating Profit

 

 

Percentage of Net Sales

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

(dollars in millions)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

Americas

 

$

1,045.1

 

 

$

1,009.3

 

 

$

430.8

 

 

$

422.2

 

 

 

41.2

 

%

 

41.8

 

%

EMEA

 

 

319.3

 

 

 

354.5

 

 

 

80.2

 

 

 

86.9

 

 

 

25.1

 

 

 

24.5

 

 

Asia Pacific

 

 

305.4

 

 

 

321.6

 

 

 

100.5

 

 

 

106.7

 

 

 

32.9

 

 

 

33.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit as a

 

 

 

 

Net Sales

 

 

Operating Profit

 

 

Percentage of Net Sales

 

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

(dollars in millions)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

Americas

 

$

3,142.1

 

 

$

3,013.7

 

 

$

1,309.6

 

 

$

1,254.7

 

 

 

41.7

 

%

 

41.6

 

%

EMEA

 

 

1,079.1

 

 

 

1,065.7

 

 

 

284.3

 

 

 

261.0

 

 

 

26.3

 

 

 

24.5

 

 

Asia Pacific

 

 

893.6

 

 

 

970.7

 

 

 

301.8

 

 

 

325.9

 

 

 

33.8

 

 

 

33.6

 

 

 

Americas

In the Americas, operating profit increased in the three and nine-month periods ended September 30, 2022 when compared to the same prior year periods due to higher net sales driven by continued recovery of elective surgical procedures. In the three-month period ended September 30, 2022, operating profit as a percentage of net sales declined when compared to the same prior year period due to higher R&D costs. In the nine-month period ended September 30, 2022, operating profit as a percentage of net sales increased slightly as savings from our restructuring programs offset higher R&D costs.

 

EMEA

In EMEA, operating profit declined in the three-month period ended September 30, 2022 when compared to the same prior year period, but increased in the nine-month period ended September 30, 2022 when compared to the same prior year period. Operating profit declined in the 2022 three-month period primarily due to the decline in net sales from changes in foreign currency exchange rates and higher bad debt expense. However, operating profit as a percentage of net sales increased in the 2022 three-month period due to our hedging program as we recognized hedge gains, which minimized the negative effects on segment operating profit. In the 2022 nine-month period operating profit and operating profit as a percentage of net sales increased due to an increase in net sales, savings from our restructuring programs and hedge gains from our hedging programs more than offset higher bad debt, travel and medical training and education expenses.

 

Asia Pacific

In Asia Pacific, operating profit decreased in both the three and nine-month periods ended September 30, 2022 when compared to the same prior year periods while operating profit as a percentage of net sales changed minimally in the 2022 periods when compared to the same prior year periods. The Asia Pacific declines in operating profit were primarily driven by lower net sales due to changes in foreign currency exchange rates and by the China government implementing a nationwide volume-based procurement process in 2022. These unfavorable factors were partially offset by savings from our restructuring programs and hedge gains from our hedging programs. In addition, in the 2022 nine-month period, China experienced lockdowns in the first quarter that negatively affected net sales.

 

Liquidity and Capital Resources

 

As of September 30, 2022, we had $545.4 million in cash and cash equivalents. In addition, we had $1.0 billion available to borrow under our 2022 364-Day Credit Agreement that matures on August 18, 2023, and $1.5 billion available under our 2022 Five-Year Revolving Facility that matures on August 19, 2027. The terms of the 2022 364-Day Credit Agreement and the 2022 Five-Year Revolving Facility are described further in Note 9 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report.

 

We believe that cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our revolving credit facilities will be sufficient to meet our ongoing liquidity requirements for at least the next twelve months. At this time, we do not anticipate needing to borrow further against our revolving credit facilities to fund our operations. However, due to the continued

33

 

uncertainties related to the COVID-19 pandemic, it is possible our needs may change. Further, there can be no assurance that, if needed, we will be able to secure additional financing on terms favorable to us, if at all.

 

Sources of Liquidity

Cash flows provided by operating activities from continuing operations were $1,112.0 million in the nine-month period ended September 30, 2022, compared to $1,066.7 million in the same prior year period. The increase in the 2022 period was driven by lower investments in inventory when compared to the 2021 period as well as the 2021 period included payments related to certain IPR&D agreements. These favorable cash flows were partially offset by increased payments under our restructuring programs in the nine-month period ended September 30, 2022 when compared to the same prior year period.

