| • | unforeseen difficulties in integrating personnel and sales forces, operations, manufacturing, logistics, research and sales forces, operations, manufacturing, logistics, research and | | development, information technology, communications, purchasing, accounting, marketing, administration and other systems and processes; |
harmonizing and optimizing quality systems and operations;
diversion of financial and management resources from existing operations;
| • | difficulties harmonizing and optimizing quality systems and operations; |
unforeseen difficulties related to entering geographic regions where we do not have prior experience;
| • | diversion of financial and management resources from existing operations; |
potential loss of key employees;
| • | unforeseen difficulties related to entering geographic regions where we do not have prior experience; |
unforeseen liabilities associated with businesses acquired; and
| • | potential loss of key employees; |
inability to generate sufficient revenue or realize sufficient cost savings to offset acquisition or investment costs.
| • | unforeseen risks and liabilities associated with businesses acquired, including any unknown vulnerabilities in acquired technology or compromises of acquired data; and |
| • | inability to generate sufficient revenue or realize sufficient cost savings to offset acquisition or investment costs. |
As a result, if we fail to evaluate and execute acquisitions properly, we might not achieve the anticipated benefits of such acquisitions, and we may incur costs in excess of what we anticipate. These risks would likely be greater in the case of larger acquisitions. We incurred substantial additional indebtedness in connection with the Biomet and LDR mergers and may not be able to meet all of our debt obligations.
We incurred substantial additional indebtedness in connection with the Biomet and LDR Holding Corporation (“LDR”) mergers. At December 31, 2016, our total indebtedness was $11.2 billion, as compared to $1.4 billion at December 31, 2014. We funded the cash portion of the Biomet merger consideration, thepay-off of certain indebtedness of Biomet and the payment of transaction-related expenses through a combination of availablecash-on-hand and proceeds from debt financings, including proceeds from a $7.65 billion issuance of senior unsecured notes in March 2015 and borrowings of $3.0 billion under a five-year term loan in June 2015. In addition, in September 2016, we borrowed $750 million under a three-year unsecured term loan facility and utilized these funds to repay outstanding borrowings under our revolving facility incurred in connection with the acquisition of LDR. Also, in December 2016, we issued €1.0 billion aggregate principal amount of Euro-denominated senior notes and used the proceeds to repay a portion of the U.S. dollar-denominated senior notes issued in connection with the Biomet merger. As of December 31, 2016, our debt service obligations, comprised of principal and interest (excluding capital leases and equipment notes), during the next 12 months are expected to be $891.1 million. As a result of the increase in our debt, demands on our cash resources have increased. The increased level of debt could, among other things:
require us to dedicate a large portion of our cash flow from operations to the servicing and repayment of our debt, thereby reducing funds available for working capital, capital expenditures, research and development expenditures and other general corporate requirements;
limit our ability to obtain additional financing to fund future working capital, capital expenditures, research and development expenditures and other general corporate requirements;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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restrict our ability to make strategic acquisitions or dispositions or to exploit business opportunities;
place us at a competitive disadvantage compared to our competitors that have less debt;
adversely affect our credit rating, with the result that the cost of servicing our indebtedness might increase and our ability to obtain surety bonds could be impaired;
adversely affect the market price of our common stock; and
limit our ability to apply proceeds from a future offering or asset sale to purposes other than the servicing and repayment of debt.
If we fail to comply with healthcare fraud and abuse or data privacy and security laws and regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.
Our industry is subject to various federal, state and foreign laws and regulations pertaining to healthcare fraud and abuse, including the federal False Claims Act, the federal Anti-Kickback Statute, the federal Stark law, the federal Physician Payments Sunshine Act and similar state and foreign laws. In addition, we are subject to various federal and foreign laws concerning anti-corruption and anti-bribery matters, sales to countries or persons subject to economic sanctions and other matters affecting our international operations. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the U.S., exclusion from participation in government healthcare programs, including Medicare, Medicaid and Veterans Administration health programs. These laws are administered by, among others, the DOJ, theOIG-HHS, the SEC, the OFAC, the Bureau of Industry and Security of the U.S. Department of Commerce and state attorneys general.
We are also subject to federal, state and international data privacy and security laws and regulations that govern the collection, use, disclosure and protection of health-related and other personal information. Certain of our affiliates are subject to privacy and security regulations promulgated under HIPAA. The FDA also has issued guidance to which we may be subject concerning data security for medical devices.
International data protection laws, including the EU Data Protection Directive and member state implementing legislation, may also apply to some of our operations and restrict our ability to collect, analyze and transfer EU personal data. Moreover, the General Data Protection Regulation, anEU-wide regulation that will be fully enforceable by May 25, 2018, will introduce new data protection requirements in the EU and substantial fines for violations of the data protection rules.
The interpretation and enforcement of the laws and regulations described above are uncertain and subject to change.
If we fail to comply with the terms of the DPA that we entered into in January 2017, we may be subject to criminal prosecution and/or exclusion from federal healthcare programs.
On January 12, 2017, we resolved previously-disclosed FCPA matters involving Biomet and certain of its subsidiaries.
As part of the settlement, we entered into a DPA with the DOJ. A copy of the DPA is incorporated by reference as an exhibit to this report.
If we do not comply with the terms of the DPA, we could be subject to prosecution for violating the internal controls provisions of the FCPA and the conduct of Biomet and its subsidiaries described in the DPA, which conductpre-dated our acquisition of Biomet, as well as any new or continuing violations. We could also be subject to exclusion byOIG-HHS from participation in federal healthcare programs, including Medicaid and Medicare. Any of these events could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to various governmental regulations relating to the manufacturing, labeling and marketing of our products,non-compliance with which could adversely affect our business, financial condition and results of operations.
The medical devices we design, develop, manufacture and market are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. The process of obtaining regulatory approvals to market a medical device can be costly and time consuming and approvals might not be granted for future products on a timely basis, if at all. Delays in receipt of, or failure to obtain, approvals for future products could result in delayed realization of product revenues or in substantial additional costs.
Both before and after a product is commercially released, we have ongoing responsibilities under FDA regulations. Compliance with the FDA’s requirements, including the QSR, recordkeeping regulations, labeling and promotional requirements and adverse event reporting regulations, is subject to continual review and is monitored rigorously through periodic inspections by the FDA, which may result in observations on Form 483, and in some cases warning letters, that require corrective action, or other forms of enforcement. If the FDA were to conclude that we are not in compliance with applicable laws or regulations, or that any of our medical devices are ineffective or pose an unreasonable health risk, the FDA could ban such medical devices, detain or seize adulterated or misbranded medical devices, order a recall, repair, replacement, or refund of payment of such devices, refuse to grant pending premarket approval applications, refuse to provide certificates to foreign governments for exports, and/or require us to notify healthcare professionals and others that the devices present unreasonable risks of substantial harm to the public health. The FDA may also impose operating restrictions including a ceasing of operations, on one or more facilities, enjoin and restrain certain violations of applicable law pertaining to medical devices and assess civil or criminal penalties against our officers, employees or us. The FDA could also issue a corporate warning letter, a recidivist warning letter or a consent decree of permanent injunction. The FDA may also recommend prosecution to the DOJ. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and
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selling our products and could have a material adverse effect on our business, financial condition and results of operations.
In 2012, we received a warning letter from the FDA citing concerns relating to certain processes pertaining to products manufactured at our Ponce, Puerto Rico manufacturing facility. In June 2015, Biomet received a warning letter from the FDA that requested additional information to allow the FDA to evaluate the adequacy of Biomet’s responses to certain Form 483 observations issued following an inspection of Biomet’s Zhejiang, China manufacturing facility in January 2015. In May 2016, we received a warning letter from the FDA related to observednon-conformities with current good manufacturing practice requirements of the QSR at our facility in Montreal, Quebec, Canada. As of December 31, 2016, these warning letters remained pending. Until the violations are corrected, we may become subject to additional regulatory action by the FDA as described above, the FDA may refuse to grant premarket approval applications and/or the FDA may refuse to grant export certificates, any of which could have a material adverse effect on our business, financial condition and results of operations. Additional information regarding these and other FDA regulatory matters can be found in Note 20 to the consolidated financial statements.
Our products and operations are also often subject to the rules of industrial standards bodies, such as the International Standards Organization. If we fail to adequately address any of these regulations, our business could be harmed.
Interruption of our manufacturing operations could adversely affect our business, financial condition and results of operations. We have manufacturing sites all over the world. In some instances, however, the manufacturing of certain of our product lines is concentrated in one or more of our plants. Damage to one or more of our facilities from weather or natural disaster-related events, vulnerabilities in our technology, cyber-attacks against our information systems (such as ransomware attacks), or issues in our manufacturing arising from failure to follow specific internal protocols and procedures, compliance concerns relating to the QSR and Good Manufacturing Practice requirements, equipment breakdown or malfunction or other factors could adversely affect our ability to manufacture our products. In the event of an interruption in manufacturing, we may be unable to move quickly to alternate means of producing affected products or to meet customer demand. In the event of a significant interruption, for example, as a result of a failure to follow regulatory protocols and procedures, we may experience lengthy delays in resuming production of affected products due primarily to the need for regulatory approvals. As a result, we may experience loss of market share, which we may be unable to recapture, and harm to our reputation, which could adversely affect our business, financial condition and results of operations. Our success depends on our ability to effectively develop and market our products against those of our competitors.
We operate in a highly competitive environment. Our present or future products could be rendered obsolete or uneconomical by technological advances by one or more of our present or future competitors or by other therapies, including
biological therapies. To remain competitive, we must continue to develop and acquire new products and technologies. Competition is primarily on the basis of:
In markets outside of the U.S., other factors influence competition as well, including:
local distribution systems;
complex regulatory environments; and
differing medical philosophies and product preferences.
Our competitors may:
have greater financial, marketing and other resources than us;
respond more quickly to new or emerging technologies;
undertake more extensive marketing campaigns;
adopt more aggressive pricing policies; or
be more successful in attracting potential customers, employees and strategic partners.
Any of these factors, alone or in combination, could cause us to have difficulty maintaining or increasing sales of our products.
If we fail to retain the independent agents and distributors upon whom we rely heavily to market our products, customers may not buy our products and our revenue and profitability may decline.
Our marketing success in the U.S. and abroad depends significantly upon our agents’ and distributors’ sales and service expertise in the marketplace. Many of these agents have developed professional relationships with existing and potential customers because of the agents’ detailed knowledge of products and instruments. A loss of a significant number of our agents could have a material adverse effect on our business and results of operations.
If we do not introduce new products in a timely manner, our products may become obsolete over time, customers may not buy our products and our revenue and profitability may decline.
Demand for our products may change, in certain cases, in ways we may not anticipate because of:
slowing industry growth rates;
declines in the musculoskeletal implant market;
the introduction of new products and technologies;
evolving surgical philosophies; and
evolving industry standards.
Without the timely introduction of new products and enhancements, our products may become obsolete over time. If that happens, our revenue and operating results would suffer. The success of our new product offerings will depend on several factors, including our ability to:
properly identify and anticipate customer needs;
commercialize new products in a timely manner;
manufacture and deliver instruments and products in sufficient volumes on time;
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differentiate our offerings from competitors’ offerings;
achieve positive clinical outcomes for new products;
satisfy the increased demands by healthcare payors, providers and patients for shorter hospital stays, faster post-operative recovery and lower-cost procedures;
innovate and develop new materials, product designs and surgical techniques; and
provide adequate medical education relating to new products.
In addition, new materials, product designs and surgical techniques that we develop may not be accepted quickly, in some or all markets, because of, among other factors:
entrenched patterns of clinical practice;
the need for regulatory clearance; and
uncertainty with respect to third-party reimbursement.
Moreover, innovations generally require a substantial investment in research and development before we can determine their commercial viability and we may not have the financial resources necessary to fund the production. In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not produce revenue in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features.
If third-party payors decline to reimburse our customers for our products or reduce reimbursement levels, the demand for our products may decline and our ability to sell our products profitably may be harmed.
We sell our products and services to hospitals, doctors, dentists and other healthcare providers, all of which receive reimbursement for the healthcare services provided to their patients from third-party payors, such as domestic and international government programs, private insurance plans and managed care programs. These third-party payors may deny reimbursement if they determine that a device used in a procedure was not in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication. Third-party payors may also decline to reimburse for experimental procedures and devices.
In addition, third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for medical products and services. If third-party payors reduce reimbursement levels to hospitals and other healthcare providers for our products, demand for our products may decline, or we may experience increased pressure to reduce the prices of our products, which could have a material adverse effect on our sales and results of operations.
We have also experienced downward pressure on product pricing and other effects of healthcare reform in our international markets. If key participants in government healthcare systems reduce the reimbursement levels for our products, our sales and results of operations may be adversely affected.
The ongoing cost-containment efforts of healthcare purchasing organizations may have a material adverse effect on our results of operations.
Many customers for our products have formed group purchasing organizations in an effort to contain costs. Group purchasing organizations negotiate pricing arrangements with medical supply manufacturers and distributors, and these negotiated prices are made available to a group purchasing organization’s affiliated hospitals and other members. If we are not one of the providers selected by a group purchasing organization, affiliated hospitals and other members may be less likely to purchase our products, and, if the group purchasing organization has negotiated a strict compliance contract for another manufacturer’s products, we may be precluded from making sales to members of the group purchasing organization for the duration of the contractual arrangement. Our failure to respond to the cost-containment efforts of group purchasing organizations may cause us to lose market share to our competitors and could have a material adverse effect on our sales and results of operations.
We conduct a significant amount of our sales activity outside of the U.S., which subjects us to additional business risks and may cause our profitability to decline due to increased costs.
We sell our products in more than 100 countries and derived nearly 40 percent of our net sales in 2016 from outside the U.S. We intend to continue to pursue growth opportunities in sales internationally, including in emerging markets, which could expose us to additional risks associated with international sales and operations. Our international operations are, and will continue to be, subject to a number of risks and potential costs, including:
changes in foreign medical reimbursement policies and programs;
unexpected changes in foreign regulatory requirements;
differing local product preferences and product requirements;
fluctuations in foreign currency exchange rates;
diminished protection of intellectual property in some countries outside of the U.S.;
trade protection measures and import or export requirements that may prevent us from shipping products to a particular market and may increase our operating costs;
foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S.;
complex data privacy requirements and labor relations laws;
extraterritorial effects of U.S. laws such as the FCPA;
effects of foreign anti-corruption laws, such as the UK Bribery Act;
difficulty in staffing and managing foreign operations;
potentially negative consequences from changes in tax laws; and
political and economic instability.
Violations of foreign laws or regulations could result in fines, criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business and damage to our reputation.
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Disruptions in the supply of the materials and components used in manufacturing our products or the sterilization of our products by third-party suppliers could adversely affect our business, financial condition and results of operations and financial condition.operations. We purchase many of the materials and components used in manufacturing our products from third-party vendorssuppliers and we outsource some key manufacturing activities. Certain of these materials and components and outsourced activities can only be obtained from a single source or a limited number of sources due to quality considerations, expertise, costs or constraints resulting from regulatory requirements. In certain cases, we may not be able to establish additional or replacement vendorssuppliers for such materials or components or outsourced activities in a timely or cost effective manner, largely as a result of FDA regulations that require validation of materials and components prior to their use in our products and the complex nature of our and many of our vendors’suppliers' manufacturing processes. A reduction or interruption in the supply of materials or components used in manufacturing our products; an inability to timely develop and validate alternative sources if required; or a significant increase in the price of such materials or components could adversely affect our business, financial condition and results of operations. In addition, many of our products require sterilization prior to sale and we utilize a mix of internal resources and contract sterilizers to perform this service. To the extent we or our contract sterilizers are unable to sterilize our products, whether due to capacity, availability of materials for sterilization, regulatory or other constraints, including federal and state regulations on the use of ethylene oxide, we may be unable to transition to other contract sterilizers,
sterilizer locations or sterilization methods in a timely or cost effective manner or at all, which could have a material impact on our results of operations and financial condition. Moreover, we are subject to the SEC’s rule regarding disclosure of the use of certain minerals, known as “conflict minerals” (tantalum, tin and tungsten (or their ores) and gold), which are mined from the Democratic Republic of the Congo and adjoining countries. This rule could adversely affect the sourcing, availability and pricing of materials used in the manufacture of our products, which could adversely affect our manufacturing operations and our profitability. In addition, we are incurring additional costs to comply with this rule, including costs related to determining the source of any relevant minerals and metals used in our products. We have a complex supply chain and we may not be able to sufficiently verify the origins of the minerals and metals used in our products through our due diligence procedures. As a result, we may face reputational challenges with our customers and other stakeholders. We are subject to costly and complex laws and governmental regulations relating to the development, design, product standards, packaging, advertising, promotion, postmarket surveillance,manufacturing, labeling and marketing of our products, non-compliance with which could adversely affect our business, financial condition and results of operations. Our global regulatory environment is increasingly stringent, unpredictable and complex. The products we design, develop, manufacture and market are subject to rigorous regulation by the FDA and numerous other supranational, national, federal, regional, state and local governmental authorities. The process of obtaining regulatory approvals and clearances to market these products can be costly and time consuming and approvals might not be granted for future products on a timely basis, if at all. Delays in receipt of, or failure to obtain, approvals for future products could result in delayed realization of product revenues or in substantial additional costs. Both before and after a product is commercially released, we have ongoing responsibilities under FDA regulations and other supranational, national, federal, regional, state and local requirements globally. Compliance with these requirements, including the QSR, recordkeeping regulations, labeling and promotional requirements and adverse event reporting regulations, is subject to continual review and is monitored rigorously through periodic inspections by the FDA and other regulators, which may result in observations (such as on Form 483), and in some cases warning letters, that require corrective action, or other forms of enforcement. If the FDA or another regulator were to conclude that we are not in compliance with applicable laws or regulations, or that any of our products are ineffective or pose an unreasonable health risk, they could ban such products, detain or seize adulterated or misbranded products, order a recall, repair, replacement, or refund of payment of such products, refuse to grant pending premarket approval applications, refuse to provide certificates for exports, and/or require us to notify healthcare professionals and others that the products present unreasonable risks of substantial harm to the public health. The FDA or other regulators may also impose operating restrictions, including a ceasing of operations at one or more facilities, enjoin and restrain certain violations of applicable law pertaining to our products, seizure of products and assess civil or criminal penalties against our officers, employees or us. The FDA or other regulators could also issue a corporate warning letter or a recidivist warning letter or negotiate the entry of a consent decree of permanent injunction with us, and/or recommend prosecution. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and selling our products and could have a material adverse effect on our business, financial condition and results of operations. In 2012, we received a warning letter from the FDA citing concerns relating to certain processes pertaining to products manufactured at our Ponce, Puerto Rico manufacturing facility. In August 2018, we received a warning letter from the FDA related to observed non-conformities with current good manufacturing practice requirements of the QSR at our Warsaw North Campus manufacturing facility. As of February 14, 2020, these warning letters remained pending. Until the violations are corrected, we may become subject to additional regulatory action by the FDA as described above, the FDA may refuse to grant premarket approval applications and/or the FDA may refuse to grant export certificates, any of which could have a material adverse effect on our business, financial condition and results of operations. Additional information regarding these and other FDA regulatory matters can be found in Note 20 to our consolidated financial statements. Governmental regulations outside the U.S. continue to become increasingly stringent and complex. In the EU, for example, the MDR will become effective in May 2020 and will include significant additional premarket and post-market requirements. Complying with the requirements of this regulation requires us to incur significant expense. Additionally, the availability of EU notified body services certified to the new requirements is limited, which may delay the marketing approval for some of our products under the MDR. Any such delays, or any failure to meet the
requirements of the new regulation, could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements. Our products and operations are also often subject to the rules of industrial standards bodies, such as the International Standards Organization. If we fail to adequately address any of these regulations, our business could be harmed. If we fail to comply with healthcare fraud and abuse or data privacy and security laws and regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected. The sales, marketing and pricing of products and relationships that medical products companies have with healthcare providers are under increased scrutiny around the world. Our industry is subject to various laws and regulations pertaining to healthcare fraud and abuse, including the False Claims Act, the Anti-Kickback Statute, the Stark law, the Physician Payments Sunshine Act, the Food, Drug, and Cosmetic Act and similar laws and regulations in the U.S. and around the world. In addition, we are subject to various laws concerning anti-corruption and anti-bribery matters (including the FCPA), sales to countries or persons subject to economic sanctions and other matters affecting our international operations. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the U.S., exclusion from participation in government healthcare programs, including Medicare, Medicaid and Veterans Administration health programs. These laws are administered by, among others, the DOJ, the OIG-HHS, the SEC, the OFAC, the Bureau of Industry and Security of the U.S. Department of Commerce and state attorneys general. We are also subject to federal, state and international data privacy and security laws and regulations that govern the collection, use, disclosure, transfer, storage, disposal and protection of health-related and other personal information. The FDA has issued guidance to which we may be subject concerning data security for medical devices. The FDA and the DHS have also issued urgent safety communications regarding cybersecurity vulnerabilities of certain medical devices, which vulnerabilities may apply to some of our current or future devices. In addition, certain of our affiliates are subject to privacy, security and breach notification regulations promulgated under HIPAA. HIPAA governs the use, disclosure, and security of protected health information by HIPAA “covered entities” and their “business associates.” Covered entities are health plans, health care clearinghouses and health care providers that engage in specific types of electronic transactions. A business associate is any person or entity (other than members of a covered entity’s workforce) that performs a service on behalf of a covered entity involving the use or disclosure of protected health information. HHS (through the Office for Civil Rights) has direct enforcement authority against covered entities and business associates with regard to compliance with HIPAA regulations. On December 12, 2018, the Office for Civil Rights of HHS issued a request for information seeking input from the public on how the HIPAA regulations could be modified to amend existing obligations relating to the processing of protected health information. We will monitor this process and assess the impact of changes to the HIPAA regulations to our business. In addition to the FDA guidance and HIPAA regulations described above, a number of U.S. states have also enacted data privacy and security laws and regulations that govern the collection, use, disclosure, transfer, storage, disposal, and protection of personal information, such as social security numbers, medical and financial information and other information. These laws and regulations may be more restrictive and not preempted by U.S. federal laws. For example, several U.S. territories and all 50 states now have data breach laws that require timely notification to individuals, and at times regulators, the media or credit reporting agencies, if a company has experienced the unauthorized access or acquisition of personal information. Other state laws include the CCPA, which was signed into law on June 28, 2018 and largely took effect on January 1, 2020. The CCPA, among other things, contains new disclosure obligations for businesses that collect personal information about California residents and affords those individuals numerous rights relating to their personal information that may affect our ability to use personal information or share it with our business partners. Regulations from the California Attorney General have not been finalized, and it is expected that additional amendments to the CCPA will be introduced. Meanwhile, over fifteen other states have considered privacy laws like the CCPA, and in October 2019, Nevada enacted a similar but generally less restrictive privacy law. We will continue to monitor and assess the impact of these state laws, which may impose substantial penalties for violations, impose significant costs for investigations and compliance, allow private class-action litigation and carry significant potential liability for our business. Outside of the U.S., data protection laws, including the GDPR and LGPD, also apply to some of our operations in the countries in which we provide services to our customers. Legal requirements in these countries relating to the collection, storage, processing and transfer of personal data continue to evolve. The GDPR imposes, among other
things, data protection requirements that include strict obligations and restrictions on the ability to collect, analyze and transfer EU personal data, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances, and possible substantial fines for any violations (including possible fines for certain violations of up to the greater of 20 million Euros or 4% of total worldwide annual turnover of the preceding financial year). Governmental authorities around the world have enacted similar types of legislative and regulatory requirements concerning data protection, and additional governments are considering similar legal frameworks. The interpretation and enforcement of the laws and regulations described above are uncertain and subject to change, and may require substantial costs to monitor and implement compliance with any additional requirements. Failure to comply with U.S. and international data protection laws and regulations could result in government enforcement actions (which could include substantial civil and/or criminal penalties), private litigation and/or adverse publicity and could have a material adverse impact on our business, financial condition or results of operations. We incurred substantial additional indebtedness in connection with previous mergers and acquisitions and may not be able to meet all of our debt obligations, and the phase-out, replacement or unavailability of LIBOR and/or other interest rate benchmarks could adversely affect our indebtedness. We incurred substantial additional indebtedness in connection with previous mergers and acquisitions. At December 31, 2019, our total indebtedness was $8.2 billion, as compared to $1.4 billion at December 31, 2014. As of December 31, 2019, our debt service obligations, comprised of principal and interest (excluding leases and equipment notes), during the next 12 months are expected to be $1.7 billion. As a result of the increase in our debt, demands on our cash resources have increased. The increased level of debt could, among other things: | • | require us to dedicate a large portion of our cash flow from operations to the servicing and repayment of our debt, thereby reducing funds available for working capital, capital expenditures, research and development expenditures and other general corporate requirements; |
| • | limit our ability to obtain additional financing to fund future working capital, capital expenditures, research and development expenditures and other general corporate requirements; |
| • | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
| • | restrict our ability to make strategic acquisitions or dispositions or to exploit business opportunities; |
| • | place us at a competitive disadvantage compared to our competitors that have less debt; |
| • | adversely affect our credit rating, with the result that the cost of servicing our indebtedness might increase and our ability to obtain surety bonds could be impaired; |
| • | adversely affect the market price of our common stock; and |
| • | limit our ability to apply proceeds from a future offering or asset sale to purposes other than the servicing and repayment of debt. |
In addition, the interest rates applicable to certain of our debt obligations are based on a fluctuating rate of interest determined by reference to the London Interbank Offered Rate (“LIBOR”), Euro Interbank Offered Rate (“EURIBOR”) and/or Tokyo Interbank Offered Rate (“TIBOR”). Any increase in interest rates applicable to our debt obligations would increase our cost of borrowing and could adversely affect our financial position, results of operations or cash flows. Further, in July 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. In response to concerns regarding the future of LIBOR, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (“ARRC”) to identify alternatives to LIBOR. The ARRC has recommended a benchmark replacement waterfall to assist issuers in continued capital market entry while safeguarding against LIBOR’s discontinuation. The initial steps in the ARRC’s recommended provision reference variations of the Secured Overnight Financing Rate (“SOFR”). At this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement. Additionally, it is uncertain if LIBOR will cease to exist after calendar year 2021, or whether additional reforms to LIBOR may be enacted, or whether alternative reference rates will gain market acceptance as a replacement for LIBOR. Further, other central banks have convened working groups to determine replacements or reforms of other interest rate benchmarks, such as EURIBOR, and it is expected, although not known, that a transition away from the use of certain of these other interest rate benchmarks will occur over the course of the next few years and alternative reference rates will be established.
Certain of our debt obligations that are based on LIBOR will mature before the end of 2021. However, the revolving credit agreement that we entered into on November 1, 2019 (the “2019 Credit Agreement”) has an initial maturity date of November 1, 2024. In anticipation of LIBOR’s phase out, the 2019 Credit Agreement provides for alternative base rates as well as a transition mechanism for selecting a benchmark replacement rate for LIBOR, with such benchmark replacement rate to be mutually agreed with the general administrative agent and our lenders. There can be no assurance that we will be able to reach an agreement with our lenders on any such replacement benchmark before experiencing adverse effects due to changes in interest rates, if at all. We will continue to monitor the situation and address the potential reference rate changes in future debt obligations that we may incur. Accordingly, the potential effect of the phase-out, replacement or unavailability of LIBOR, or the unavailability of any other interest rate benchmark such as EURIBOR or TIBOR, on our cost of capital cannot yet be determined. Further, the use of an alternative base rate or a benchmark replacement rate as a basis for calculating interest with respect to any outstanding variable rate indebtedness could lead to an increase in the interest we pay and a corresponding increase in our costs of capital or otherwise have a material adverse impact on our business, financial condition or results of operations. We are increasingly dependent on sophisticated information technology and if we fail to effectively maintain or protect our information systems or data, including from data breaches, our business could be adversely affected. We are increasingly dependent on sophisticated information technology for our products and infrastructure. As a result of technology initiatives, recently enacted regulations, changes in our system platforms and integration of new business acquisitions, we have been consolidating and integrating the number of systems we operate and have upgraded and expanded our information systems capabilities. In addition, some of our products and services incorporate software or information technology that collects data regarding patients and patient therapy, and some products or software we provide to customers connect to our systems for maintenance and other purposes. We also have outsourced elements of our operations to third parties, and, as a result, we manage a number of third-party suppliers who may or could have access to our confidential information, including, but not limited to, intellectual property, proprietary business information and personal information of patients, employees and customers (collectively “Confidential Information”). Our information systems, and those of third-party suppliers with whom we contract, require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information technology, evolving systems and regulatory standards and the increasing need to protect patient and customer information. In addition, given their size and complexity, these systems could be vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third-party suppliers and/or business partners, or from cyber-attacks by malicious third parties attempting to gain unauthorized access to our products, systems or Confidential Information. Like other large multi-national corporations, we have experienced instances of successful phishing attacks on our email systems and expect to be subject to similar attacks in the future. We also are subject to other cyber-attacks, including state-sponsored cyber-attacks, industrial espionage, insider threats, computer denial-of-service attacks, computer viruses, ransomware and other malware, payment fraud or other cyber incidents. Our incident response efforts, business continuity procedures and disaster recovery planning may not be sufficient for all eventualities. If we fail to maintain or protect our information systems and data integrity effectively, we could: | • | lose existing customers; |
| • | have difficulty attracting new customers; |
| • | have problems in determining product cost estimates and establishing appropriate pricing; |
| • | suffer outages or disruptions in our operations or supply chain; |
| • | have difficulty preventing, detecting, and controlling fraud; |
| • | have disputes with customers, physicians, and other healthcare professionals; |
| • | have regulatory sanctions or penalties imposed; |
| • | incur increased operating expenses; |
| • | be subject to issues with product functionality that may result in a loss of data, risk to patient safety, field actions and/or product recalls; |
| • | incur expenses or lose revenues as a result of a data privacy breach; or |
| • | suffer other adverse consequences. |
While we have invested heavily in the protection of our data and information technology, there can be no assurance that our activities related to consolidating the number of systems we operate, upgrading and expanding our information systems capabilities, protecting and enhancing our systems and implementing new systems will be successful. We will continue to dedicate significant resources to protect against unauthorized access to our systems and work with government authorities to detect and reduce the risk of future cyber incidents; however, cyber-attacks are becoming more sophisticated, frequent and adaptive. Therefore, despite our efforts, we cannot assure that cyber-attacks or data breaches will not occur or that systems issues will not arise in the future. Any significant breakdown, intrusion, breach, interruption, corruption or destruction of these systems could have a material adverse effect on our business and reputation. Our success depends on our ability to effectively develop and market our products against those of our competitors. We operate in a highly competitive environment. Our present or future products could be rendered obsolete or uneconomical by technological advances by one or more of our present or future competitors or by other therapies, including biological therapies. To remain competitive, we must continue to develop and acquire new products and technologies and improve existing products and technologies. Competition is primarily on the basis of: In markets outside of the U.S., other factors influence competition as well, including: | • | local distribution systems; |
| • | complex regulatory environments; and |
| • | differing medical philosophies and product preferences. |
Our competitors may: | • | have greater financial, marketing and other resources than us; |
| • | respond more quickly to new or emerging technologies; |
| • | undertake more extensive marketing campaigns; |
| • | adopt more aggressive pricing policies; or |
| • | be more successful in attracting potential customers, employees and strategic partners. |
Any of these factors, alone or in combination, could cause us to have difficulty maintaining or increasing sales of our products. If we fail to retain the independent agents and distributors upon whom we rely heavily to market our products, customers may not buy our products and our revenue and profitability may decline. Our marketing success in the U.S. and abroad depends significantly upon our agents’ and distributors’ sales and service expertise in the marketplace. Many of these agents have developed professional relationships with existing and potential customers because of the agents’ detailed knowledge of products and instruments. A loss of a significant number of our agents could have a material adverse effect on our business and results of operations.
If we do not introduce new products in a timely manner, our products may become obsolete over time, customers may not buy our products and our revenue and profitability may decline Demand for our products may change, in certain cases, in ways we may not anticipate because of: | • | evolving customer needs; |
| • | slowing industry growth rates; |
| • | declines in the musculoskeletal implant market; |
| • | the introduction of new products and technologies; |
| • | evolving surgical philosophies; and |
| • | evolving industry standards. |
Without the timely introduction of new products and enhancements, our products may become obsolete over time. If that happens, our revenue and operating results would suffer. The success of our new product offerings will depend on several factors, including our ability to: | • | properly identify and anticipate customer needs; |
| • | commercialize new products in a timely manner; |
| • | manufacture and deliver instruments and products in sufficient volumes on time; |
| • | differentiate our offerings from competitors’ offerings; |
| • | achieve positive clinical outcomes for new products; |
| • | satisfy the increased demands by healthcare payors, providers and patients for shorter hospital stays, faster post-operative recovery and lower-cost procedures; |
| • | innovate and develop new materials, product designs and surgical techniques; and |
| • | provide adequate medical education relating to new products. |
In addition, new materials, product designs and surgical techniques that we develop may not be accepted quickly, in some or all markets, because of, among other factors: | • | entrenched patterns of clinical practice; |
| • | the need for regulatory clearance; and |
| • | uncertainty with respect to third-party reimbursement. |
Moreover, innovations generally require a substantial investment in research and development before we can determine their commercial viability and we may not have the financial resources necessary to fund the production. In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not produce revenue in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features. If third-party payors decline to reimburse our customers for our products or reduce reimbursement levels, the demand for our products may decline and our ability to sell our products profitably may be harmed. We sell our products and services to hospitals, doctors, dentists and other healthcare providers, all of which receive reimbursement for the healthcare services provided to their patients from third-party payors, such as domestic and international government programs, private insurance plans and managed care programs. These third-party payors may deny reimbursement if they determine that a product or service used in a procedure was not in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication. Third-party payors may also decline to reimburse for experimental procedures and products.
In addition, third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for medical products and services. If third-party payors reduce reimbursement levels to hospitals and other healthcare providers for our products, demand for our products may decline, or we may experience increased pressure to reduce the prices of our products, which could have a material adverse effect on our sales and results of operations. We have also experienced downward pressure on product pricing and other effects of healthcare reform in our international markets. If key participants in government healthcare systems reduce the reimbursement levels for our products, our sales and results of operations may be adversely affected. The ongoing cost-containment efforts of healthcare purchasing organizations may have a material adverse effect on our results of operations. Many customers for our products have formed group purchasing organizations in an effort to contain costs. Group purchasing organizations negotiate pricing arrangements with medical supply manufacturers and distributors, and these negotiated prices are made available to a group purchasing organization’s affiliated hospitals and other members. If we are not one of the providers selected by a group purchasing organization, affiliated hospitals and other members may be less likely to purchase our products, and, if the group purchasing organization has negotiated a strict compliance contract for another manufacturer’s products, we may be precluded from making sales to members of the group purchasing organization for the duration of the contractual arrangement. Our failure to respond to the cost-containment efforts of group purchasing organizations may cause us to lose market share to our competitors and could have a material adverse effect on our sales and results of operations. We conduct a significant amount of our sales activity outside of the U.S., which subjects us to additional business risks and may cause our profitability to decline due to increased costs. We sell our products in more than 100 countries and derived approximately 40 percent of our net sales in 2019 from outside the U.S. We intend to continue to pursue growth opportunities in sales internationally, including in emerging markets, which could expose us to additional risks associated with international sales and operations. Our international operations are, and will continue to be, subject to a number of risks and potential costs, including: | • | 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; |
| • | 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 a particular market and may increase our operating costs; |
| • | foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S.; |
| • | complex data privacy requirements and labor relations laws; |
| • | extraterritorial effects of U.S. laws such as the 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 sovereign debt issues. |
Violations of foreign laws or regulations could result in fines, criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business and damage to our reputation.
We have significant global sales and operations and face risks related to health epidemics that could impact our sales and operating results. Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China. Any outbreak of contagious diseases, and other adverse public health developments, could have a material adverse effect on our business operations. These could include disruptions or restrictions on our ability to travel or to distribute our products, as well as temporary closures of our facilities or the facilities of our suppliers or customers, the deferral of elective procedures in impacted countries or the temporary suspension of operations by us or our suppliers or customers. Any disruption of our operations, or those of our suppliers or customers, would likely impact our sales and operating results. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and likely impact our operating results. We may have additional tax liabilities. We are subject to income taxes in the U.S. and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly are under audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our financial statements in the period or periods for which that determination is made. We earnThe Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017 (the “2017 Tax Act”), with significant changes to the U.S. corporate income tax system, including a significant amountfederal corporate income tax rate reduction from 35 percent to 21 percent, limitations on the deductibility of our operating incomeinterest expense, and the transition of U.S. international taxation from outside the U.S., and any repatriation of funds representing earnings of foreign subsidiaries may significantly impact our effectivea worldwide tax rates. In addition, there have been proposalssystem to change U.S.a territorial tax laws that would significantly impact how U.S. multinational corporations are taxed on
foreign earnings. Although we cannot predict whether or in what form this proposed legislation will pass, if enacted it could have a material adverse impact on oursystem. Our tax expense and cash flow.flow could be impacted in the event of adverse future regulatory guidance provided by the U.S. Treasury clarifying certain aspects of the 2017 Tax Act or other changes to the U.S. corporate income tax system.
Other changes in the tax laws of the jurisdictions where we do business, including an increase in tax rates or an adverse change in the treatment of an item of income or expense, could result in a material increase in our tax expense. For example, changes in the tax laws of foreign jurisdictions could arise as a result of the “base erosion and profit shifting” project undertaken by the Organisation for Economic Co-operation and Development (“OECD”). The OECD, which represents a coalition of member countries, has recommended changes to numerous long-standing tax principles. These changes, as adopted by countries, could increase tax uncertainty and may adversely affect our provision for income taxes. We are subject to risks arising from currency exchange rate fluctuations, which can increase our costs, cause our profitability to decline and expose us to counterparty risks. A substantial portion of our foreign revenues is generated in Europe and Japan. The U.S. Dollar value of our foreign-generated revenues varies with currency exchange rate fluctuations. Significant increases in the value of the U.S. Dollar relative to the Euro, or the Japanese Yen, as well asthe Swiss Franc or other currencies could have a material adverse effect on our results of operations. Although we address currency risk management through regular operating and financing activities, and, on a limited basis, through the use of derivative financial instruments, those actions may not prove to be fully effective.effective or may create additional financial obligations for us. Further, if the counterparties to the derivative financial instrument transactions fail to honor their obligations due to financial distress or otherwise, we would be exposed to potential losses or the inability to recover anticipated gains from those transactions. Pending and future product liability claims and litigation could adversely impact our financial condition and results of operations and impair our reputation. Our business exposes us to potential product liability risks that are inherent in the design, manufacture and marketing of medical devices. In the ordinary course of business, we are the subject of product liability lawsuits alleging that component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to patients. As discussed further in
Note 20 to theour consolidated financial statements, we are defending product liability lawsuits relating to the Durom® Acetabular Component (“Durom Cup”), certain products within the NexGen Knee System,M/L Taper and theM2a-MagnumM/L Taper with KinectivTM® Technology hip system. The majority of the Durom Cup cases are pending in a federal Multidistrict Litigation (“MDL”) in the District of New Jersey (In Re: Zimmer Durom Hip Cup Products Liability Litigation); the majority of the NexGen Knee System cases are pending in a federal MDL in the Northern District of Illinois (In Re: Zimmer NexGen Knee Implant Products LiabilityLitigation);stems and Versys® Femoral Head implants, and the majority of theM2a-MagnumTM hip system cases are pending in a federal MDL in the Northern District of Indiana (In Re: Biomet M2a Magnum Hip Implant Products Liability Litigation).system. We are also currently defending a number of other product liability lawsuits and claims related to various other products. Any product liability claim brought against us, with or without merit, can be costly to defend. Product liability lawsuits and claims, safety alerts or product recalls, regardless of their ultimate outcome, could have a material adverse effect on our business and reputation and on our ability to attract and retain customers. Although we maintain third-party product liability insurance coverage, we have substantial self-insured retention amounts that we must pay in full before obtaining any insurance proceeds to satisfy a judgment or settlement. Furthermore, even if any product liability loss is covered by our insurance, it is possible that claims against us may exceed the coverage limits of our insurance policies and we would
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have to pay the amount of any settlement or judgment that is in excess of our policy limits. Product liability claims in excess of applicable insurance could have a material adverse effect on our business, financial condition and results of operations.