Cash flows used in investing activities from continuing operations were $409.5 million in the nine-month period ended September 30, 2022, compared to $319.3 million in the same prior year period. Instrument and property, plant and equipment additions reflected ongoing investments in our product portfolio, optimization of our manufacturing and logistics networks and investments in enterprise resource planning software. The nine-month period ended September 30, 2022 also reflects investments for an acquisition as well as other investments for acquiring intellectual property related to products that have been commercialized.

Cash flows used in financing activities from continuing operations were $462.3 million in the nine-month period ended September 30, 2022, compared to $650.2 million in the same prior year period. At the ZimVie spinoff date, we received $540.6 million as partial consideration for the contribution of assets in connection with the separation. We used these proceeds, together with borrowings on our 2021 Five-Year Revolving Facility and cash on hand to redeem the full $750.0 million on senior notes that were due April 1, 2022. We subsequently repaid all borrowings under the 2021 Five-Year Revolving Facility. In the third quarter of 2022, we repaid $242.9 million outstanding on our Japanese term loans, and we borrowed $83.0 million under the Short-Term Term Loan in connection with our plans to transfer our ZimVie shares pursuant to the Forward Exchange Agreement. In the 2021 period, we paid the remaining $500.0 million on senior notes which matured in the period. We also had a deferred business combination payment of $100.0 million that was paid in the 2021 period under the terms of the purchase agreement.

We place our cash and cash equivalents in highly-rated financial institutions and limit the amount of credit exposure to any one entity. We invest only in high-quality financial instruments in accordance with our internal investment policy.

As of September 30, 2022, $292.1 million of our cash and cash equivalents were held in jurisdictions outside of the U.S. Of this amount, $12.6 million is denominated in U.S. Dollars and, therefore, bears no foreign currency translation risk. The balance of these assets is denominated in currencies of the various countries where we operate. We intend to repatriate $5.0 to $6.0 billion of unremitted earnings in future years.

Our concentrations of credit risks with respect to trade accounts receivable are limited due to the large number of customers and their dispersion across a number of geographic areas and by frequent monitoring of the creditworthiness of the customers to whom credit is granted in the normal course of business. Substantially all of our trade receivables are concentrated in the public and private hospital and healthcare industry in the U.S. and internationally or with distributors or dealers who operate in international markets and, accordingly, are exposed to their respective business, economic and country-specific variables. We have continued to collect on outstanding receivables throughout the pandemic. However, we are closely monitoring the financial stability of our customers and the country-specific risks, including those customers in markets with hospitals sponsored by the government.

Material Cash Requirements from Known Contractual and Other Obligations

At September 30, 2022, we had outstanding debt of $5,714.3 million, of which $659.1 million was classified as current debt. Of our current debt, $489.8 million of Euro denominated senior notes mature on December 13, 2022, $86.3 million of senior notes mature on March 19, 2023 and the $83.0 million Short-Term Term Loan is expected to settle in the first quarter of 2023. We believe we can satisfy these debt obligations with cash generated from our operations, by issuing new debt, and/or by borrowing on our revolving credit facilities.

For additional information on our debt, including types of debt, maturity dates, interest rates, debt covenants and available revolving credit facilities, see Note 9 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report.

34

 

In February, May and August 2022, our Board of Directors declared a quarterly cash dividend of $0.24 per share. We expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the Board of Directors and may be adjusted as business needs or market conditions change.

In February 2016, our Board of Directors authorized a new $1.0 billion share repurchase program effective March 1, 2016, with no expiration date. As of September 30, 2022, all $1.0 billion remained authorized.

As discussed in Note 5 to our interim condensed consolidated financial statements in Part I, Item 1 of this report, we have a 2021 Restructuring Plan and a 2019 Restructuring Plan. The 2021 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $220 million, of which approximately $125 million was incurred through September 30, 2022. We expect to reduce gross annual pre-tax operating expenses by approximately $190 million relative to the 2021 baseline expenses by the end of 2024 as program benefits under the 2021 Restructuring Plan are realized. The 2019 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $350 million to $400 million, of which approximately $240 million was incurred through September 30, 2022. We expect to reduce gross annual pre-tax operating expenses by approximately $180 million to $280 million relative to the 2019 baseline expenses by the end of 2023 as program benefits under the 2019 Restructuring Plan are realized.