We are substantially dependent on patent and other proprietary rights, and failing to protect such rights or to be successful in litigation related to our rights or the rights of others may result in our payment of significant monetary damages and/or royalty payments, negatively impact our ability to sell current or future products, or prohibit us from enforcing our patent and other proprietary rights against others. Claims of intellectual property infringement and litigation regarding patent and other intellectual property rights are commonplace in our industry and are frequently time consuming and costly. At any given time, we may be involved as either plaintiff or defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time. While it is not possible to predict the outcome of patent and other intellectual property litigation, such litigation could result in our payment of significant monetary damages and/or royalty payments, negatively impact our ability to sell current or future products, or prohibit us from enforcing our patent and proprietary rights against others, which could have a material adverse effect on our business and results of operations. Patents and other proprietary rights are essential As discussed further in Note 20 to our business.consolidated financial statements, in 2015 we paid a compensatory damages award of approximately $90 million and in March 2019 we paid approximately $168 million related to an award of treble damages and attorneys’ fees in a patent infringement lawsuit.
Our success depends in part on our proprietary technology, processes, methodologies and information. We rely on a combination of patents,patent, copyright, trademark, trade secrets andnon-disclosuresecret and other agreementsintellectual property laws and nondisclosure, license, assignment and confidentiality arrangements to establish, maintain and protect our proprietary rights, as well as the intellectual property rights of third parties whose assets we license. However, the steps we have taken to protect our proprietary intellectual property rights, and the rights of those from whom we will continue to do so. While we intend to defend against any threats to ourlicense intellectual property, these patents, trade secrets and other agreements may not adequately protectbe adequate to prevent unauthorized use, misappropriation or theft of our intellectual property. Further, our currently pending or future patent applications may not result in patents being issued to us, patents issued to or licensed by us in the past or in the future may be challenged or circumvented by competitors, and such patents may be found invalid, unenforceable or insufficiently broad to protect our technology or to provide us with any competitive advantage. Third parties could obtain patents that may require us to negotiate licenses to conduct our business, and the required licenses may not be available on reasonable terms or at all. In addition, intellectual property rights may be unavailable or of limited effect in some foreign countries. If we do not obtain sufficient international protection for our intellectual property, our competitiveness in international markets could be impaired, which could limit our growth and revenue.
We also attempt to protect our trade secrets, proprietaryknow-how and continuing technological innovation with security measures, including the use ofnon-disclosure and other agreements with our employees, consultants and collaborators. We cannot be certain that these agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information,information. In addition, intellectual property laws differ in various jurisdictions in which we operate and are subject to change at any time, which could further restrict our ability to protect our intellectual property and proprietary rights. In particular, a portion of our revenues is derived from jurisdictions where adequately protecting intellectual property rights may prove more challenging or that third parties willimpossible. We may also not otherwise gain accessbe able to detect unauthorized uses or take timely and effective steps to remedy unauthorized conduct. To prevent or respond to unauthorized uses of our trade secretsintellectual property, we might be required to engage in costly and time-consuming litigation or other proceedings and we may not ultimately prevail. Any failure to establish, maintain or protect our intellectual property or proprietary knowledge.rights could have a material adverse effect on our business, financial condition, or results of operations. We are involved in legal proceedings that may result in adverse outcomes. In addition to intellectual property and product liability claims and lawsuits, we are involved in various commercial and securities litigation and claims and other legal proceedings that arise from time to time in the ordinary course of our business. For example, as discussed further in Note 20 to theour consolidated financial statements, we are defending a purported class action lawsuit,Shah v. Zimmer Biomet Holdings, Inc. et al.,filed against us, and certain of our current and former officers, certain current and former members of our Board of Directors, and certain former stockholders of ours who sold shares of our common stock in secondary public offerings in 2016, alleging violations of thethat we and other defendants violated federal securities laws relatedby making materially false and/or misleading statements and/or omissions about our compliance with FDA regulations and our ability to continue to accelerate our third quarterorganic revenue growth rate in the second half of 2016. There have also been four shareholder derivative actions filed purportedly on our behalf against certain of our current and former directors and officers and certain former stockholders of ours who sold shares of our common stock in secondary public offerings in 2016, performance alleging breaches of fiduciary duties
and 2016 forecasts. insider trading, based on substantially the same factual allegations as Shah. Although we believe we havethere are substantial defenses in these matters, litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. Given the uncertain nature of legal proceedings generally, we are not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome. We could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in any particular period. We are increasingly dependent on sophisticated information technology and if we fail to effectively maintain or protect our information systems or data, including from data breaches, our business could be adversely affected.
We are increasingly dependent on sophisticated information technology for our products and infrastructure. As a result of technology initiatives, recently enacted regulations, changes in our system platforms and integration of new business acquisitions, including the Biomet merger, we have been consolidating and integrating the number of systems we operate and have upgraded and expanded our information systems capabilities. We also have outsourced elements of our operations to third parties, and, as a result, we manage a number of third-party vendors who may or could have access to our confidential information. Our information systems, and those of third-party vendors with whom we contract, require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information technology, evolving systems and regulatory standards and the increasing need to protect patient and customer information. In addition, given their size and complexity, these systems could be vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third-party vendors and/or business partners, or from cyber-attacks by malicious third parties attempting to gain unauthorized access to our products, systems or confidential information (including, but not limited to, intellectual property, proprietary business information and personal information). Cyber-attacks, such as those involving the deployment of malware, are increasing in their frequency, sophistication and intensity and have become increasingly difficult to detect. If we fail to maintain or protect our information systems and data integrity effectively, we could:
have difficulty attracting new customers;
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have problems in determining product cost estimates and establishing appropriate pricing;
have difficulty preventing, detecting, and controlling fraud;
have disputes with customers, physicians, and other healthcare professionals;
have regulatory sanctions or penalties imposed;
incur increased operating expenses;
incur expenses or lose revenues as a result of a data privacy breach; or
suffer other adverse consequences.
While we have invested heavily in the protection of our data and information technology, there can be no assurance that our activities related to consolidating the number of systems we operate, upgrading and expanding our information systems capabilities, protecting and enhancing our systems and implementing new systems will be successful. Despite our efforts, we cannot assure you that cyber-attacks or data breaches will not occur or that systems issues will not arise in the future. Any significant breakdown, intrusion, breach, interruption, corruption or destruction of these systems could have a material adverse effect on our business and reputation.
We have determined that a material weakness exists in our internal control over financial reporting which could, if not remediated, result in a material misstatement in our financial statements.
We are responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(e) and 13a-15(f) under the Exchange Act. As discussed in Management’s Report on Internal Control over Financial Reporting appearing under item 7A of this report, we identified a material weakness in our internal control over financial reporting as of December 31, 2016 related to management’s controls over accounting for income taxes. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this material weakness, our management concluded that our internal control over financial reporting was not effective, and our disclosure controls and procedures were not effective as of December 31, 2016. We are actively engaged in developing and implementing a remediation plan designed to address this material weakness. However, we cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. If the remedial measures are insufficient to address the material weakness or if additional material weaknesses in internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.
Future material impairments in the carrying value of our intangible assets, including goodwill, would negatively affect our operating results. Our assets includeGoodwill and intangible assets primarily goodwill.represent a significant portion of our assets. At December 31, 2016,2019, we had $10.5$9.6 billion in goodwill.goodwill and $7.3 billion of intangible assets. The goodwill results from our acquisition activity including the
Biomet merger, and represents the excess of the consideration transferred over the fair value of the net assets acquired. We assess at least annually whether events or changes in circumstances indicate that the carrying value of our intangible assets may not be recoverable. As discussed further in Note 10 to our consolidated financial statements, we recorded goodwill impairment charges of $975.9 million in 2018. If the operating performance at one or more of our businessreporting units falls significantly below current levels, if competing or alternative technologies emerge, or if market conditions or future cash flow estimates for one or more of our businesses decline, or as a result of restructuring initiatives pursuant to which we reorganize our reporting units, we could be required under current U.S. accounting rules, to record anon-cash charge to operating earnings for the amount of the impairment.additional goodwill impairment charges. Anywrite-off of a material portion of our goodwill or unamortized intangible assets would negatively affect our results of operations.
Recent developmentsDevelopments relating to the United Kingdom’s referendum vote in favor of leavingUK’s exit from the European UnionEU could adversely affect us.
The United Kingdom (UK)UK held a referendum onin June 23, 2016 in which voters approvedchose to leave the UK’s voluntary exit from the European Union (EU),EU, commonly referred to as “Brexit”. The announcementFollowing a protracted period of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted innegotiation, the strengtheningUK ceased to be a member of the U.S. dollar relative to other foreign currencies inEU on January 31, 2020, after the ratification and approval of a withdrawal agreement by the EU and the UK. The withdrawal agreement provides for a transition period until December 31, 2020 (the “Transition Period”), during which we conduct business. The effectsthe terms of Brexit are expected tothe future trading relationship between the EU and the UK will befar-reaching. negotiated. Throughout the Transition Period, the legal and regulatory framework as between the UK and the EU will remain the same. Brexit and the perceptions as to its potential impact have and may continue to adversely affect business activity and economic conditions in Europe and globally and could continue to contribute to instability in global financial and foreign exchange markets.markets both during and after the Transition Period. Brexit could also have the effect of disrupting the free movement of goods, services and people between the UK and the EU; however,EU through the full effectsimposition of tariffs, custom inspections, and/or migration restrictions. The future relationship for medical products regulation and trade between the UK and the EU is currently uncertain and any adjustments we make to our business and operations as a result of Brexit are uncertaincould result in significant expense and will depend on any agreements the UK may maketake significant time to retain access to EU markets.complete. Brexit could also lead to legal uncertainty and potentially divergent national laws and regulations asresult in the UK determines whichor the EU laws to replace or replicate. Also,significantly altering its regulations affecting the clearance and approval of medical products. In addition, as a result of Brexit, other European countries may seek to conduct referenda with respect to their continuing membership with the EU. If there is no agreed upon long-term trading arrangement by the end of the Transition Period (a so-called “hard Brexit”), it would likely have a significant adverse impact on labor and trade and create significant short-term currency volatility. Given these possibilities and others we may not anticipate, as well as the lack of comparable precedent, the full extent to which we will be affected by Brexit is uncertain. Any of the potential negative effects of Brexit could adversely affect our business, results of operations and financial condition could be adversely affected by Brexit is uncertain.condition. Anti-takeover provisions in our organizational documents could delay or prevent a change of control. Certain provisions of our Restated Certificate of Incorporation, our RestatedBy-Laws and the Delaware General Corporation Law may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders.
These provisions provide for, among other things: the ability of our board of directors to issue one or more series of preferred stock without further stockholder action;
advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;
| • | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORTthe ability of our board of directors to issue one or more series of preferred stock without further stockholder action; |
certain limitations on convening special stockholder meetings; and
the prohibition on engaging in a “business combination” with an “interested stockholder” for three years after the time at which a person became an interested stockholder unless certain conditions are met, as set forth in Section 203 of the Delaware General Corporation Law.
| • | advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings; |
| • | certain limitations on convening special stockholder meetings; and |
| • | the prohibition on engaging in a “business combination” with an “interested stockholder” for three years after the time at which a person became an interested stockholder unless certain conditions are met, as set forth in Section 203 of the Delaware General Corporation Law. |
These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. Our RestatedBy-Laws designate certain Delaware courts as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees. Our RestatedBy-Laws provide that, unless we consent in writing to the selection of an alternative forum, a state court located within the State of Delaware (or, if no state court located in the State of Delaware has jurisdiction, the federal district court for the District of Delaware) will be the sole and exclusive forum for any stockholder (including any beneficial owner) to bring (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of the Delaware General Corporation Law or our Restated Certificate of Incorporation or our RestatedBy-Laws, as either may be amended from time to time, or (iv) any action asserting a claim against us or any of our directors, officers or other employees governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations. Not Applicable.
Item 2. | | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORTProperties |
We own or lease approximately 340 different facilities around the world, of which approximately half are in the U.S. Our corporate headquarters is in Warsaw, Indiana. Warsaw, Indiana is also home to our most significant manufacturing, research and development (“R&D”), and other business activities for our Knees, Hips and S.E.T. product categories. Our Spine, CMF, Office Based Technologies and Dental product categories also have business unit headquarters located in the U.S. that are the primary facilities for these product categories’ manufacturing, R&D and other business activities. Internationally, our EMEA regional headquarters is in Switzerland and our Asia Pacific regional headquarters is in Singapore. The followingWe have approximately 30 manufacturing locations in the U.S. and internationally. Our most significant locations outside of the U.S. are in Switzerland, Ireland, the U.K., China, and Puerto Rico. We primarily own our principal properties:manufacturing facilities in the U.S.; internationally, we occupy both owned and leased manufacturing facilities.
| | | | | | | | | | | Location | | Use | | Owned / Leased | | | Square Feet | | Warsaw, Indiana
| | Research & Development, Manufacturing, Warehousing, Marketing & Administration | | | Owned | | | | 1,900,000 | | Warsaw, Indiana
| | Corporate Headquarters & The Zimmer Institute | | | Owned | | | | 115,000 | | Warsaw, Indiana
| | Manufacturing & Warehousing | | | Leased | | | | 195,000 | | Broomfield, Colorado
| | Business Unit Headquarters | | | Leased | | | | 65,000 | | Jacksonville, Florida
| | Business Unit Headquarters & Manufacturing | | | Owned | | | | 85,000 | | Palm Beach Gardens, Florida
| | Business Unit Headquarters & Manufacturing | | | Owned | | | | 190,000 | | Palm Beach Gardens, Florida
| | Manufacturing | | | Leased | | | | 50,000 | | Southaven, Mississippi
| | Distribution Center | | | Leased | | | | 190,000 | | Parsippany, New Jersey
| | Office, Research & Development, Manufacturing, Warehousing & The Zimmer Institute | | | Leased | | | | 240,000 | | Dover, Ohio
| | Business Unit Headquarters & Manufacturing | | | Owned | | | | 140,000 | | Austin, Texas
| | Offices & Manufacturing | | | Leased | | | | 120,000 | | Beijing, China
| | Manufacturing | | | Leased | | | | 95,000 | | Changzhou, China
| | Manufacturing | | | Owned | | | | 75,000 | | Jinhua, China
| | Manufacturing | | | Owned | | | | 135,000 | | Valence, France
| | Manufacturing | | | Owned | | | | 120,000 | | Berlin, Germany
| | Manufacturing | | | Owned | | | | 50,000 | | Eschbach, Germany
| | Distribution Center | | | Owned | | | | 100,000 | | Galway, Ireland
| | Manufacturing | | | Owned | | | | 115,000 | | Shannon, Ireland
| | Offices & Manufacturing | | | Owned | | | | 125,000 | | Hazeldonk, The Netherlands
| | Distribution Center | | | Leased | | | | 195,000 | | Ponce, Puerto Rico
| | Offices, Manufacturing & Warehousing | | | Owned | | | | 225,000 | | Singapore
| | Regional Headquarters | | | Leased | | | | 30,000 | | Bridgend, South Wales
| | Manufacturing | | | Owned | | | | 185,000 | | Bridgend, South Wales
| | Manufacturing | | | Leased | | | | 100,000 | | Valencia, Spain
| | Manufacturing | | | Owned | | | | 70,000 | | Valencia, Spain
| | Manufacturing | | | Leased | | | | 10,000 | | Winterthur, Switzerland
| | Regional Headquarters, Offices, Research & Development & Manufacturing | | | Leased | | | | 485,000 | |
In addition to the above, weWe maintain sales and administrative offices and warehouse and distribution facilities in more than 40 countries around the world. These local market facilities are primarily leased due to common businesses practices and to allow us to be more adaptable to changing needs in the market.
We distribute our products both through large, centralized warehouses and through smaller, market specific facilities, depending on the needs of the market. We maintain large, centralized warehouses in the U.S. and the Netherlands to be able to efficiently distribute our products to customers in the U.S. and EMEA. We believe that all of the facilities and equipment are in good condition, well maintained and able to operate at present levels. We believe the current facilities, including manufacturing, warehousing, research and developmentR&D and office space, provide sufficient capacity to meet ongoing demands. Information pertaining to certain legal proceedings in which we are involved can be found in Note 20 to our consolidated financial statements included in Part II, Item 8 of this report and is incorporated herein by reference. | | | Item 4. | | Mine Safety Disclosures |
Not Applicable.
PART II | | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
PART II
| | | Item 5. | | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is traded on the New York Stock Exchange and the SIX Swiss Exchange under the symbol “ZBH.” The high and low sales prices for our common stock on the New York Stock Exchange and the dividends declared for the calendar quarters of fiscal years 2016 and 2015 are as follows: QUARTERLYHIGH-LOW SHARE PRICES AND DECLARED DIVIDENDS
| | | | | | | | | | | | | | | | High | | | Low | | | Declared
Dividends | | Year Ended December 31, 2016: | | | | | | | | | | | | | First Quarter | | $ | 107.22 | | | $ | 88.27 | | | $ | 0.24 | | Second Quarter | | $ | 123.43 | | | $ | 105.53 | | | $ | 0.24 | | Third Quarter | | $ | 133.19 | | | $ | 119.22 | | | $ | 0.24 | | Fourth Quarter | | $ | 133.21 | | | $ | 95.63 | | | $ | 0.24 | | | | | | Year Ended December 31, 2015: | | | | | | | | | | | | | First Quarter | | $ | 121.84 | | | $ | 111.06 | | | $ | 0.22 | | Second Quarter | | $ | 119.10 | | | $ | 97.48 | | | $ | 0.22 | | Third Quarter | | $ | 111.35 | | | $ | 90.92 | | | $ | 0.22 | | Fourth Quarter | | $ | 108.99 | | | $ | 88.77 | | | $ | 0.22 | |
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. As further discussed in Item 7 of this report, our debt facilities restrict the payment of dividends under certain circumstances.
As of February 23, 2017,7, 2020, there were approximately 24,000 registered17,900 holders of record of our common stock. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers and other financial institutions. On February 24, 2017, We expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the closing priceBoard of our common stock,Directors and may be adjusted as reported on the New York Stock Exchange, was $116.92 per share.business needs or market conditions change. The information required by this Item concerning equity compensation plans is incorporated herein by reference to Item 12 of this report.
| | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
| | | Item 6. | | Selected Financial Data |
The financial information for each of the past five years ended December 31 is set forth below (in millions, except per share amounts): | | | | 2016 | | | 2015(1) | | | 2014 | | | 2013 | | | 2012 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 (1)(2) | | STATEMENT OF EARNINGS DATA | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 7,683.9 | | | $ | 5,997.8 | | | $ | 4,673.3 | | | $ | 4,623.4 | | | $ | 4,471.7 | | | $ | 7,982.2 | | | $ | 7,932.9 | | | $ | 7,803.3 | | | $ | 7,668.4 | | | $ | 5,997.8 | | Net earnings of Zimmer Biomet Holdings, Inc. | | | 305.9 | | | | 147.0 | | | | 720.3 | | | | 780.4 | | | | 734.0 | | | Earnings per common share | | | | | | | | | | | | Net earnings (loss) of Zimmer Biomet Holdings, Inc. | | | | 1,131.6 | | | | (379.2 | ) | | | 1,813.8 | | | | 305.9 | | | | 147.0 | | Earnings (loss) per common share | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 1.53 | | | $ | 0.78 | | | $ | 4.26 | | | $ | 4.60 | | | $ | 4.20 | | | $ | 5.52 | | | $ | (1.86 | ) | | $ | 8.98 | | | $ | 1.53 | | | $ | 0.78 | | Diluted | | | 1.51 | | | | 0.77 | | | | 4.20 | | | | 4.54 | | | | 4.17 | | | | 5.47 | | | | (1.86 | ) | | | 8.90 | | | | 1.51 | | | | 0.77 | | Dividends declared per share of common stock | | $ | 0.96 | | | $ | 0.88 | | | $ | 0.88 | | | $ | 0.80 | | | $ | 0.54 | | | $ | 0.96 | | | $ | 0.96 | | | $ | 0.96 | | | $ | 0.96 | | | $ | 0.88 | | Average common shares outstanding | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 200.0 | | | | 187.4 | | | | 169.0 | | | | 169.6 | | | | 174.9 | | | | 205.1 | | | | 203.5 | | | | 201.9 | | | | 200.0 | | | | 187.4 | | Diluted | | | 202.4 | | | | 189.8 | | | | 171.7 | | | | 171.8 | | | | 176.0 | | | | 206.7 | | | | 203.5 | | | | 203.7 | | | | 202.4 | | | | 189.8 | | BALANCE SHEET DATA | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | $ | 26,684.4 | | | $ | 27,160.6 | | | $ | 9,658.0 | | | $ | 9,595.0 | | | $ | 8,995.6 | | | $ | 24,638.7 | | | $ | 24,126.8 | | | $ | 26,014.0 | | | $ | 26,684.4 | | | $ | 27,160.6 | | Long-term debt | | | 10,665.8 | | | | 11,497.4 | | | | 1,425.5 | | | | 1,672.3 | | | | 1,720.8 | | | | 6,721.4 | | | | 8,413.7 | | | | 8,917.5 | | | | 10,665.8 | | | | 11,497.4 | | Other long-term obligations | | | 3,967.2 | | | | 4,155.9 | | | | 656.8 | | | | 583.6 | | | | 568.2 | | | | 2,083.0 | | | | 2,015.7 | | | | 2,291.3 | | | | 3,967.2 | | | | 4,155.9 | | Stockholders’ equity | | | 9,669.9 | | | | 9,889.4 | | | | 6,551.7 | | | | 6,310.6 | | | | 5,848.0 | | | Stockholders' equity | | | | 12,392.8 | | | | 11,276.1 | | | | 11,735.5 | | | | 9,669.9 | | | | 9,889.4 | |
(1) | | | | | Effective January 1, 2018 we adopted Accounting Standards Update 2014-09 – Revenue from Contracts with Customers (Topic 606). We adopted this new standard using the retrospective method, which resulted in us restating the 2017 and 2016 periods. The 2015 period has not been restated. |
(1) Includes the results of Biomet starting on June 24, 2015 and Biomet balance sheet data as of December 31, 2015.
(2) | | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORTOn June 24, 2015 we acquired LVB Acquisition, Inc. Accordingly, the results of this significant acquisition have only been reflected in 2015 starting on that date. |
| | | | | Item 7. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in conjunction with the consolidated financial statements and the corresponding notes included elsewhere in this Annual Report on Form10-K. Certain percentages presented in this discussion and analysis are calculated from the underlying whole-dollar amounts and therefore may not recalculate from the rounded numbers used for disclosure purposes. Certain amounts in the 20152018 and 20142017 consolidated financial statements have been reclassified to conform to the 20162019 presentation. On June 24, 2015, we completed our merger with Biomet The following discussion, analysis and itscomparisons generally focus on the operating results of operations have been included in our results starting on that date. The Biomet merger was a transformational event for us and has had significant effects on all aspects of our business. Accordingly, our sales and expenses increased significantly in the years ended December 31, 2016 and 2015 when compared to prior years.
In portions of this discussion and analysis, we also present sales information on an unaudited, pro forma basis for the years ended December 31, 20152019 and 2014. This pro forma information includes Zimmer2018. Discussion, analysis and Biomet salescomparisons of the years ended December 31, 2018 and 2017 that are not included in those periods as ifthis Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the merger occurredCompany's Annual Report on January 1, 2014. Accordingly,Form 10-K for the pro formayear ended December 31, 2018.
EXECUTIVE LEVEL OVERVIEW 2019 Financial Highlights In 2019, our net sales information for periods priorincreased by 0.6 percent compared to the Closing Date includes the net2018. We estimate changes in volume/mix of our products and pricing had a positive effect of 2.2 percent on our 2019 sales while changes in foreign currency exchange rates had a negative effect of Biomet, but does not include the impact of the divestiture of certain product line rights and assets. We believe this pro forma analysis is beneficial for investors because it represents how the merged companies may have performed on a combined basis in 2015 and 2014. EXECUTIVE LEVEL OVERVIEW
2016 Results
In 2016, we made strategic internal and external investments to further broaden and diversify1.6 percent. Notably, our musculoskeletal portfolio, including the acquisitions of LDR, which provided us with an immediate position in the growing cervical disc replacement market; Cayenne Medical, Inc. (“Cayenne Medical”), a sports medicine company; Compression Therapy Concepts, Inc. (“CTC”), a provider ofnon-invasive products for the prevention of deep vein thrombosis; CD Diagnostics, Inc. (“CD Diagnostics”), a medical diagnostic testing company; and MedTech SA (“MedTech”), a designer and manufacturer of robotic equipment for brain and spine surgeries. These commercial additions have both enhanced our core offerings and expanded our presence across the full continuum and episode of care.
We have also continued to make progress in our commercial and operational integration of Biomet across all geographies and functions. Despite this progress, sales in 2016 were below our expectations due in part to some temporary disruption in product supply in certain Knee, Hip, Upper Extremities, Sports Medicine and Trauma product linesgrowth was higher in the second half of 2016 relatedthe year compared to several factors, including implementation of operational and quality process enhancements that resulted in various shipment delays, and
manufacturing forecasting constraints related to continued integration of our supply chain. In the second half of 2016, we saw increased demand for certain Knee, Hip and Upper Extremities products, particularly related to cross-selling various offerings across the combined Zimmer Biomet portfolio. The increased demand temporarily impacted our ability to effectively respond to this shifting product mix. In response, we accelerated work to enhance certain aspects of our supply chain infrastructure as we harmonize and optimize our sourcing, manufacturing and quality management systems. We are in the process of deploying new demand planning and production planning tools. We made progress on these enhancements in late 2016 and anticipate continued progress towards the replenishment of safety stocks on key cross-sell products throughout the first half of 2017.
Our 2016 results have been significantly impacted by the inclusion of Biomet sales and expenses for the entire year including sales growth of 28.1 percent. On an unaudited pro forma basis, sales increased by 2.2 percent driven by volume/mix growth acrossprimarily due to various product launches in our Knees product category, which drove improved commercial execution. The improved second half performance was present in all our regions in most of our product categories including growth from our 2016 acquisitions, offset byand geographic regions. Additionally, the negative effectsimpact of changes in foreign currency exchange rates and continued, but stable, pricing pressurewas less in allthe second half of our geographic regions.2019 compared to the first half.
Our net earnings increased by more than $1.5 billion in 2016 compared2019 from 2018. We had significant goodwill and intangible asset impairments and litigation-related charges in 2018, which contributed to 2015. The primary drivers of the improved earnings performance were the inclusion of Biomet earnings for the entire yeara net loss that year. In 2019, expenses related to quality remediation, as well as acquisition and the absence in 2016 of significant expenses incurred in 2015 in connection with completing the Biomet merger. As a result of the merger, we recognized significant expenses in 2015integration, declined due to the accelerationcontinued progress in completing those projects. Higher sales, lower interest expense and the recognition of unvested LVB stock options and LVB stock-based awards, retention bonuses paid to Biomet employees and third-party sales agents who remained with Biomet through the Closing Date, severance expense, a lossdeferred tax benefit related to a call premium on Biomet debt we redeemed, third party fees, and other acquisition and integration charges. While we did incur similar expensesSwitzerland tax reform resulted in 2016 relatedthe significant increase in earnings in 2019 compared to acquisitions, they were less significant.2018. 20172020 Outlook
We believe that the improved sales performance in the second half of 2019 will continue into 2020. We estimate our sales growth in 2017 over 20162020 compared to 2019 will be in a range of 2.22.5 percent to 3.23.5 percent. This estimate assumesWe anticipate the impact from changes in foreign currency exchange rates will decreasebe minimal for 2020. We expect to be able to leverage the sales by approximately 1.5 percent, continued pricing pressure will decrease sales by approximately 2 percent and the inclusion of LDR sales for the full year will increase sales by approximately 1.2 percent. As noted previously,growth into higher operating profits. Additionally, we expect to make substantial progressreductions in remediating supply constraints during the first half of this year as we prioritize production for key cross-sell brands, clear our back orders, and restore safety stocks. Additionally, as part of our effort to implement certain regulatory compliance enhancements, we are making operational and quality process improvements in certain of our major production facilities. As such, affected products may experience temporary and occasional distribution delays while
| | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
we implement and validate these enhanced processes and generate the necessary supporting records. We believe that continued progress towards restoring full supply expected during the second quarter will enable our commercial teams to service existing customers and also resume executing against the full potential of our broad and diverse portfolio. As such, we expect volume/mix sales growth to improve as we progress through 2017.
Turning to cost of products sold, in 2016 we recognized significant expenses related to stepping up acquired Biomet inventory to fair value and for excess and obsolete inventory charges from our decision to discontinue certain products. Without these significant expenses, we expect cost of products sold will decrease in 2017. Additionally, due to the two year moratorium on the U.S. medical device excise tax,remediation costs, of products sold will decrease. However, we believe we will experience unfavorable effects on costs of products sold as a percentage of sales from declining selling prices, as well as from lower hedge gainsother various project costs, as we complete these initiatives. We have recently initiated restructuring activities designed to reduce our operating costs in the long-term. These activities are expected to result in expenses of approximately $350 million to $400 million through the end of 2023, with slightly more than half of that expected to be recognizedincurred in 2017 when compared to 2016.
As it relates to other expenses, our intangible asset amortization expense is expected to increase as we recognize a full year of intangible asset amortization from the LDR merger and other 2016 acquisitions. We expect research and development (“R&D”) expense for the year to be
approximately 4.5 percent of sales. Selling, general and administrative (“SG&A”) expense is expected to approximate 37.5 percent of sales, which is an improvement from 2016 as2020. Further, we expect to realize synergies from our acquisitions and leverage sales growth. We estimate special itemsinterest expense, net, will continue to be significant as we continue our integration activities as well as harmonize and optimize our supply chain and manufacturing and quality systems. However, we expect special items expense will be lessdecline in 2017 compared to 2016. We expect interest expense will decrease in 2017 compared to 20162020 due to lower average outstanding debt levelsbalances.
Our 2020 outlook does not consider any impacts from planned debt repayments.the recent outbreak of the coronavirus. While there could be a near-term effect on our operating results, it is difficult to assess or predict how material the impact will be and what long-term effects the outbreak may have. RESULTS OF OPERATIONS We analyze sales by three geographies, the Americas, EMEA and Asia Pacific, and by the following product categories: Knees, Hips, S.E.T., Dental, Spine & CMF and Other. This sales analysis differs from our reportable operating segments, which are based upon our senior management organizational structure and how we allocate resources towards achieving operating profit goals. We analyze sales by geography because the underlying market trends in any particular geography tend to be similar across product categories and because we primarily sell the same products in all geographies.
Net Sales by Geography The following tables present net sales by geography and the components of the percentage changes (dollars in millions): | | | | Year Ended December 31, | | | | | Volume/
Mix | | | | | Foreign
Exchange | | | Year Ended December 31, | | | | | | | Volume/ | | | | | | | Foreign | | | | | | 2016 | | | 2015 | | | % Inc | | Price | | | 2019 | | | 2018 | | | % Inc/(Dec) | | | Mix | | | Price | | | Exchange | | | Americas | | $ | 4,802.2 | | | $ | 3,662.4 | | | | 31.1 | % | | | 33.4 | % | | | (2.1 | )% | | | (0.2 | )% | | $ | 4,875.8 | | | $ | 4,837.2 | | | | 0.8 | | % | | 4.0 | | % | | (3.0 | ) | % | | (0.2 | ) | % | EMEA | | | 1,730.4 | | | | 1,417.8 | | | | 22.0 | | | | 26.1 | | | | (0.7 | ) | | | (3.4 | ) | | | 1,746.9 | | | | 1,801.9 | | | | (3.1 | ) | | | 4.3 | | | | (2.1 | ) | | | (5.3 | ) | | Asia Pacific | | | 1,151.3 | | | | 917.6 | | | | 25.5 | | | | 24.5 | | | | (2.5 | ) | | | 3.5 | | | | 1,359.5 | | | | 1,293.8 | | | | 5.1 | | | | 9.1 | | | | (2.2 | ) | | | (1.8 | ) | | | | | | | | | | | | | | | | Total | | $ | 7,683.9 | | | $ | 5,997.8 | | | | 28.1 | | | | 30.3 | | | | (1.8 | ) | | | (0.4 | ) | | $ | 7,982.2 | | | $ | 7,932.9 | | | | 0.6 | | | | 4.9 | | | | (2.7 | ) | | | (1.6 | ) | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, | | | | | Volume/
Mix | | | | | Foreign
Exchange | | | Year Ended December 31, | | | | | | | Volume/ | | | | | | | Foreign | | | | | | 2015 | | | 2014 | | | % Inc | | Price | | | 2018 | | | 2017 | | | % Inc/(Dec) | | | Mix | | | Price | | | Exchange | | | Americas | | $ | 3,662.4 | | | $ | 2,594.2 | | | | 41.2 | % | | | 44.3 | % | | | (2.3 | )% | | | (0.8 | )% | | $ | 4,837.2 | | | $ | 4,844.8 | | | | (0.2 | ) | % | | 2.3 | | % | | (2.4 | ) | % | | (0.1 | ) | % | EMEA | | | 1,417.8 | | | | 1,269.5 | | | | 11.7 | | | | 27.9 | | | | (1.1 | ) | | | (15.1 | ) | | | 1,801.9 | | | | 1,745.2 | | | | 3.2 | | | | 1.7 | | | | (1.6 | ) | | | 3.1 | | | Asia Pacific | | | 917.6 | | | | 809.6 | | | | 13.3 | | | | 26.0 | | | | (2.2 | ) | | | (10.5 | ) | | | 1,293.8 | | | | 1,213.3 | | | | 6.6 | | | | 9.2 | | | | (3.5 | ) | | | 0.9 | | | | | | | | | | | | | | | | | Total | | $ | 5,997.8 | | | $ | 4,673.3 | | | | 28.3 | | | | 36.7 | | | | (2.0 | ) | | | (6.4 | ) | | $ | 7,932.9 | | | $ | 7,803.3 | | | | 1.7 | | | | 3.2 | | | | (2.4 | ) | | | 0.9 | | | | | | | | | | | | | | | | |
“Foreign Exchange” used in the tables in this report represents the effect of changes in foreign currency exchange rates on sales. The following tables present our 2016 net sales, and our 2015 and 2014 pro forma net sales, by geography and the components of the percentage changes (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | Volume/
Mix | | | | | | Divestiture
Impact | | | Foreign
Exchange | | | | | 2016 | | | Pro Forma
2015 | | | % Inc/(Dec) | | | | Price | | | | Americas | | $ | 4,802.2 | | | $ | 4,685.2 | | | | 2.5 | % | | | 5.2 | % | | | (1.6 | )% | | | (0.9 | )% | | | (0.2 | )% | EMEA | | | 1,730.4 | | | | 1,767.9 | | | | (2.1 | ) | | | 1.9 | | | | (0.6 | ) | | | (0.8 | ) | | | (2.6 | ) | Asia Pacific | | | 1,151.3 | | | | 1,064.7 | | | | 8.1 | | | | 8.0 | | | | (2.1 | ) | | | (0.7 | ) | | | 2.9 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 7,683.9 | | | $ | 7,517.8 | | | | 2.2 | | | | 4.9 | | | | (1.5 | ) | | | (0.9 | ) | | | (0.3 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | Volume/
Mix | | | | | | Divestiture
Impact | | | Foreign
Exchange | | | | | Pro Forma
2015 | | | Pro Forma
2014 | | | % (Dec) | | | | Price | | | | Americas | | $ | 4,685.2 | | | $ | 4,748.6 | | | | (1.3 | )% | | | 1.6 | % | | | (1.5 | )% | | | (0.9 | )% | | | (0.5 | )% | EMEA | | | 1,767.9 | | | | 2,072.6 | | | | (14.7 | ) | | | 1.6 | | | | (1.0 | ) | | | (0.5 | ) | | | (14.8 | ) | Asia Pacific | | | 1,064.7 | | | | 1,144.1 | | | | (6.9 | ) | | | 5.6 | | | | (1.9 | ) | | | – | | | | (10.6 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 7,517.8 | | | $ | 7,965.3 | | | | (5.6 | ) | | | 2.3 | | | | (1.5 | ) | | | (0.7 | ) | | | (5.7 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Sales by Product Category The following tables present net sales by product category and the components of the percentage changes (dollars in millions): | | | | Year Ended December 31, | | | | | Volume/
Mix | | | | | Foreign
Exchange | | | Year Ended December 31, | | | | | | | Volume/ | | | | | | | Foreign | | | | | | 2016 | | | 2015 | | | % Inc | | Price | | | 2019 | | | 2018 | | | % Inc/(Dec) | | | Mix | | | Price | | | Exchange | | | Knees | | $ | 2,751.9 | | | $ | 2,276.8 | | | | 20.9 | % | | | 23.6 | % | | | (2.0 | )% | | | (0.7 | )% | | $ | 2,810.1 | | | $ | 2,773.7 | | | | 1.3 | | % | | 6.2 | | % | | (3.0 | ) | % | | (1.9 | ) | % | Hips | | | 1,867.9 | | | | 1,533.0 | | | | 21.8 | | | | 24.6 | | | | (2.6 | ) | | | (0.2 | ) | | | 1,935.1 | | | | 1,921.4 | | | | 0.7 | | | | 5.5 | | | | (3.0 | ) | | | (1.8 | ) | | S.E.T. | | | 1,645.4 | | | | 1,214.6 | | | | 35.5 | | | | 37.0 | | | | (1.4 | ) | | | (0.1 | ) | | | 1,795.7 | | | | 1,751.8 | | | | 2.5 | | | | 5.4 | | | | (1.6 | ) | | | (1.3 | ) | | Spine & CMF | | | | 747.3 | | | | 763.9 | | | | (2.2 | ) | | | 1.4 | | | | (2.6 | ) | | | (1.0 | ) | | Dental | | | 427.9 | | | | 335.7 | | | | 27.5 | | | | 25.7 | | | | 2.1 | | | | (0.3 | ) | | | 414.0 | | | | 411.2 | | | | 0.7 | | | | 3.2 | | | | (0.9 | ) | | | (1.6 | ) | | Spine & CMF | | | 662.0 | | | | 404.4 | | | | 63.7 | | | | 66.7 | | | | (2.9 | ) | | | (0.1 | ) | | Other | | | 328.8 | | | | 233.3 | | | | 40.9 | | | | 43.2 | | | | (1.8 | ) | | | (0.5 | ) | | | 280.0 | | | | 310.9 | | | | (9.9 | ) | | | (2.1 | ) | | | (6.5 | ) | | | (1.3 | ) | | | | | | | | | | | | | | | | Total | | $ | 7,683.9 | | | $ | 5,997.8 | | | | 28.1 | | | | 30.3 | | | | (1.8 | ) | | | (0.4 | ) | | $ | 7,982.2 | | | $ | 7,932.9 | | | | 0.6 | | | | 4.9 | | | | (2.7 | ) | | | (1.6 | ) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | Volume/
Mix | | | | | | Foreign
Exchange | | | | | 2015 | | | 2014 | | | % Inc | | | | Price | | | Knees | | $ | 2,276.8 | | | $ | 1,895.2 | | | | 20.1 | % | | | 28.8 | % | | | (2.4 | )% | | | (6.3 | )% | Hips | | | 1,533.0 | | | | 1,326.4 | | | | 15.6 | | | | 25.8 | | | | (2.4 | ) | | | (7.8 | ) | S.E.T. | | | 1,214.6 | | | | 863.2 | | | | 40.7 | | | | 46.8 | | | | (0.7 | ) | | | (5.4 | ) | Dental | | | 335.7 | | | | 242.8 | | | | 38.3 | | | | 45.1 | | | | (1.1 | ) | | | (5.7 | ) | Spine & CMF | | | 404.4 | | | | 207.2 | | | | 95.2 | | | | 101.2 | | | | (1.6 | ) | | | (4.4 | ) | Other | | | 233.3 | | | | 138.5 | | | | 68.4 | | | | 73.5 | | | | (1.8 | ) | | | (3.3 | ) | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 5,997.8 | | | $ | 4,673.3 | | | | 28.3 | | | | 36.7 | | | | (2.0 | ) | | | (6.4 | ) | | | | | | | | | | | | | | | | | | | | | | |
The following tables present our 2016 net sales, and our 2015 and 2014 pro forma net sales, by product category and the components of the percentage changes (dollars in millions):
| | Year Ended December 31, | | | | | | | Volume/ | | | | | | | Foreign | | | | | 2018 | | | 2017 | | | % Inc/(Dec) | | | Mix | | | Price | | | Exchange | | | Knees | | $ | 2,773.7 | | | $ | 2,734.0 | | | | 1.5 | | % | | 3.6 | | % | | (2.9 | ) | % | | 0.8 | | % | Hips | | | 1,921.4 | | | | 1,871.8 | | | | 2.6 | | | | 4.3 | | | | (2.8 | ) | | | 1.1 | | | S.E.T. | | | 1,751.8 | | | | 1,701.8 | | | | 2.9 | | | | 3.9 | | | | (1.8 | ) | | | 0.8 | | | Spine & CMF | | | 763.9 | | | | 757.9 | | | | 0.8 | | | | 2.1 | | | | (1.7 | ) | | | 0.4 | | | Dental | | | 411.2 | | | | 418.6 | | | | (1.8 | ) | | | (1.7 | ) | | | (1.5 | ) | | | 1.4 | | | Other | | | 310.9 | | | | 319.2 | | | | (2.6 | ) | | | (1.7 | ) | | | (1.5 | ) | | | 0.6 | | | Total | | $ | 7,932.9 | | | $ | 7,803.3 | | | | 1.7 | | | | 3.2 | | | | (2.4 | ) | | | 0.9 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | | | | | | | | | | | 2016 | | | Pro Forma
2015 | | | % Inc/(Dec) | | | Volume/
Mix | | | Price | | | Divestiture
Impact | | | Foreign
Exchange | | Knees | | $ | 2,751.9 | | | $ | 2,735.9 | | | | 0.6 | % | | | 4.2 | % | | | (1.6 | )% | | | (1.4 | )% | | | (0.6 | )% | Hips | | | 1,867.9 | | | | 1,842.6 | | | | 1.4 | | | | 3.7 | | | | (2.1 | ) | | | – | | | | (0.2 | ) | S.E.T. | | | 1,645.4 | | | | 1,571.8 | | | | 4.7 | | | | 6.2 | | | | (1.1 | ) | | | (0.4 | ) | | | – | | Dental | | | 427.9 | | | | 454.8 | | | | (5.9 | ) | | | (7.2 | ) | | | 1.5 | | | | – | | | | (0.2 | ) | Spine & CMF | | | 662.0 | | | | 583.5 | | | | 13.5 | | | | 15.5 | | | | (2.0 | ) | | | – | | | | – | | Other | | | 328.8 | | | | 329.2 | | | | (0.1 | ) | | | 7.6 | | | | (1.2 | ) | | | (6.2 | ) | | | (0.3 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 7,683.9 | | | $ | 7,517.8 | | | | 2.2 | | | | 4.9 | | | | (1.5 | ) | | | (0.9 | ) | | | (0.3 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | | | | | | | | | | | Pro Forma
2015 | | | Pro Forma
2014 | | | % (Dec) | | | Volume/
Mix | | | Price | | | Divestiture
Impact | | | Foreign
Exchange | | Knees | | $ | 2,735.9 | | | $ | 2,888.9 | | | | (5.3 | )% | | | 3.7 | % | | | (1.9 | )% | | | (1.1 | )% | | | (6.0 | )% | Hips | | | 1,842.6 | | | | 1,984.3 | | | | (7.1 | ) | | | 2.2 | | | | (2.1 | ) | | | – | | | | (7.2 | ) | S.E.T. | | | 1,571.8 | | | | 1,619.1 | | | | (2.9 | ) | | | 3.0 | | | | (0.7 | ) | | | (0.3 | ) | | | (4.9 | ) | Dental | | | 454.8 | | | | 500.4 | | | | (9.1 | ) | | | (3.5 | ) | | | 0.1 | | | | – | | | | (5.7 | ) | Spine & CMF | | | 583.5 | | | | 604.1 | | | | (3.4 | ) | | | 0.1 | | | | (0.7 | ) | | | – | | | | (2.8 | ) | Other | | | 329.2 | | | | 368.5 | | | | (10.7 | ) | | | (1.5 | ) | | | (1.2 | ) | | | (4.8 | ) | | | (3.2 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 7,517.8 | | | $ | 7,965.3 | | | | (5.6 | ) | | | 2.3 | | | | (1.5 | ) | | | (0.7 | ) | | | (5.7 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
The following table presents net sales by product category by geography for our Knees and Hips product categories, which represent our most significant product categories (dollars in millions): | | | | Year Ended December 31, | | | Year Ended December 31, | | | | | | 2016 | | | 2015 | | | 2014 | | | 2016 vs. 2015
% Inc | | 2015 vs. 2014
% Inc | | | 2019 | | | 2018 | | | 2017 | | | 2019 vs. 2018 % Inc/(Dec) | | | 2018 vs. 2017 % Inc/(Dec) | | | Knees | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Americas | | $ | 1,687.7 | | | $ | 1,391.5 | | | $ | 1,086.8 | | | | 21.3 | % | | | 28.0 | % | | $ | 1,676.6 | | | $ | 1,642.7 | | | $ | 1,656.5 | | | | 2.1 | | % | | (0.8 | ) | % | EMEA | | | 637.8 | | | | 535.2 | | | | 498.6 | | | | 19.2 | | | | 7.3 | | | | 654.1 | | | | 672.3 | | | | 644.4 | | | | (2.7 | ) | | | 4.4 | | | Asia Pacific | | | 426.4 | | | | 350.1 | | | | 309.8 | | | | 21.8 | | | | 13.0 | | | | 479.4 | | | | 458.7 | | | | 433.1 | | | | 4.5 | | | | 5.9 | | | | | | | | | | | | | | | | Total | | $ | 2,751.9 | | | $ | 2,276.8 | | | $ | 1,895.2 | | | | 20.9 | | | | 20.1 | | | $ | 2,810.1 | | | $ | 2,773.7 | | | $ | 2,734.0 | | | | 1.3 | | | | 1.5 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Hips | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Americas | | $ | 987.5 | | | $ | 789.7 | | | $ | 607.8 | | | | 25.0 | | | | 29.9 | | | $ | 1,016.3 | | | $ | 996.3 | | | $ | 968.9 | | | | 2.0 | | % | | 2.8 | | % | EMEA | | | 522.4 | | | | 455.2 | | | | 448.9 | | | | 14.8 | | | | 1.4 | | | | 499.8 | | | | 519.9 | | | | 518.4 | | | | (3.9 | ) | | | 0.3 | | | Asia Pacific | | | 358.0 | | | | 288.1 | | | | 269.7 | | | | 24.3 | | | | 6.8 | | | | 419.0 | | | | 405.2 | | | | 384.5 | | | | 3.4 | | | | 5.4 | | | | | | | | | | | | | | | | Total | | $ | 1,867.9 | | | $ | 1,533.0 | | | $ | 1,326.4 | | | | 21.8 | | | | 15.6 | | | $ | 1,935.1 | | | $ | 1,921.4 | | | $ | 1,871.8 | | | | 0.7 | | | | 2.6 | | | | | | | | | | | | | | | |
The following table presents our 2016 net sales, and our 2015 and 2014 pro forma net sales, by product category by geography for our Knees and Hips product categories, which represent our most significant product categories (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | 2016 | | | Pro Forma
2015 | | | Pro Forma
2014 | | | 2016 vs. 2015
% Inc/(Dec) | | | 2015 vs. 2014
% Inc/(Dec) | | Knees | | | | | | | | | | | | | | | | | | | | | Americas | | $ | 1,687.7 | | | $ | 1,684.6 | | | $ | 1,708.4 | | | | 0.2 | % | | | (1.4 | )% | EMEA | | | 637.8 | | | | 649.5 | | | | 752.3 | | | | (1.8 | ) | | | (13.7 | ) | Asia Pacific | | | 426.4 | | | | 401.8 | | | | 428.2 | | | | 6.1 | | | | (6.2 | ) | | | | | | | | | | | | | | | | | | | Total | | $ | 2,751.9 | | | $ | 2,735.9 | | | $ | 2,888.9 | | | | 0.6 | | | | (5.3 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Hips | | | | | | | | | | | | | | | | | | | | | Americas | | $ | 987.5 | | | $ | 980.3 | | | $ | 998.4 | | | | 0.7 | | | | (1.8 | ) | EMEA | | | 522.4 | | | | 537.2 | | | | 625.9 | | | | (2.8 | ) | | | (14.2 | ) | Asia Pacific | | | 358.0 | | | | 325.1 | | | | 360.0 | | | | 10.1 | | | | (9.7 | ) | | | | | | | | | | | | | | | | | | | Total | | $ | 1,867.9 | | | $ | 1,842.6 | | | $ | 1,984.3 | | | | 1.4 | | | | (7.1 | ) | | | | | | | | | | | | | | | | | | |
As previously discussed, sales increased significantly in 2016 when compared to prior years due to the inclusion of Biomet sales for the entire year. Therefore, we analyze sales on a pro forma basis because it represents how the Zimmer and Biomet underlying businesses may have performed. Sales discussion in this management discussion and analysis focuses on sales trends on a pro forma basis since that is how we analyze our business.
Demand (Volume/Mix) Trends Increased volume and changes in the mix of product sales contributedhad a positive effect of 4.9 percentage points ofpercent on year-over-year sales growth during 2016 on a pro forma basis. 2019. Volume/mix growth was driven by recent product introductions, particularly in our Knees product category, sales in key emerging markets an aging population and 2016 acquisitions (including LDR, which contributed 1.1 percentage points of growth). We believe long-term indicators point toward sustainedmarket growth. Market growth drivenhas generally been influenced by an aging global population, growth in emerging markets, obesity, proven clinical benefits, new material technologies, advances in surgical techniques and more active lifestyles, among other factors. In addition, demand for clinically proven premium products and patient
specific devices are expected to continue to positively affect sales growth in markets that recognize the value of these advanced technologies.
Pricing Trends Global selling prices had a negative effect of 1.5 percentage points2.7 percent on year-over-year sales during 2016 on a pro forma basis. The negative 1.5 percent effect on year-over-year sales was consistent with2019. In the range experienced over the past several years. The majority of countries in which we operate, we continue to experience pricing pressure from governmental healthcare cost containment efforts and from local hospitals and health systems. Foreign Currency Exchange Rates In 2016,2019, changes in foreign currency exchange rates had a negative effect of 0.3 percentage points1.6 percent on year-over-year sales on a pro forma basis. We address currency risk through regular operating and financing activities and through the use of forward contracts andsales. If foreign currency options solely to manageexchange rates remain at levels consistent with recent rates, we estimate they will have a minimal effect on sales in 2020 for the full year. However, we estimate sales will be negatively affected by foreign currency volatilityexchange rates in the first half of the year, but that impact will be offset by positive effects in the second half of the year. Sales by Product Category Knees Knee sales increased by 1.3 percent in 2019 compared to 2018. Various product launches resulted in improved volume/mix growth in the knee product category, which was partially offset by price declines and risk. Changeschanges in foreign currency exchange rates affectrates. Knee sales growth but due to offsetting gains/losses on hedge contracts and options, which | | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
are recorded in cost of products sold, the effect on net earnings in the near term is reduced.
Sales by Product Category
Knees
On a pro forma basis, Knee sales experienced steady volume/mix growth in 2016 compared to 2015, primarilywas principally driven by recent product introductions, such asincreased demand for Persona® The Personalized Knee System, cross-sell opportunities,the Oxford® Partial Knee and strong performancethe ROSA® Knee System.
Hips Hip sales increased by 0.7 percent in our Asia Pacific operating segment.2019 compared to 2018. Volume/mix growth in this product category was partially offset by continued pricing pressureprice declines and the divestiturechanges in foreign currency exchange rates. Hip sales growth was primarily attributable to increased utilization of certain product line rightsour Taperloc® Complete Hip System and assets.G7® Acetabular System. HipsS.E.T.
On a pro forma basis, HipsS.E.T. sales experienced steady volume/mix growthincreased by 2.5 percent in 20162019 compared to 2015,2018 primarily driven by recentdue to supply stability, salesforce specialization and new product introductions, such as the G7 Acetabular System, and strong performance in our Asia Pacific operating segment. Volume/mix growth waslaunches, partially offset by continued pricing pressure.
S.E.T.
On a pro forma basis, our S.E.T. sales have continued positive volume/mix trendsprice declines and changes in 2016 compared to 2015, primarily driven by a growing emphasis on sales force specialization, strong performance by key brands and 2016 acquisitions. This product category’ssub-categories all experienced growth in 2016 despite continued pricing pressure.foreign currency exchange rates.
Dental
On a pro forma basis, dental sales have continued to decline. In the second half of 2015, we experienced a supply disruption related to a voluntary field action in response to a packaging issue which we were not able to remediate until 2016, which affected our sales. Looking forward, we must improve our commercial execution to get back to market growth rates.
Spine & CMF On a pro forma basis, Spine and CMF sales increaseddecreased by 2.2 percent in 20162019 compared to 20152018 primarily due to the LDR mergerongoing sales channel consolidation in our Spine division, price declines and changes in foreign currency exchange rates. Demand for our thoracic products continued strong performanceto positively contribute to sales.
Dental Dental sales increased by 0.7 percent in 2019 compared to 2018. Volume/mix growth in our Dental product category improved primarily due to investment of our CMF products.resources in priority areas, as well as other operational improvements. The following table presents estimated* 20162019 global market size and market share information (dollars in billions): | | | Global | | | Global | | Zimmer Biomet | | | | | | | | | | | | Market | | | Market | | Market | | | | | Global
Market
Size | | | Global Market
% Growth** | | Zimmer
Biomet
Market
Share | | Zimmer
Biomet
Market
Position | | | Size | | | % Growth** | | Position | | Knees | | $ | 7.7 | | | | 4 | % | | | 36 | % | | | 1 | | | $ | 8 | | | Low-Single Digit | | | 1 | | Hips | | | 6.2 | | | | 2 | | | | 30 | | | | 1 | | | | 7 | | | Low-Single Digit | | | 1 | | S.E.T. | | | 15.2 | | | | 5 | | | | 11 | | | | 5 | | | | 22 | | | Mid-Single Digit | | | 5 | | Spine & CMF | | | | 11 | | | Low-Single Digit | | | 5 | | Dental | | | 4.2 | | | | 5 | | | | 10 | | | | 4 | | | | 5 | | | Mid-Single Digit | | | 4 | | Spine & CMF | | | 10.5 | | | | 2 | | | | 6 | | | | 5 | | |
* | * Estimates are not precise and are based on competitor annual filings, Wall Street equity research and Company estimates
|
** | Excludes the effect of changes in foreign currency exchange rates on sales growth |
** Excludes the effect of changes in foreign currency exchange rates on sales growth
Expenses as a Percent of Net Sales | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2016 | | 2015 | | 2014 | | 2016 vs. 2015
Inc/(Dec) | | 2015 vs. 2014
Inc/(Dec) | | | 2019 | | | 2018 | | | 2017 | | | 2019 vs. 2018 Inc/(Dec) | | | 2018 vs. 2017 Inc/(Dec) | | | Cost of products sold, excluding intangible asset amortization | | | 31.0 | % | | | 30.0 | % | | | 26.6 | % | | | 1.0 | | | | 3.4 | | | | 28.2 | | % | | 28.6 | | % | | 27.3 | | % | | (0.4 | ) | % | | 1.3 | | % | Intangible asset amortization | | | 7.4 | | | | 5.6 | | | | 2.0 | | | | 1.8 | | | | 3.6 | | | | 7.3 | | | | 7.5 | | | | 7.7 | | | | (0.2 | ) | | | (0.2 | ) | | Research and development | | | 4.8 | | | | 4.5 | | | | 4.0 | | | | 0.3 | | | | 0.5 | | | | 5.6 | | | | 4.9 | | | | 4.7 | | | | 0.7 | | | | 0.2 | | | Selling, general and administrative | | | 38.2 | | | | 38.1 | | | | 37.5 | | | | 0.1 | | | | 0.6 | | | | 41.9 | | | | 42.6 | | | | 39.8 | | | | (0.7 | ) | | | 2.8 | | | Certain claims | | | – | | | | 0.1 | | | | 0.5 | | | | (0.1 | ) | | | (0.4 | ) | | Special items | | | 8.0 | | | | 13.9 | | | | 7.3 | | | | (5.9 | ) | | | 6.6 | | | Goodwill and intangible asset impairment | | | | 0.9 | | | | 12.3 | | | | 4.2 | | | | (11.4 | ) | | | 8.1 | | | Quality remediation | | | | 1.0 | | | | 1.9 | | | | 2.3 | | | | (0.9 | ) | | | (0.4 | ) | | Restructuring and other cost reduction initiatives | | | | 0.6 | | | | 0.4 | | | | 0.2 | | | | 0.2 | | | | 0.2 | | | Acquisition, integration and related | | | | 0.2 | | | | 1.3 | | | | 3.4 | | | | (1.1 | ) | | | (2.1 | ) | | Operating Profit | | | 10.7 | | | | 7.8 | | | | 22.2 | | | | 2.9 | | | | (14.4 | ) | | | 14.2 | | | | 0.4 | | | | 10.2 | | | | 13.8 | | | | (9.8 | ) | |
Cost of Products Sold and Intangible Asset Amortization We calculate gross profit as net sales minus cost of products sold and intangible asset amortization. Our gross margin percentage is gross profit divided by net sales. The following table sets forth the factors that contributed to the gross margin changes in each of 20162019 and 20152018 compared to the prior year: | | | | Year Ended December 31, | | | Year Ended December 31, | | | | | 2016 | | 2015 | | | 2019 | | | 2018 | | Prior year gross margin | | | 64.4 | % | | | 71.4 | % | | | 63.9 | % | | | 64.9 | % | Lower average selling prices | | | (0.6 | ) | | | (0.6 | ) | | | (0.7 | ) | | | (0.6 | ) | Average cost per unit | | | (0.7 | ) | | | 1.3 | | | | (0.4 | ) | | | 0.8 | | Excess and obsolete inventory | | | 0.4 | | | | (0.8 | ) | | | 0.1 | | | | (1.0 | ) | Discontinued products and other certain excess and obsolete inventory charges | | | (1.0 | ) | | | – | | | Certain inventory and manufacturing related charges related to quality | | | – | | | | 0.2 | | | Foreign currency hedges | | | (0.9 | ) | | | 1.3 | | | Discontinued products inventory charges | | | | - | | | | (0.1 | ) | Royalties | | | | 0.4 | | | | - | | Impact of foreign currency hedges | | | | 0.8 | | | | (0.4 | ) | Inventorystep-up | | | 1.2 | | | | (5.1 | ) | | | - | | | | 0.4 | | U.S. medical device excise tax | | | 0.3 | | | | – | | | | 0.2 | | | | (0.3 | ) | Intangible asset amortization | | | (1.6 | ) | | | (3.5 | ) | | | 0.2 | | | | 0.2 | | Other | | | 0.1 | | | | 0.2 | | | | | | Current year gross margin | | | 61.6 | % | | | 64.4 | % | | | 64.5 | % | | | 63.9 | % | | | |
The decreaseincrease in gross margin percentage in 20162019 compared to 20152018 was primarily due to increasedthe effect of our hedging program, lower royalty expense, a refund related to U.S. medical device excise taxes and lower intangible asset amortization from the 2016 acquisitions, excess and obsolete inventory charges for certain product lines we intend to discontinue, lower average selling prices and loweramortization. We incurred hedge gains of $38.4 million in 2016 from our foreign currency hedging program2019 compared to 2015. Under the hedging program, forhedge losses of $26.2 million in 2018. For derivatives which qualify as hedges of future cash flows, the effective portion of changes in fair value is temporarily recorded in other comprehensive income and then recognized in cost of products sold when the hedged items affect earnings. The refund of a portion of the U.S. medical device excise tax was the result of a change in the methodology we used to calculate the constructive sales price upon which the taxes were paid. On July 1, 2019 the IRS approved and agreed to our change in methodology. The reduction in royalty expense was partially the result of an agreement we entered into on April 1, 2019. Under the agreement, we paid $192.5 million to buy out certain licensing arrangements from an unrelated third party. This new agreement and the related payment replace the variable royalty payments that otherwise would have been due under the terms of previous licensing arrangements through 2029. The payment was recorded as an intangible asset and will be amortized through 2029. Intangible asset amortization expense declined in 2019 due to certain intangible assets from past acquisitions being fully amortized, partially offset by additional amortization from the agreement to buy out certain licensing arrangements we entered into on April 1, 2019. These unfavorablefavorable items were partially offset by lower inventorystep-up charges from the Biomet mergeraverage selling prices and lower expense from the U.S. medical device excise tax,higher manufacturing costs. Operating Expenses R&D expenses as a percentage of net sales increased in each case in 20162019 compared to 2015. In 2015, we experienced a decrease in gross margin percentage compared to 20142018 primarily due to increased inventorystep-up chargesinvestment in our Knee product pipeline, costs associated with the EU MDR and intangible asset amortization from the Biomet merger.
| | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
patent licenses acquired for use in R&D activities that were expensed immediately.Operating Expenses
R&DSelling, general and administrative (“SG&A”) expenses and R&DSG&A expenses as a percentage of sales have increased over the last three years, drivendecreased in 2019 compared to 2018 primarily due to lower litigation-related charges. In 2018, we recognized a $168 million litigation charge for a patent infringement lawsuit. The lower litigation-related charges were partially offset by the Biomet mergerhigher selling costs due to higher sales, investments in preparation for new product launches, and 2016 acquisitions. The combinationhigher expenses from legal entity, distribution and manufacturing optimization, including distributor contract terminations.
In 2019, we recognized a $70.1 million in-process research and development (“IPR&D”) intangible asset impairment on certain IPR&D projects that we terminated. In 2018, we recognized goodwill impairment charges of $975.9 million primarily related to our R&D functions subsequentEMEA and Spine reporting units. Our quality remediation expenses continued to decline in 2019 due to the mergernatural regression of completing our remediation milestones. Similarly, acquisition, integration and related expenses declined mainly due to the completion of certain integration efforts. In December 2019, our Board of Directors approved, and we initiated, a new global restructuring program with an overall objective of reducing costs to allow us to allocateinvest in higher priority growth opportunities. We recognized expenses of $50.0 million in 2019 primarily related to severance associated with this program as well as expenses
incurred related to a greater portion of the combined R&D spending towards innovation efforts to address unmet clinical needs and create new market adjacencies. Additionally, most of our R&D activities occur in the U.S., sosupply chain optimization initiative. The 2018 cost reduction expenses do not decrease proportionally to changes in net sales when there are significant changes in foreign currency exchange rates, which contributes to an increase in R&D as a percentage of sales. We expect R&D spending in 2017 to stay consistent and be approximately 4.5 percent of sales. SG&Aonly included expenses and SG&A as a percentage of sales have increased over the last three years, driven primarily by the Biomet merger and 2016 acquisitions. We expect that SG&A as a percentage of sales will continue to be higher than prior to these mergers and acquisitions until we can realize synergy benefits of the transactions and further leverage sales growth. In 2017, we expect to make additional progress in our synergy programs with SG&A as a percentage of sales estimated to be approximately 37.5 percent of sales.
“Certain claims” expense is for estimated liabilities to Durom Cup patients undergoing revision surgeries. Since 2008, we have recognized $479.4 million for these claims. For more information regarding these claims, see Note 20related to the consolidated financial statements.supply chain optimization initiative.
We recognize expenses resulting directly from our business combinations, employee termination benefits, certain R&D agreements, certain contract terminations, consulting and professional fees and asset impairment or loss on disposal charges connected with global restructuring, quality and operational excellence initiatives, and other items as “Special items” in our consolidated statement of earnings. We recognized significant expenses in 2015 due to Biomet merger-related expenses, such as the acceleration of unvested LVB stock options and LVB stock-based awards, retention bonuses paid to Biomet employees and third-party sales agents who remained with Biomet through the Closing Date, severance expense and contract terminations. Expenses declined in 2016 due to the absence of certain of these expenses. See Note 2 to the consolidated financial statements for more information regarding “Special items” charges.
Other Expense, Interest Income,net, Interest Expense, net, and Income Taxes In 2016,Our other expense, net, primarily included a $53.3 million loss on debt extinguishment. It also includedrelates to certain components of pension expense, investment gains and losses on the sale of certain assets and the net expenseremeasurement gains and losses related to remeasuring monetary assets and liabilities denominated in a foreign currency other than an entity’s functional currency, partially offset by the impact of foreign currency forward exchange contracts we enterentered into to mitigate any gain or loss. In 2015,The decline in other expense, net included a $22.0 million loss onin 2019 was driven by higher pension-related gains.
Interest expense, net, declined in 2019 compared to 2018 primarily due to continued debt extinguishment, debt issuance costs that we recognized for a bridge credit agreement that we entered into in May 2014 in connection with the Biomet merger, the net expenserepayments and gains related to remeasuring monetary assets and liabilities, partially offset by a gain related to selling certain product line rights and assets. In 2014, other expense, net, only included debt issuance costs that we recognized for the bridge credit agreement and the net expense related to remeasuring monetary assets and liabilities.our cross-currency interest rate swaps.
Net interest expense has increased due to the issuance of the debt in connection with the LDR merger in July 2016 and Biomet merger in March 2015.
Our effective tax rate (“ETR”) on earnings (loss) before income taxes was negative 24.9 percent (a tax benefit was recognized on earnings before income taxes) and negative 39.9 percent (a tax provision was recognized on a loss before income taxes) for the years ended December 31, 2016, 20152019 and 20142018, respectively. In 2019, we recognized an overall tax benefit in the year due to a $315.0 million benefit from Switzerland’s Federal Act on Tax Reform and AHV Financing (“TRAF”) in addition to the tax impact of certain restructuring transactions in Switzerland. The TRAF is effective January 1, 2020 and includes the abolishment of various favorable federal and cantonal tax regimes. The TRAF provides transitional relief measures for companies that are losing the tax benefit of a ruling, including a "step-up" for amortizable goodwill, equal to the amount of future tax benefit they would have received under their existing ruling, subject to certain limitations. In 2018, our negative ETR was 23.8 percent, 4.6 percent and 23.4 percent, respectively. We have incurred significant expensesprimarily due to goodwill impairment that resulted in us having a net loss before income taxes with no associated with the Biomet merger and other acquisitions which were generallytax benefit recognized in higherfor this charge. In 2018, we also recognized an additional $8.3 million of income tax jurisdictions. Accordingly, this reducedprovision as we completed our estimate of the effects of the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). Absent discrete tax events, we expect our future ETR as our earnings werewill be lower in these higherthan the U.S. corporate income tax jurisdictions. Additionally, other discrete adjustmentsrate of 21.0 percent due to our mix of earnings between U.S. and foreign locations, which have occurred that have significantly affected our ETR. In 2016, we recognized $40.6 million oflower corporate income tax benefits from the favorable resolution of certain tax matters with taxing authorities. These benefits were partially offset by $27.6 million of additional tax provisions related to finalizing the tax accounts of the Biomet merger. The low 2015 tax rate resulted from operating losses in the U.S. caused by significant expenses incurred in connection with the merger.rates. Our ETR in future periods could also potentially be impacted byby: changes in our mix ofpre-tax earnings; changes in tax rates, tax laws or their interpretation, including the European Union rules on state aid; the outcome of various federal, state and foreign audits; and the expiration of certain statutes of limitations. Currently, we cannot reasonably estimate the impact of these items on our financial results. Segment Operating Profit Similar to our consolidated results, our segment operating profit has been significantly impacted by the addition of Biomet sales and expenses to these segments.
| | | | | | | | | | | | | | | | | | | | | | | | | | Operating Profit as a | | | | | Net Sales | | | Operating Profit | | | Percentage of Net Sales | | | | | Year Ended December 31, | | | Year Ended December 31, | | | Year Ended December 31, | | | (dollars in millions) | | 2019 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | | 2017 | | | Americas | | $ | 3,978.1 | | | $ | 3,932.6 | | | $ | 3,928.9 | | | $ | 2,163.2 | | | $ | 2,084.4 | | | $ | 2,126.8 | | | | 54.4 | | % | | 53.0 | | % | | 54.1 | | % | EMEA | | | 1,538.6 | | | | 1,576.1 | | | | 1,523.4 | | | | 477.1 | | | | 479.3 | | | | 478.1 | | | | 31.0 | | | | 30.4 | | | | 31.4 | | | Asia Pacific | | | 1,297.0 | | | | 1,236.9 | | | | 1,158.3 | | | | 458.9 | | | | 435.3 | | | | 417.6 | | | | 35.4 | | | | 35.2 | | | | 36.1 | | |
In the Americas, operating profit as a percentage of net sales increased in 2019 compared to 2018. The increase was primarily due to synergies from the Biomet mergerimproved sales volume/mix and a two year moratorium on the U.S. medical device excise tax for the calendar years of 2016 and 2017. Under the applicable accounting rules that we applied to the U.S. medical device excise tax, we still had a portion of the tax paid prior to the moratorium included in the cost of inventory and continued to recognize expense, albeit at a lower level than in 2015, related to the tax through the fourth quarter of 2016. In 2017, we intend to invest the savings from the medical device excise tax moratorium into our business in areas such as R&D, sales force specialization and medical training and education. controlled spending. In EMEA, operating profit as a percentage of net sales declinedincreased in 2019 compared to 2018. The increase was primarily due to the increased expenseshigher sales volume/mix and gains recognized related to the Biomet merger, lower average selling prices and a reduced impact of hedge gains. In EMEA, even though our integration plans are on schedule, it will take longer to realize the full synergies of the merger compared to other segments due to the multiple | | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
countries in which we operate and the complexities in those countries.
hedging program. In Asia Pacific, operating profit as a percentage of net sales declinedincreased in 2019 compared to 2018 primarily due to the increased expensesvolume/mix net sales growth and gains recognized related to the Biomet merger, lower average selling prices and a reduced impact of hedge gains.our hedging program. Non-GAAP Operating Performance Measures We use financial measures that differ from financial measures determined in accordance with GAAPU.S. Generally Accepted Accounting Principles (“GAAP”) to evaluate our operating performance. Thesenon-GAAP financial
measures exclude, as applicable, the impact of inventorystep-up; certain inventory and manufacturing-related charges connectedincluding charges to discontinuingdiscontinue certain product lines, quality enhancement and remediation efforts;lines; intangible asset amortization; “Special items;” “Certain claims;” financinggoodwill and intangible asset impairment; quality remediation expenses; restructuring and other expenses/cost reduction initiatives; acquisition, integration and related expenses; certain litigation gains relatedand charges; expenses to the Biomet merger and other acquisitions; debt extinguishment; the interest expense incurred on the senior notes issued in connectioncomply with the Biomet merger during the period prior to the consummation of the Biomet merger;EU MDR; other charges; any related effects on our income tax provision associated with these items anditems; the effect of Switzerland tax reform; the effect of the 2017 Tax Act; other certain tax adjustments. Other certain tax adjustments primarily include internal restructuring transactionsadjustments; and, with respect to integrate Biomet operations and facilitate access to offshore earnings resolutionper share information, provide for the effect of certain matters with taxing authorities, adjustments to deferred tax liabilities recognized as partdilutive shares assuming net earnings in a period of acquisition-related accounting, the resolution of unrecognized tax positions established through goodwill as part of acquisition accounting that had not previously been recognized in the earnings of the acquired company and any tax item that would otherwise be distortive to the expected future tax rate.a reported net loss. We use thesenon-GAAP financial measures internally to evaluate the performance of the business andbusiness. Additionally, we believe they are usefulthese non-GAAP measures that provide meaningful supplementalincremental information to investors to consider when evaluating our performance. We believe these measures offer the ability to makeperiod-to-period comparisons that are not impacted by certain items that can cause dramatic changes in reported income but that do not impact the fundamentals of our operations. The non-GAAP measures enable the evaluation of operating results to performand trend analysis by allowing a reader to better identify operating trends that may otherwise be masked or distorted by these types of items and to provide additional transparency of certain items.that are excluded from the non-GAAP measures. In addition, certain of thesenon-GAAP financial measures areadjusted diluted earnings per share is used as a performance metricsmetric in our incentive compensation programs. Ournon-GAAP adjusted net earnings used for internal management purposes for the years ended December 31, 2016, 20152019, 2018 and 20142017 were $1,610.8$1,626.4 million, $1,310.5$1,565.4 million and $1,098.0$1,636.4 million, respectively, and ournon-GAAP adjusted diluted earnings per share were $7.96, $6.90,$7.87, $7.64 and $6.40,$8.03, respectively. The following are reconciliations from our GAAP net earnings and diluted earnings per share to ournon-GAAP adjusted net earnings andnon-GAAP adjusted diluted earnings per share used for internal management purposes (in millions, except per share amounts). | | | | | | | | | | | | | | | | Year ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | Net Earnings of Zimmer Biomet Holdings, Inc. | | $ | 305.9 | | | $ | 147.0 | | | $ | 720.3 | | Inventorystep-up and other inventory and manufacturing related charges | | | 469.1 | | | | 348.8 | | | | 36.3 | | Certain claims | | | – | | | | 7.7 | | | | 21.5 | | Intangible asset amortization | | | 565.9 | | | | 337.4 | | | | 92.5 | | Special items | | | | | | | | | | | | | Biomet merger-related | | | 487.3 | | | | 619.1 | | | | 61.9 | | Other special items | | | 124.5 | | | | 212.7 | | | | 279.2 | | Merger-related and other expense in other (expense) income, net | | | 3.6 | | | | 1.0 | | | | 39.6 | | Debt extinguishment cost | | | 53.3 | | | | 22.0 | | | | – | | Interest expense on Biomet merger financing | | | – | | | | 70.0 | | | | – | | Taxes on above items(1) | | | (449.0 | ) | | | (487.6 | ) | | | (153.3 | ) | Biomet merger-related measurement period tax adjustments(2) | | | 52.7 | | | | – | | | | – | | Other certain tax adjustments(3) | | | (2.5 | ) | | | 32.4 | | | | – | | | | | | | | | | | | Adjusted Net Earnings | | $ | 1,610.8 | | | $ | 1,310.5 | | | $ | 1,098.0 | | | | | | | | | | | |
(1) The tax effect for the U.S. jurisdiction is calculated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is calculated based upon the statutory rates where the items were incurred.
(2)The 2016 period includes negative effects from finalizing the tax accounts for the Biomet merger. Under the applicable U.S. GAAP rules, these measurement period adjustments are recognized on a prospective basis in the period of change.