As discussed in Note 13 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report, the IRS has issued proposed adjustments for years 2010 through 2012, as well as proposed adjustments for years 2013 through 2015, reallocating profits between certain of our U.S. and foreign subsidiaries. We have disputed these proposed adjustments and intend to continue to vigorously defend our positions. Although the ultimate timing for resolution of the disputed tax issues is uncertain, future payments may be significant to our operating cash flows.

As discussed in Note 16 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report, we are involved in various litigation matters. We estimate the total liabilities for all litigation matters was $373.0 million as of September 30, 2022. However, litigation is inherently uncertain, and upon resolution of any of these uncertainties, we may incur charges in excess of these estimates, and may in the future incur other material judgments or enter into other material settlements of claims. We expect to pay these liabilities over the next few years. Additionally, we have entered into development, distribution and other contractual arrangements that may result in future payments dependent upon various events such as the achievement of certain product R&D milestones, sales milestones, or, at our discretion, maintenance of exclusive rights to distribute a product. Since there is uncertainty on the timing or whether such payments will have to be made, they have not been recognized on our condensed consolidated balance sheets. These estimated payments could range from $0 to approximately $400 million.

Recent Accounting Pronouncements

Information pertaining to recent accounting pronouncements can be found in Note 3 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report.

Critical Accounting Estimates

The preparation of our financial statements is affected by the selection and application of accounting policies and methods, and also requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. There were no changes in the three-month period ended September 30, 2022 to our critical accounting estimates as described in our Annual Report on Form 10-K for the year ended December 31, 2021.

Cautionary Note Regarding Forward-Looking Statements and Factors That May Affect Future Results

This quarterly report contains certain statements that are forward-looking statements within the meaning of federal securities laws. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this report, the words “may,” “will,” “can,” “should,” “would,” “could,” “anticipate,” “expect,” “plan,” “seek,” “believe,” “are confident that,” “look forward to,” “predict,” “estimate,” “potential,” “project,” “target,” “forecast,” “see,” “intend,” “design,” “strive,” “strategy,” “future,” “opportunity,” “assume,” “guide,” “position,” “continue” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on current beliefs, expectations and assumptions that are subject to significant risks, uncertainties and changes in circumstances that could cause actual results to differ materially from such forward-looking statements. These risks, uncertainties and changes in circumstances include, but are not limited to:

•
the effects of the COVID-19 global pandemic and other adverse public health developments on the global economy, our business and operations and the business and operations of our suppliers and customers, including the deferral of elective surgical procedures and our ability to collect accounts receivable, the failure of vaccine rollouts and other strategies to

35

 

mitigate or reverse the impacts of the COVID-19 pandemic, the emergence of new pandemic variants, and the failure of elective surgical procedures to recover at the levels or on the timeline anticipated;
•
the risks and uncertainties related to our ability to successfully execute our restructuring plans;
•
our ability to attract, retain and develop the highly skilled employees we need to support our business;
•
the success of our quality and operational excellence initiatives, including ongoing quality remediation efforts at our Warsaw North Campus facility;
•
the ability to remediate matters identified in inspectional observations or warning letters issued by the FDA, while continuing to satisfy the demand for our products;
•
the risks and uncertainties associated with the spinoff of ZimVie Inc., including, without limitation, the tax-free nature of the transaction, the tax-efficient nature of any subsequent disposal of the ZimVie Inc. common stock we retain, possible disruptions in our relationships with customers, suppliers and other business partners, and the possibility that the anticipated benefits and synergies of the transaction, strategic and competitive advantages, and future growth and other opportunities will not be realized within the expected time periods or at all;
•
the impact of substantial indebtedness on our ability to service our debt obligations and/or refinance amounts outstanding under our debt obligations at maturity on terms favorable to us, or at all;
•
the ability to retain the employees, independent agents and distributors who market our products;
•
dependence on a limited number of suppliers for key raw materials and outsourced activities;
•
the possibility that the anticipated synergies and other benefits from mergers and acquisitions will not be realized, or will not be realized within the expected time periods;
•
the risks and uncertainties related to our ability to successfully integrate the operations, products, employees and distributors of acquired companies;
•
the effect of the potential disruption of management’s attention from ongoing business operations due to integration matters related to mergers and acquisitions;
•
the effect of mergers and acquisitions on our relationships with customers, suppliers and lenders and on our operating results and businesses generally;
•
challenges relating to changes in and compliance with governmental laws and regulations affecting our U.S. and international businesses, including regulations of the FDA and foreign government regulators, such as more stringent requirements for regulatory clearance of products;
•
the outcome of government and regulatory investigations;
•
competition;
•
pricing pressures;
•
changes in customer demand for our products and services caused by demographic changes or other factors;
•
the impact of healthcare reform measures;
•
reductions in reimbursement levels by third-party payors and other cost containment efforts sponsored by government agencies, legislative bodies, the private sector and healthcare purchasing organizations, including the volume-based procurement in China;
•
dependence on new product development, technological advances and innovation;
•
shifts in the product category or regional sales mix of our products and services;
•
supply and prices of raw materials, especially of titanium and other inputs used in our products;
•
control of costs and expenses;
•
the ability to obtain and maintain adequate intellectual property protection;
•
breaches or failures of our information technology systems or products, including by cyber-attack, unauthorized access or theft;
•
the ability to form and implement alliances;
•
changes in tax obligations arising from tax reform measures, including European Union rules on state aid, or examinations by tax authorities;
•
product liability, intellectual property and commercial litigation losses;