(3) Other certain tax adjustments primarily include internal restructuring transactions to integrate Biomet operations and facilitate access to offshore earnings, partially offset by resolution of certain matters with taxing authorities and adjustments to deferred tax liabilities recognized as part of acquisition-related accounting.
| | | | | | | | | | | | | | | | Year ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | Diluted EPS | | $ | 1.51 | | | $ | 0.77 | | | $ | 4.20 | | Inventorystep-up and other inventory and manufacturing related charges | | | 2.32 | | | | 1.84 | | | | 0.21 | | Certain claims | | | – | | | | 0.04 | | | | 0.13 | | Intangible asset amortization | | | 2.80 | | | | 1.78 | | | | 0.54 | | Special items | | | | | | | | | | | | | Biomet merger-related | | | 2.40 | | | | 3.26 | | | | 0.36 | | Other special items | | | 0.62 | | | | 1.12 | | | | 1.63 | | Merger-related and other expense in other (expense) income, net | | | 0.02 | | | | – | | | | 0.23 | | Debt extinguishment cost | | | 0.26 | | | | 0.12 | | | | – | | Interest expense on Biomet merger financing | | | – | | | | 0.37 | | | | – | | Taxes on above items(1) | | | (2.22 | ) | | | (2.57 | ) | | | (0.90 | ) | Biomet merger-related measurement period tax adjustments(2) | | | 0.26 | | | | – | | | | – | | Other certain tax adjustments(3) | | | (0.01 | ) | | | 0.17 | | | | – | | | | | | | | | | | | Adjusted Diluted EPS | | $ | 7.96 | | | $ | 6.90 | | | $ | 6.40 | | | | | | | | | | | |
| | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
: | | Year ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Net Earnings (Loss) of Zimmer Biomet Holdings, Inc. | | $ | 1,131.6 | | | $ | (379.2 | ) | | $ | 1,813.8 | | Inventory step-up and other inventory and manufacturing related charges(1) | | | 53.9 | | | | 32.5 | | | | 70.8 | | Intangible asset amortization(2) | | | 584.3 | | | | 595.9 | | | | 603.9 | | Goodwill and intangible asset impairment(3) | | | 70.1 | | | | 979.7 | | | | 331.5 | | Quality remediation(4) | | | 87.6 | | | | 165.4 | | | | 195.1 | | Restructuring and other cost reduction initiatives(5) | | | 50.0 | | | | 34.2 | | | | 17.6 | | Acquisition, integration and related(6) | | | 12.2 | | | | 99.5 | | | | 262.2 | | Litigation(7) | | | 65.0 | | | | 186.0 | | | | 104.0 | | Litigation settlement gain(8) | | | (23.5 | ) | | | - | | | | - | | European Union Medical Device Regulation(9) | | | 30.9 | | | | 3.7 | | | | - | | Other charges(10) | | | 119.2 | | | | 82.8 | | | | 43.8 | | Taxes on above items (11) | | | (226.2 | ) | | | (239.6 | ) | | | (421.5 | ) | U.S. tax reform (12) | | | - | | | | 8.3 | | | | (1,272.4 | ) | Switzerland tax reform (13) | | | (315.0 | ) | | | - | | | | - | | Other certain tax adjustments (14) | | | (13.7 | ) | | | (3.8 | ) | | | (112.4 | ) | Adjusted Net Earnings | | $ | 1,626.4 | | | $ | 1,565.4 | | | $ | 1,636.4 | |
| | Year ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Diluted Earnings (Loss) per share | | $ | 5.47 | | | $ | (1.86 | ) | | $ | 8.90 | | Inventory step-up and other inventory and manufacturing related charges(1) | | | 0.26 | | | | 0.16 | | | | 0.35 | | Intangible asset amortization(2) | | | 2.83 | | | | 2.93 | | | | 2.96 | | Goodwill and intangible asset impairment(3) | | | 0.34 | | | | 4.81 | | | | 1.63 | | Quality remediation(4) | | | 0.42 | | | | 0.81 | | | | 0.96 | | Restructuring and other cost reduction initiatives(5) | | | 0.24 | | | | 0.17 | | | | 0.09 | | Acquisition, integration and related(6) | | | 0.06 | | | | 0.49 | | | | 1.28 | | Litigation(7) | | | 0.31 | | | | 0.91 | | | | 0.51 | | Litigation settlement gain(8) | | | (0.11 | ) | | | - | | | | - | | European Union Medical Device Regulation(9) | | | 0.15 | | | | 0.02 | | | | - | | Other charges(10) | | | 0.58 | | | | 0.41 | | | | 0.22 | | Taxes on above items (11) | | | (1.09 | ) | | | (1.18 | ) | | | (2.07 | ) | U.S. tax reform (12) | | | - | | | | 0.04 | | | | (6.25 | ) | Switzerland tax reform (13) | | | (1.52 | ) | | | - | | | | - | | Other certain tax adjustments (14) | | | (0.07 | ) | | | (0.02 | ) | | | (0.55 | ) | Effect of dilutive shares assuming net earnings(15) | | | - | | | | (0.05 | ) | | | - | | Adjusted Diluted EPS | | $ | 7.87 | | | $ | 7.64 | | | $ | 8.03 | |
(1) | Inventory step-up and other inventory and manufacturing-related charges relate to inventory step-up expense, excess and obsolete inventory charges on certain product lines we intend to discontinue and other inventory and manufacturing-related charges. The year ended December 31, 2019 included a $20.8 million charge incurred to terminate a raw material supply agreement. Inventory step-up expense represents the incremental expense of inventory sold recognized at its fair value after business combination accounting is applied versus the expense that would have been recognized if sold at its cost to manufacture. Since only the inventory that existed at the business combination date was stepped-up to fair value, we believe excluding the incremental expense provides investors useful information as to what our costs may have been if we had not been required to increase the inventory’s book value to fair value. The excess and obsolete inventory charges on certain product lines are driven by acquisitions where there are competing product lines and we have plans to discontinue one of the competing product lines. |
(2) | We exclude intangible asset amortization from our non-GAAP financial measures because we internally assess our performance against our peers without this amortization. Due to various levels of acquisitions among our peers, intangible asset amortization can vary significantly from company to company. |
(3) | In 2019 and 2018, we recognized $70.1 and $3.8 million, respectively, of intangible asset impairments from merger-related IPR&D intangible assets. Also in 2018, we recognized a goodwill impairment charge of $975.9 million. The impairment was comprised of $401.2 million in our Spine reporting unit, $567.0 million in our EMEA reporting unit and $7.7 million in an insignificant reporting unit. In 2017, we recognized $18.8 million and $8.0 million of intangible asset impairment from merger-related IPR&D and trademark intangible assets, respectively. Also in 2017, we recognized goodwill impairment charges of $32.7 million and $272.0 million on our Office Based Technologies and Spine reporting units, respectively. |
(4) | We are addressing inspectional observations on Form 483 and a Warning Letter issued by the U.S. Food and Drug Administration (“FDA”) following its previous inspections of our Warsaw North Campus facility, among other matters. This quality remediation has required us to devote significant financial resources and is for a discrete period of time. The majority of the expenses are related to consultants who are helping us to update previous documents and redesign certain processes. |
(5) | In December 2019, our Board of Directors approved, and we initiated, a new global restructuring program with an overall objective of reducing costs to allow us to invest in higher priority growth opportunities. In 2019, the expenses were primarily related to severance and our supply chain optimization initiative. The 2018 and 2017 expenses were related to our supply chain optimization initiative. |
(6) | The acquisition, integration and related gains and expenses we have excluded from our non-GAAP financial measures resulted from various acquisitions. The acquisition, integration and related gains and expenses include the following types of gains and expenses: |
| • | Consulting and professional fees related to third-party integration consulting performed in a variety of areas, such as tax, compliance, logistics and human resources, and legal fees related to the consummation of mergers and acquisitions. |
| • | Employee termination benefits related to terminating employees with overlapping responsibilities in various areas of our business. |
| • | Dedicated project personnel expenses which include the salary, benefits, travel expenses and other costs directly associated with employees who are 100 percent dedicated to our integration of acquired businesses and employees who have been notified of termination, but are continuing to work on transferring their responsibilities. |
| • | Contract termination expenses related to terminated contracts, primarily with sales agents and distribution agreements. |
| • | Other various expenses to relocate facilities, integrate information technology, losses incurred on assets resulting from the applicable acquisition, and other various expenses. |
(7) | We are involved in routine patent litigation, product liability litigation, commercial litigation and other various litigation matters. We review litigation matters from both a qualitative and quantitative perspective to determine if excluding the losses or gains will provide our investors with useful incremental information. Litigation matters can vary in their characteristics, frequency and significance to our operating results. The litigation charges and gains excluded from our non-GAAP financial measures in the periods presented relate to product liability matters where we have received numerous claims on specific products, patent litigation and commercial litigation related to a common matter in multiple jurisdictions. In regards to the product liability matters, due to the complexities involved and claims filed in multiple districts, the expenses associated with these matters are significant to our operating results. Once the litigation matter has been excluded from our non-GAAP financial measures in a particular period, any additional expenses or gains from changes in estimates are also excluded, even if they are not significant, to ensure consistency in our non-GAAP financial measures from period-to-period. |
(8) | In the first quarter of 2019, we settled a patent infringement lawsuit out of court, and the other party agreed to pay us an upfront, lump-sum amount for a non-exclusive license to the patent. |
(9) | The EU MDR imposes significant additional premarket and postmarket requirements. The new regulations provide a transition period until May 2020 for currently-approved medical devices to meet the additional requirements. For certain devices, this transition period can be extended until May 2024. We are excluding from our non-GAAP financial measures the incremental costs incurred to establish initial compliance with the regulations related to our currently-approved medical devices. The incremental costs primarily include third-party consulting necessary to supplement our internal resources. |
(10) | We have incurred other various expenses from specific events or projects that we consider highly variable or that have a significant impact to our operating results that we have excluded from our non-GAAP measures. These include costs related to legal entity, distribution and manufacturing optimization, including contract terminations, as well as our costs of complying with our Deferred Prosecution Agreement (“DPA”) with the U.S. government related to certain Foreign Corrupt Practices Act matters involving Biomet and certain of its subsidiaries. Under the DPA, which has a three-year term, we are subject to oversight by an independent compliance monitor, which monitorship commenced in August 2017. The excluded costs include the fees paid to the independent compliance monitor and to external legal counsel assisting in the matter. |
(11) | Represents the tax effects on the previously specified items. The tax effect for the U.S. jurisdiction is calculated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is calculated based upon the statutory rates where the items were incurred. |
(12) | The 2017 Tax Act resulted in a net favorable provisional adjustment due to the reduction of deferred tax liabilities for unremitted earnings and revaluation of deferred tax liabilities to a 21 percent rate, which was partially offset by provisional tax charges related to the toll charge provision of the 2017 Tax Act. In 2018, we finalized our estimates of the effects of the 2017 Tax Act based upon final guidance issued by U.S. tax authorities. |
(13) | We recognized a tax benefit related to TRAF in addition to an impact from certain restructuring transactions in Switzerland. |
(14) | Other certain tax adjustments relate to various discrete tax period adjustments, including changes in statutory tax rates, adjustments from internal restructuring transactions that provide us access to offshore funds in a tax efficient manner and resolutions of various tax matters. |
(15) | Diluted share count used in Adjusted Diluted EPS (in millions): |
| | Year ended December 31, 2018 | | Diluted shares | | | 203.5 | | Dilutive shares assuming net earnings | | | 1.5 | | Adjusted diluted shares | | | 205.0 | |
(1) The tax effect for the U.S. jurisdiction is calculated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is calculated based upon the statutory rates where the items were incurred.
(2)The 2016 period includes negative effects from finalizing the tax accounts for the Biomet merger. Under the applicable U.S. GAAP rules, these measurement period adjustments are recognized on a prospective basis in the period of change.
(3) Other certain tax adjustments primarily include internal restructuring transactions to integrate Biomet operations and facilitate access to offshore earnings, partially offset by resolution of certain matters with taxing authorities and adjustments to deferred tax liabilities recognized as part of acquisition-related accounting.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities increased to $1,632.2were $1,585.8 million in 20162019 compared to $849.8$1,747.4 million and $1,060.5$1,582.3 million in 20152018 and 2014,2017, respectively. The increaseddecrease in operating cash flows in 2016 were2019 compared to 2018 was primarily from the inclusiondue to a payment of Biomet cash flows for the entire year. We also sold $103.1approximately $168 million on a patent infringement lawsuit. Additionally, in 2018 we expanded our sale of our accounts receivable in certain countries in 2016, which improvedprovided additional cash inflows, compared to 2019 when we sold fewer receivables at the end of the year which had a negative effect on operating cash flows. Conversely, in 2015 we had various significant cash outflows, including a $97.6 million loss on our forward starting interest rate swaps we settled and expenses related to completing the Biomet merger. In 2017, we expect operating cash flows to be in a range of $1,750.0 million to $1,900.0 million. Cash flows used in investing activities were $1,691.5$729.3 million in 20162019 compared to $7,557.9$416.6 million and $469.4$510.8 million in 20152018 and 2014,2017, respectively. In 2019, we paid $197.6 million to buy out certain licensing arrangements from unrelated third parties. Instrument and property, plant and equipment additions increased due to the Biomet merger as we continue to investreflected ongoing investments in the combined companyour product portfolio and optimizeoptimization of our manufacturing and logistics network. Purchases and sales ofnetwork, including investments in debt securities declined because as investments matured, we used the cash to pay off debt and repurchase shares of our common stock. In the 2016 period, we also investedinstruments in the Cayenne, CTC, LDR, CD Diagnostics and MedTech acquisitions and other various assets. In 2017, we expect to spend approximately $330.0 million on instruments and $170.0 million on property, plant and equipment2019 to support the ongoing business.new product launches. Cash flows used in financing activities were $743.2$779.9 million in 2016. This reflected2019. Our primary use of available cash in 2019 was for debt repayment. We received net proceeds of $549.2 million from the issuance of additional Euro-denominated senior notes which we used to repay $500.0 million of senior notes that became due on November 30, 2019. In January 2019, we borrowed an additional $200.0 million under a U.S. term loan (“U.S. Term Loan C”) and used those proceeds, along with cash on hand, to repay the remaining $225.0 million outstanding under the U.S. term loan (“U.S. Term Loan B”) provided for under our 2016 credit agreement. During 2019 we also repaid the $735.0 million outstanding balance under U.S. Term Loan C, with the remainder of the proceeds from the Euro-denominated senior notes issuance and cash from operations. Overall, we had approximately $1,010.0$710 million of net principal repayments on theour senior notes and term loanloans in 2019. In 2018, we issuedreceived net proceeds of $749.5 million from the issuance of additional senior notes and borrowed $400.0 million from our $1.5 billion multicurrency revolving facility provided for under our 2016 credit agreement (the “2016 Multicurrency Revolving Facility”) to repay $1,150.0 million of senior notes that became due on April 2, 2018. We subsequently repaid the $400.0 million of 2016 Multicurrency Revolving Facility borrowings in 2015 for2018. Also in 2018, we borrowed $675.0 million under U.S. Term Loan C and used the Biomet merger. We also borrowed $750.0cash proceeds along with cash generated from operations throughout the year to repay an aggregate of $835.0 million on U.S. Term Loan A, $450.0 million on U.S. Term Loan B, and we subsequently repaid $140.0 million on U.S. Term Loan C. Overall, we had approximately $1,150 million of net principal repayments on our senior notes and term loans in 2016 for the LDR merger.2018. In February, May, JulyAugust and December 2016,2019, our Board of Directors declared cash dividends of $0.24 per share. We expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the Board of Directors and may be adjusted as business needs or market conditions change. As further discussed below, our debt facilities restrict the payment of dividends in certain circumstances. In February 2016, our Board of Directors authorized a new $1.0 billion share repurchase program effective March 1, 2016, with no expiration date. The previous program expired on February 29, 2016. As of December 31, 2016,2019, all $1.0 billion remained authorized for repurchase under the program. We will continue to exercise disciplined capital allocation designed to drive stockholder value creation. We intend to use available cash for debt repayment, reinvestment in the business debt repayment, dividends and opportunistic share repurchases.payment of dividends. If the right opportunities arise, we may also use available cash to pursue business development opportunities. In order to achieve operational synergies, we expect cash outlays relatedAs discussed in Note 4 to our integration plansconsolidated financial statements, in December 2019, our Board of Directors approved, and we initiated, a new global restructuring program with an objective of reducing costs to allow us to further invest in higher priority growth opportunities. The restructuring program is expected to result in total pre-tax restructuring charges of approximately $350 million to $400 million, with slightly more than half of that expected to be incurred in 2020. We expect to reduce gross annual pre-tax operating expenses by approximately $310.0$200 million in 2017. These cash outlays are necessary to achieve our integration goals of net annualpre-tax operating profit synergies of $350.0$300 million bymid-2018. the end of 2023 as program benefits are realized.
As discussed in Note 16 to our consolidated financial statements, the Internal Revenue Service (“IRS”) has issued proposed adjustments for years 2005 through 20092012 reallocating profits between certain of our U.S. and foreign subsidiaries. We have disputed these proposed adjustments and continue to pursue resolution with the IRS. 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 20 to our consolidated financial statements, as of December 31, 2016, a short-term2019, we have an estimated liability of $75.0 million and long-term liability of $218.6$59.9 million related to Durom Cup product liability claims was recordedand a liability of $50.1 million related to Biomet metal-on-metal hip implant claims on our consolidated balance sheet. We expect to continue paying these claims over the next few years. We expect to be reimbursed a portion of these payments for product liability claims from insurance carriers. As of December 31, 2016, we have received a portion of the insurance proceeds we estimate we will recover. We have a long-term receivable of $95.3 million remaining for future expected reimbursements from our insurance carriers. We also had a short-term liability of $57.4 million related to Biometmetal-on-metal hip implant claims.
At December 31, 2016, we had twelve tranches2019, our outstanding debt consisted of senior notes outstandingand term loans as follows (dollars in millions): | | | | | | | | | | Principal | | | Interest
Rate | | | Maturity Date | | $ | 500.0 | | | | 1.450 | % | | April 1, 2017 | | | 1,150.0 | | | | 2.000 | | | April 1, 2018 | | | 500.0 | | | | 4.625 | | | November 30, 2019 | | | 1,500.0 | | | | 2.700 | | | April 1, 2020 | | | 300.0 | | | | 3.375 | | | November 30, 2021 | | | 750.0 | | | | 3.150 | | | April 1, 2022 | | | 2,000.0 | | | | 3.550 | | | April 1, 2025 | | | 253.4 | | | | 4.250 | | | August 15, 2035 | | | 317.8 | | | | 5.750 | | | November 30, 2039 | | | 395.4 | | | | 4.450 | | | August 15, 2045 | | | 527.4 | * | | | 1.414 | | | December 13, 2022 | | | 527.4 | * | | | 2.425 | | | December 13, 2026 |
* Euro denominated debt securities
We also had three term loans with total principal of $2,549.6 million outstanding as of December 31, 2016.
| | | | | | | | | | Interest | | | | | Type | | | Principal | | | Currency | | Rate | | | | Maturity Date | Notes | | | $ | 1,500.0 | | | U.S. Dollar | | | 2.700 | | % | | April 1, 2020 | Notes | | | | 450.0 | | | U.S. Dollar | | Floating | | | | March 19, 2021 | Notes | | | | 300.0 | | | U.S. Dollar | | | 3.375 | | | | November 30, 2021 | Notes | | | | 750.0 | | | U.S. Dollar | | | 3.150 | | | | April 1, 2022 | Term | | | | 106.9 | | | Japanese Yen | | | 0.635 | | | | September 27, 2022 | Term | | | | 194.7 | | | Japanese Yen | | | 0.635 | | | | September 27, 2022 | Notes | | | | 561.3 | | | Euro | | | 1.414 | | | | December 13, 2022 | Notes | | | | 300.0 | | | U.S. Dollar | | | 3.700 | | | | March 19, 2023 | Notes | | | | 2,000.0 | | | U.S. Dollar | | | 3.550 | | | | April 1, 2025 | Notes | | | | 561.3 | | | Euro | | | 2.425 | | | | December 13, 2026 | Notes | | | | 561.3 | | | Euro | | | 1.164 | | | | November 15, 2027 | Notes | | | | 253.4 | | | U.S. Dollar | | | 4.250 | | | | August 15, 2035 | Notes | | | | 317.8 | | | U.S. Dollar | | | 5.750 | | | | November 30, 2039 | Notes | | | | 395.4 | | | U.S. Dollar | | | 4.450 | | | | August 15, 2045 |
We have a five-year unsecured multicurrency revolving facility of $1.5 billion (the “Multicurrency“2019 Multicurrency Revolving Facility”) | | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
that will mature on September 30, 2021.November 1, 2024. There were no outstanding borrowings onunder this facility as of December 31, 2016.2019. The 2019 Multicurrency Revolving Facility replaced the 2016 Multicurrency Revolving Facility, effective November 1, 2019. We also havehad other available uncommitted credit facilities totaling $47.1 million.$45.3 million as of December 31, 2019. We have $1.5 billion principal amount of notes due April 1, 2020. We believe we can satisfy this debt obligation with cash generated from our operations, by issuing new debt, and/or by borrowing on our 2019 Multicurrency Revolving Facility. We believe that our earnings, balance sheet and cash flows will allow us to obtain additional capital, if necessary, to satisfy this debt obligation. For additional information on our debt, see Note 12 to our consolidated financial statements. We place our cash and cash equivalents in highly-rated financial institutions and limit the amount of credit exposure to any one entity. We invest only in high-quality financial instruments in accordance with our internal investment policy. As of December 31, 2016, $408.62019, $373.4 million of our cash and cash equivalents were held in jurisdictions outside of the U.S. Of this amount, $77.8$102.1 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. In light of our commitments under various credit facilities, as well as our expectation for continued business development,the future, we have plansintend to repatriate a significant portionat least $5.0 billion of our offshore earnings to the U.S. In particular, as a result of the Biomet merger, we have unremitted foreign earnings, of $3,658.7 million, which we planthe additional tax related to repatriate to the U.S. in future periods. We have estimated a long-term deferred tax liability of $1,190.7 million for the estimated tax impact of this repatriation.remitting earnings is deemed immaterial. Management believes that cash flows from operations and available borrowings under the 2019 Multicurrency Revolving Facility are sufficient to meet our working capital, capital expenditure and debt service needs, as well as to return cash to stockholders in the form of dividends and share repurchases. Should additional investment opportunities arise, we believe that our earnings, balance sheet and cash flows will allow us to obtain additional capital, if necessary.
CONTRACTUAL OBLIGATIONS We have entered into contracts with various third parties in the normal course of business that will require future payments. The following table illustrates our contractual obligations and certain other commitments (in millions): | | | | | | | | | | | 2021 | | | 2023 | | | 2025 | | | | | | | | | | | | | | | | | | | | | | and | | | and | | | and | | Contractual
Obligations | | Total | | 2017 | | 2018 and 2019 | | 2020 and 2021 | | 2022 and
Thereafter | | | Total | | | 2020 | | | 2022 | | | 2024 | | | Thereafter | | Long-term debt | | $ | 11,275.8 | | | $ | 575.6 | | | $ | 2,891.3 | | | $ | 3,037.5 | | | $ | 4,771.4 | | | $ | 8,252.1 | | | $ | 1,500.0 | | | $ | 2,362.9 | | | $ | 300.0 | | | $ | 4,089.2 | | Interest payments | | | 2,501.4 | | | | 315.5 | | | | 578.2 | | | | 374.0 | | | | 1,233.7 | | | | 1,602.8 | | | | 173.0 | | | | 306.0 | | | | 279.4 | | | | 844.4 | | Operating leases | | | 331.8 | | | | 69.5 | | | | 106.3 | | | | 67.3 | | | | 88.7 | | | | 307.3 | | | | 70.5 | | | | 99.4 | | | | 63.3 | | | | 74.1 | | Purchase obligations | | | 315.3 | | | | 140.9 | | | | 132.5 | | | | 41.9 | | | | – | | | | 599.6 | | | | 319.8 | | | | 203.3 | | | | 76.1 | | | | 0.4 | | Toll charge tax liability | | | | 234.9 | | | | - | | | | 12.4 | | | | 136.6 | | | | 85.9 | | Other long-term liabilities | | | 368.3 | | | | – | | | | 172.3 | | | | 108.3 | | | | 87.7 | | | | 227.2 | | | | - | | | | 146.6 | | | | 19.3 | | | | 61.3 | | | | | | | | | | | | | | | | | Total contractual obligations | | $ | 14,792.6 | | | $ | 1,101.5 | | | $ | 3,880.6 | | | $ | 3,629.0 | | | $ | 6,181.5 | | | $ | 11,223.9 | | | $ | 2,063.3 | | | $ | 3,130.6 | | | $ | 874.7 | | | $ | 5,155.3 | | | | | | | | | | | | | | | | |
$82.2118.6 million of the other long-term liabilities on our balance sheet as of December 31, 20162019 are liabilities related to defined benefit pension plans. Defined benefit plan liabilities are based upon the underfunded status of the respective plans; they are not based upon future contributions. Due to uncertainties regarding future plan asset performance, changes in interest rates and our intentions with respect to voluntary contributions, we are unable to reasonably estimate future contributions beyond 2016.2020. Therefore, this table does not include any amounts related to future contributions to our plans. See Note 15 to our consolidated financial statements for further information on our defined benefit plans. Under the 2017 Tax Act, we have a $234.9 million toll charge liability for the one-time deemed repatriation of unremitted foreign earnings. This amount was recorded in non-current income tax liabilities on our consolidated balance sheet as of December 31, 2019. We have elected to pay the toll charge in installments over eight years. Also included in other long-term liabilities on our consolidated balance sheetsheets are liabilities related to unrecognized tax benefits and corresponding interest and penalties thereon. Due to the uncertainties inherent in these liabilities, such as the ultimate timing and resolution of tax audits, we are unable to reasonably estimate the amount or period in which potential tax payments related to these positions will be made. Therefore, this table does not include any obligations related to unrecognized tax benefits. We have also excluded long-term deferred tax liabilities from this table, as they do not represent liabilities that will be settled in cash. See Note 16 to our consolidated financial statements for further information on thesetax-related accounts. We have entered into various agreements that may result in future payments dependent upon various events such as the achievement of certain product R&D milestones, sales milestones, or, at our discretion, to maintainmaintenance of exclusive rights to distribute a product. Since there is uncertainty on the timing or whether such payments will have to be made, we have not included them in this table. These payments could range from $0 to $57$60 million. CRITICAL ACCOUNTING ESTIMATES Our financial results are affected by the selection and application of accounting policies and methods. Significant accounting policies which require management’s judgment are discussed below. Excess Inventory and Instruments – - We must determine as of each balance sheet date how much, if any, of our inventory may ultimately prove to be unsaleable or unsaleable at our carrying cost. Similarly, we must also determine if instruments on hand will be put to productive use or remain undeployed as a result of excess supply. Accordingly, inventory and instruments are written down to their net realizable value. To determine the appropriate net realizable value, we evaluate current stock levels in relation to historical and expected patterns of demand for all of our products and instrument systems and components. The basis for the determination is generally the same for all inventory and instrument items and categories except forwork-in-process work‑in‑process inventory, which is recorded at cost. Obsolete or discontinued items are generally destroyed and completely written off. Management evaluates the need for changes to the net realizable values of inventory and instruments net realizable values based on market conditions, competitive offerings and other factors on a regular basis. Income Taxes – - Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits | | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.
We estimate income tax expense and income tax liabilities and assets by taxable jurisdiction. Realization of deferred tax assets in each taxable jurisdiction is dependent on our ability to generate future taxable income sufficient to realize the benefits. We evaluate deferred tax assets on an ongoing basis and provide valuation allowances unless we determine it is “more likely than not” that the deferred tax benefit will be realized. Federal income taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the U.S. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. We are subject to regulatory review or audit in virtually all of those jurisdictions and those reviews and audits may require extended periods of time to resolve. We record our income tax provisions based on our knowledge of all relevant facts and circumstances, including existing tax laws, our experience with previous settlement agreements, the status of current examinations and our understanding of how the tax authorities view certain relevant industry and commercial matters. We recognize tax liabilities in accordance with the Financial Accounting Standards Board’sBoard (“FASB”) guidance on income taxes and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. Commitments and Contingencies – - Accruals for product liability and other claims are established with the assistance of internal and external legal counsel based on current information and historical settlement information for claims, related legal fees and for claims incurred but not reported. We use an actuarial model to assist management in determining an appropriate level of accruals for product liability claims. Historical patterns of claim loss development over time are statistically analyzed to arrive at factors which are then applied to loss estimates in the actuarial model. In addition to our general product liability, we have recorded provisions totaling $479.4 million related to the Durom Cup. See Note 20 to our consolidated financial statements for further discussion of the Durom Cup litigation.
Goodwill and Intangible Assets – - We evaluate the carrying value of goodwill and indefinite life intangible assets annually, or whenever events or circumstances indicate the carrying value may not be recoverable. We evaluate the carrying value of finite life intangible assets whenever events or circumstances indicate the carrying value may not be recoverable. Significant assumptions are required to estimate the fair value of goodwill and intangible assets, most notably estimated future cash flows generated by these assets.assets and risk-adjusted discount rates. As such, these fair value measurements use significant unobservable inputs. Changes to these assumptions could require us to record impairment charges on these assets. We have seven reporting units with goodwill assigned to them. In our 2016annual impairment test our EMEA reporting unit’s estimated fair value only exceededin the carrying valuefourth quarter of its net assets by 8 percent, or approximately $240 million. The goodwill balance of the EMEA reporting unit at the time of the impairment test was $1,326.0 million. This reporting unit’s estimated fair value continues to be lower than in past years due to the weakening of the Euro against the U.S. Dollar. We2019, we estimated the fair value of thisour EMEA and Dental reporting unitunits only exceeded their carrying values by less than 5 percent. Fair value was determined using a combination of income and market approaches. Fair value under the income approach was determined by discounting to present value the estimated future cash flows of the reporting unit.units. Significant assumptions are incorporated into the income approach, such as estimated growth rates and risk-adjusted discount rates. Fair value under the market approach utilized the guideline public company methodology, which uses valuation indicators determined from other businesses that are similar to our EMEA and Dental reporting units. As of December 31, 2019, the remaining goodwill on the EMEA and Dental reporting unit. In estimatingunits were $749.8 million and $397.7 million, respectively.
Future impairment in the future cash flowsEMEA and Dental reporting units could occur if the estimates used in the income and market approaches change. If our estimates of profitability in the reporting unit we utilized a combination of market and company-specific inputs that a market participant would use in assessingdecline, the fair value ofestimate under the reporting unit. The primary market input was revenue growth rates. These rates were based on historical trends and estimated future growth drivers such as an aging population, obesity and more active lifestyles. Significant company-specific inputs included assumptions regarding how the reporting unit could leverage operating expenses as revenue grows and the impact any new productsincome approach will have on revenues. Discount rates used to determine the present value of the estimated future cash flows considered the weighted average cost of capital of other comparable companies and the country risk of our reporting unit. Under the guideline public company methodology, we took into consideration differences between the reporting unit and the comparable companies. The EMEA reporting unit remains sensitive to changes in market conditions. If estimated cash flows for this reporting unit decrease, we may be required to record impairment charges in the future. The cash flows used in our annual impairment test are estimates and therefore involve uncertainty. Factors that could result in our actual cash flows being lower than our current estimates include: 1) decreased revenues caused by unforeseen changes in these areas of the healthcare market, our inability to generate new product revenue from our research and development activities, or macroeconomic factors that may affect consumers’ ability to pay for these products and 2) our inability to achieve the estimated operating margins for these reporting units’ forecasts due to unforeseen factors.decline. Additionally, changes in the broader economic environment could cause changes to our estimated discount rates, orforeign currency exchange rates used to translate cash flows and comparable company valuation indicators, which may impact our estimated fair values.
For ourWe have three other six reporting units their estimatedthat have goodwill assigned to them. The fair value exceeded theirof each of these three reporting units is sufficiently in excess of its carrying value by more than 15 percent.
| | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
which leads us to believe only a significant, unforeseen event could cause impairment to any of these reporting units. RECENT ACCOUNTING PRONOUNCEMENTS See Note 2 to our consolidated financial statements for information on how recent accounting pronouncements have affected or may affect our financial position, results of operations or cash flows.
| | | Item 7A. | | Quantitative and Qualitative Disclosures About Market Risk |
MARKET RISK We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in foreign currency exchange rates, interest rates and commodity prices that could affect our financial condition, results of operations and cash flows. We manage our exposure to these and other market risks through regular operating and financing activities and through the use of derivative financial instruments. We use derivative financial instruments solely as risk management tools and not for speculative investment purposes. FOREIGN CURRENCY EXCHANGE RISK We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Swiss Francs, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, Indian Rupees, Turkish Lira, Polish Zloty, Danish Krone, and Norwegian Krone. We manage the foreign currency exposure centrally, on a combined basis, which allows us to net exposures and to take advantage of any natural offsets. To reduce the uncertainty of foreign currency exchange rate movements on transactions denominated in foreign currencies, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts and options with major financial institutions. These forward contracts and options are designed to hedge anticipated foreign currency transactions, primarily intercompany sale and purchase transactions, for periods consistent with commitments. Realized and unrealized gains and losses on these contracts and options that qualify as cash flow hedges are temporarily recorded in accumulated other comprehensive income, then recognized in cost of products sold when the hedged item affects net earnings. For contracts outstanding at December 31, 2016,2019, we had obligations to purchase U.S. Dollars and sell Euros, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, Indian Rupees, Turkish Lira, Polish Zloty, Danish Krone, and Norwegian Krone and purchase Swiss Francs and sell U.S. Dollars at set maturity dates ranging from January 20172020 through June 2019.2022. The notional amounts of outstanding forward contracts entered into with third parties to purchase U.S. Dollars at December 31, 20162019 were $1,512.6$1,496.3 million. The notional amounts of outstanding forward contracts entered into with third parties to purchase Swiss Francs at December 31, 20162019 were $315.7$276.0 million. The weighted average contract rates outstanding at December 31, 20162019 were Euro:USD 1.15,1.21, USD:Swiss Franc 0.94, USD:Japanese Yen 108.35,104.34, British Pound:USD 1.52,1.37, USD:Canadian Dollar 1.29,1.30, Australian Dollar:USD 0.74,0.73, USD:Korean Won 1,153,1,138, USD:Swedish Krona 8.27,8.80, USD:Czech Koruna 23.65,22.11, USD:Thai Baht 36.05,31.17, USD:Taiwan Dollar 32.14,29.60, USD:South African Rand 15.56,15.40, USD:Russian Ruble 69.92,68.81, USD:Indian Ruppee 71.77, USD:Turkish Lira 3.20,74.26, USD:Polish Zloty 3.91,3.72, USD:Danish Krone 6.56,6.15, and USD:Norwegian Krone 8.31.8.36.
We maintain written policies and procedures governing our risk management activities. Our policy requires that critical terms of hedging instruments be the same as hedged forecasted transactions. On this basis, with respect to cash flow hedges, changes in cash flows attributable to hedged transactions are generally expected to be completely offset by changes in the fair value of hedge instruments. As part of our risk management program, we also perform sensitivity analyses to assess potential changes in revenue, operating results, cash flows and financial position relating to hypothetical movements in currency exchange rates. A sensitivity analysis of changes in the fair value of foreign currency exchange forward contracts outstanding at December 31, 20162019 indicated that, if the U.S. Dollar uniformly changed in value by 10 percent relative to the various currencies, with no change in the interest differentials, the fair value of those contracts would increase or decrease earnings before income taxes in periods through June 2018,2022, depending on the direction of the change, by the following average approximate amounts (in millions): | | | | | | Currency | | Average
Amount | | Euro | | $ | 51.9 | | Swiss Franc | | | 32.7 | | Japanese Yen | | | 39.6 | | British Pound | | | 6.6 | | Canadian Dollar | | | 15.1 | | Australian Dollar | | | 18.7 | | Korean Won | | | 3.1 | | Swedish Krona | | | 2.6 | | Czech Koruna | | | 0.7 | | Thai Baht | | | 0.6 | | Taiwan Dollars | | | 3.3 | | South African Rand | | | 0.5 | | Russian Rubles | | | 1.1 | | Indian Rupees | | | 1.5 | | Turkish Lira | | | 0.5 | | Polish Zloty | | | 0.7 | | Danish Krone | | | 3.6 | | Norwegian Krone | | | 1.9 | |
| | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
| | Average | | Currency | | Amount | | Euro | | $ | 43.5 | | Swiss Franc | | | 28.5 | | Japanese Yen | | | 54.0 | | British Pound | | | 1.6 | | Canadian Dollar | | | 14.3 | | Australian Dollar | | | 13.3 | | Korean Won | | | 2.6 | | Swedish Krona | | | 2.4 | | Czech Koruna | | | 1.7 | | Thai Baht | | | 0.9 | | Taiwan Dollars | | | 4.1 | | South African Rand | | | 1.1 | | Russian Rubles | | | 2.3 | | Indian Rupees | | | 0.8 | | Polish Zloty | | | 3.4 | | Danish Krone | | | 3.0 | | Norwegian Krone | | | 1.8 | |
Any change in the fair value of foreign currency exchange forward contracts as a result of a fluctuation in a currency exchange rate is expected to be largely offset by a change in the value of the hedged transaction. Consequently, foreign currency exchange contracts would not subject us to material risk due to exchange rate movements because gains and losses on these contracts offset gains and losses on the assets, liabilities and transactions being hedged. We had net assets, excluding goodwill and intangible assets, in legal entities withnon-U.S. Dollar functional currencies of $2,935.8$1,193.5 million at December 31, 2016,2019, primarily in Euros, Japanese Yen and Australian Dollars. We enter into foreign currency forward exchange contracts with terms of one month to manage currency exposures for monetary assets and liabilities denominated in a currency other than an entity’s functional currency. As a result, foreign currency remeasurement gains/losses recognized in earnings are generally offset with gains/losses on the foreign currency forward exchange contracts in the same reporting period. For details about these and other financial instruments, including fair value methodologies, see Note 14 to our consolidated financial statements.
COMMODITY PRICE RISK We purchase raw material commodities such as cobalt chrome, titanium, tantalum, polymer and sterile packaging. We enter into supply contracts generally with terms of 12 to 24 months, where available, on these commodities to alleviate the effect of market fluctuation in prices. As part of our risk management program, we perform sensitivity analyses related to potential commodity price changes. A 10 percent price change across all these commodities would not have a material effect on our consolidated financial position, results of operations or cash flows. INTEREST RATE RISK In the normal course of business, we are exposed to market risk from changes in interest rates that could affect our results of operations and financial condition. We manage our exposure to interest rate risks through our regular operations and financing activities. We invest our cash and cash equivalents primarily in highly-rated corporate commercial paper and bank deposits. The primary investment objective is to ensure capital preservation. Currently, we do not use derivative financial instruments in our investment portfolio. We are exposed to interest rate risk onThe majority of our debt obligationsis fixed-rate debt and our cash and cash equivalents.
We have multiplevariable-to-fixed interest rate swap agreements that we have designated as cash flow hedges of the variable interest rate obligations on our Term Loan B. The total notional amounttherefore is $375.0 million. The interest rate swaps minimize the exposurenot exposed to changes in the LIBOR interest rates while the variable-rate debt is outstanding. The weighted
average fixed interest rate for all of the outstanding interest rate swap agreements is approximately 0.82 percent through September 30, 2019.
The interest rate swap agreements are intended to manage our exposure to interest rate movements by converting variable-rate debt into fixed-rate debt. The objective of the instruments is to limit exposure to interest rate movements.
For details about these and other financial instruments, including fair value methodologies, see Note 14 to our consolidated financial statements.
rates. Based upon our overall interest rate exposure as of December 31, 2016,2019, a change of 10 percent in interest rates, assuming the principal amount outstanding remains constant, would not have a material effect on net interest expense.expense, net. This analysis does not consider the effect of the change in the level of overall economic activity that could exist in such an environment. CREDIT RISK Financial instruments, which potentially subject us to concentrations of credit risk, are primarily cash and cash equivalents, derivative instruments counterparty transactions and accounts receivable. We place our investments incash and cash equivalents and enter into derivative transactions with highly-rated financial institutions or highly-rated debt securities and limit the amount of credit exposure to any one entity. We believe we do not have any significant credit risk on our cash and cash equivalents. We are exposed to credit loss if the financial institutionsequivalents or counterparties issuing the debt security fail to perform. However, this loss is limited to the amounts, if any, by which the obligations of the counterparty to the financial instrument contract exceed our obligation. We also minimize exposure to credit risk by dealing with a diversified group of major financial institutions. We manage credit risk by monitoring the financial condition of our counterparties using standard credit guidelines. We do not anticipate any nonperformance by any of the counterparties.derivative instruments.
Our concentrations of credit risks with respect to trade accounts receivable is limited due to the large number of customers and their dispersion across a number of geographic areas and by frequent monitoring of the creditworthiness of the customers to whom credit is granted in the normal course of business. Substantially all of our trade receivables are concentrated in the public and private hospital and healthcare industry in the U.S. and internationally or with distributors or dealers who operate in international markets and, accordingly, are exposed to their respective business, economic and country specific variables. Our ability to collect accounts receivable in some countries depends in part upon the financial stability of these hospital and healthcare sectors and the respective countries’ national economic and healthcare systems. Most notably, in Europe healthcare is typically sponsored by the government. Since we sell products to public hospitals in those countries, we are indirectly exposed to government budget constraints. | | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
The ongoing financial uncertainties in the Euro zone impact the indirect credit exposure we have to those governments through their public hospitals. As of December 31, 2016, in Greece, Italy, Portugal and Spain, countries that have been widely recognized as presenting the highest risk, our gross short-term and long-term trade accounts receivable combined were $193.8 million. With allowances for doubtful accounts of $16.6 million recorded in those countries, the net balance was $177.2 million, representing 12 percent of our total consolidated short-term and long-term trade accounts receivable balance, net. Italy and Spain accounted for $159.7 million of that net amount. We are actively monitoring the situations in these countries. We maintain contact with customers in these countries on a regular basis. We continue to
receive payments, albeit at a slower rate than in the past. We believe our allowance for doubtful accounts is adequate in these countries, as ultimately we believe the governments in these countries will be able to pay. To the extent the respective governments’ ability to fund their public hospital programs deteriorates, we may have to record significant bad debt expenses in the future.
While we are exposed to risks from the broader healthcare industry in Europe and around the world, there is no significant net exposure due to any individual customer. Exposure to credit risk is controlled through credit approvals, credit limits and monitoring procedures, and we believe that reserves for losses are adequate. | | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
Management’s Report on Internal Control Over Financial Reporting
The management of Zimmer Biomet Holdings, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework(2013).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Based on their assessment, management concluded that the Company did not maintain effective controls over its accounting for income taxes. Specifically, the Company did not maintain the appropriate complement of resources in its tax department commensurate with the increased volume and complexity of accounting for income taxes subsequent to the Biomet merger. This material weakness did not result in a material misstatement to the Company’s financial statements or disclosures, but did result in out-of-period adjustments in the Company’s provision for income taxes and deferred tax liabilities that were individually and in aggregate immaterial. Additionally, this control deficiency could result in misstatements of income tax related accounts and disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected. Accordingly, the Company’s management has determined that this control deficiency constitutes a material weakness.
Because of this material weakness, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2016.
The Company’s independent registered public accounting firm has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, as stated in its report which appears in Item 8 of this Annual Report onForm 10-K.
| | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
| | | Item 8. | | Financial Statements and Supplementary Data |
Zimmer Biomet Holdings, Inc. Index to Consolidated Financial Statements Financial Statements: | | | | Page | Zimmer Biomet Holdings, Inc.
Index to Consolidated Financial Statements
| | | | Financial Statements: | | Page | | Report of Independent Registered Public Accounting Firm | | | 36 | 47 | | | | Consolidated Statements of Earnings for the Years Ended December 31, 2016, 20152019, 2018 and 20142017 | | | 37 | 50 | | | | Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 20152019,
2018 and 20142017 | | | 38 | 51 | | | | Consolidated Balance Sheets as of December 31, 20162019 and 20152018 | | | 39 | 52 | | | | Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016, 2015 2019, 2018
and 20142017 | | | 40 | 53 | | | | Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 20152019, 2018 and 20142017 | | | 41 | 54 | | | | Notes to Consolidated Financial Statements | | | 42 | 55 |
| | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Zimmer Biomet Holdings, Inc. In our opinion,Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial positionbalance sheets of Zimmer Biomet Holdings, Inc. and its subsidiaries (the “Company)as of December 31, 20162019 and 2015, 2018,and the resultsrelated consolidated statements of their operationsearnings, comprehensive income (loss), stockholders’ equity and their cash flows for each of the three years in the period ended December 31, 2016 2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 appearing under Item 15(a)(2),(collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2019in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company did not maintain,maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016,2019, based on criteria established inInternal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in internal control over financial reporting related to a lack of an appropriate complement of resources in the Company’s tax department existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. COSO. Basis for Opinions The material weakness referred to above is described in Management’s Report on Internal Control over Financial Reporting appearing under item 7A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2016 consolidated financial statements and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company’sCompany's management is responsible for these consolidatedfinancial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management’s report referred to above.Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these the Company’s consolidatedfinancial statements on the financial statement schedule, and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We conducted our audits in accordanceare a public accounting firm registered with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidatedfinancial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidatedfinancial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated beloware mattersarising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Goodwill Impairment Assessment – EMEA and Dental Reporting Units As described in Notes 2 and 10 to the consolidated financial statements, the Company’s consolidated goodwill balance was $9,599.7 million as of December 31, 2019, and the goodwill associated with the EMEA reporting unit and the Dental reporting unit was $749.8 million and $397.7 million, respectively. Management conducts an impairment test in the fourth quarter of each year or whenever events or changes in circumstances indicate that the carrying value of the reporting unit’s assets may not be recoverable. Potential impairment of a reporting unit is identified by comparing the reporting unit’s estimated fair value to its carrying amount. The Company estimated the fair value of the Dental and EMEA reporting units based on income and market approaches. As disclosed by management, fair value under the income approach was determined by discounting to present value the estimated future cash flows of the reporting unit. Fair value under the market approach utilized the guideline public company methodology, which uses valuation indicators from other businesses that are similar to the EMEA and Dental reporting units. Significant assumptions are incorporated into the discounted cash flow analysis such as estimated growth rates and risk-adjusted discount rates. The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the EMEA and Dental reporting units is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting units. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating management’s discounted cash flow analysis and significant assumptions, including estimatedgrowth rates and risk-adjusted discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting units. These procedures also included, among others, (i) testing management’s process for developing the fair value estimate, (ii) evaluating the appropriateness of management’s fair value approaches, (iii) testing the completeness, accuracy and relevance of the underlying data used in the approaches, and (iv) evaluating significant assumptions used by management in the discounted cash flow analysis, including the revenue growth rates and the risk-adjusted discount rate. Evaluating management’s assumptions related to revenue growth rates involved evaluating whether the assumptions used by management were reasonable considering the past performance of the reporting units, the consistency with external data from other sources, and whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow analysis and certain significant assumptions, including the risk-adjusted discount rate. Tax Liabilities for Unrecognized Tax Benefits As described in Notes 2 and 16 to the consolidated financial statements, the Company has recorded tax liabilities for unrecognized tax benefits of $741.8 million as of December 31, 2019. The calculation of the Company’s estimated tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a
multitude of jurisdictions across the Company’s global operations. The Company’s income tax filings are regularly under audit in multiple federal, state and foreign jurisdictions. Income tax audits may require an extended period of time to reach resolution and may result in significant income tax adjustments when interpretation of tax laws or allocation of company profits is disputed. The principal considerations for our determination that performing procedures relating to tax liabilities for unrecognized tax benefits is a critical audit matter are that there was significant judgment by management when determining the tax liabilities, including a high degree of estimation uncertainty relative to the numerous and complex tax laws and regulations, frequency of income tax audits, and potential for significant adjustments as a result of such audits. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate the timely identification and accurate measurement of tax liabilities for unrecognized tax benefits. Also, the evaluation of audit evidence available to support the estimates is complex and required significant auditor judgment as the nature of the evidence is often highly subjective, and the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the identification, accurate measurement, and recognition of tax liabilities for unrecognized tax benefits, including controls addressing completeness of the tax liabilities. These procedures alsoincluded, among others, (i) testing certain information used in the calculation of tax liabilities for unrecognized tax benefits by jurisdiction on a sample basis, (ii) assessing the completeness of the Company’s identification of tax liabilities for unrecognized tax benefits and possible outcomes for each unrecognized tax benefit, and (iii) evaluating the status and results of income tax audits with the relevant tax authorities. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s interpretation and application of relevant tax laws and regulations in various jurisdictions and assessing the reasonableness of the Company’s tax positions. /s/ PricewaterhouseCoopers LLP Chicago, Illinois March 1, 2017
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
February 21, 2020 We have served as the Company’s auditor since 2000.
ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (in millions, except per share amounts) | | For the Years Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Net Sales | | $ | 7,982.2 | | | $ | 7,932.9 | | | $ | 7,803.3 | | Cost of products sold, excluding intangible asset amortization | | | 2,252.6 | | | | 2,271.9 | | | | 2,132.9 | | Intangible asset amortization | | | 584.3 | | | | 595.9 | | | | 603.9 | | Research and development | | | 449.3 | | | | 391.7 | | | | 369.9 | | Selling, general and administrative | | | 3,343.8 | | | | 3,379.3 | | | | 3,104.7 | | Goodwill and intangible asset impairment | | | 70.1 | | | | 979.7 | | | | 331.5 | | Quality remediation | | | 82.4 | | | | 146.9 | | | | 181.3 | | Restructuring and other cost reduction initiatives | | | 50.0 | | | | 34.2 | | | | 17.6 | | Acquisition, integration and related | | | 12.2 | | | | 99.5 | | | | 262.2 | | Operating expenses | | | 6,844.7 | | | | 7,899.1 | | | | 7,004.0 | | Operating Profit | | | 1,137.5 | | | | 33.8 | | | | 799.3 | | Other expense, net | | | (4.8 | ) | | | (15.6 | ) | | | (9.4 | ) | Interest expense, net | | | (226.9 | ) | | | (289.3 | ) | | | (325.3 | ) | Earnings (loss) before income taxes | | | 905.8 | | | | (271.1 | ) | | | 464.6 | | (Benefit) provision for income taxes | | | (225.7 | ) | | | 108.2 | | | | (1,348.8 | ) | Net Earnings (Loss) | | | 1,131.5 | | | | (379.3 | ) | | | 1,813.4 | | Less: Net loss attributable to noncontrolling interest | | | (0.1 | ) | | | (0.1 | ) | | | (0.4 | ) | Net Earnings (Loss) of Zimmer Biomet Holdings, Inc. | | $ | 1,131.6 | | | $ | (379.2 | ) | | $ | 1,813.8 | | Earnings (Loss) Per Common Share - Basic | | $ | 5.52 | | | $ | (1.86 | ) | | $ | 8.98 | | Earnings (Loss) Per Common Share - Diluted | | $ | 5.47 | | | $ | (1.86 | ) | | $ | 8.90 | | Weighted Average Common Shares Outstanding | | | | | | | | | | | | | Basic | | | 205.1 | | | | 203.5 | | | | 201.9 | | Diluted | | | 206.7 | | | | 203.5 | | | | 203.7 | |
| | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | Net Sales | | | $7,683.9 | | | $ | 5,997.8 | | | $ | 4,673.3 | | Cost of products sold, excluding intangible asset amortization | | | 2,381.8 | | | | 1,800.6 | | | | 1,242.8 | | Intangible asset amortization | | | 565.9 | | | | 337.4 | | | | 92.5 | | Research and development | | | 365.6 | | | | 268.8 | | | | 187.4 | | Selling, general and administrative | | | 2,932.9 | | | | 2,284.2 | | | | 1,750.7 | | Certain claims (Note 20) | | | – | | | | 7.7 | | | | 21.5 | | Special items (Note 2) | | | 611.8 | | | | 831.8 | | | | 341.1 | | | | | | | | | | | | Operating expenses | | | 6,858.0 | | | | 5,530.5 | | | | 3,636.0 | | | | | | | | | | | | Operating Profit | | | 825.9 | | | | 467.3 | | | | 1,037.3 | | Other expense, net | | | (71.3 | ) | | | (36.9 | ) | | | (46.7 | ) | Interest income | | | 2.9 | | | | 9.4 | | | | 11.9 | | Interest expense | | | (357.9 | ) | | | (286.6 | ) | | | (63.1 | ) | | | | | | | | | | | Earnings before income taxes | | | 399.6 | | | | 153.2 | | | | 939.4 | | Provision for income taxes | | | 95.0 | | | | 7.0 | | | | 220.2 | | | | | | | | | | | | Net earnings | | | 304.6 | | | | 146.2 | | | | 719.2 | | Less: Net loss attributable to noncontrolling interest | | | (1.3 | ) | | | (0.8 | ) | | | (1.1 | ) | | | | | | | | | | | Net Earnings of Zimmer Biomet Holdings, Inc. | | $ | 305.9 | | | $ | 147.0 | | | $ | 720.3 | | | | | | | | | | | | Earnings Per Common Share – Basic | | $ | 1.53 | | | $ | 0.78 | | | $ | 4.26 | | Earnings Per Common Share – Diluted | | $ | 1.51 | | | $ | 0.77 | | | $ | 4.20 | | Weighted Average Common Shares Outstanding | | | | | | | | | | | | | Basic | | | 200.0 | | | | 187.4 | | | | 169.0 | | Diluted | | | 202.4 | | | | 189.8 | | | | 171.7 | | Cash Dividends Declared Per Common Share | | $ | 0.96 | | | $ | 0.88 | | | $ | 0.88 | |
The accompanying notes are an integral part of these consolidated financial statements. | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in millions) | | For the Years Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Net Earnings (Loss) | | $ | 1,131.5 | | | $ | (379.3 | ) | | $ | 1,813.4 | | Other Comprehensive (Loss) Income: | | | | | | | | | | | | | Foreign currency cumulative translation adjustments, net of tax | | | (1.5 | ) | | | (135.4 | ) | | | 445.0 | | Unrealized cash flow hedge gains/(losses), net of tax | | | 30.6 | | | | 68.2 | | | | (95.0 | ) | Reclassification adjustments on cash flow hedges, net of tax | | | (35.1 | ) | | | 23.6 | | | | (3.8 | ) | Adjustments to prior service cost and unrecognized actuarial assumptions, net of tax | | | (48.5 | ) | | | (17.7 | ) | | | 4.6 | | Total Other Comprehensive (Loss) Income | | | (54.5 | ) | | | (61.3 | ) | | | 350.8 | | Comprehensive Income (Loss) | | | 1,077.0 | | | | (440.6 | ) | | | 2,164.2 | | Comprehensive Loss Attributable to Noncontrolling Interest | | | (0.1 | ) | | | (0.1 | ) | | | (1.3 | ) | Comprehensive Income (Loss) Attributable to Zimmer Biomet Holdings, Inc. | | $ | 1,077.1 | | | $ | (440.5 | ) | | $ | 2,165.5 | |
| | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | Net Earnings | | $ | 304.6 | | | $ | 146.2 | | | $ | 719.2 | | Other Comprehensive Income (Loss): | | | | | | | | | | | | | Foreign currency cumulative translation adjustments, net of tax | | | (130.0 | ) | | | (305.2 | ) | | | (223.1 | ) | Unrealized cash flow hedge gains, net of tax | | | 28.3 | | | | 52.7 | | | | 55.9 | | Reclassification adjustments on cash flow hedges, net of tax | | | (25.8 | ) | | | (93.0 | ) | | | (18.9 | ) | Unrealized gains/(losses) on securities, net of tax | | | 0.5 | | | | (0.2 | ) | | | (0.5 | ) | Reclassification adjustments on securities, net of tax | | | – | | | | – | | | | (0.4 | ) | Adjustments to prior service cost and unrecognized actuarial assumptions, net of tax | | | 22.0 | | | | (21.4 | ) | | | (75.8 | ) | | | | | | | | | | | Total Other Comprehensive (Loss) | | | (105.0 | ) | | | (367.1 | ) | | | (262.8 | ) | | | | | | | | | | | Comprehensive Income (Loss) | | | 199.6 | | | | (220.9 | ) | | | 456.4 | | | | | | | | | | | | Comprehensive Loss Attributable to Noncontrolling Interest | | | (0.5 | ) | | | (0.3 | ) | | | (1.0 | ) | | | | | | | | | | | Comprehensive Income (Loss) Attributable to Zimmer Biomet Holdings, Inc. | | $ | 200.1 | | | $ | (220.6 | ) | | $ | 457.4 | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in millions, except share amounts) | | As of December 31, | | | | 2019 | | | 2018 | | ASSETS | | | | | | | | | Current Assets: | | | | | | | | | Cash and cash equivalents | | $ | 617.9 | | | $ | 542.8 | | Accounts receivable, less allowance for doubtful accounts | | | 1,363.9 | | | | 1,275.8 | | Inventories | | | 2,385.0 | | | | 2,256.5 | | Prepaid expenses and other current assets | | | 357.1 | | | | 352.3 | | Total Current Assets | | | 4,723.9 | | | | 4,427.4 | | Property, plant and equipment, net | | | 2,077.4 | | | | 2,015.4 | | Goodwill | | | 9,599.7 | | | | 9,594.4 | | Intangible assets, net | | | 7,257.6 | | | | 7,684.6 | | Other assets | | | 980.1 | | | | 405.0 | | Total Assets | | $ | 24,638.7 | | | $ | 24,126.8 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | Current Liabilities: | | | | | | | | | Accounts payable | | $ | 400.9 | | | $ | 362.6 | | Income taxes payable | | | 126.7 | | | | 142.4 | | Other current liabilities | | | 1,413.9 | | | | 1,391.3 | | Current portion of long-term debt | | | 1,500.0 | | | | 525.0 | | Total Current Liabilities | | | 3,441.5 | | | | 2,421.3 | | Deferred income taxes, net | | | 840.1 | | | | 999.5 | | Long-term income tax payable | | | 685.1 | | | | 666.2 | | Other long-term liabilities | | | 557.8 | | | | 350.0 | | Long-term debt | | | 6,721.4 | | | | 8,413.7 | | Total Liabilities | | | 12,245.9 | | | | 12,850.7 | | Commitments and Contingencies (Note 20) | | | | | | | | | Stockholders' Equity: | | | | | | | | | Common stock, $0.01 par value, 1 billion shares authorized, 309.9 million (307.9 million in 2018) issued | | | 3.1 | | | | 3.1 | | Paid-in capital | | | 8,920.1 | | | | 8,686.1 | | Retained earnings | | | 10,427.3 | | | | 9,491.2 | | Accumulated other comprehensive loss | | | (241.9 | ) | | | (187.4 | ) | Treasury stock, 103.9 million shares (103.9 million shares in 2018) | | | (6,720.5 | ) | | | (6,721.7 | ) | Total Zimmer Biomet Holdings, Inc. stockholders' equity | | | 12,388.1 | | | �� | 11,271.3 | | Noncontrolling interest | | | 4.7 | | | | 4.8 | | Total Stockholders' Equity | | | 12,392.8 | | | | 11,276.1 | | Total Liabilities and Stockholders' Equity | | $ | 24,638.7 | | | $ | 24,126.8 | |
The accompanying notes are an integral part of these consolidated financial statements. | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETSSTATEMENTS OF STOCKHOLDERS' EQUITY (in millions) | | 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 January 1, 2017 | | | 304.7 | | | $ | 3.1 | | | $ | 8,368.5 | | | $ | 8,467.1 | | | $ | (434.0 | ) | | | (104.1 | ) | | $ | (6,735.8 | ) | | $ | 1.0 | | | $ | 9,669.9 | | Net earnings | | | - | | | | - | | | | - | | | | 1,813.8 | | | | - | | | | - | | | | - | | | | (0.4 | ) | | | 1,813.4 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 350.8 | | | | - | | | | - | | | | (0.9 | ) | | | 349.9 | | Cash dividends declared ($0.96 per share) | | | - | | | | - | | | | - | | | | (194.1 | ) | | | - | | | | - | | | | - | | | | - | | | | (194.1 | ) | Retrospective adoption of new accounting standard | | | - | | | | - | | | | - | | | | (77.8 | ) | | | - | | | | - | | | | - | | | | - | | | | (77.8 | ) | Stock compensation plans | | | 1.8 | | | | - | | | | 146.4 | | | | 13.8 | | | | - | | | | 0.2 | | | | 14.0 | | | | - | | | | 174.2 | | Balance December 31, 2017 | | | 306.5 | | | | 3.1 | | | | 8,514.9 | | | | 10,022.8 | | | | (83.2 | ) | | | (103.9 | ) | | | (6,721.8 | ) | | | (0.3 | ) | | | 11,735.5 | | Net loss | | | - | | | | - | | | | - | | | | (379.2 | ) | | | - | | | | - | | | | - | | | | (0.1 | ) | | | (379.3 | ) | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (61.3 | ) | | | - | | | | - | | | | - | | | | (61.3 | ) | Cash dividends declared ($0.96 per share) | | | - | | | | - | | | | - | | | | (195.5 | ) | | | - | | | | - | | | | - | | | | - | | | | (195.5 | ) | Adoption of new accounting standard | | | - | | | | - | | | | - | | | | 42.9 | | | | (42.9 | ) | | | - | | | | - | | | | - | | | | - | | Sale of shares in a subsidiary without loss of control | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5.2 | | | | 5.2 | | Stock compensation plans | | | 1.4 | | | | - | | | | 171.2 | | | | 0.2 | | | | - | | | | - | | | | 0.1 | | | | - | | | | 171.5 | | Balance December 31, 2018 | | | 307.9 | | | | 3.1 | | | | 8,686.1 | | | | 9,491.2 | | | | (187.4 | ) | | | (103.9 | ) | | | (6,721.7 | ) | | | 4.8 | | | | 11,276.1 | | Net earnings | | | - | | | | - | | | | - | | | | 1,131.6 | | | | - | | | | - | | | | - | | | | (0.1 | ) | | | 1,131.5 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (54.5 | ) | | | - | | | | - | | | | - | | | | (54.5 | ) | Cash dividends declared ($0.96 per share) | | | - | | | | - | | | | - | | | | (197.2 | ) | | | - | | | | - | | | | - | | | | - | | | | (197.2 | ) | Stock compensation plans | | | 2.0 | | | | - | | | | 234.0 | | | | 1.7 | | | | - | | | | - | | | | 1.2 | | | | - | | | | 236.9 | | Balance December 31, 2019 | | | 309.9 | | | $ | 3.1 | | | $ | 8,920.1 | | | $ | 10,427.3 | | | $ | (241.9 | ) | | | (103.9 | ) | | $ | (6,720.5 | ) | | $ | 4.7 | | | $ | 12,392.8 | |
| | | | | | | | | | | | As of December 31, | | | | | 2016 | | | 2015 | | ASSETS | | | | | | | | | Current Assets: | | | | | | | | | Cash and cash equivalents | | $ | 634.1 | | | $ | 1,459.3 | | Short-term investments | | | – | | | | 164.6 | | Accounts receivable, less allowance for doubtful accounts | | | 1,604.4 | | | | 1,446.5 | | Inventories | | | 1,959.4 | | | | 2,254.1 | | Prepaid expenses and other current assets | | | 465.7 | | | | 529.2 | | | | | | | | Total Current Assets | | | 4,663.6 | | | | 5,853.7 | | Property, plant and equipment, net | | | 2,037.9 | | | | 2,062.6 | | Goodwill | | | 10,643.9 | | | | 9,934.2 | | Intangible assets, net | | | 8,785.4 | | | | 8,746.3 | | Other assets | | | 553.6 | | | | 563.8 | | | | | | | | Total Assets | | $ | 26,684.4 | | | $ | 27,160.6 | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | Current Liabilities: | | | | | | | | | Accounts payable | | $ | 364.5 | | | $ | 284.8 | | Income taxes payable | | | 183.5 | | | | 147.2 | | Other current liabilities | | | 1,257.9 | | | | 1,185.9 | | Current portion of long-term debt | | | 575.6 | | | | – | | | | | | | | Total Current Liabilities | | | 2,381.5 | | | | 1,617.9 | | Deferred income taxes | | | 3,030.9 | | | | 3,150.2 | | Other long-term liabilities | | | 936.3 | | | | 1,005.7 | | Long-term debt | | | 10,665.8 | | | | 11,497.4 | | | | | | | | Total Liabilities | | | 17,014.5 | | | | 17,271.2 | | | | | | | | Commitments and Contingencies (Note 20) | | | | | | | | | Stockholders’ Equity: | | | | | | | | | Common stock, $0.01 par value, one billion shares authorized,
304.7 million (302.7 million in 2015) issued | | | 3.1 | | | | 3.0 | | Paid-in capital | | | 8,368.5 | | | | 8,195.3 | | Retained earnings | | | 8,467.1 | | | | 8,347.7 | | Accumulated other comprehensive loss | | | (434.0 | ) | | | (329.0 | ) | Treasury stock, 104.1 million shares (100.0 million shares in 2015) | | | (6,735.8 | ) | | | (6,329.1 | ) | | | | | | | Total Zimmer Biomet Holdings, Inc. stockholders’ equity | | | 9,668.9 | | | | 9,887.9 | | Noncontrolling interest | | | 1.0 | | | | 1.5 | | | | | | | | Total Stockholders’ Equity | | | 9,669.9 | | | | 9,889.4 | | | | | | | | Total Liabilities and Stockholders’ Equity | | $ | 26,684.4 | | | $ | 27,160.6 | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCASH FLOWS (in millions) | | For the Years Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Cash flows provided by (used in) operating activities: | | | | | | | | | | | | | Net earnings (loss) | | $ | 1,131.5 | | | $ | (379.3 | ) | | $ | 1,813.4 | | Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 1,006.1 | | | | 1,040.5 | | | | 1,062.7 | | Share-based compensation | | | 84.3 | | | | 65.5 | | | | 53.7 | | Goodwill and intangible asset impairment | | | 70.1 | | | | 979.7 | | | | 331.5 | | Inventory step-up | | | - | | | | - | | | | 32.8 | | Deferred income tax benefit (provision) | | | (538.7 | ) | | | 13.4 | | | | (1,776.0 | ) | Changes in operating assets and liabilities, net of | | | | | | | | | | | | | acquired assets and liabilities | | | | | | | | | | | | | Income taxes | | | 111.4 | | | | (150.8 | ) | | | 150.2 | | Receivables | | | (93.8 | ) | | | 213.6 | | | | 161.7 | | Inventories | | | (125.2 | ) | | | (199.5 | ) | | | (120.1 | ) | Accounts payable and accrued liabilities | | | (42.0 | ) | | | 155.9 | | | | (133.3 | ) | Other assets and liabilities | | | (17.9 | ) | | | 8.4 | | | | 5.7 | | Net cash provided by operating activities | | | 1,585.8 | | | | 1,747.4 | | | | 1,582.3 | | Cash flows provided by (used in) investing activities: | | | | | | | | | | | | | Additions to instruments | | | (315.9 | ) | | | (276.3 | ) | | | (337.0 | ) | Additions to other property, plant and equipment | | | (207.1 | ) | | | (162.7 | ) | | | (156.0 | ) | Net investment hedge settlements | | | 48.1 | | | | 69.2 | | | | - | | Acquisition of intellectual property rights | | | (197.6 | ) | | | - | | | | - | | Business combination investments, net of acquired cash | | | (37.1 | ) | | | (15.3 | ) | | | (4.0 | ) | Investments in other assets | | | (19.7 | ) | | | (31.5 | ) | | | (13.8 | ) | Net cash used in investing activities | | | (729.3 | ) | | | (416.6 | ) | | | (510.8 | ) | Cash flows provided by (used in) financing activities: | | | | | | | | | | | | | Proceeds from senior notes | | | 549.2 | | | | 749.5 | | | | - | | Proceeds from multicurrency revolving facility | | | - | | | | 400.0 | | | | 400.0 | | Payments on multicurrency revolving facility | | | - | | | | (400.0 | ) | | | (400.0 | ) | Redemption of senior notes | | | (500.0 | ) | | | (1,150.0 | ) | | | (500.0 | ) | Proceeds from term loans | | | 200.0 | | | | 675.0 | | | | 192.7 | | Payments on term loans | | | (960.0 | ) | | | (1,425.0 | ) | | | (940.0 | ) | Net payments on other debt | | | (5.3 | ) | | | (3.9 | ) | | | (0.9 | ) | Dividends paid to stockholders | | | (196.7 | ) | | | (195.2 | ) | | | (193.6 | ) | Proceeds from employee stock compensation plans | | | 158.2 | | | | 107.9 | | | | 145.5 | | Net cash flows from unremitted collections from factoring programs | | | (12.2 | ) | | | (36.7 | ) | | | 103.5 | | Business combination contingent consideration payments | | | (2.9 | ) | | | (19.8 | ) | | | (9.1 | ) | Other financing activities | | | (10.2 | ) | | | (4.0 | ) | | | (8.6 | ) | Net cash used in financing activities | | | (779.9 | ) | | | (1,302.2 | ) | | | (1,210.5 | ) | Effect of exchange rates on cash and cash equivalents | | | (1.5 | ) | | | (10.2 | ) | | | 29.3 | | Increase (decrease) in cash and cash equivalents | | | 75.1 | | | | 18.4 | | | | (109.7 | ) | Cash and cash equivalents, beginning of year | | | 542.8 | | | | 524.4 | | | | 634.1 | | Cash and cash equivalents, end of period | | $ | 617.9 | | | $ | 542.8 | | | $ | 524.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Zimmer Biomet Holdings, Inc. Stockholders | | | Noncontrolling
Interest | | | Total
Stockholders’
Equity | | | | Common Shares | | | Paid-in
Capital | | | Retained
Earnings | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Treasury Shares | | | | | | Number | | | Amount | | | | | | Number | | | Amount | | | | Balance January 1, 2014 | | | 264.3 | | | $ | 2.6 | | | $ | 4,000.6 | | | $ | 7,789.4 | | | $ | 300.9 | | | | (94.5 | ) | | $ | (5,785.7 | ) | | $ | 2.8 | | | $ | 6,310.6 | | Net earnings | | | – | | | | – | | | | – | | | | 720.3 | | | | – | | | | – | | | | – | | | | (1.1 | ) | | | 719.2 | | Other comprehensive income | | | – | | | | – | | | | – | | | | – | | | | (262.8 | ) | | | – | | | | – | | | | 0.1 | | | | (262.7 | ) | Cash dividends declared | | | – | | | | – | | | | – | | | | (148.6 | ) | | | – | | | | – | | | | – | | | | – | | | | (148.6 | ) | Stock compensation plans | | | 4.1 | | | | 0.1 | | | | 330.1 | | | | 1.0 | | | | – | | | | – | | | | 2.5 | | | | – | | | | 333.7 | | Share repurchases | | | – | | | | – | | | | – | | | | – | | | | – | | | | (4.2 | ) | | | (400.5 | ) | | | – | | | | (400.5 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance December 31, 2014 | | | 268.4 | | | | 2.7 | | | | 4,330.7 | | | | 8,362.1 | | | | 38.1 | | | | (98.7 | ) | | | (6,183.7 | ) | | | 1.8 | | | | 6,551.7 | | Net earnings | | | – | | | | – | | | | – | | | | 147.0 | | | | – | | | | – | | | | – | | | | (0.8 | ) | | | 146.2 | | Other comprehensive loss | | | – | | | | – | | | | – | | | | – | | | | (367.1 | ) | | | – | | | | – | | | | 0.5 | | | | (366.6 | ) | Cash dividends declared | | | – | | | | – | | | | – | | | | (164.4 | ) | | | – | | | | – | | | | – | | | | – | | | | (164.4 | ) | Stock compensation plans | | | 1.6 | | | | – | | | | 142.2 | | | | 3.0 | | | | – | | | | 0.1 | | | | 4.6 | | | | – | | | | 149.8 | | Share repurchases | | | – | | | | – | | | | – | | | | – | | | | – | | | | (1.4 | ) | | | (150.0 | ) | | | – | | | | (150.0 | ) | Biomet merger consideration | | | 32.7 | | | | 0.3 | | | | 3,722.4 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 3,722.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance December 31, 2015 | | | 302.7 | | | | 3.0 | | | | 8,195.3 | | | | 8,347.7 | | | | (329.0 | ) | | | (100.0 | ) | | | (6,329.1 | ) | | | 1.5 | | | | 9,889.4 | | Net earnings | | | – | | | | – | | | | – | | | | 305.9 | | | | – | | | | – | | | | – | | | | (1.3 | ) | | | 304.6 | | Other comprehensive loss | | | – | | | | – | | | | – | | | | – | | | | (105.0 | ) | | | – | | | | – | | | | 0.8 | | | | (104.2 | ) | Cash dividends declared | | | – | | | | – | | | | – | | | | (191.9 | ) | | | – | | | | – | | | | – | | | | – | | | | (191.9 | ) | Stock compensation plans | | | 2.0 | | | | 0.1 | | | | 173.2 | | | | 5.4 | | | | – | | | | 0.1 | | | | 8.8 | | | | – | | | | 187.5 | | Share repurchases | | | – | | | | – | | | | – | | | | – | | | | – | | | | (4.2 | ) | | | (415.5 | ) | | | – | | | | (415.5 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance December 31, 2016 | | | 304.7 | | | $ | 3.1 | | | $ | 8,368.5 | | | $ | 8,467.1 | | | $ | (434.0 | ) | | | (104.1 | ) | | $ | (6,735.8 | ) | | $ | 1.0 | | | $ | 9,669.9 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | Cash flows provided by (used in) operating activities: | | | | | | | | | | | | | Net earnings | | $ | 304.6 | | | $ | 146.2 | | | $ | 719.2 | | Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 1,039.3 | | | | 712.4 | | | | 375.8 | | Biomet merger consideration compensation expense | | | – | | | | 90.4 | | | | – | | Intangible asset impairment | | | 30.0 | | | | – | | | | – | | Share-based compensation | | | 57.3 | | | | 46.4 | | | | 49.4 | | Excess income tax benefit from stock option exercises | | | – | | | | (11.8 | ) | | | (11.1 | ) | Inventorystep-up | | | 323.3 | | | | 317.8 | | | | 5.4 | | Gain on divestiture of assets | | | – | | | | (19.0 | ) | | | – | | Debt extinguishment | | | 53.3 | | | | 22.0 | | | | – | | Deferred income tax provision | | | (153.2 | ) | | | (164.0 | ) | | | (90.5 | ) | Changes in operating assets and liabilities, net of acquired assets and liabilities | | | | | | | | | | | | | Income taxes | | | (10.9 | ) | | | 244.7 | | | | (13.2 | ) | Receivables | | | (137.8 | ) | | | (56.1 | ) | | | (40.4 | ) | Inventories | | | 76.4 | | | | (205.4 | ) | | | (164.6 | ) | Accounts payable and accrued liabilities | | | 28.7 | | | | (252.0 | ) | | | 116.1 | | Other assets and liabilities | | | 21.2 | | | | (21.8 | ) | | | 114.4 | | | | | | | | | | | | Net cash provided by operating activities | | | 1,632.2 | | | | 849.8 | | | | 1,060.5 | | | | | | | | | | | | Cash flows provided by (used in) investing activities: | | | | | | | | | | | | | Additions to instruments | | | (345.5 | ) | | | (266.4 | ) | | | (197.4 | ) | Additions to other property, plant and equipment | | | (184.7 | ) | | | (167.7 | ) | | | (144.9 | ) | Purchases of investments | | | (1.5 | ) | | | (214.8 | ) | | | (1,350.9 | ) | Sales of investments | | | 286.2 | | | | 802.9 | | | | 1,282.2 | | Proceeds from divestiture of assets | | | – | | | | 69.9 | | | | – | | Biomet acquisition, net of acquired cash | | | – | | | | (7,760.1 | ) | | | – | | LDR acquisition, net of acquired cash | | | (1,021.1 | ) | | | – | | | | – | | Business combination investments, net of acquired cash | | | (421.9 | ) | | | – | | | | (54.3 | ) | Investments in other assets | | | (3.0 | ) | | | (21.7 | ) | | | (4.1 | ) | | | | | | | | | | | Net cash used in investing activities | | | (1,691.5 | ) | | | (7,557.9 | ) | | | (469.4 | ) | | | | | | | | | | | Cash flows provided by (used in) financing activities: | | | | | | | | | | | | | Proceeds from (payments on) senior notes | | | 1,073.5 | | | | 7,628.2 | | | | (250.0 | ) | Proceeds from term loan | | | 750.0 | | | | 3,000.0 | | | | – | | Redemption of senior notes | | | (1,250.0 | ) | | | (2,762.0 | ) | | | – | | Payments on term loan | | | (800.0 | ) | | | (500.0 | ) | | | – | | Net proceeds (payments) under revolving credit facilities | | | (33.1 | ) | | | 0.1 | | | | 2.3 | | Dividends paid to stockholders | | | (188.4 | ) | | | (157.1 | ) | | | (145.5 | ) | Proceeds from employee stock compensation plans | | | 136.6 | | | | 105.2 | | | | 284.7 | | Restricted stock withholdings | | | (6.3 | ) | | | (11.1 | ) | | | (7.7 | ) | Excess income tax benefit from stock option exercises | | | – | | | | 11.8 | | | | 11.1 | | Debt issuance costs | | | (10.0 | ) | | | (58.4 | ) | | | (64.1 | ) | Repurchase of common stock | | | (415.5 | ) | | | (150.0 | ) | | | (400.9 | ) | | | | | | | | | | | Net cash (used in) provided by financing activities | | | (743.2 | ) | | | 7,106.7 | | | | (570.1 | ) | | | | | | | | | | | Effect of exchange rates on cash and cash equivalents | | | (22.7 | ) | | | (22.6 | ) | | | (18.3 | ) | | | | | | | | | | | (Decrease) increase in cash and cash equivalents | | | (825.2 | ) | | | 376.0 | | | | 2.7 | | Cash and cash equivalents, beginning of year | | | 1,459.3 | | | | 1,083.3 | | | | 1,080.6 | | | | | | | | | | | | Cash and cash equivalents, end of period | | $ | 634.1 | | | $ | 1,459.3 | | | $ | 1,083.3 | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We design, manufacture and market orthopaedicorthopedic reconstructive products; sports medicine, biologics, extremities and trauma products; office based technologies; spine, craniomaxillofacial and thoracic products; dental implants; and related surgical products. We collaborate with healthcare professionals around the globe to advance the pace of innovation. Our products and solutions help treat patients suffering from disorders of, or injuries to, bones, joints or supporting soft tissues. Together with healthcare professionals, we help millions of people live better lives. On June 24, 2015 (the “Closing Date”), pursuant to an agreement and plan of merger dated April 24, 2014, we acquired LVB Acquisition, Inc. (“LVB”), the parent company of Biomet, Inc. (“Biomet”), and LVB and Biomet became our wholly-owned subsidiaries (sometimes hereinafter referred to as the “Biomet merger” or the “merger”). For more information on the merger, see Note 3. In connection with the merger, we changed our name from Zimmer Holdings, Inc. to Zimmer Biomet Holdings, Inc.
The words “Zimmer Biomet,” “we,” “us,” “our,” “the Company” and similar words refer to Zimmer Biomet Holdings, Inc. and its subsidiaries. “Zimmer Biomet Holdings” refers to the parent company only. “Zimmer” used alone refersIn 2015, we completed our merger with LVB Acquisition, Inc., the parent company of Biomet, Inc. (“Biomet”) (which merger is sometimes referred to herein as the business or information of us and our subsidiaries on a stand-alone basis without inclusion of the business or information of LVB or any of its subsidiaries.“Biomet merger”). 2. | Significant Accounting Policies |
Basis of Presentation – - The consolidated financial statements include the accounts of Zimmer Biomet Holdings and its subsidiaries in which it holds a controlling financial interest. All significant intercompany accounts and transactions are eliminated. Certain amounts in the 2015 and 2014 consolidated financial statements have been reclassified to conform to the 2016 presentation. Use of Estimates – - The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S. which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign Currency Translation – - The financial statements of our foreign subsidiaries are translated into U.S. Dollars usingperiod-end exchange rates for assets and liabilities and average exchange rates for operating results. Unrealized translation gains and losses are included in accumulated other comprehensive incomeloss (income) in stockholders’ equity. When a transaction is denominated in a currency other than the subsidiary’s functional currency, we recognize a transaction gain or loss when the transaction is settled. Foreign currency transaction gains and losses included in net earnings for the years ended December 31, 2016, 2015 and 2014 were not significant.
Revenue Recognition – We sell product through three principal channels: 1) direct to healthcare institutions, referred to as direct channel accounts; 2) through stocking distributors and healthcare dealers; and 3) directly to dental practices and dental laboratories. The direct channel accounts represented approximately 80 percent of our net sales in 2016. Through this channel, inventory is generally consigned to sales agents or customers so that products are available when needed for surgical procedures. No revenue is recognized upon the placement of inventory into consignment as we retain title and maintain the inventory on our balance sheet. Upon implantation, we issue an invoice and revenue is recognized. Pricing for products is generally predetermined by contracts with customers, agents acting on behalf of customer groups or by government regulatory bodies, depending on the market. Price discounts under group purchasing contracts are generally linked to volume of implant purchases by customer healthcare institutions within a specified group. At negotiated thresholds within a contract buying period, price discounts may increase.
Sales to stocking distributors, healthcare dealers, dental practices and dental laboratories accounted for approximately 20 percent of our net sales in 2016. With these types of sales, revenue is recognized when title to product passes, either upon shipment of the product or in some cases upon implantation of the product. Product is generally sold at contractually fixed prices for specified periods. Payment terms vary by customer, but are typically less than 90 days.
If sales incentives are earned by a customer for purchasing a specified amount of our product, we estimate whether such incentives will be achieved and, if so, recognize these incentives as a reduction in revenue in the same period the underlying revenue transaction is recognized. Occasionally, products are returned and, accordingly, we maintain an estimated sales return reserve that is recorded as a reduction in revenue. Product returns were not significant for the years ended December 31, 2016, 2015 and 2014.
Taxes collected from customers and remitted to governmental authorities are presented on a net basis and excluded from revenues.
Shipping and Handling – - Amounts billed to customers for shipping and handling of products are reflected in net sales and are not significant. Expenses incurred related to shipping and handling of products are reflected in selling, general and administrative (“SG&A”) expenses and were $231.7$292.7 million, $214.2$290.2 million and $181.9$263.6 million for the years ended December 31, 2016, 20152019, 2018 and 2014, respectively.2017, respectively. Research and Development – - We expense all research and development (“R&D”) costs as incurred except when there is an alternative future use for the R&D. R&D costs include salaries, prototypes, depreciation of equipment used in R&D, consultant fees and service fees paid to collaborative partners. | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Where contingent milestone payments are due to third parties under R&D arrangements, we expense the milestone payment obligations are expensed when it is probable that the milestone results arewill be achieved. Litigation – - We record a liability for contingent losses, including future legal costs, settlements and judgments, when we consider it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Special Items –Quality remediation - We use the financial statement line item “Quality remediation” to recognize expenses resulting directly fromrelated to addressing inspectional observations on Form 483 and a warning letter issued by the FDA following its inspections of our Warsaw North Campus facility, among other matters. See Note 20 for additional information about the Form 483 and warning letter. The majority of these expenses are related to consultants who are helping us to update previous documents and redesign certain processes.
Restructuring and other cost reduction initiatives - A restructuring is defined as a program that is planned and controlled by management, and materially changes either the scope of a business combinations, employeeundertaken by an entity, or the manner in which that business is conducted. Restructuring charges include (i) termination benefits certain R&D agreements, certainrelated to employee terminations, (ii) contract terminations, consultingtermination costs and professional fees(iii) other related costs associated with exit or disposal activities.