36

 

•
changes in general industry and market conditions, including domestic and international growth rates;
•
changes in general domestic and international economic conditions, including interest rate and currency exchange rate fluctuations;
•
the domestic and international business impact of political, social and economic instability, tariffs, trade embargoes, sanctions, wars, disputes and other conflicts;
•
the effects of inflation, including the effects of different rates of inflation in different countries, on our costs, on the costs of our products and on demand for our products;
•
the effects of supply chain disruptions; and
•
the impact of the ongoing and potential new financial and political uncertainty relating to the Russian-Ukrainian crisis, or which may emerge from other potential conflicts such as may arise involving China and Taiwan, including on our ability to operate in, export from or collect accounts receivable in affected countries.

Our Annual Report on Form 10-K for the year ended December 31, 2021 and this Quarterly Report on Form 10-Q contain detailed discussions of these and other important factors under the heading “Risk Factors.” You should understand that it is not possible to predict or identify all factors that could cause actual results to differ materially from forward-looking statements. Consequently, you should not consider any list or discussion of such factors to be a complete set of all potential risks or uncertainties.

Forward-looking statements speak only as of the date they are made and we expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Readers of this report are cautioned not to rely on these forward-looking statements since there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

37

 

Part II – Other Information

Information pertaining to legal proceedings can be found in Note 16 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report and is incorporated herein by reference.

Item 1A. Risk Factors

You should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”) and the factors discussed below, which could materially affect our business, financial condition and results of operations. Except as set forth below, there have been no material changes in those risk factors. The risks described in our 2021 Form 10-K and below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations. In addition, the COVID-19 pandemic could exacerbate or trigger other risks discussed in our 2021 Form 10-K and below, any of which could materially affect our business, financial condition and results of operations.

The risk factor in our 2021 Form 10-K entitled “We conduct a significant amount of our sales activity outside of the U.S., which subjects us to additional business risks and may cause our profitability to decline due to increased costs” is replaced in its entirety by the following:

We conduct a significant amount of our sales activity outside of the U.S., which subjects us to additional business risks and may cause our profitability to decline due to increased costs.

We sell our products in more than 100 countries, derived approximately 40 percent of our net sales in 2021 from outside the U.S. and have manufacturing operations in the U.S., Puerto Rico, Europe and China. We intend to continue to pursue growth opportunities in sales internationally, including in emerging markets, which could expose us to additional risks associated with international sales and operations. Our international operations are, and will continue to be, subject to a number of risks and potential costs, including:

•
changes in foreign medical reimbursement policies and programs;
•
changes in foreign regulatory requirements, such as more stringent requirements for regulatory clearance of products;
•
differing local product preferences and product requirements;
•
fluctuations in foreign currency exchange rates;
•
the effects of inflation, including the effects of different rates of inflation in different countries, on our costs and the costs of our products;
•
diminished protection of intellectual property in some countries outside of the U.S.;
•
trade protection measures, import or export requirements, new or increased tariffs, trade embargoes and sanctions and other trade barriers, which may prevent us from shipping products to or receiving products from a particular market, restrict our access to certain sources of raw materials and other inputs, increase our operating costs and disrupt our ability to collect payment for our products and services in particular markets;
•
foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S.;
•
complex data privacy and cybersecurity requirements and labor relations laws;
•
extraterritorial effects of U.S. laws such as the FCPA;
•
effects of foreign anti-corruption laws, such as the UK Bribery Act;
•
difficulty in staffing and managing foreign operations;
•
labor force instability;
•
potentially negative consequences from changes in tax laws; and
•
political, social and economic instability and uncertainty, including wars, other conflict and sovereign debt issues.

Violations of foreign laws or regulations could result in fines, criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business and damage to our reputation.

38

 

Wars and other conflicts may increase certain of these risks and may adversely affect our business and financial performance, including by limiting our ability to operate in, or export from, certain markets. Losing access to such markets or exports may have a material adverse effect on our business in the affected market, and may limit our ability to operate some of our businesses globally.

We anticipate that the effects of emerging, expanding and new conflicts, such as a possible expansion of the Russian-Ukrainian conflict or an expanded conflict involving China and Taiwan, would not be limited to the specific markets involved. For example, the U.S. and other countries have imposed sanctions on Russia, certain of its governmental bodies, certain businesses and certain individuals due to the invasion of Ukraine, and additional sanctions may continue to be imposed. Similar sanctions could be expected to emerge from other conflicts. Sanctions, and other civil, political and economic effects of the Russia-Ukraine crisis or of conflicts involving other countries, may have adverse impacts globally, including supply chain continuity disruption; inflationary pressures and increased costs of raw materials and inputs, especially titanium and other inputs for our products; manufacturing or shipping delays; increased shipping costs; inability to ship products to or from certain countries potentially resulting in an inability to sell certain products globally; and increased disruptions and delays on our ability to collect payment for our products and services in particular markets. While Russia and Ukraine do not constitute material portions of our business, a significant escalation or expansion of economic disruption or the conflict’s current scope, or the emergence or expansion of conflicts involving other actors, could adversely affect our results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

During the three-month period ended September 30, 2022, the Audit Committee of our Board of Directors approved the engagement of PricewaterhouseCoopers LLP, our independent registered public accounting firm, to perform certain non-audit services. This disclosure is made pursuant to Section 10A(i)(2) of the Exchange Act, as added by Section 202 of the Sarbanes-Oxley Act of 2002.F

39

 

Item 6. Exhibits

The following exhibits are filed or furnished as part of this report:

 

3.1

 

Restated Certificate of Incorporation of Zimmer Biomet Holdings, Inc., dated May 17, 2021 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed May 20, 2021)

 

 

 

3.2

 

Restated By-Laws of Zimmer Biomet Holdings, Inc., effective May 17, 2021 (incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed May 20, 2021)

 

 

 

10.1

 

Five-Year Revolving Credit Agreement, dated as of August 19, 2022, among Zimmer Biomet Holdings, Inc., the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed August 22, 2022)

 

 

 

10.2

 

364-Day Revolving Credit Agreement, dated as of August 19, 2022, among Zimmer Biomet Holdings, Inc., the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed August 22, 2022)

 

 

 

 21

 

List of Subsidiaries of Zimmer Biomet Holdings, Inc.

 

 

 

 31.1

 

Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 31.2

 

Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 32

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

 

 

40

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

ZIMMER BIOMET HOLDINGS, INC.

 

 

(Registrant)

 

 

 

 

 

Date: November 2, 2022

 

By:

 

/s/ Suketu Upadhyay

 

 

 

 

Suketu Upadhyay

 

 

 

 

Executive Vice President and Chief Financial Officer

 

 

 

 

(Principal Financial Officer)

 

 

 

 

 

Date: November 2, 2022

 

By:

 

/s/ Paul Stellato

 

 

 

 

Paul Stellato

 

 

 

 

Vice President, Controller and Chief Accounting Officer

 

 

 

 

(Principal Accounting Officer)

 

 

 

 

 

 

 

 

 

 

 

 

41