In December 2019, our Board of Directors approved, and asset impairment or loss on disposal charges connected withwe initiated, a new global restructuring quality and operational excellence initiatives, and other items as “Special items”program with an objective of reducing costs to allow us to further invest in our consolidated statement of earnings. “Special items” included (in millions): | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | Biomet-related | | | | | | | | | | | | | Merger consideration compensation expense | | $ | – | | | $ | 90.4 | | | $ | – | | Retention plans | | | – | | | | 73.0 | | | | – | | Consulting and professional fees | | | 220.4 | | | | 167.4 | | | | 61.5 | | Employee termination benefits | | | 50.8 | | | | 101.0 | | | | – | | Dedicated project personnel | | | 79.8 | | | | 62.3 | | | | 0.4 | | Relocated facilities | | | 19.1 | | | | 5.6 | | | | – | | Certain litigation matters | | | 2.5 | | | | – | | | | – | | Contract terminations | | | 39.9 | | | | 95.0 | | | | – | | Information technology integration | | | 14.3 | | | | 5.2 | | | | – | | Intangible asset impairment | | | 30.0 | | | | – | | | | – | | Loss/impairment on assets | | | 13.0 | | | | – | | | | – | | Other | | | 17.5 | | | | 19.2 | | | | – | | | | | | | | | | | | | | | Total Biomet-related | | | 487.3 | | | | 619.1 | | | | 61.9 | | Other | | | | | | | | | | | | | Consulting and professional fees | | | 33.0 | | | | 114.8 | | | | 115.2 | | Employee termination benefits | | | 7.0 | | | | 1.9 | | | | 0.9 | | Dedicated project personnel | | | 17.3 | | | | 31.8 | | | | 50.4 | | Relocated facilities | | | 0.2 | | | | – | | | | 0.7 | | Certain litigation matters | | | 30.8 | | | | 31.2 | | | | 70.0 | | Contract terminations | | | 2.9 | | | | – | | | | 1.8 | | Information technology integration | | | 1.3 | | | | 1.8 | | | | – | | Intangible asset impairment | | | 1.1 | | | | – | | | | 24.0 | | Loss/impairment on assets | | | – | | | | 3.8 | | | | 6.0 | | LDR merger consideration compensation expense | | | 24.1 | | | | – | | | | – | | Contingent consideration adjustments | | | – | | | | 2.4 | | | | 0.6 | | Certain R&D agreements | | | – | | | | – | | | | 4.5 | | Distributor acquisitions | | | – | | | | – | | | | 0.6 | | Other | | | 6.8 | | | | 25.0 | | | | 4.5 | | | | | | | | | | | | | | | Total Other | | | 124.5 | | | | 212.7 | | | | 279.2 | | | | | | | | | | | | | | | Special items | | $ | 611.8 | | | $ | 831.8 | | | $ | 341.1 | | | | | | | | | | | | | | |
Pursuant to the Biomet merger agreement, all outstanding LVB stock options and LVB stock-based awards vested immediately prior to the effective time of the merger, and holders of these options and awards received a portion of the aggregate merger consideration. Some of these options and awards were already vested under the terms of LVB’s equity incentive plans. We accounted for the fair value of the consideration we paid in exchange for previously vested options and awards as consideration to complete the merger. As part of the merger agreement terms, all previously unvested options and awards vested immediately prior to the effective time of the merger. Under LVB’s equity incentive plans, unvested options and awards would have otherwise been forfeited.higher priority growth opportunities. We have concluded that the discretionary accelerated vesting of these unvested optionsreclassified $34.2 million and awards was for the economic benefit of the combined company, and, therefore, we classified the fair value of the merger consideration we paid to holders of such unvested options and awards of $90.4$17.6 million as compensation expense in 2015. Under similar terms, a portion of LDR Holding Corporation (“LDR”) stock options and LDR stock-based awards vested immediately before the LDR merger and we recognized compensation expense of $24.1 million in 2016.
Pursuant to the LVB merger agreement, retention plans were established for certain Biomet employees and third-party sales agents. Retention payments were earned by employees and third-party sales agents who remained with Biomet through the Closing Date. We recognized $73.0 million of expense resulting from these retention plans in 2015.
Consulting and professional fees relate to third-party integration consulting performed in a variety of areas such as tax, compliance, logistics and human resources for our business combinations and merger with Biomet; legal fees related to the consummation of mergers and acquisitions and certain litigation and compliance matters; third-party consulting and professional fees and contract labor related to our quality and operational excellence initiatives; third-party fees related to severance and termination benefits matters; and third-party consulting fees related to certain information system integrations.
After the closing date of the Biomet merger, we started to implement our integration plans to drive operational synergies. Our Biomet integration plans are expected to run through 2018. Part of these integration plans included termination of employees and certain contracts. Expenses attributable to these integration plans that were recognized in the years ended December 31, 20162018 and 2015 as part of “Special items” related2017, respectively, from the “Acquisition, integration and related” line item to employee termination benefits and contract termination expense associated with agreements with independent agents, distributors, suppliers and lessors. We expect to incur a total of $170 million for employee termination benefits and $140 million for contract termination expense. As of December 31, 2016, we have incurred a cumulative total of $151.8 million for employee termination benefits and $134.9 million for contract termination expense.
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Accordingly, our integration plans with respect to employee termination benefits and contract termination expenses are substantially complete. The following table summarizes the liabilities related to these integration plans (in millions):
| | | | | | | | | | | | | | | | Employee
Termination
Benefits | | | Contract
Terminations | | | Total | | Balance, December 31, 2015 | | $ | 46.8 | | | $ | 56.0 | | | $ | 102.8 | | Additions | | | 50.8 | | | | 39.9 | | | | 90.7 | | Cash payments | | | (58.4 | ) | | | (60.6 | ) | | | (119.0 | ) | Foreign currency exchange rate changes | | | (1.1 | ) | | | (0.2 | ) | | | (1.3 | ) | | | | | | | | | | | | | | Balance, December 31, 2016 | | $ | 38.1 | | | $ | 35.1 | | | $ | 73.2 | | | | | | | | | | | | | | |
We have also recognized other employee termination benefits related to LDR, other acquisitions and our operational excellence initiatives.
Dedicated project personnel expenses include the salary, benefits, travel expenses“Restructuring and other costs directly associated with employees who are 100 percent dedicatedcost reduction initiatives” line item, which amounts were primarily attributable to our quality and operational excellence initiatives or integration of acquired businesses.
Relocated facilities expenses are the moving costs and the lease expenses incurred during the relocation period in connection with relocating certain facilities.
Certain litigation matters relate to net expenses recognized during the year for the estimated or actual settlement of certain pending litigation and similar claims, including matters where we recognized income from a settlement on more favorable terms than our previous estimate, or we reduced our estimate of a previously recorded contingent liability. These litigation matters have included royalty disputes, patent litigation matters, product liability litigation matters and commercial litigation matters.
Contract termination costs relate to terminated agreements in connection with the integration of acquired companies and changes to our distribution model as part of business restructuring and operational excellence initiatives. The terminated contracts primarily relate to sales agents and distribution agreements.
Information technology integration costs arenon-capitalizable costs incurred related to integrating information technology platforms of acquired companies or other significant software implementations as part of our quality and operational excellence initiatives.
As part of the Biomet merger, we recognized $209.0 million of intangible assets forin-process research and development (“IPR&D”) projects. During 2016, we recorded an impairment loss of $30.0 million related to these IPR&D intangible assets. The impairment was primarily due to the termination of certain IPR&D projects.
Loss/impairment on disposal of assets relates to assets that we have sold or intend to sell, or for which the economic useful life of the asset has been significantly reduced due to
integration or our quality and operational excellence initiatives.
Contingent consideration adjustments represent the changes in the fair value of contingent consideration obligations to be paid to the prior owners of acquired businesses.
Certain R&D agreements relate to agreements with upfront payments to obtain intellectual property to be used in R&D projects that have no alternative future use in other projects.
Over the past few years we have acquired a number of U.S. and foreign-based distributors. We have incurred variousproject costs related to our supply chain optimization initiative.
Acquisition, integration and related – We use the financial statement line item, “Acquisition, integration and related” to recognize expenses resulting from the consummation of business mergers and acquisitions and the related integration of those businesses. Acquisition, integration and related gains and expenses are primarily composed of: | • | Consulting and professional fees related to third-party integration consulting performed in a variety of areas, such as tax, compliance, logistics and human resources, and legal fees related to the consummation of mergers and acquisitions. |
| • | Employee termination benefits related to terminating employees with overlapping responsibilities in various areas of our business. |
| • | Dedicated project personnel expenses which include the salary, benefits, travel expenses and other costs directly associated with employees who are 100 percent dedicated to our integration of acquired businesses and employees who have been notified of termination, but are continuing to work on transferring their responsibilities. |
| • | Contract termination expenses related to terminated contracts, primarily with sales agents and distribution agreements. |
| • | Other various expenses to relocate facilities, integrate information technology, losses incurred on assets resulting from the applicable acquisition, and other various expenses. |
We have reclassified $34.2 million and $17.6 million in the years ended December 31, 2018 and 2017, respectively, from the “Acquisition, integration and related” line item to the “Restructuring and other cost reduction initiatives” line item, which amounts were primarily attributable to project costs related to our supply chain optimization initiative. Cash and Cash Equivalents – - We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying amounts reported in the balance sheet for cash and cash equivalents are valued at cost, which approximates their fair value. Investments – We invest our excess cash and cash equivalents in debt securities. Our investments include corporate debt securities, U.S. government and agency debt securities, foreign government debt securities, commercial paper and certificates of deposit, and are classified and accounted for asavailable-for-sale.Available-for-sale debt securities are recorded at fair value on our consolidated balance sheet. Investments with a contractual maturity of less than one year are classified as short-term investments on our consolidated balance sheet, or in othernon-current assets if the contractual maturity is greater than one year. Changes in fair value foravailable-for-sale securities are recorded, net of taxes, as a component of accumulated other comprehensive loss on our consolidated balance sheet. We review our investments for other-than-temporary impairment at each reporting period. If an unrealized loss for any investment is considered to be other-than-temporary, the loss will be recognized in the consolidated statement of earnings in the period the determination is made. See Note 7 for more information regarding our investments.
Accounts Receivable – - Accounts receivable consists of trade and other miscellaneous receivables. We grant credit to customers in the normal course of business and maintain an allowance for doubtful accounts for potential credit losses. We determine the allowance for doubtful accounts by geographic market and take into consideration historical credit experience, creditworthiness of the customer and other pertinent information. We make concerted efforts to collect all accounts receivable, but sometimes we have towrite-off the account against the allowance when we determine the account is uncollectible. The allowance for doubtful accounts was $51.6$65.0 million and $34.1$65.7 million as of December 31, 20162019 and 2015, respectively.2018, respectively. We also have receivables purchase arrangements with unrelated third parties to transfer portions of our trade accounts receivable balance. Funds received from the transfers are recorded as an increase to cash and a reduction to accounts receivable outstanding in our consolidated balance sheets. We report the cash flows attributable to the sale of receivables to third parties in cash flows from operating activities in our consolidated statements of cash flows. Net expenses resulting from the sales of receivables are recognized in SG&A expense. Net expenses include any resulting gains or losses from the sales of receivables, credit insurance and factoring fees. Any collections that we make that are unremitted to the third parties are recognized on our consolidated balance sheets under other current liabilities and in our consolidated statements of cash flows in financing activities. Inventories – - Inventories are stated at the lower of cost or market,and net realizable value, with cost determined on afirst-infirst-out first-in first-out basis. | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Property, Plant and Equipment – - Property, plant and equipment is carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on estimated useful lives of ten to forty years for buildings and improvements and three to eight years for machinery and equipment. Maintenance and repairs are expensed as incurred. We review property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the asset are less than its carrying amount. An impairment loss is measured as the amount by which the carrying amount of an asset exceeds its fair value.
Software Costs – - We capitalize certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use when both the preliminary project stage is completed and it is probable that the software will be used as intended. Capitalized software costs generally include external direct costs of materials and services utilized in developing or obtaining computer software and compensation and related benefits for employees who are directly associated with the software project. Capitalized software costs are included in property, plant and equipment on our balance sheet and amortized on a straight-line or weighted average estimated user basis when the software is ready for its intended use over the estimated useful lives of the software, which approximate three to fifteen years. Instruments – - Instruments are hand-held devices used by surgeons during total joint replacement and other surgical procedures. Instruments are recognized as long-lived assets and are included in property, plant and equipment. Undeployed instruments are carried at cost or realizable value. Instruments that have been deployed to be used in the fieldsurgeries are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on average estimated useful lives, determined principally in reference to associated product life cycles, primarily five years. We review instruments for impairment whenever events or changes in circumstances indicate that the carrying value of an instrument may not be recoverable. Depreciation of instruments is recognized as selling, general and administrativeSG&A expense. Goodwill – - Goodwill is not amortized but is subject to annual impairment tests. Goodwill has been assigned to reporting units. We perform annual impairment tests by either comparing a reporting unit’s estimated fair value to its carrying amount or doing a qualitative assessment of a reporting unit’s fair value from the last quantitative assessment to determine if there is potential impairment. We may do a qualitative assessment when the results of the previous quantitative test indicated the reporting unit’s estimated fair value was significantly in excess of the carrying value of its net assets and we do not believe there have been significant changes in the reporting unit’s operations that would significantly decrease its estimated fair value or significantly increase its net assets. If a quantitative assessment is performed, the fair value of the reporting unit and the implied fair value of goodwill are determined based upon a discounted cash flow analysis and/or use of a market approach by looking at market values of comparable companies. Significant assumptions are incorporated into our discounted cash flow analyses such as estimated growth rates and risk-adjusted discount rates. We perform this test in the fourth quarter of the year or whenever events or changes in circumstances indicate that the carrying value of the reporting unit’s assets may not be recoverable. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded toin the extentamount that the implied fair value of the reporting unit goodwill is less than the carrying value of the reportingbusiness unit goodwill.exceeds the fair value. See Note 10 for more information regarding goodwill. Intangible Assets – - Intangible assets are initially measured at their fair value. We have determined the fair value of our intangible assets either by the fair value of the consideration exchanged for the intangible asset or the estimatedafter-tax discounted cash flows expected to be generated from the intangible asset. Intangible assets with an indefinite life, including certain trademarks and trade names and in-process research and development (“IPR&D”) projects, are not amortized. Indefinite life intangible assets are assessed annually to determine whether events and circumstances continue to support an indefinite life. Intangible assets with a finite life, including core and developed technology, certain trademarks and trade names, customer-related intangibles, intellectual property rights and patents and licenses are amortized on a straight-line basis over their estimated useful life rangingor contractual life, which may range from less than one year to 20twenty years. Intangible assets with a finite life are tested for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. Intangible assets with an indefinite life are tested for impairment annually or whenever events or circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount exceeds the estimated fair value of the asset. The amount of the impairment loss to be recorded would be determined based upon the excess of the asset’s carrying value over its fair value. The fair values of indefinite lived intangible assets are determined based upon a discounted cash flow analysis using the relief from royalty method or a qualitative assessment may be performed for any changes to the asset’s fair value from the last quantitative assessment. The relief from royalty method estimates the cost savings associated with owning, rather than licensing, assets. Significant assumptions are incorporated into these discounted cash flow analyses such as estimated growth rates, royalty rates and risk-adjusted discount rates. We may do a qualitative assessment when the results of the previous quantitative test indicated that the asset’s fair value was significantly in excess of its carrying value. In determining the useful lives of intangible assets, we consider the expected use of the assets and the effects of | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
obsolescence, demand, competition, anticipated technological advances, changes in surgical techniques, market influences and other economic factors. For technology-based intangible assets, we consider the expected life cycles of products, absent unforeseen technological advances, which incorporate the corresponding technology.
Trademarks and trade names that do not have a wasting characteristic (i.e., there are no legal, regulatory, contractual, competitive, economic or other factors which limit the useful life) are assigned an indefinite life. Trademarks and trade names that are related to products expected to be phased out are assigned lives consistent with the period in which the products bearing each brand are expected to be sold. For customer relationship intangible assets, we assign useful lives based upon historical levels of customer attrition. Intellectual property rights are assigned useful lives that approximate the contractual life of any related patent or the period for which we maintain exclusivity over the intellectual property. Income Taxes – - We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the new tax rate is enacted. We reduce our deferred tax assets by a valuation allowance if it is more likely than not that we will not realize some portion or all of the deferred tax assets. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes. Federal income taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the U.S. We operate on a global basis and are subject to numerous and complex tax laws and regulations. Our income tax filings are regularly under audit in multiple federal, state and foreign jurisdictions. Income tax audits may require an extended period of time to reach resolution and may result in significant income tax adjustments when interpretation of tax laws or allocation of company profits is disputed. Because income tax adjustments in certain jurisdictions can be significant, we record accruals representing management’smanagement's best estimate of the probable resolution of these matters. To the extent additional information becomes available, such accruals are adjusted to reflect the revised estimated probable outcome. Derivative Financial Instruments – - We measure all derivative instruments at fair value and report them on our consolidated balance sheet as assets or liabilities. We maintain written policies and procedures that permit, under appropriate circumstances and subject to proper authorization, the use of derivative financial instruments solely for risk management purposes. The use of derivative financial instruments for trading or speculative purposes is prohibited by our policy. See Note 14 for more information regarding our derivative and hedging activities. Accumulated Other Comprehensive (Loss) Income (Loss)– Other Accumulated other comprehensive income (loss) (“OCI”AOCI”) refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net earnings as these amounts are recorded directly as an adjustment to stockholders’ equity. Our OCIAOCI is comprised of foreign currency translation adjustments, including unrealized gains and losses on net investments hedges, unrealized gains and losses on cash flow hedges unrealized gains and losses onavailable-for-sale securities and amortization of prior service costs and unrecognized gains and losses in actuarial assumptions. Treasury Stock – - We account for repurchases of common stock under the cost method and present treasury stock as a reduction of stockholders’ equity. We reissue common stock held in treasury only for limited purposes. Noncontrolling Interest – - We have an investmentinvestments in another companyother companies in which we have a controlling financial interest, but not 100 percent of the equity. Further information related to the noncontrolling interests of that investment hasthose investments have not been provided as it is not significant to our consolidated financial statements. Accounting Pronouncements – Recently Adopted In April 2015,February 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)2015-03 2016-02 – Simplifying the Presentation of Debt Issuance Costs. This ASU requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. This ASU does not affect the measurement and recognition of debt issuance costs in our statement of earnings. We adopted ASU2015-03 in 2016 on a retrospective basis. Accordingly, we reclassified the debt issuance costs on our December 31, 2015 consolidated balance sheet, which decreased long-term debt by $58.9 million, other current assets by $9.2 million and other assets by $49.7 million. In March 2016, the FASB issued ASU2016-09 – Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for employee share-based payments, including the accounting for employer tax withholding on share-based compensation, forfeitures and the financial statement presentation of excess tax benefits and deficiencies. The ASU also clarifies the statement of cash flows presentation for certain components of share-based awards.
We elected to early adopt ASU2016-09 in 2016. As a result of the adoption, we are required to recognize excess tax
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
benefits in our provision for income taxes, rather thanpaid-in capital. The ASU required prospective application of this provision and therefore 2015 and 2014 have not been restated.
Additionally, ASU2016-09 requires us to amend the presentation of employee shared-based payment-related items in our statement of cash flows as follows: (i) excess tax benefits are presented as an operating activity (such cash flows were previously included in cash flows from financing activities), and (ii) cash paid for employee taxes on withheld shares from equity awards is presented as a financing activity (such cash flows were previously included in cash flows from operating activities)Leases (Topic 842). We elected to apply the change in cash flow classification for excess tax benefits on a prospective basis. Further, we applied the change in cash flow classification for cash paid for withheld shares on a retrospective basis, as required.
We also elected to continue to estimate the number of forfeitures related to share-based payments, rather than account for forfeitures as they occur.
We recognized excess tax benefits of $13.3 million in our provision for income taxes rather thanpaid-in capital for the year ended December 31, 2016. The retrospective application of cash paid for withheld shares resulted in an $11.1 million and $7.7 million reclassification of these cash outflows from net cash provided by operating activities to net cash (used in) provided by financing activities on our consolidated statement of cash flows for the years ended December 31, 2015 and 2014, respectively.
In August 2016 the FASB issued ASU2016-15 – Classification of Certain Cash Receipts and Cash Payments. This ASU provided guidance on eight issues which were not specifically addressed under previous GAAP. The only issue of significance to us provided guidance that cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows from financing activities. We early adopted this ASU in 2016, and as a result, classified $38.5 million of early tender debt premium costs as cash outflows from financing activities. The ASU required a retrospective transition method, which resulted in a reclassification of $22.0 million of debt extinguishment cash outflows from net cash provided by operating activities to net cash (used in) provided by financing activities in the year ended December 31, 2015.
In May 2014, the FASB issued ASU2014-09 – Revenue from Contracts with Customers (Topic 606). This ASU provides a five-step model for revenue recognition that all industries will apply to recognize revenue when a customer obtains control of a good or service. The ASU will be effective for us beginning January 1, 2018. Entities are permitted to apply the standard and related amendments either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application.
During the fourth quarter of 2016, we commenced an initial evaluation of the new standard and a related assessment
and review of a representative sample of existing revenue contracts with our customers. We are currently unable to estimate the impact, if any, of the new standard on the timing and pattern of our revenue recognition. It is likely we will be required to provide additional disclosures in the notes to the consolidated financial statements upon adoption. We have not yet determined the effect of the ASU on our internal control over financial reporting or other changes in business practices and processes but will do so in the design and implementation phase to occur over the next year. We continue to evaluate the available adoption methods. Our evaluation of ASU2014-09 is ongoing and not complete.
In February 2016, the FASB issued ASU2016-02 – Leases. This ASU requires lessees to recognizeright-of-use assets and lease liabilities on the balance sheet. This ASU will bewas effective for us beginningas of January 1, 2019. Early adoption is permitted. TheThis ASU must be adopted usingrequired a modified retrospective transition approachmethod that could either be applied at the beginning of the earliest comparative period in the consolidated financial statements.statements or the period of adoption. We own mostelected to use the period of adoption (January 1, 2019) transition method and therefore did not recast prior periods. This ASU allowed for certain practical expedients to make the adoption of the ASU less burdensome. We elected the practical expedients upon transition which permitted us to not reassess lease identification, classification, and initial direct costs under the new standard for leases that commenced prior to
the effective date. We also elected not to recognize a right-of-use asset nor a lease liability for leases with an initial term of twelve months or less. Finally, we elected not to separate non-lease components from the leased components in the valuation of our manufacturing facilities, butright-of-use asset and lease various office space throughoutliability for all asset classes. On January 1, 2019, we recognized a right-of-use asset of $274.7 million in other assets and lease liabilities of $62.2 million and $221.2 million in other current liabilities and other long-term liabilities, respectively. NaN cumulative adjustment to retained earnings was required upon adoption. We do not have any significant finance leases. See Note 19 for additional information. Accounting Pronouncements Not Yet Adopted In June 2016, the world.FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The new guidance describes the current expected credit loss (“CECL”) model which requires an estimate of expected impairment on financial instruments over the lifetime of the assets at each reporting date. Financial instruments in scope of the guidance include financial assets measured at amortized cost. Current accounting guidance requires recognition of impairment when it is probable the loss has been incurred. Under the CECL model, lifetime expected credit losses are measured and recognized at each reporting date based on historical experience, current conditions and forecasted information. The standard is effective for interim and annual periods after December 15, 2019. Adoption of this standard requires a modified retrospective transition method, which will result in a cumulative-effect adjustment to retained earnings in the period of adoption. We will adopt this standard as of January 1, 2020. The standard will primarily impact our trade receivables. We are currently evaluating the impact this ASUthe standard will have on our consolidated financial statements. In October 2016, the FASB issued ASU2016-16 – Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU changes the accounting for the tax effects of intra-entity asset transfers/sales. Under current GAAP, the tax effects of intra-entity asset transfers/sales are deferred until the transferred asset is soldstatements, but at this time we do not expect it to a third party or otherwise recovered through use. Under the new guidance, the tax expense from the sale of the asset in the seller’s tax jurisdiction is recognized when the transfer occurs, even though thepre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new guidance does not apply to intra-entity transfers/sales of inventory. In the past, we have transferred intellectual property intra-entity which, under current GAAP, resulted in deferring the tax impact on the selling entity. We are still assessing the impact this ASU may have on us. The ASU will be effective for us on January 1, 2018, with early adoption permitted. The modified retrospective approach will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption for intra-entity transfers/sales executed prior to that date.significant.
There are no other recently issued accounting pronouncements that we have not yet adopted that are expected to have a material effect on our financial position, results of operations or cash flows. 3. | Business CombinationsRevenue Recognition |
Biomet MergerWe recognize revenue when our performance obligations under the terms of a contract with our customer are satisfied. This happens when we transfer control of our products to the customer, which generally occurs upon implantation or when title passes upon shipment. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring our product. Taxes collected from customers and remitted to governmental authorities are excluded from revenues.
We completedsell products through three principal channels: 1) direct to healthcare institutions, referred to as direct channel accounts; 2) through stocking distributors and healthcare dealers; and 3) directly to dental practices and dental laboratories. In direct channel accounts and with some healthcare dealers, inventory is generally consigned to sales agents or customers so that products are available when needed for surgical procedures. No revenue is recognized upon the placement of inventory into consignment, as we retain the ability to control the inventory. Upon implantation, we issue an invoice and revenue is recognized. Consignment sales represented approximately 80 percent of our mergernet sales in 2019. Pricing for products is generally predetermined by contracts with LVB,customers, agents acting on behalf of customer groups or by government regulatory bodies, depending on the parent companymarket. Price discounts under group purchasing contracts are generally linked to volume of Biomet,implant purchases by customer healthcare institutions within a specified group. At negotiated thresholds within a contract buying period, price discounts may increase. Payment terms vary by customer, but are typically less than 90 days. With sales to stocking distributors, some healthcare dealers, dental practices and dental laboratories, revenue is generally recognized when control of our product passes to the customer, which is typically upon shipment of the product. We estimate sales recognized in this manner represented approximately 20 percent of our net sales in 2019. These customers may purchase items in large quantities if incentives are offered or if there are new product offerings in a market, which could cause period-to-period differences in sales. It is our accounting policy to account for shipping and handling activities as a fulfillment cost rather than as an additional promised service. We have contracts with these customers or orders may be placed from available price lists. Payment terms vary by customer, but are typically less than 90 days. We offer standard warranties to our customers that our products are not defective. These standard warranties are not considered separate performance obligations. In limited circumstances, we offer extended warranties that are separate performance obligations. We have very few contracts that have multiple performance obligations. Since we do 0t have significant multiple element arrangements and essentially all of our sales are recognized upon implantation of a product or when title passes, very little judgment is required to allocate the transaction price of a contract or determine when control has passed to a customer. Our costs to obtain contracts consist primarily of sales
commissions to employees or third party agents that are earned when control of our product passes to the customer. Therefore, sales commissions are expensed as part of SG&A expenses at the same time revenue is recognized. Accordingly, we do 0t have significant contract assets, liabilities or future performance obligations. We offer volume-based discounts, rebates, prompt pay discounts, right of return and other various incentives which we account for under the variable consideration model. If sales incentives may be earned by a customer for purchasing a specified amount of our product, we estimate whether such incentives will be achieved and recognize these incentives as a reduction in revenue in the same period the underlying revenue transaction is recognized. We primarily use the expected value method to estimate incentives. Under the expected value method, we consider the historical experience of similar programs as well as review sales trends on June 24, 2015. a customer-by-customer basis to estimate what levels of incentives will be earned. Occasionally, products are returned and, accordingly, we maintain an estimated refund liability based upon the expected value method that is recorded as a reduction in revenue. We paid $12,030.3 millionanalyze sales by three geographies, the Americas; Europe, Middle East and Africa (“EMEA”); and Asia Pacific; and by the following product categories: Knees; Hips; Surgical, Sports Medicine, Biologics, Foot and Ankle, Extremities and Trauma (“S.E.T.”); Spine & Craniomaxillofacial and Thoracic (“CMF”); Dental; and Other. As discussed in cash | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
Note 18, we have 7 operating segments that are based upon geography and product categories. The geographic segments include sales of all product categories exclusive of the specific product category operating segments. The geographic operating segments are the Americas, EMEA and Asia Pacific. These 3 operating segments are our reporting segments. The product category operating segments are Spine, less Asia Pacific; Office Based Technologies; CMF; and Dental. The product operating segments do not constitute a reporting segment because they are, individually and on a combined basis, insignificant to our consolidated results. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)Our sales analysis differs from our reporting operating segments because the underlying market trends in any particular geography tend to be similar across product categories, we primarily sell the same products in all geographies and the product category operating segments are not individually significant to our consolidated results.
Net sales by geography are as follows (in millions): | | For the Years Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Americas | | $ | 4,875.8 | | | $ | 4,837.2 | | | $ | 4,844.8 | | EMEA | | | 1,746.9 | | | | 1,801.9 | | | | 1,745.2 | | Asia Pacific | | | 1,359.5 | | | | 1,293.8 | | | | 1,213.3 | | Total | | $ | 7,982.2 | | | $ | 7,932.9 | | | $ | 7,803.3 | |
Net sales by product category are as follows (in millions): | | For the Years Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Knees | | $ | 2,810.1 | | | $ | 2,773.7 | | | $ | 2,734.0 | | Hips | | | 1,935.1 | | | | 1,921.4 | | | | 1,871.8 | | S.E.T | | | 1,795.7 | | | | 1,751.8 | | | | 1,701.8 | | Spine & CMF | | | 747.3 | | | | 763.9 | | | | 757.9 | | Dental | | | 414.0 | | | | 411.2 | | | | 418.6 | | Other | | | 280.0 | | | | 310.9 | | | | 319.2 | | Total | | $ | 7,982.2 | | | $ | 7,932.9 | | | $ | 7,803.3 | |
In December 2019, our Board of Directors approved, and stockwe initiated, a new global restructuring program (the “2019 Restructuring Plan”) with an objective of reducing costs to allow us to further invest in higher priority growth opportunities.The 2019 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $350 million to $400 million and assumed Biomet’s senior notes. The total amount of merger consideration utilized for the acquisition method of accounting, as reducedreduce gross annual pre-tax operating expenses by approximately $200 million to $300 million by the merger consideration paidend of 2023 as program benefits are realized. The pre-tax restructuring charges will 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 2019
primarily relate to holders of unvested LVB stock optionsemployee termination benefits, consulting and LVB stock-based awards of $90.4 million, was $11,939.9 million. In the three month period ended June 30, 2016, we finalized our valuation of the assets acquired and liabilities assumed in the Biomet merger. The measurement period adjustments in 2016 primarily related to refinements to intangible assets for certain less significant brands, the finalization of tax accounts, including the allocation of acquired intangible assets and goodwill on a jurisdictional basis, and finalizing the estimation of certain contingent liabilities. All other adjustments were not significant. Under GAAP, measurement period adjustments are recognized on a prospective basis in the period of change, instead of restating prior periods. With respect to intangible asset amortization expense, the adjustments resulted in a decrease of $6.7 million in the year ended December 31, 2016, which related to the year ended December 31, 2015 on a retrospective basis. With respect to inventory fair value, an adjustment was made which decreased cost of products sold, excluding intangible asset amortization, by $4.6 million in the year ended December 31, 2016, which related to the year ended December 31, 2015 on a retrospective basis. Through the finalization of tax accounts, we recognized an increase in our provision for income taxes of $52.7 million in the year ended December 31, 2016, which related to the year ended December 31, 2015 on a retrospective basis.
project management. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the closing date of the Biomet merger (in millions): | | | | | | | | Final Values | | Cash | | $ | 494.8 | | Accounts receivable, net | | | 527.9 | | Inventory | | | 1,224.1 | | Other current assets | | | 25.4 | | Property, plant and equipment | | | 775.3 | | Intangible assets not subject to amortization: | | | | | Trademarks and trade names | | | 479.0 | | In-process research and development (IPR&D) | | | 209.0 | | Intangible assets subject to amortization: | | | | | Technology | | | 2,332.1 | | Customer relationships | | | 4,961.0 | | Trademarks and trade names | | | 360.0 | | Other assets | | | 42.6 | | Goodwill | | | 7,433.2 | | | | | | | Total assets acquired | | | 18,864.4 | | | | | | | Current liabilities | | | 584.0 | | Long-term debt | | | 2,740.0 | | Deferred taxes | | | 3,497.6 | | Other long-term liabilities | | | 102.9 | | | | | | | Total liabilities assumed | | | 6,924.5 | | | | | | | Net assets acquired | | $ | 11,939.9 | | | | | | |
This table does not reflect $139.9 million of net adjustments to the assets acquired and liabilities assumed that were recognized after the measurement period. We have evaluated the effect of these out-of-period adjustments and concluded for both quantitative and qualitative reasons that these adjustments were not material to any of the periods affected.
The following table sets forth unaudited pro forma financial information derived from (i) the audited financial statements of Zimmer for the years ended December 31, 2015 and 2014; and (ii) the unaudited financial statements of LVB for the period January 1, 2015 to June 23, 2015 and for the year ended December 31, 2014. The pro forma financial information has been adjusted to give effect to the merger as if it had occurred on January 1, 2014.
Pro Forma Financial Information
(Unaudited)
| | | | | | | | | | | | Year Ended December 31, | | | | | 2015 | | | 2014 | | | | | (in millions) | | Net Sales | | $ | 7,517.7 | | | $ | 7,965.2 | | Net Earnings | | $ | 330.2 | | | $ | 320.3 | |
These unaudited pro forma results have been prepared for comparative purposes only and include adjustments such as inventorystep-up, amortization of acquired intangible assets and interest expense on debt incurred to finance the merger. Material, nonrecurring pro forma adjustments directly attributable to the Biomet merger include:
The $90.4 million of merger compensation expense for unvested LVB stock options and LVB stock-based awards was removed from net earnings for the year ended December 31, 2015 and recognized as an expense in the year ended December 31, 2014.
The $73.0 million of retention plan expense was removed from net earnings for the year ended December 31, 2015 and recognized as an expense in the year ended December 31, 2014.
Transaction costs of $17.7 million were removed from net earnings for the year ended December 31, 2015 and recognized as an expense in the year ended December 31, 2014.
LDR Merger
On July 13, 2016, we completed our merger with LDR. We paid cash of $1,138.0 million. The total amount of merger consideration utilized for the acquisition method of accounting, as reduced by the merger consideration paid to holders of unvested LDR stock options and LDR stock-based awards of $24.1 million, was $1,113.9 million.
The addition of LDR provides us with an immediate position in the growing cervical disc replacement (“CDR”) market. The combination positions us to accelerate the growth of our Spine business through the incremental revenues associated with entry into the CDR market and cross-portfolio selling opportunities to both Zimmer Biomet and LDR
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
customer bases. The goodwill is generated from the operational synergies and cross-selling opportunities we expect to achieve from our combined operations. None of the goodwill is expected to be deductible for tax purposes.
The purchase price allocation as of December 31, 2016 is preliminary. The primary tasks to be completed related to our purchase price accounting are finalizing tax accounts,
including, but not limited to, the allocation of acquired intangible assets and goodwill on a jurisdictional basis. There may be differences between the preliminary estimates of fair value and the final acquisition accounting, which differences could be material. The final estimates of fair value are expected to be completed as soon as possible, but no later than July 13, 2017.
The following table summarizes the preliminary estimates of fair value of the assets acquired and liabilities assumed in the LDR merger (in millions):
| | | | | | | | | | | | | | | | July 13, 2016
(initial) | | | Adjustments | | | July 13, 2016
(as adjusted) | | Cash | | $ | 92.8 | | | $ | – | | | $ | 92.8 | | Accounts receivable, net | | | 31.2 | | | | – | | | | 31.2 | | Inventory | | | 86.5 | | | | 13.1 | | | | 99.6 | | Other current assets | | | 5.6 | | | | – | | | | 5.6 | | Property, plant and equipment | | | 24.7 | | | | – | | | | 24.7 | | Intangible assets not subject to amortization: | | | | | | | | | | | | | In-process research and development (IPR&D) | | | 2.0 | | | | – | | | | 2.0 | | Intangible assets subject to amortization: | | | | | | | | | | | | | Technology | | | 431.0 | | | | 21.0 | | | | 452.0 | | Customer relationships | | | 132.0 | | | | (14.0 | ) | | | 118.0 | | Trademarks and trade names | | | 77.0 | | | | (6.0 | ) | | | 71.0 | | Other assets | | | 17.4 | | | | 59.4 | | | | 76.8 | | Goodwill | | | 527.1 | | | | (44.7 | ) | | | 482.4 | | | | | | | | | | | | | | | Total assets acquired | | | 1,427.3 | | | | 28.8 | | | | 1,456.1 | | | | | | | | | | | | | | | Current liabilities | | | 53.3 | | | | 22.6 | | | | 75.9 | | Long-term debt | | | 0.5 | | | | – | | | | 0.5 | | Deferred taxes | | | 259.1 | | | | 6.4 | | | | 265.5 | | Other long-term liabilities | | | 0.5 | | | | (0.2 | ) | | | 0.3 | | | | | | | | | | | | | | | Total liabilities assumed | | | 313.4 | | | | 28.8 | | | | 342.2 | | | | | | | | | | | | | | | Net assets acquired | | $ | 1,113.9 | | | $ | – | | | $ | 1,113.9 | | | | | | | | | | | | | | |
The weighted average amortization period selected for trademarks and trade names, technology and customer relationship intangible assets was 18 years, 18 years and 20 years, respectively.
We have not included pro forma information and certain other information under GAAP for the LDR merger because it did not have a material impact on our financial position or results of operations.
Other 2016 Acquisitions
In 2016, we made a number of individually immaterial acquisitions of companies including Cayenne Medical, Inc. (“Cayenne Medical”), a sports medicine company, Compression Therapy Concepts, Inc. (“CTC”), a provider ofnon-invasive products for the prevention of deep vein thrombosis, CD Diagnostics, Inc. (“CD Diagnostics”), a medical diagnostic testing company, and MedTech SA (“MedTech”), a designer and manufacturer of robotic equipment for brain and spine surgeries. The total aggregate cash consideration was $441.7 million. These acquisitions were
completed primarily to expand our product offerings. We have assigned a preliminary fair value of $61.6 million for settlement of preexisting relationships and additional payments related to these acquisitions that are contingent on the respective acquired companies’ product sales, commercial milestones and certain cost savings. The estimated fair value of the aggregate contingent payment liabilities was calculated based on the probability of achieving the specified sales growth, cost savings and commercial milestones and discounting to present value the estimated payments. The goodwill is generated from the operational synergies and cross-selling opportunities we expect to achieve from the technologies acquired. None of the goodwill related to these acquisitions is expected to be deductible for tax purposes.
The purchase price allocations as of December 31, 2016 are preliminary. The primary tasks to be completed related to our purchase price accounting are refinements to certain intangible assets, finalizing tax accounts, including, but not limited to, the allocation of acquired intangible assets and goodwill on a jurisdictional basis, and finalizing the estimated
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
fair values of contingent 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 respective acquisition dates.
The following table summarizes the aggregate preliminary estimates of fair value of the assets acquired and liabilities assumed related to the Cayenne Medical, CTC, CD Diagnostics, MedTech,2019 Restructuring Plan (in millions):
| | Employee | | | | | | | | | | | | Termination | | | | | | | | | | | | Benefits | | | Other | | | Total | | Balance, December 31, 2018 | | $ | - | | | $ | - | | | $ | - | | Additions | | | 23.2 | | | | 13.1 | | | | 36.3 | | Cash payments | | | - | | | | (9.0 | ) | | | (9.0 | ) | Balance, December 31, 2019 | | $ | 23.2 | | | $ | 4.1 | | | $ | 27.3 | |
We do not include restructuring charges in the operating profit of our reportable segments. In our consolidated statement of earnings, we report restructuring charges in our “Restructuring and other immaterial acquisitions that occurred during 2016 (in millions):cost reduction initiatives” financial statement line item. We report the expenses for other cost reduction initiatives with restructuring expenses because these activities both 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. | | | | | Current assets | | $ | 64.2 | | Property, plant and equipment | | | 3.9 | | Intangible assets | | | 211.3 | | Goodwill | | | 340.0 | | Other assets | | | 7.9 | | | | | | | Total assets acquired | | | 627.3 | | | | | | | Current liabilities | | | 13.6 | | Long-term liabilities | | | 110.4 | | | | | | | Total liabilities assumed | | | 124.0 | | | | | | | Net assets acquired | | $ | 503.3 | | | | | | |
The weighted average amortization period selected for the intangible assets is 9.9 years.
We have not included pro forma information and certain other information under GAAP for these acquisitions because they did not have a material impact on our financial position or results of operations.
4.5. | Share-Based Compensation |
Our share-based payments primarily consist of stock options and restricted stock units (“RSUs”). Share-based compensation expense was as follows (in millions): | | | | For
the Years Ended December 31, | | | For the Years Ended December 31, | | | | | 2016 | | 2015 | | 2014 | | | 2019 | | | 2018 | | | 2017 | | Total expense,pre-tax | | | 57.3 | | | | 46.4 | | | | 49.4 | | | $ | 84.3 | | | $ | 65.5 | | | $ | 53.7 | | Tax benefit related to awards | | | (31.5 | ) | | | (14.5 | ) | | | (15.5 | ) | | | 21.8 | | | | 14.6 | | | | 12.5 | | | | | | | | | | | | | Total expense, net of tax | | $ | 25.8 | | | $ | 31.9 | | | $ | 33.9 | | | $ | 62.5 | | | $ | 50.9 | | | $ | 41.2 | | | | | | | | | | | | |
Stock Options
We had two2 equity compensation plans in effect at December 31, 2016:2019: the 2009 Stock Incentive Plan (“2009 Plan”) and the Stock Plan forNon-Employee Directors. The 2009 Plan succeeded the 2006 Stock Incentive Plan (“2006 Plan”) and the TeamShare Stock Option Plan (“TeamShare Plan”). No further awards have been granted under the 2006 Plan or under the TeamShare Plan since May 2009, and shares remaining available for grant under those plans have been merged into the 2009 Plan. Vested stock options previously granted under the 2006 Plan and the TeamShare Plan remained outstanding as of December 31, 2016. We have reserved the maximum number of shares of common stock available for awardawards under the terms of each of these plans. We have registered 61.6 million shares of common stock and expect to register an additional 10.071.6 million shares of common stock under these plans. The 2009 Plan provides for the grant of nonqualified stock options and incentive stock options, long-term performance awards in the form of performance shares or units, restricted stock, RSUs and stock appreciation rights. The Compensation and Management Development Committee of the Board of Directors determines the grant date for annual grants under our equity compensation plans. The date for annual grants under the 2009 Plan to our executive officers is expected to occur in the first quarter of each year following the earnings announcements for the previous quarter and full year. The Stock Plan forNon-Employee Directors provides for awards of stock options, restricted stock and RSUs tonon-employee directors. It has been our practice to issue shares of common stock upon exercise of stock options from previously unissued shares, except in limited circumstances where they are issued from treasury stock. The total number of awards which may be granted in a given year and/or over the life of the plan under each of our equity compensation plans is limited. At December 31, 2016,2019, an aggregate of 13.17.8 million shares were available for future grants and awards under these plans.
Stock Options Stock options granted to date under our plans vest over two or four years and have a maximum contractual life of 10 years. As established under our equity compensation plans, vesting may accelerate upon retirement after the first anniversary date of the award if certain criteria are met. We recognize expense related to stock options on a straight-line basis over the requisite service period, less awards expected to be forfeited using estimated forfeiture rates. Due to the accelerated retirement provisions, the requisite service period of our stock options range from one to four years. Stock options are granted with an exercise price equal to the market price of our common stock on the date of grant, except in limited circumstances where local law may dictate otherwise. | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
A summary of stock option activity for the year ended December 31, 20162019 is as follows (options in thousands): | | | | | | | | | | Stock Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life | | | Intrinsic Value (in millions) | | | | | Stock
Options | | Weighted
Average
Exercise
Price | | | Weighted
Average
Remaining
Contractual
Life | | | Intrinsic
Value (in millions) | | | Outstanding at January 1, 2016 | | | 7,931 | | | $ | 78.73 | | | | | | | Outstanding at January 1, 2019 | | | | 7,763 | | | $ | 100.29 | | | | | | | | | | Options granted | | | 2,109 | | | | 105.97 | | | | | | | | 1,488 | | | | 123.76 | | | | | | | | | | Options exercised | | | (1,786 | ) | | | 73.37 | | | | | | | | (1,633 | ) | | | 85.97 | | | | | | | | | | Options forfeited | | | (312 | ) | | | 104.58 | | | | | | | | (303 | ) | | | 117.28 | | | | | | | | | | Options expired | | | (41 | ) | | | 83.00 | | | | | | | | (30 | ) | | | 115.12 | | | | | | | | | | | | | | | | | | | | | Outstanding at December 31, 2016 | | | 7,901 | | | $ | 86.21 | | | | 6.2 | | | $ | 149.6 | | | | | | | | | | | | | | | | | Vested or expected to vest as of December 31, 2016 | | | 7,377 | | | $ | 84.90 | | | | 6.0 | | | $ | 148.4 | | | | | | | | | | | | | | | | | Exercisable at December 31, 2016 | | | 4,316 | | | $ | 72.23 | | | | 4.1 | | | $ | 136.6 | | | | | | | | | | | | | | | | | Outstanding at December 31, 2019 | | | | 7,285 | | | $ | 107.53 | | | | 6.6 | | | $ | 307.1 | | Vested or expected to vest as of December 31, 2019 | | | | 7,057 | | | $ | 107.10 | | | | 6.6 | | | $ | 300.5 | | Exercisable at December 31, 2019 | | | | 3,890 | | | $ | 97.15 | | | | 5.1 | | | $ | 204.3 | |
We use a Black-Scholes option-pricing model to determine the fair value of our stock options. Expected volatility was derived from a combination of historical volatility and implied volatility because the traded options that were actively traded around the grant date of our stock options did not have maturities of over one year. The expected term of the stock options has been derived from historical employee exercise behavior. The risk-free interest rate was determined using the implied yield currently available forzero-coupon U.S. government issues with a remaining term approximating the expected life of the options. The dividend yield was determined by using an estimated annual dividend and dividing it by the market price of our stock on the grant date. The following table presents information regarding the weighted average fair value of stock options granted, the assumptions used to determine fair value, and the intrinsic value of options exercised and the tax benefit of options exercised in the indicated year: | | | | For the Years Ended December 31, | | | For the Years Ended December 31, | | | | | 2016 | | 2015 | | 2014 | | | 2019 | | | 2018 | | | 2017 | | Dividend yield | | | 0.9 | % | | | 0.8 | % | | | 0.9 | % | | | 0.8 | % | | | 0.8 | % | | | 0.8 | % | Volatility | | | 21.9 | % | | | 22.2 | % | | | 25.2 | % | | | 22.1 | % | | | 22.1 | % | | | 21.6 | % | Risk-free interest rate | | | 1.4 | % | | | 1.7 | % | | | 1.8 | % | | | 2.4 | % | | | 2.7 | % | | | 2.0 | % | Expected life (years) | | | 5.3 | | | | 5.3 | | | | 5.5 | | | | 5.5 | | | | 5.2 | | | | 5.3 | | Weighted average fair value of options granted | | $ | 21.30 | | | $ | 22.30 | | | $ | 22.59 | | | $ | 28.68 | | | $ | 26.66 | | | $ | 26.09 | | Intrinsic value of options exercised (in millions) | | $ | 73.0 | | | $ | 49.4 | | | $ | 99.6 | | | $ | 76.8 | | | $ | 46.6 | | | $ | 67.6 | | Tax benefit of options exercised (in millions) | | | $ | 15.8 | | | $ | 6.8 | | | $ | 27.7 | |
As of December 31, 2016,2019, there was $53.0$48.6 million of unrecognized share-based payment expense related to nonvested stock options granted under our plans. That expense is expected to be recognized over a weighted average period of 2.92.5 years.
RSUs We have awarded RSUs to certain of our employees. The terms of the awards have been twofrom five months to four years. Some of the awards have only service conditions while some have performance and market conditions in addition to service conditions. The service condition-only awards vest ratably on the anniversary date of the award. The awards that have performance and market conditions vest all at once on the third anniversary date. Future service conditions may be waived if an employee retires after the first anniversary date of the award, but performance and market conditions continue to apply. Accordingly, the requisite service period used for share-based payment expense on our RSUs range from onefive months to four years. A summary of nonvested RSU activity for the year ended December 31, 20162019 is as follows (RSUs in thousands): | | | | | | | | | | Weighted Average | | | | | RSUs | | Weighted Average
Grant Date
Fair Value | | | | | | | Grant Date | | Outstanding at January 1, 2016 | | | 1,300 | | | $ | 91.64 | | | | | | RSUs | | | Fair Value | | Outstanding at January 1, 2019 | | | | 1,347 | | | $ | 112.81 | | Granted | | | 623 | | | | 107.90 | | | | 508 | | | | 132.69 | | Vested | | | (236 | ) | | | 77.79 | | | | (210 | ) | | | 108.35 | | Forfeited | | | (293 | ) | | | 88.49 | | | | (417 | ) | | | 114.61 | | | | | | | | | Outstanding at December 31, 2016 | | | 1,394 | | | | 102.04 | | | | | | | | | | Outstanding at December 31, 2019 | | | | 1,228 | | | | 118.11 | |
For the RSUs with service conditions only, the fair value of the awards was determined based upon the fair market value of our common stock on the date of grant. For the RSUs with market conditions, a Monte Carlo valuation technique was used to simulate the market conditions of the awards. The outcome of the simulation was used to determine the fair value of the awards. | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
We are required to estimate the number of RSUs that will vest and recognize share-based payment expense on a straight-line basis over the requisite service period. As of December 31, 2016,2019, we estimate that approximately 1,044,000777,336 outstanding RSUs will vest. If our estimate were to change in the future, the cumulative effect of the change in estimate will be recorded in that period. Based upon the number of RSUs that we expect to vest, the unrecognized share-based payment expense as of December 31, 20162019 was $49.4$47.8 million and is expected to be recognized over a weighted-average period of 2.52.1 years. The fair value of RSUs vestingthat vested during the years ended December 31, 2016, 20152019, 2018 and 20142017 based upon our stock price on the date of vesting was $25.5$26.3 million, $40.6$18.7 million, and $29.3$31.2 million, respectively. Inventories consisted of the following (in millions): | | | | | | | | | | | | As of December 31, | | | | | 2016 | | | 2015 | | Finished goods | | $ | 1,556.9 | | | $ | 1,827.9 | | Work in progress | | | 141.7 | | | | 146.1 | | Raw materials | | | 260.8 | | | | 280.1 | | | | | | | | Inventories | | $ | 1,959.4 | | | $ | 2,254.1 | | | | | | | |
Finished goods inventory as of December 31, 2016 and 2015 includes $35.3 million and $284.4 million, respectively, tostep-up acquired inventory to fair value.
| | As of December 31, | | | | 2019 | | | 2018 | | Finished goods | | $ | 1,875.4 | | | $ | 1,797.7 | | Work in progress | | | 231.0 | | | | 230.4 | | Raw materials | | | 278.6 | | | | 228.4 | | Inventories | | $ | 2,385.0 | | | $ | 2,256.5 | |
Amounts charged to the consolidated statementstatements of earnings for excess and obsolete inventory, including certain product lines we intend to discontinue, in the years ended December 31, 2016, 20152019, 2018 and 20142017 were $195.4$221.4 million, $118.4$226.1 million and $51.8$128.4 million, respectively. The increase in the 2016 period primarily resulted from our decision to discontinue certain products.
6.7. | Property, Plant and Equipment |
Property, plant and equipment consisted of the following (in millions): | | | | As of December 31, | | | As of December 31, | | | | | 2016 | | 2015 | | | 2019 | | | 2018 | | Land | | $ | 37.0 | | | $ | 39.6 | | | $ | 27.6 | | | $ | 28.0 | | Building and equipment | | | 1,789.9 | | | | 1,789.3 | | | | 2,007.0 | | | | 1,885.6 | | Capitalized software costs | | | 397.2 | | | | 330.1 | | | | 482.4 | | | | 425.8 | | Instruments | | | 2,347.6 | | | | 2,160.5 | | | | 3,250.5 | | | | 2,950.5 | | Construction in progress | | | 99.8 | | | | 108.4 | | | | 149.3 | | | | 147.2 | | | | | | | | | | 5,916.8 | | | | 5,437.1 | | | | | 4,671.5 | | | | 4,427.9 | | | Accumulated depreciation | | | (2,633.6 | ) | | | (2,365.3 | ) | | | (3,839.4 | ) | | | (3,421.7 | ) | | | | | | | Property, plant and equipment, net | | $ | 2,037.9 | | | $ | 2,062.6 | | | $ | 2,077.4 | | | $ | 2,015.4 | | | | | | | |
Depreciation expense was $466.7$421.8 million, $375.0$442.6 million and $268.6$454.1 million for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. Information regarding our investments isWe had $39.8 million and $49.3 million of property, plant and equipment included in accounts payable as follows (in millions):of December 31, 2019 and 2018, respectively.
| | | | | | | | | | | | | | | | | | | | | | | Gross Unrealized | | | | | | | | Amortized Cost | | | Gains | | | Losses | | | Fair
value | | As of December 31, 2015 | | | | | | | | | | | | | | | | | Corporate debt securities | | $ | 245.7 | | | $ | 0.1 | | | $ | (0.4 | ) | | $ | 245.4 | | U.S. government and agency debt securities | | | 21.6 | | | | – | | | | (0.1 | ) | | | 21.5 | | Commercial paper | | | 4.2 | | | | – | | | | – | | | | 4.2 | | Certificates of deposit | | | 2.0 | | | | – | | | | – | | | | 2.0 | | | | | | | | | | | | | | | | | | | Total short and long-term investments | | $ | 273.5 | | | $ | 0.1 | | | $ | (0.5 | ) | | $ | 273.1 | | | | | | | | | | | | | | | | | | |
In 2016, we either sold or allowed our investments to mature and did not reinvest the cash.
8. | Transfers of Financial Assets |
In 2016, we executedWe have receivables purchase arrangements with unrelated third parties to liquidate portions of our trade accounts receivable balance with unrelated third parties for factoring of specific accounts receivable.balance. The receivables relate to products sold to customers and are short-term in nature. The factorings were treated as sales of our accounts receivable in accordance with FASB ASC 860,Transfers and Servicing.
receivable. Proceeds from the transfers reflect either the face value of the accountaccounts receivable or the face value less factoring fees. Interest chargedIn the U.S. and Japan, our programs are executed on the transferred account balance and factoring fees are recordeda revolving basis with a maximum funding limit as a charge to interest expense in our consolidated statements of earnings in the period the expenses are incurred.December 31, 2019 of $450 million combined. We act as the collection agent on behalf of the third party, for portions of the arrangements, but have no significant retained interests or servicing liabilities related to the accounts receivable sold. In order to mitigate credit risk, related to portions of our factoring of accounts receivable, we purchased credit insurance for the factored accounts receivable. TheAs a result, is our risk of loss beingis limited to the factored accounts receivable not covered by the insurance, whichinsurance. Additionally, we do not believehave provided guarantees for the factored accounts receivable. The maximum exposures to be significant.
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
loss associated with these arrangements were $21.8 million and $33.0 million as of December 31, 2019 and 2018, respectively.In Europe, we sell to a third party and have no continuing involvement or significant risk with the factored accounts receivable. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Funds received from the transfers are recorded as an increase to cash and a reduction toof accounts receivable outstanding in the consolidated balance sheets. We report the cash flows attributable to the sale of the receivables to third parties and the cash receipts from collections made on behalf of and paid to third parties as trade accounts receivables in cash flows from operating activities in our consolidated statements of cash flows. Net expenses resulting from the sales of receivables are recognized in SG&A expense. Net expenses included any resulting gains or losses from the sales of receivables, credit insurance and factoring fees. InFor the yearyears ended December 31, 2016,2019, 2018 and 2017, we sold receivables having an aggregate face value of $3,116.2 million, $2,706.4 million and $1,456.9 million to third parties in exchange for cash proceeds of $3,113.9 million, $2,704.9 million and $1,455.6 million, respectively. Expenses recognized on these sales during the Company factored approximately $103.1 million of accounts receivable pursuant to the arrangements. For the yearyears ended December 31, 2016,2019, 2018 and 2017 were not significant. For the Company incurred minimal expenses relatedyears ended December 31, 2019, 2018 and 2017 under the U.S. and Japan programs, we collected $2,857.4 million, $2,273.5 million and $1,031.2 million, respectively, from our customers and remitted that amount to the factoring.third party, and we effectively repurchased $184.6 million, $208.9 million and $96.3 million, respectively, of previously sold accounts receivable from the third party due to the programs’ revolving nature. At December 31, 2019 and 2018, we had collected $54.6 million and $66.8 million, respectively, that were unremitted to the third party, which are reflected in our consolidated balance sheets under other current liabilities. The initial collection of cash from customers and its remittance to the third party is reflected in net cash provided by/(used in) financing activities in our consolidated statements of cash flows.
At December 31, 2019 and 2018, the outstanding principal amount of receivables that has been derecognized under the U.S. and Japan revolving arrangements combined amounted to $270.2 million and $365.9 million, respectively. 9. | Fair Value Measurements of Assets and Liabilities |
The following financial assets and liabilities are recorded at fair value on a recurring basis (in millions): | | | | As of December 31, 2016 | | | As of December 31, 2019 | | | | | | | Fair Value Measurements
at Reporting Date Using: | | | | | | | 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) | | | 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, current and long-term | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency forward contracts | | $ | 65.3 | | | $ | – | | | $ | 65.3 | | | $ | – | | | $ | 39.1 | | | $ | - | | | $ | 39.1 | | | $ | - | | Interest rate swaps | | | 4.0 | | | | – | | | | 4.0 | | | | – | | | | 60.5 | | | | - | | | | 60.5 | | | | - | | | | | | | | | | | | | | | | $ | 69.3 | | | $ | – | | | $ | 69.3 | | | $ | – | | | | | | | | | | | | | | | Total Assets | | | $ | 99.6 | | | $ | - | | | $ | 99.6 | | | $ | - | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | Derivatives, current and long-term | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency forward contracts | | $ | 0.3 | | | $ | – | | | $ | 0.3 | | | $ | – | | | $ | 0.6 | | | $ | - | | | $ | 0.6 | | | $ | - | | Contingent payments related to acquisitions | | | 62.8 | | | | – | | | | – | | | | 62.8 | | | | | | | | | | | | | | | | | $ | 63.1 | | | $ | – | | | $ | 0.3 | | | $ | 62.8 | | | | | | | | | | | | | | | Total Liabilities | | | $ | 0.6 | | | $ | - | | | $ | 0.6 | | | $ | - | |
| | As of December 31, 2018 | | | | | | | | 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, current and long-term | | | | | | | | | | | | | | | | | Foreign currency forward contracts | | $ | 45.7 | | | $ | - | | | $ | 45.7 | | | $ | - | | Interest rate swaps | | | 17.9 | | | | - | | | | 17.9 | | | | - | | Total Assets | | $ | 63.6 | | | $ | - | | | $ | 63.6 | | | $ | - | | Liabilities | | | | | | | | | | | | | | | | | Derivatives, current and long-term | | | | | | | | | | | | | | | | | Foreign currency forward contracts | | $ | 0.5 | | | $ | - | | | $ | 0.5 | | | $ | - | | Interest rate swaps | | | 2.5 | | | | - | | | | 2.5 | | | | - | | Total Liabilities | | $ | 3.0 | | | $ | - | | | $ | 3.0 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | As of December 31, 2015 | | | | | | | | 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 | | | | | | | | | | | | | | | | | Available-for-sale securities | | | | | | | | | | | | | | | | | Corporate debt securities | | $ | 245.4 | | | $ | – | | | $ | 245.4 | | | $ | – | | U.S. government and agency debt securities | | | 21.5 | | | | – | | | | 21.5 | | | | – | | Commercial paper | | | 4.2 | | | | – | | | | 4.2 | | | | – | | Certificates of deposit | | | 2.0 | | | | – | | | | 2.0 | | | | – | | | | | | | | | | | | | | | | Totalavailable-for-sale securities | | | 273.1 | | | | – | | | | 273.1 | | | | – | | Derivatives, current and long-term | | | | | | | | | | | | | | | | | Foreign currency forward contracts | | | 96.9 | | | | – | | | | 96.9 | | | | – | | Interest rate swaps | | | 26.8 | | | | – | | | | 26.8 | | | | – | | | | | | | | | | | | | | | | | | $ | 396.8 | | | $ | – | | | $ | 396.8 | | | $ | – | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | Derivatives, current and long-term | | | | | | | | | | | | | | | | | Foreign currency forward contracts | | | 1.6 | | | | – | | | | 1.6 | | | | – | | | | | | | | | | | | | | | | | | $ | 1.6 | | | $ | – | | | $ | 1.6 | | | $ | – | | | | | | | | | | | | | | | |
We value ouravailable-for-sale securities using a market approach based on broker prices for identical assets inover-the-counter markets and we perform ongoing assessments of counterparty credit risk.
We value our foreign currency forward contracts and foreign currency options using a market approach based on foreign currency exchange rates obtained from active markets, and we perform ongoing assessments of counterparty credit risk. We value our interest rate swaps using a market approach based on publicly available market yield curves, foreign currency exchange rates and the terms of our swaps, and we perform ongoing assessments of counterparty credit risk. Contingent payments related to acquisitions consist of commercial milestone, cost savings and sales-based payments, and are valued using discounted cash flow techniques. The fair value of commercial milestone payments reflects management’s expectations of probability of payment, and increases as the probability of payment increases or expectation of timing of payments is accelerated. The fair value of cost savings and sales-based payments is based upon probability-weighted future cost savings and revenue estimates, and increases as cost savings and revenue estimates
10. | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
increase, probability weighting of higher cost savings and revenue scenarios increase or expectation of timing of payment is accelerated. The majority of these contingent payments are related to acquisitions that have occurred in 2016 for which the acquisition method of accounting is
preliminary. Therefore, we recognized minimal gains and losses related to these contingent payments in our consolidated statement of earnings for the year ended December 31, 2016.
10. | Goodwill and Other Intangible Assets |
The following table summarizes the changes in the carrying amount of goodwill (in millions): | | | | | | | | | | | | Americas | | | EMEA | | | Asia Pacific | | | Immaterial Product Category Operating Segments | | | Total | | | | | Americas | | EMEA | | Asia
Pacific | | Immaterial Product Category Operating
Segments | | Total | | | Balance at January 1, 2015 | | | | | | | | | | | | Balance at January 1, 2018 | | | | | | | | | | | | | | | | | | | | | | Goodwill | | $ | 931.1 | | | $ | 1,157.3 | | | $ | 148.2 | | | $ | 650.6 | | | $ | 2,887.2 | | | $ | 7,724.8 | | | $ | 1,379.8 | | | $ | 500.5 | | | $ | 1,741.0 | | | $ | 11,346.1 | | Accumulated impairment losses | | | – | | | | – | | | | – | | | | (373.0 | ) | | | (373.0 | ) | | | - | | | | - | | | | - | | | | (677.7 | ) | | | (677.7 | ) | | | | | | | | | | | | | | | | | | 7,724.8 | | | | 1,379.8 | | | | 500.5 | | | | 1,063.3 | | | | 10,668.4 | | | | | 931.1 | | | | 1,157.3 | | | | 148.2 | | | | 277.6 | | | | 2,514.2 | | | Biomet Merger | | | 6,445.2 | | | | 225.6 | | | | 408.1 | | | | 495.0 | | | | 7,573.9 | | | Currency translation | | | (48.3 | ) | | | (91.9 | ) | | | (7.4 | ) | | | (6.3 | ) | | | (153.9 | ) | | | (12.4 | ) | | | (57.6 | ) | | | 6.7 | | | | (34.8 | ) | | | (98.1 | ) | | | | | | | | | | | | | | | | Balance at December 31, 2015 | | | | | | | | | | | | Impairment | | | | - | | | | (567.0 | ) | | | - | | | | (408.9 | ) | | | (975.9 | ) | Balance at December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | Goodwill | | | 7,328.0 | | | | 1,291.0 | | | | 548.9 | | | | 1,139.3 | | | | 10,307.2 | | | | 7,712.4 | | | | 1,322.2 | | | | 507.2 | | | | 1,706.2 | | | | 11,248.0 | | Accumulated impairment losses | | | – | | | | – | | | | – | | | | (373.0 | ) | | | (373.0 | ) | | | - | | | | (567.0 | ) | | | - | | | | (1,086.6 | ) | | | (1,653.6 | ) | | | | | | | | | | | | | | | | | | 7,712.4 | | | | 755.2 | | | | 507.2 | | | | 619.6 | | | | 9,594.4 | | | | | 7,328.0 | | | | 1,291.0 | | | | 548.9 | | | | 766.3 | | | | 9,934.2 | | | Biomet purchase accounting adjustments | | | 31.9 | | | | (8.0 | ) | | | (61.3 | ) | | | (8.3 | ) | | | (45.7 | ) | | LDR purchase accounting | | | – | | | | – | | | | – | | | | 482.4 | | | | 482.4 | | | Other acquisitions | | | 284.8 | | | | 34.3 | | | | – | | | | 20.9 | | | | 340.0 | | | | - | | | | - | | | | - | | | | 25.0 | | | | 25.0 | | Currency translation | | | (10.2 | ) | | | (53.6 | ) | | | (0.3 | ) | | | (2.9 | ) | | | (67.0 | ) | | | (12.6 | ) | | | (5.4 | ) | | | 0.2 | | | | (1.9 | ) | | | (19.7 | ) | | | | | | | | | | | | | | | | Balance at December 31, 2016 | | | | | | | | | | | | Balance at December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | Goodwill | | | 7,634.5 | | | | 1,263.7 | | | | 487.3 | | | | 1,631.4 | | | | 11,016.9 | | | | 7,699.8 | | | | 1,316.8 | | | | 507.4 | | | | 1,729.3 | | | | 11,253.3 | | Accumulated impairment losses | | | – | | | | – | | | | – | | | | (373.0 | ) | | | (373.0 | ) | | | - | | | | (567.0 | ) | | | - | | | | (1,086.6 | ) | | | (1,653.6 | ) | | | | | | | | | | | | | | | | | $ | 7,699.8 | | | $ | 749.8 | | | $ | 507.4 | | | $ | 642.7 | | | $ | 9,599.7 | | | | $ | 7,634.5 | | | $ | 1,263.7 | | | $ | 487.3 | | | $ | 1,258.4 | | | $ | 10,643.9 | | | | | | | | | | | | | | | | | |
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
We have 5 reporting units with goodwill assigned to them. We perform our annual test of goodwill impairment in the fourth quarter of every year. In 2019, we performed a qualitative test on our Americas and Asia Pacific reporting units and concluded it was more likely than not the fair value of these reporting units exceeded their carrying value. We estimated the fair value of our EMEA, Dental and CMF reporting units using the income and market approaches. The estimated fair value of our EMEA and Dental reporting units only exceeded their carrying values by less than 5 percent. The estimated fair value of our CMF reporting unit exceeded its carrying value by more than 25 percent. We will continue to monitor the fair value of our EMEA and Dental reporting units as well as our other three reporting units in our interim and annual reporting periods. If our estimated cash flows for these reporting units decrease, we may have to record impairment charges in the future. Factors that could result in our cash flows being lower than our current estimates include: 1) decreased revenues caused by unforeseen changes in the healthcare market, or our inability to generate new product revenue from our research and development activities, and 2) our inability to achieve the estimated operating margins in our forecasts due to unforeseen factors. Additionally, changes in the broader economic environment could cause changes to our estimated discount rates, foreign currency exchange rates used to translate cash flows and comparable company valuation indicators, which may impact our estimated fair values.
As indicated in Note 18, our operating segments may change in 2020 which, under the applicable accounting rules, could cause us to change our reporting units to which goodwill is assigned and/or could cause the assets and related cash flows assigned to a reporting unit to change. A change in reporting units may lead us to perform interim impairment tests on the new reporting units. We may have long-lived assets that currently have a carrying value that is greater than their fair value, but are not impaired because the impairment test for long-lived assets compares the carrying value to undiscounted cash flows. If the carrying value of assets that are reallocated to a new reporting unit is greater than their estimated fair value (as measured by their discounted cash flows), we may need to record an impairment charge with respect to that reporting unit. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)During the year ended December 31, 2018, we recorded goodwill impairment charges related to our Spine reporting unit, our EMEA reporting unit and an insignificant reporting unit of $401.2 million, $567.0 million and $7.7 million, respectively. During the year ended December 31, 2017, we recorded goodwill impairment charges related to our Office Based Technologies and Spine reporting units of $32.7 million and $272.0 million, respectively.
For more information on how the fair values of these reporting units were determined in the prior periods and the factors that led to impairment, please see our Annual Reports on Form 10-K for the years ended December 31, 2018 and 2017. The components of identifiable intangible assets were as follows (in millions): | | | | | | | | | | | | | | | | Technology | | | Intellectual Property Rights | | | Trademarks and Trade Names | | | Customer Relationships | | | IPR&D | | | Other | | | Total | | | | | Technology | | Intellectual
Property
Rights | | Trademarks
and Trade
Names | | Customer
Relationships | | IPR&D | | | Other | | Total | | | As of December 31, 2016: | | | | | | | | | | | | | | | | As of December 31, 2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Intangible assets subject to amortization: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross carrying amount | | $ | 3,599.4 | | | $ | 181.6 | | | $ | 626.1 | | | $ | 5,303.5 | | | $ | – | | | $ | 135.7 | | | $ | 9,846.3 | | | $ | 3,634.0 | | | $ | 378.3 | | | $ | 659.9 | | | $ | 5,375.0 | | | $ | - | | | $ | 165.4 | | | $ | 10,212.6 | | Accumulated amortization | | | (806.8 | ) | | | (172.3 | ) | | | (80.8 | ) | | | (566.0 | ) | | | – | | | | (70.4 | ) | | | (1,696.3 | ) | | | (1,487.6 | ) | | | (191.9 | ) | | | (207.6 | ) | | | (1,489.4 | ) | | | - | | | | (95.3 | ) | | | (3,471.8 | ) | Intangible assets not subject to amortization: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross carrying amount | | | – | | | | – | | | | 475.1 | | | | – | | | | 160.3 | | | | – | | | | 635.4 | | | | - | | | | - | | | | 454.9 | | | | - | | | | 61.9 | | | | - | | | | 516.8 | | | | | | | | | | | | | | | | | | | | | | | Total identifiable intangible assets | | $ | 2,792.6 | | | $ | 9.3 | | | $ | 1,020.4 | | | $ | 4,737.5 | | | $ | 160.3 | | | $ | 65.3 | | | $ | 8,785.4 | | | $ | 2,146.4 | | | $ | 186.4 | | | $ | 907.2 | | | $ | 3,885.6 | | | $ | 61.9 | | | $ | 70.1 | | | $ | 7,257.6 | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2015: | | | | | | | | | | | | | | | | As of December 31, 2018: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Intangible assets subject to amortization: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross carrying amount | | $ | 3,161.6 | | | $ | 181.0 | | | $ | 583.3 | | | $ | 5,133.0 | | | $ | – | | | $ | 101.8 | | | $ | 9,160.7 | | | $ | 3,638.5 | | | $ | 180.7 | | | $ | 664.2 | | | $ | 5,384.4 | | | $ | - | | | $ | 128.3 | | | $ | 9,996.1 | | Accumulated amortization | | | (591.9 | ) | | | (164.8 | ) | | | (50.9 | ) | | | (269.6 | ) | | | – | | | | (64.8 | ) | | | (1,142.0 | ) | | | (1,282.7 | ) | | | (177.6 | ) | | | (169.3 | ) | | | (1,194.5 | ) | | | - | | | | (80.0 | ) | | | (2,904.1 | ) | Intangible assets not subject to amortization: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross carrying amount | | | – | | | | – | | | | 479.0 | | | | – | | | | 248.6 | | | | – | | | | 727.6 | | | | - | | | | - | | | | 457.1 | | | | - | | | | 135.5 | | | | - | | | | 592.6 | | | | | | | | | | | | | | | | | | | | | | | Total identifiable intangible assets | | $ | 2,569.7 | | | $ | 16.2 | | | $ | 1,011.4 | | | $ | 4,863.4 | | | $ | 248.6 | | | $ | 37.0 | | | $ | 8,746.3 | | | $ | 2,355.8 | | | $ | 3.1 | | | $ | 952.0 | | | $ | 4,189.9 | | | $ | 135.5 | | | $ | 48.3 | | | $ | 7,684.6 | | | | | | | | | | | | | | | | | | | | | | |
In 2019, we entered into an agreement and paid $192.5 million to buy out certain licensing arrangements from an unrelated third party. This new agreement and the related payment replaced the variable royalty payments that otherwise would have been due under the terms of previous licensing arrangements through 2029. Under the new agreement, we maintain the rights to the counterparty’s intellectual property provided under the previous licensing arrangements. The $192.5 million payment was recognized as an intangible asset and will be amortized through 2029, which represents the useful life of the intellectual property.
We recognized intangible asset impairment charges of $70.1 million, $3.8 million and $26.8 million in the years ended December 31, 2019, 2018 and 2017, respectively, in “Goodwill and intangible asset impairment” on our consolidated statements of earnings. The impairment charges were primarily related to the abandonment of IPR&D projects that were recognized as part of the Biomet merger purchase accounting. Estimated annual amortization expense based upon intangible assets recognized as of December 31, 20162019 for the years ending December 31, 20172020 through 20212024 is (in millions): | | For the Years Ending December 31, | | | | | | | | 2017 | | $ | 587.4 | | | 2018 | | | 568.2 | | | 2019 | | | 554.0 | | | 2020 | | | 552.3 | | | $ | 576.9 | | 2021 | | | 546.8 | | | | 562.8 | | 2022 | | | | 556.3 | | 2023 | | | | 551.6 | | 2024 | | | | 543.4 | |
11. | Other Current and Long-term Liabilities |
Other current and long-term liabilities consisted of the following (in millions): | | | | As of December 31, | | | As of December 31, | | | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | Other current liabilities: | | | | | | | | | | | | | License and service agreements | | $ | 168.0 | | | $ | 144.1 | | | $ | 179.3 | | | $ | 181.8 | | Certain claims accrual (Note 20) | | | 75.0 | | | | 50.0 | | | Salaries, wages and benefits | | | 225.8 | | | | 265.9 | | | | 314.1 | | | | 260.3 | | Litigation and product liability | | | | 142.4 | | | | 278.6 | | Accrued liabilities | | | 789.1 | | | | 725.9 | | | | 778.1 | | | | 670.6 | | | | | | | | Total other current liabilities | | $ | 1,257.9 | | | $ | 1,185.9 | | | $ | 1,413.9 | | | $ | 1,391.3 | | | | | | | | Other long-term liabilities: | | | | | | Certain claims accrual (Note 20) | | | 218.6 | | | | 264.6 | | | Other long-term liabilities | | | 717.7 | | | | 741.1 | | | | | | | | | Total other long-term liabilities | | $ | 936.3 | | | $ | 1,005.7 | | | | | | | | |
Our debt consisted of the following (in millions): | | | | As of December 31, | | | As of December 31, | | | | | 2016 | | 2015 | | | 2019 | | | 2018 | | Current portion of long-term debt | | | | | | | | | | | | | 1.450% Senior Notes due 2017 | | $ | 500.0 | | | $ | – | | | U.S. Term Loan B | | | 75.0 | | | | – | | | Other short-term debt | | | 0.6 | | | | – | | | | | | | | | | | Total short-term debt | | $ | 575.6 | | | $ | – | | | | | | | | | | | Long-term debt | | | | | | 1.450% Senior Notes due 2017 | | $ | – | | | $ | 500.0 | | | 2.000% Senior Notes due 2018 | | | 1,150.0 | | | | 1,150.0 | | | 4.625% Senior Notes due 2019 | | | 500.0 | | | | 500.0 | | | $ | - | | | $ | 500.0 | | 2.700% Senior Notes due 2020 | | | 1,500.0 | | | | 1,500.0 | | | | 1,500.0 | | | | - | | U.S. Term Loan B | | | | - | | | | 25.0 | | Total short-term debt | | | $ | 1,500.0 | | | $ | 525.0 | | Long-term debt | | | | | | | | | | 2.700% Senior Notes due 2020 | | | $ | - | | | $ | 1,500.0 | | Floating Rate Notes due 2021 | | | | 450.0 | | | | 450.0 | | 3.375% Senior Notes due 2021 | | | 300.0 | | | | 300.0 | | | | 300.0 | | | | 300.0 | | 3.150% Senior Notes due 2022 | | | 750.0 | | | | 750.0 | | | | 750.0 | | | | 750.0 | | 3.700% Senior Notes due 2023 | | | | 300.0 | | | | 300.0 | | 3.550% Senior Notes due 2025 | | | 2,000.0 | | | | 2,000.0 | | | | 2,000.0 | | | | 2,000.0 | | 4.250% Senior Notes due 2035 | | | 253.4 | | | | 500.0 | | | | 253.4 | | | | 253.4 | | 5.750% Senior Notes due 2039 | | | 317.8 | | | | 500.0 | | | | 317.8 | | | | 317.8 | | 4.450% Senior Notes due 2045 | | | 395.4 | | | | 1,250.0 | | | | 395.4 | | | | 395.4 | | 1.414% Euro Notes due 2022 | | | 527.4 | | | | – | | | | 561.3 | | | | 571.6 | | 2.425% Euro Notes due 2026 | | | 527.4 | | | | – | | | | 561.3 | | | | 571.6 | | U.S. Term Loan A | | | 1,700.0 | | | | 2,500.0 | | | 1.164% Euro Notes due 2027 | | | | 561.3 | | | | - | | U.S. Term Loan B | | | 675.0 | | | | – | | | | - | | | | 200.0 | | Japan Term Loan | | | 99.6 | | | | 96.8 | | | Other long-term debt | | | 4.2 | | | | 4.6 | | | U.S. Term Loan C | | | | - | | | | 535.0 | | Japan Term Loan A | | | | 106.9 | | | | 105.3 | | Japan Term Loan B | | | | 194.7 | | | | 191.7 | | Debt discount and issuance costs | | | (65.8 | ) | | | (80.8 | ) | | | (37.1 | ) | | | (42.7 | ) | Adjustment related to interest rate swaps | | | 31.4 | | | | 26.8 | | | | 6.4 | | | | 14.6 | | | | | | | | | | Total long-term debt | | $ | 10,665.8 | | | $ | 11,497.4 | | | $ | 6,721.4 | | | $ | 8,413.7 | | | | | | | | | |
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
At December 31, 2016,2019, our total current and non-current debt of $8.2 billion consisted of $7.67$8.0 billion aggregate principal amount of our U.S dollar-denominated senior notes, (“senior notes”),which included $1.7 billion outstanding under a U.S. term loan (“U.S. Term Loan A”), $750 million outstanding under a U.S. term loan (“U.S. Term Loan B”), $1.1 billion aggregate principal amount of our Euro-denominated senior notes (“Euro notes”), an 11.7 billion Japanese Yen term loan agreement (“Japan Term Loan”Loan A”) and a 21.3 billion Japanese Yen term loan agreement (“Japan Term Loan B”) that each will mature on May 31, 2018,September 27, 2022, and other debt and fair value adjustments totaling $36.2$6.4 million, partially offset by debt discount and issuance costs of $65.8$37.1 million. On December 13, 2016,November 15, 2019, we completed the offering of €500 million aggregate principal amount of our 1.414%1.164% Euro notes due December 13, 2022 and €500 million aggregate principal amount of our 2.425% Euro notes due December 13, 2026.November 15, 2027. Interest is payable on each series ofthe 1.164% Euro notes on December 13November 15 of each year until maturity. We received net proceeds of $1,073.5 million. These proceedsapproximately $549.2 million from this offering, which were primarily used to repay the $500 million principal amount 4.625% Senior Notes due 2019 at maturity, and the remainder of which were used to repay the following portionsa portion of the Merger Notes: $246.6 million of the 4.250% Senior Notes due 2035, $182.2 million of the 5.750% Senior Notes due 2039, and $854.6 million of the 4.450% Senior Notes due 2045.a U.S. term loan (“U.S. Term Loan C”). As a result, we recorded a loss on the extinguishment of debt in the amount of $53.3 million in our consolidated statement of earnings for the year ended December 31, 2016 in other expense, net. The components of this loss were $66.4 million from portions of thepre-issuance hedge losses related to the Senior Notes due 2045 and $20.3 million from portions of the original debt issuance costs and debt discount offset by the gain of $33.4 million, calculated as the difference between the net carrying amount of the debt of $1,283.4 million and the reacquisition price of $1,250.0 million.
On September 30, 2016,November 1, 2019, we entered into a revolving credit and term loan agreement (the “2016“2019 Credit Agreement”) and, which contains a first amendment to our credit agreement entered into on May 29, 2014 (the “2014 Credit Agreement”). The 2016 Credit Agreement contains the U.S. Term Loan B, which is a three-year unsecured term loan facility of $750.0 million, and a five-year unsecured multicurrency revolving facility of $1.5 billion (the “Multicurrency“2019 Multicurrency Revolving Facility”), which replaced the previous $1.5 billion multicurrency revolving credit facility (the “2016 Multicurrency Revolving Facility”) and a U.S. term loan (“U.S. Term Loan B”) under our credit agreement executed in September 2016 (as amended, the “2016 Credit Agreement”). TheAs of the date we entered into the 2019 Credit Agreement, there were 0 borrowings outstanding under the 2016 Multicurrency Revolving Facility replaced the previous multicurrency revolving facilityor U.S. Term Loan B. The 2019 Credit Agreement will mature on November 1, 2024, with two one-year extensions exercisable at our discretion and subject to required lender consent. As of December 31, 2019, there were 0 outstanding borrowings under the 20142019 Multicurrency Revolving Facility. On December 14, 2018, we entered into a credit agreement (the “2018 Credit Agreement. On September 30, 2016,Agreement”) that provides for U.S. Term Loan C, which is a two-year unsecured multi-draw term loan facility for the Company in the principal amount of $900.0 million, with a maturity date of December 14, 2020, and borrowed $675.0 million under that facility. In January 2019, we borrowed $750.0an additional $200.0 million under U.S. Term Loan C and used those proceeds, along
with cash on hand, to repay the remaining $225.0 million outstanding under U.S. Term Loan B and utilized those borrowings to repay outstanding borrowingsissued under the previous multicurrency revolving facility incurred in connection with2016 Credit Agreement. Under the acquisitionapplicable accounting rules, since $200.0 million of LDR. The previous multicurrency revolving facility was terminated effective September 30, 2016. The 2014 Credit Agreement also provided for the U.S. Term Loan A, which isB was refinanced on a5-year unsecured term loan facility long-term basis before the issuance of our consolidated financial statements, we classified the refinanced portion of U.S. Term Loan B as long-term as of December 31, 2018. We have repaid $735.0 million and $140.0 million in principal under U.S. Term Loan C during the originalyears ended December 31, 2019 and 2018, respectively, primarily with cash from operations. As of December 31, 2019, we had 0 borrowings outstanding under U.S. Term Loan C, and since there are 0 more advances available under the 2018 Credit Agreement, the 2018 Credit Agreement and U.S. Term Loan C have terminated by their terms. On March 19, 2018, we completed the offering of $450.0 million aggregate principal amount of $3.0 billion, whichour floating rate senior notes due March 19, 2021 and $300.0 million aggregate principal amount of our 3.700% senior notes due March 19, 2023. Interest on the floating rate senior notes is equal to three-month LIBOR plus 0.750% and is payable quarterly, commencing on June 19, 2018, until maturity. Interest is payable on the 3.700% senior notes semi-annually, commencing on September 19, 2018, until maturity. We received net proceeds of $749.5 million from this offering. On September 22, 2017, we entered into a term loan facility remains in effect. The Multicurrency Revolving Facilityagreement for the Japan Term Loan B, and an amended and restated term loan agreement, which amended and restated the Japan Term Loan A loan agreement dated as of May 24, 2012, as amended as of October 31, 2014. As described above, the term loans under both of these agreements will mature on September 30, 2021, with two availableone-year extensions27, 2022. Each of these term loans bears interest at our discretion. a fixed rate of 0.635 percent per annum.
Borrowings under the Multicurrency Revolving Facility will be used for general corporate purposes. Borrowings under the 2014 and 20162019 Credit AgreementsAgreement generally bear interest at floating rates based upon indices determined by the currency of the borrowing, or at an alternate base rate, in each case, plus an applicable margin determined by reference to our senior unsecured long-term credit rating, or, in the case of borrowings under the Multicurrency Revolving Facility only, at a fixed rate determined through a competitive bid process.rates. We pay a facility fee on the aggregate amount of the 2019 Multicurrency Revolving Facility at a rate determined by reference to our senior unsecured long-term credit rating.
Facility. The 20162019 Credit Agreement and 2014 Credit Agreement, as amended, containcontains 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. Financial covenants under the 2016 and 2014 Credit Agreements include a consolidated indebtedness to consolidated EBITDA ratio of no greater than 5.0 to 1.0 through June 30, 2017, and no greater than 4.5 to 1.0 thereafter. If our credit rating falls below investment grade, additional restrictions would result, including restrictions on investments and payment of dividends. We were in compliance with all covenants under the 2016 and 20142019 Credit AgreementsAgreement as of December 31, 2016. On June 24, 2015, we borrowed $3.0 billion under U.S. Term Loan A to fund a portion of the Biomet merger. Under the terms of U.S. Term Loan A, starting September 30, 2015, principal payments are due as follows: $75.0 million on a quarterly basis during the first three years, $112.5 million on a quarterly basis during the fourth year, and $412.5 million on a quarterly basis during the fifth year. We have paid $1.3 billion in principal under U.S. Term Loan A, resulting in $1.7 billion in outstanding borrowings as of December 31, 2016. The interest rate at December 31, 2016 was 2.1 percent on Term Loan A.
On September 30, 2016, we borrowed $750.0 million under U.S. Term Loan B to repay borrowings under the previous multicurrency revolving facility incurred to fund a portion of the LDR merger. Under the terms of U.S. Term Loan B, starting September 30, 2017, principal payments are due as follows: $75.0 million on each of the first two anniversaries of the U.S. Term Loan B effective date, with the remaining balance due on the U.S. Term Loan B maturity date of September 30, 2019.
Borrowings under the Multicurrency Revolving Facility may be used for general corporate purposes. There were no borrowings outstanding under the Multicurrency Revolving Facility as of December 31, 2016.
Of the total $7.67 billion aggregate principal amount of senior notes outstanding at December 31, 2016, we issued $6.55 billion of this amount in March 2015 (the “Merger Notes”), the proceeds of which were used to finance a portion of the cash consideration payable in the Biomet merger, pay merger related fees and expenses and pay a portion of Biomet’s funded debt. The Merger Notes consist of the following seven tranches: the 1.450% Senior Notes due 2017,
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
the 2.000% Senior Notes due 2018, the 2.700% Senior Notes due 2020, the 3.150% Senior Notes due 2022, the 3.550% Senior Notes due 2025, the 4.250% Senior Notes due 2035 and the 4.450% Senior Notes due 2045.
We may, at our option, redeem our senior notes, in whole or in part, at any time upon payment of the principal, any applicable make-whole premium, and accrued and unpaid interest to the date of redemption.redemption, except that the Floating Rate Notes due 2021 do not have any applicable make-whole premium. In addition, the Merger Notes andwe may redeem, at our option, the 3.375% Senior Notes due 2021, may be redeemed at our optionthe 3.150% Senior Notes due 2022, the 1.414% Euro notes due 2022, the 3.700% Senior Notes due 2023, the 3.550% Senior Notes due 2025, the 2.425% Euro notes due 2026, the 1.164% Euro notes due 2027, the 4.250% Senior Notes due 2035 and the 4.450% Senior Notes due 2045 without any make-whole premium at specified dates ranging from one month to six months in advance of the scheduled maturity date. Between the Closing Date and June 30, 2015, we repaid the Biomet senior notes we assumed in the merger. The fair value of the principal amount plus interest was $2,798.6 million. These senior notes required us to pay a call premium in excess of the fair value of the notes when they were repaid. As a result, we recognized $22.0 million innon-operating other expense in 2015 related to this call premium.
The estimated fair value of our senior notes as of December 31, 2016,2019, based on quoted prices for the specific securities from transactions inover-the-counter markets (Level 2), was $8,722.5$8,261.2 million. The estimated fair value of the Japan Term Loan A and Japan Term Loan B, in the aggregate, as of December 31, 2016,2019, based upon publicly available market yield curves and the terms of the debt (Level 2), was $99.2$300.1 million. The carrying value of U.S. Term Loan A and U.S. Term Loan B approximate fair value as they bear interest at short-term variable market rates. We have entered into interest rate swap agreements which we designated as fair value hedges of underlying fixed-rate obligations on our senior notes due 2019 and 2021. In August 2016, weThese fair value hedges were settled these instruments for $36.9 million.in 2016. In September 2016, we entered into variousvariable-to-fixed interest rate swap agreements that were accounted for as cash flow hedges of U.S. Term Loan B. These interest rate swaps were terminated concurrently with the repayment of the remaining balance of U.S. Term Loan B in 2019. In 2018 and 2019, we entered into cross-currency interest rate swaps that we designated as net investment hedges. The excluded component of these net investment hedges is recorded in interest expense, net. See Note 14 for additional information regarding theour interest rate swap agreements. We also have available uncommitted credit facilities totaling $47.1 million.$45.3 million as of December 31, 2019. At December 31, 20162019 and 2015,2018, the weighted average interest rate for our long-term borrowings was 2.82.9 percent and 2.93.1 percent, respectively. We paid $363.1$226.9 million, $207.1$282.8 million, and $67.5$317.5 million in interest during 2016, 2015,2019, 2018, and 2014,2017, respectively.
13. | Accumulated Other Comprehensive (Loss) Income |
OCIAOCI 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 OCIAOCI may be reclassified to net earnings upon the occurrence of certain events.
Our OCIAOCI is comprised of foreign currency translation adjustments, unrealized gains and losses on cash flow hedges, unrealized gains and losses onavailable-for-sale securities, and amortization of prior service costs and unrecognized gains and losses in actuarial assumptions on our defined benefit plans. Foreign currency translation adjustments are reclassified to net earnings upon sale or upon a complete or substantially complete liquidation of an investment in a foreign entity. Unrealized gains and losses on cash flow hedges are reclassified to net earnings when the hedged item affects net earnings. Unrealized gains and losses onavailable-for-sale securities are reclassified to net earnings if we sell the security before maturity or if the unrealized loss is considered to be other-than-temporary. Amounts related to defined benefit plans that are in OCIAOCI are reclassified over the service periods of employees in the plan. The reclassification amounts are allocated to all employees in the plans and, therefore, the reclassified amounts may become part of inventory to the extent they are considered direct labor costs. See Note 15 for more information on our defined benefit plans. The following table shows the changes in the components of OCI,AOCI, net of tax (in millions): | | | | | | | | | | | | | | | | | | | | Foreign
Currency
Translation | | | Cash
Flow
Hedges | | | Unrealized
Gains (Losses)
on Securities | | | Defined
Benefit
Plan
Items | | Balance December 31, 2015 | | $ | (193.4 | ) | | $ | 29.8 | | | $ | (0.6 | ) | | $ | (164.8 | ) | OCI before reclassifications | | | (130.0 | ) | | | 28.3 | | | | 0.5 | | | | 12.1 | | Reclassifications | | | – | | | | (25.8 | ) | | | – | | | | 9.9 | | | | | | | | | | | | | | | | Balance December 31, 2016 | | $ | (323.4 | ) | | $ | 32.3 | | | $ | (0.1 | ) | | $ | (142.8 | ) | | | | | | | | | | | | | | |
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
| | Foreign | | | Cash | | | Defined | | | | | | | | Currency | | | Flow | | | Benefit | | | Total | | | | Translation | | | Hedges | | | Plan Items | | | AOCI | | Balance December 31, 2018 | | $ | (31.3 | ) | | $ | 20.9 | | | $ | (177.0 | ) | | $ | (187.4 | ) | AOCI before reclassifications | | | (1.5 | ) | | | 30.6 | | | | (53.5 | ) | | | (24.4 | ) | Reclassifications to statements of earnings | | | - | | | | (35.1 | ) | | | 5.0 | | | | (30.1 | ) | Balance December 31, 2019 | | $ | (32.8 | ) | | $ | 16.4 | | | $ | (225.5 | ) | | $ | (241.9 | ) |
The following table shows the reclassification adjustments from OCIAOCI (in millions): | | | | | | | | | | Amount of Gain / (Loss) | | | | | | | Amount of Gain / (Loss) Reclassified from OCI | | Location on Statement of Earnings | | Reclassified from AOCI | | | | | | | For the Years Ended December 31, | | | For the Years Ended December 31, | | | Location on | | Component of OCI | | 2016 | | 2015 | | 2014 | | | Component of AOCI | | | 2019 | | | 2018 | | | 2017 | | | Statements of Earnings | Cash flow hedges | | | | | | | | | | | | | | | | | | | | | | | Foreign exchange forward contracts | | $ | 87.7 | | | $ | 122.3 | | | $ | 33.3 | | | Cost of products sold | | $ | 38.4 | | | $ | (26.2 | ) | | $ | 5.1 | | | Cost of products sold | Interest rate swaps | | | | 2.8 | | | | - | | | | - | | | Interest expense, net | Forward starting interest rate swaps | | | (66.4 | ) | | | – | | | | – | | | Other expense | | | (0.6 | ) | | | (0.6 | ) | | | (0.5 | ) | | Interest expense, net | Forward starting interest rate swaps | | | (1.7 | ) | | | (1.3 | ) | | | – | | | Interest expense | | | | | | | | | | | | | | | | 19.6 | | | | 121.0 | | | | 33.3 | | | Total before tax | | | | | (6.2 | ) | | | 28.0 | | | | 14.4 | | | Provision for income taxes | | | | | | | | | | | | | | | $ | 25.8 | | | $ | 93.0 | | | $ | 18.9 | | | Net of tax | | | | | | | | | | | | | Investments | | | | | | | | | | Realized gains on securities | | $ | – | | | $ | – | | | $ | 0.4 | | | Interest income | | | | | | | | | | | | | | | | – | | | | – | | | | 0.4 | | | Total before tax | | | | | – | | | | – | | | | – | | | Provision for income taxes | | | | | | | | | | | | | | | 40.6 | | | | (26.8 | ) | | | 4.6 | | | Total before tax | | | $ | – | | | $ | – | | | $ | 0.4 | | | Net of tax | | | 5.5 | | | | (3.2 | ) | | | 0.8 | | | (Benefit) provision for income taxes | | | | | | | | | | | | | $ | 35.1 | | | $ | (23.6 | ) | | $ | 3.8 | | | Net of tax | Defined benefit plans | | | | | | | | | | | | | | | | | | | | | | | Prior service cost | | $ | 7.8 | | | $ | 5.6 | | | $ | 3.9 | | | * | | $ | 7.3 | | | $ | 9.9 | | | $ | 10.3 | | | Other expense, net | Unrecognized actuarial (loss) | | | (22.9 | ) | | | (20.1 | ) | | | (11.1 | ) | | * | | | | | | | | | | | | | | | | (15.1 | ) | | | (14.5 | ) | | | (7.2 | ) | | Total before tax | | | | | (5.2 | ) | | | (5.3 | ) | | | (3.0 | ) | | Provision for income taxes | | Curtailment gain | | | | 7.2 | | | | - | | | | - | | | Other expense, net | Unrecognized actuarial loss | | | | (21.8 | ) | | | (26.2 | ) | | | (22.1 | ) | | Other expense, net | | | | | | | | | | | | | | (7.3 | ) | | | (16.3 | ) | | | (11.8 | ) | | Total before tax | | | $ | (9.9 | ) | | $ | (9.2 | ) | | $ | (4.2 | ) | | Net of tax | | | (2.3 | ) | | | (4.3 | ) | | | (4.5 | ) | | (Benefit) provision for income taxes | | | | | | | | | | | | | $ | (5.0 | ) | | $ | (12.0 | ) | | $ | (7.3 | ) | | Net of tax | Total reclassifications | | $ | 15.9 | | | $ | 83.8 | | | $ | 15.1 | | | Net of tax | | $ | 30.1 | | | $ | (35.6 | ) | | $ | (3.5 | ) | | Net of tax | | | | | | | | | | | |
* These OCI components are included in the computation of net periodic pension expense (see Note 15).
The following table shows the tax effects on each component of OCIAOCI recognized in our consolidated statements of comprehensive income (loss) (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | Before Tax | | | Tax | | | Net of Tax | | | | | 2016 | | | 2015 | | | 2014 | | | 2016 | | | 2015 | | | 2014 | | | 2016 | | | 2015 | | | 2014 | | Foreign currency cumulative translation adjustments | | $ | (128.2 | ) | | $ | (305.2 | ) | | $ | (223.1 | ) | | $ | 1.8 | | | $ | – | | | $ | – | | | $ | (130.0 | ) | | $ | (305.2 | ) | | $ | (223.1 | ) | Unrealized cash flow hedge gains | | | 29.7 | | | | 59.1 | | | | 60.5 | | | | 1.4 | | | | 6.4 | | | | 4.6 | | | | 28.3 | | | | 52.7 | | | | 55.9 | | Reclassification adjustments on foreign currency hedges | | | (19.6 | ) | | | (121.0 | ) | | | (33.3 | ) | | | 6.2 | | | | (28.0 | ) | | | (14.4 | ) | | | (25.8 | ) | | | (93.0 | ) | | | (18.9 | ) | Reclassification adjustments on securities | | | – | | | | – | | | | (0.4 | ) | | | – | | | | – | | | | – | | | | – | | | | – | | | | (0.4 | ) | Unrealized gains/(losses) on securities | | | 0.5 | | | | (0.2 | ) | | | (0.5 | ) | | | – | | | | – | | | | – | | | | 0.5 | | | | (0.2 | ) | | | (0.5 | ) | Adjustments to prior service cost and unrecognized actuarial assumptions | | | 27.3 | | | | (25.0 | ) | | | (104.8 | ) | | | 5.3 | | | | (3.6 | ) | | | (29.0 | ) | | | 22.0 | | | | (21.4 | ) | | | (75.8 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Other Comprehensive (Loss) Income | | $ | (90.3 | ) | | $ | (392.3 | ) | | $ | (301.6 | ) | | $ | 14.7 | | | $ | (25.2 | ) | | $ | (38.8 | ) | | $ | (105.0 | ) | | $ | (367.1 | ) | | $ | (262.8 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | | Before Tax | | | Tax | | | Net of Tax | | | | 2019 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | | 2017 | | Foreign currency cumulative translation adjustments | | $ | 12.1 | | | $ | (148.7 | ) | | $ | 396.8 | | | $ | 13.6 | | | $ | (13.3 | ) | | $ | (48.2 | ) | | $ | (1.5 | ) | | $ | (135.4 | ) | | $ | 445.0 | | Unrealized cash flow hedge gains (losses) | | | 34.6 | | | | 81.1 | | | | (116.0 | ) | | | 4.0 | | | | 12.9 | | | | (21.0 | ) | | | 30.6 | | | | 68.2 | | | | (95.0 | ) | Reclassification adjustments on cash flow hedges | | | (40.6 | ) | | | 26.8 | | | | (4.6 | ) | | | (5.5 | ) | | | 3.2 | | | | (0.8 | ) | | | (35.1 | ) | | | 23.6 | | | | (3.8 | ) | Adjustments to prior service cost and unrecognized actuarial assumptions | | | (56.4 | ) | | | (22.7 | ) | | | 6.6 | | | | (7.9 | ) | | | (5.0 | ) | | | 2.0 | | | | (48.5 | ) | | | (17.7 | ) | | | 4.6 | | Total Other Comprehensive (Loss) Income | | $ | (50.3 | ) | | $ | (63.5 | ) | | $ | 282.8 | | | $ | 4.2 | | | $ | (2.2 | ) | | $ | (68.0 | ) | | $ | (54.5 | ) | | $ | (61.3 | ) | | $ | 350.8 | |
14. | Derivative Instruments and Hedging Activities |
We are exposed to certain market risks relating to our ongoing business operations, including foreign currency exchange rate risk, commodity price risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risks that we manage through the use of derivative instruments are interest rate risk and foreign currency exchange rate risk. Interest Rate Risk Derivatives Designated as Fair Value Hedges In prior years, we entered into variousfixed-to-variable interest rate swap agreements that were accounted for as fair value hedges of a portion of theour 4.625% Senior Notes due in 2019 and all of theour 3.375% Senior Notes due 2021. In August 2016, we received cash for these interest rate swap assets by terminating the hedging instruments with the counterparties.counterparties. The asset value, including accrued interest through4.625% Senior Notes were repaid at maturity in 2019. The remaining unamortized balance related to the date of termination, was $36.9 million and the amount being amortized as a reduction of interest expense over the remaining terms of the hedged debt instruments was $34.3 million, of which the unamortized balance3.375% Senior Notes as of December 31, 20162019 was $31.4 million. | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
$6.4 million, which will be recognized using the effective interest rate method over the remaining maturity period of the 3.375% Senior Notes. As of December 31, 2019 and 2018, the following amounts were recorded on our 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 | | December 31, 2019 | | | December 31, 2018 | | | | December 31, 2019 | | | December 31, 2018 | | Long-term debt | | $ | 306.2 | | | $ | 564.4 | | | | $ | 6.4 | | | $ | 14.6 | |
Derivatives Designated as Cash Flow Hedges In 2014, we entered into forward starting interest rate swaps that were designated as cash flow hedges of the thirty yearour thirty-year tranche of senior notes (the 4.450% Senior Notes due 2045) we expected to issue in 2015. The forward starting interest rate swaps mitigated the risk of changes in interest rates prior to the completion of the Merger Notesnotes offering. The total notional amounts of the forward starting interest rate swaps were $1 billionsettled, and settled in March 2015the remaining loss to be recognized at a loss of $97.6 million. This lossDecember 31, 2019 was $26.5 million, which will be recognized using the effective interest rate method over the remaining maturity period of the 4.450% Senior Notes due 2045. With the issuance of the Euro notes, we extinguished a portion of the 4.450% Senior Notes due 2045 and recognized $66.4 million as part of our debt extinguishment loss. The remaining loss to be recognized at December 31, 2016 was $28.2 million.hedged notes. In September 2016, we entered into variousvariable-to-fixed interest rate swap agreements with a notional amount of $375 million that were accounted for as cash flow hedges of U.S. Term Loan B. The interest rate swaps minimizeminimized the exposure to changes in the LIBOR interest rates while the variable-rate debt iswas outstanding. The weighted average fixedIn the first quarter of 2019, we terminated these interest rate for allswaps concurrently with the repayment of the outstandingremaining
balance of U.S Term Loan B, and we recognized proceeds and interest rate swap agreements is approximately 0.82 percent through September 30, 2019.income of $2.8 million related to the termination. Foreign Currency Exchange Rate Risk We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. We also designated our Euro notes and other foreign currency exchange forward contracts as net investment hedges of investments in foreign subsidiaries. We are primarily exposed to foreign currency exchange rate risk 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.Dollar. In order to mitigate the volatility in foreign exchange rates, we issued Euro notes in December 2016 and November 2019, as discussed in Note 12, and designated 100 percent of the Euro notes to hedge our net investment in certain wholly-owned foreign subsidiaries that have a functional currency of Euro. All changes in the fair value of the hedging instrument designated as a net investment hedge are recorded as a component of accumulated other comprehensive lossAOCI in our consolidated balance sheets. At December 31, 2019, we had receive-fixed-rate, pay-fixed-rate cross-currency interest rate swaps with notional amounts outstanding of Euro 1,450 million, Japanese Yen 7 billion and Swiss Franc 50 million. These transactions further hedge our net investment in certain wholly-owned foreign subsidiaries that have a functional currency of Euro, Japanese Yen and Swiss Franc. All changes in the fair value of a derivative instrument designated as a net investment hedge are recorded as a component of AOCI in the consolidated balance sheet. We also enteredsheets. The portion of this change related to the excluded component will be amortized into a foreign currency exchange forward contract in anticipationearnings over the life of the Euro notes issuance and designated it as aderivative while the remainder will be recorded in AOCI until the hedged net investment hedge.
Inis sold or substantially eliminated. We recognize the year ended December 31, 2016, we recognized a foreign exchange gain of $18.8 millionexcluded component in OCIinterest expense, net on our consolidated statements of earnings. The net investment hedges. We recognized no ineffectiveness fromcash 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 net investment hedges for the year ended December 31, 2016.consolidated statements of cash flows.
Derivatives Designated as Cash Flow Hedges Our revenues are generated in various currencies throughout the world. However, a significant amount of our inventory is produced in U.S. Dollars. Therefore, movements in foreign currency exchange rates may have different proportional effects on our revenues compared to our cost of products sold. To minimize the effects of foreign currency exchange rate movements on cash flows, we hedge intercompany sales of inventory expected to occur within the next 30 months with foreign currency exchange forward contracts and options.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 effective portion of changes in fair value isgains and losses are temporarily recorded in other comprehensive incomeAOCI and then recognized in cost of products sold when the hedged item affects net earnings. The ineffective portion of a derivative’s change in fair value, if any, is immediately reported in cost of products sold. On our consolidated statementstatements 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 December 31, 2016,2019, we had obligations to purchase U.S. Dollars and sell Euros, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, Indian Rupees, Turkish Lira, Polish Zloty, Danish Krone, and Norwegian Krone and obligations to purchase Swiss Francs and sell U.S. Dollars. These derivatives mature at dates ranging from January 20172020 through June 2019.2022. As of December 31, 2016,2019, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase U.S. Dollars were $1,512.6$1,496.3 million. As of December 31, 2016,2019, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase Swiss Francs were $315.7$276.0 million.
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Derivatives Not Designated as Hedging Instruments We enter into foreign currency forward exchange contracts with terms of one month to manage currency exposures for monetary assets and liabilities denominated in a currency other than an entity’s functional currency. As a result, any foreign currencyre-measurement gains/losses recognized in earnings are generally offset with gains/losses on the foreign currency forward exchange contracts in the same reporting period. The net amount of these offsetting gains/losses is recorded in other expense, net. These contracts are settled on the last day of each reporting period. Therefore, there is no outstanding balance related to these contracts recorded on the balance sheet as of the end of the reporting period. The notional amounts of these contracts are typically in a range of $1.75$1.5 billion to $2.25$2.0 billion per quarter. Income Statement Presentation Derivatives Designated as Fair Value Hedges
Derivative instruments designated as fair value hedges had the following effects on our consolidated statements of earnings (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gain / (Loss) on Instrument | | | Gain / (Loss) on Hedged Item | | | Derivative Instrument | | Location on Statement of Earnings | | | Year Ended December 31, | | | Year Ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | | 2016 | | | 2015 | | | 2014 | | Interest rate swaps | | | Interest expense | | | $ | 7.5 | | | $ | 2.8 | | | $ | 14.7 | | | $ | (7.5 | ) | | $ | (2.8 | ) | | $ | (14.7 | ) |
We had no ineffective fair value hedging instruments nor any amounts excluded from the assessment of hedge effectiveness during the years ended December 31, 2016, 2015 and 2014.
Derivatives Designated as Cash Flow Hedges Derivative instruments designated as cash flow hedges had the following effects, before taxes, on OCIAOCI and net earnings on our consolidated statements of earnings, consolidated statements of comprehensive income (loss) and consolidated balance sheets (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount of Gain / (Loss)
Recognized in OCI | | | | | Amount of Gain / (Loss)
Reclassified from OCI | | | | | Year Ended December 31, | | | | | Year Ended December 31, | | | Derivative Instrument | | 2016 | | | 2015 | | | 2014 | | | Location on Statement of Earnings | | 2016 | | | 2015 | | | 2014 | | Foreign exchange forward contracts | | $ | 25.7 | | | $ | 97.4 | | | $ | 119.8 | | | Cost of products sold | | $ | 87.7 | | | $ | 122.3 | | | $ | 33.3 | | Interest rate swaps | | | 4.0 | | | | – | | | | – | | | Interest expense | | | – | | | | – | | | | – | | Forward starting interest rate swaps | | | – | | | | (38.3 | ) | | | (59.3 | ) | | Interest expense | | | (1.7 | ) | | | (1.3 | ) | | | – | | Forward starting interest rate swaps | | | – | | | | – | | | | – | | | Other expense, net | | | (66.4 | ) | | | – | | | | – | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 29.7 | | | $ | 59.1 | | | $ | 60.5 | | | | | $ | 19.6 | | | $ | 121.0 | | | $ | 33.3 | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Gain / (Loss) | | | | | Amount of Gain / (Loss) | | | | Recognized in AOCI | | | Location on | | Reclassified from AOCI | | | | Years Ended December 31, | | | Statement of | | Years Ended December 31, | | Derivative Instrument | | 2019 | | | 2018 | | | 2017 | | | Earnings | | 2019 | | | 2018 | | | 2017 | | Foreign exchange forward contracts | | $ | 34.6 | | | $ | 82.8 | | | $ | (116.5 | ) | | Cost of products sold | | $ | 38.4 | | | $ | (26.2 | ) | | $ | 5.1 | | Interest rate swaps | | | - | | | | (1.7 | ) | | | 0.5 | | | Interest expense, net | | | 2.8 | | | | - | | | | - | | Forward starting interest rate swaps | | | - | | | | - | | | | - | | | Interest expense, net | | | (0.6 | ) | | | (0.6 | ) | | | (0.5 | ) | | | $ | 34.6 | | | $ | 81.1 | | | $ | (116.0 | ) | | | | $ | 40.6 | | | $ | (26.8 | ) | | $ | 4.6 | |
The net amount recognized in earnings during the years ended December 31, 2016, 2015 and 2014 due to ineffectiveness and amounts excluded from the assessment of hedge effectiveness were not significant.
The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on the consolidated balance sheet at December 31, 2016,2019, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized gain of $32.2$17.4 million, or $28.2$16.4 million after taxes, which is deferred in accumulated other comprehensive income. Of the net unrealizedAOCI. A gain $34.4of $38.4 million, or $28.0$33.1 million after taxes, is expected to be reclassified to earnings in cost of products sold and a loss of $0.5$0.6 million, or $0.3$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 effects of fair value, cash flow and net investment hedge accounting on our consolidated statements of earnings (in millions): | | | | Location and Amount of Gain/(Loss) Recognized in Income on Fair Value, Cash Flow and Net Investment Hedging Relationships | | | | | | Years Ended December 31, | | | | | | 2019 | | | 2018 | | | 2017 | | | | | | Cost of | | | Interest | | | Cost of | | | Interest | | | Cost of | | | Interest | | | | | | Products | | | Expense, | | | Products | | | Expense, | | | Products | | | Expense, | | | | | | 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 | $ | 2,252.6 | | | $ | (226.9 | ) | | $ | 2,271.9 | | | $ | (289.3 | ) | | $ | 2,132.9 | | | $ | (325.3 | ) | | The effects of fair value, cash flow and net investment hedging: | | | | | | | | | | | | | | | | | | | | | | | | | | Gain on fair value hedging relationships | | | | | | | | | | | | | | | | | | | | | | | | | | | Discontinued interest rate swaps | | - | | | | 8.2 | | | | - | | | | 8.5 | | | | - | | | | 8.3 | | | | Gain (loss) on cash flow hedging relationships | | | | | | | | | | | | | | | | | | | | | | | | | | | Forward starting interest rate swaps | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | | | - | | | | (0.5 | ) | | | | Interest rate swaps | | - | | | | 2.8 | | | | - | | | | - | | | | - | | | | - | | | | | Foreign exchange forward contracts | | 38.4 | | | | - | | | | (26.2 | ) | | | - | | | | 5.1 | | | | - | | | | Gain on net investment hedging relationships | | | | | | | | | | | | | | | | | | | | | | | | | | | Cross-currency interest rate swaps | | - | | | | 52.2 | | | | - | | | | 25.5 | | | | - | | | | - | |
Derivatives Not Designated as Hedging Instruments The following gainsgains/(losses) from these derivative instruments were recognized on our consolidated statements of earnings (in millions): | | | | | | | | | | | Location on | | Years Ended December 31, | | Derivative Instrument | | Location on | | Year Ended December 31, | | | Statements of Earnings | | 2019 | | | 2018 | | | 2017 | | | | Statement of Earnings | | 2016 | | | 2015 | | | 2014 | | | Foreign exchange forward contracts | | Other expense, net | | $ | 2.5 | | | $ | 28.8 | | | $ | 15.3 | | | Other expense, net | | $ | (11.0 | ) | | $ | 24.7 | | | $ | (62.3 | ) |
This impact does
These gains/(losses) do not include any offsetting gains/reflect losses of $3.4 million and $41.2 million in 2019 and 2018, respectively, and gains of $45.5 million in 2017 recognized in earningsother expense, net as a result of foreign currency remeasurementre-measurement of monetary assets and liabilities denominated in a currency other than an entity’s functional currency. | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Balance Sheet Presentation As of December 31, 20162019 and December 31, 2015,2018, all derivative instruments designated as fair value hedges and cash flow hedges are recorded at fair value on theour consolidated balance sheet.sheets. On our consolidated balance sheets, we recognize individual forward contracts and options with the same counterparty on a net asset/liability basis if we have a master netting agreement with the counterparty. Under these master netting agreements, we are able to settle derivative instrument assets and liabilities with the same counterparty in a single transaction, instead of settling each derivative instrument separately. We have master netting agreements with all of our counterparties.
The fair value of derivative instruments on a gross basis is as follows (in millions): | | | | | | | | | | As of December 31, 2019 | | | As of December 31, 2018 | | | | | As of December 31, 2016 | | | As of December 31, 2015 | | | Balance Sheet | | Fair | | | Balance Sheet | | Fair | | | | | Balance Sheet Location | | Fair
Value | | | Balance Sheet Location | | Fair
Value | | | Location | | Value | | | Location | | Value | | Asset Derivatives | | | | | | | | | | | | | | | | | | | | | Foreign exchange forward contracts | | Other current assets | | $ | 57.9 | | | Other current assets | | $ | 100.5 | | | Other current assets | | $ | 41.8 | | | Other current assets | | $ | 37.9 | | Foreign exchange forward contracts | | Other assets | | | 34.9 | | | Other assets | | | 19.8 | | | Other assets | | | 9.8 | | | Other assets | | | 20.9 | | Interest rate swaps | | Other assets | | | 4.0 | | | Other assets | | | 26.8 | | | Other assets | | | - | | | Other assets | | | 2.8 | | | | | | | | | | | | Cross-currency interest rate swaps | | | Other assets | | | 60.5 | | | Other assets | | | 15.1 | | Total asset derivatives | | | | $ | 96.8 | | | | | $ | 147.1 | | | | | $ | 112.1 | | | | | $ | 76.7 | | | | | | | | | | | | | | | | | | | | | | | | Liability Derivatives | | | | | | | | | | | | | | | | | | | | | Foreign exchange forward contracts | | Other current liabilities | | $ | 20.9 | | | Other current liabilities | | $ | 16.7 | | | Other current liabilities | | $ | 7.9 | | | Other current liabilities | | $ | 9.9 | | Forward starting interest rate swaps | | Other current liabilities | | | – | | | Other current liabilities | | | – | | | Foreign exchange forward contracts | | Other long-term liabilities | | | 6.9 | | | Other long-term liabilities | | | 8.3 | | | Other long-term liabilities | | | 5.2 | | | Other long-term liabilities | | | 3.7 | | | | | | | | | | | | Cross-currency interest rate swaps | | | Other long-term liabilities | | | - | | | Other long-term liabilities | | | 2.5 | | Total liability derivatives | | | | $ | 27.8 | | | | | $ | 25.0 | | | | | $ | 13.1 | | | | | $ | 16.1 | | | | | | | | | | | |
The table below presents the effects of our master netting agreements on our consolidated balance sheets (in millions): | | | | | | | As of December 31, 2016 | | | As of December 31, 2015 | | | | | As of December 31, 2019 | | | As of December 31, 2018 | | | Description | | Location | | | Gross
Amount | | | Offset | | | Net Amount
in Balance
Sheet | | | Gross
Amount | | | Offset | | | Net Amount
in Balance
Sheet | | | 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 | | | $ | 57.9 | | | $ | 20.6 | | | $ | 37.3 | | | $ | 100.5 | | | $ | 16.3 | | | $ | 84.2 | | | Other current assets | | $ | 41.8 | | | $ | 7.9 | | | $ | 33.9 | | | $ | 37.9 | | | $ | 9.6 | | | $ | 28.3 | | Cash flow hedges | | | Other assets | | | | 34.9 | | | | 6.8 | | | | 28.1 | | | | 19.8 | | | | 7.1 | | | | 12.7 | | | Other assets | | | 9.8 | | | | 4.6 | | | | 5.2 | | | | 20.9 | | | | 3.5 | | | | 17.4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liability Derivatives | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flow hedges | | | Other current liabilities | | | | 20.9 | | | | 20.6 | | | | 0.3 | | | | 16.7 | | | | 16.3 | | | | 0.4 | | | Other current liabilities | | | 7.9 | | | | 7.9 | | | | - | | | | 9.9 | | | | 9.6 | | | | 0.3 | | Cash flow hedges | | | Other long-term liabilities | | | | 6.9 | | | | 6.8 | | | | 0.1 | | | | 8.3 | | | | 7.1 | | | | 1.2 | | | Other long-term liabilities | | | 5.2 | | | | 4.6 | | | | 0.6 | | | | 3.7 | | | | 3.5 | | | | 0.2 | |
The following net investment hedge gains (losses) were recognized on our consolidated statements of comprehensive income (loss) (in millions): | | | | | | | | Amount of Gain / (Loss) | | | | | Amount of Gain / (Loss)
Recognized in OCI | | | Recognized in AOCI | | | | | Year Ended December 31, | | | Years Ended December 31, | | | Derivative Instrument | | 2016 | | | 2015 | | | 2014 | | | 2019 | | | 2018 | | | 2017 | | Euro Notes | | $ | 9.4 | | | $ | – | | | $ | – | | | $ | 10.7 | | | $ | 57.6 | | | $ | (146.0 | ) | Foreign exchange forward contracts | | | 9.4 | | | | – | | | | – | | | Cross-currency interest rate swaps | | | | 47.9 | | | | 62.8 | | | | - | | | | | | | | | | | | | $ | 58.6 | | | $ | 120.4 | | | $ | (146.0 | ) | | | $ | 18.8 | | | $ | – | | | $ | – | | | | | | | | | | | | | |
15. | Retirement Benefit Plans |
We have defined benefit pension plans covering certain U.S. and Puerto Rico employees. The employees who are not participating in the defined benefit plans receive additional benefits under our defined contribution plans. Plan benefits are primarily based on years of credited service and the participant’s average eligible compensation. The U.S. and Puerto Rico plans are frozen; meaning there are no new participants that can join the plan and participants in the plan do not accrue additional years of service or compensation. In addition to the U.S. and Puerto Rico defined benefit pension plans, we sponsor various foreign pension arrangements, including retirement and termination benefit plans required by local law or coordinated with government sponsored plans. We use a December 31 measurement date for our benefit plans. | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Defined Benefit Plans The components of net pension expense for our defined benefit retirement plans were as follows (in millions): | | | | For the Years Ended December 31, | | | For the Years Ended December 31, | | | | | U.S. and Puerto Rico | | Foreign | | | U.S. and Puerto Rico | | | Foreign | | | | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | | 2019 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | | 2017 | | Service cost | | $ | 9.6 | | | $ | 11.8 | | | $ | 10.9 | | | $ | 19.0 | | | $ | 18.9 | | | $ | 14.7 | | | $ | 7.1 | | | $ | 8.0 | | | $ | 8.7 | | | $ | 19.0 | | | $ | 20.0 | | | $ | 17.7 | | Interest cost | | | 13.8 | | | | 15.8 | | | | 15.5 | | | | 10.0 | | | | 8.8 | | | | 9.2 | | | | 16.2 | | | | 14.2 | | | | 14.0 | | | | 9.0 | | | | 8.1 | | | | 8.4 | | Expected return on plan assets | | | (32.2 | ) | | | (31.8 | ) | | | (30.8 | ) | | | (13.7 | ) | | | (13.9 | ) | | | (11.0 | ) | | | (32.4 | ) | | | (32.9 | ) | | | (32.4 | ) | | | (13.4 | ) | | | (14.0 | ) | | | (12.2 | ) | Curtailment gain | | | – | | | | – | | | | – | | | | (0.5 | ) | | | – | | | | – | | | | (7.2 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | Settlements | | | 2.6 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.8 | | | | 1.2 | | | | 0.4 | | | | - | | | | 0.2 | | | | 1.1 | | Amortization of prior service cost | | | (5.9 | ) | | | (3.7 | ) | | | (2.6 | ) | | | (1.9 | ) | | | (1.9 | ) | | | (1.3 | ) | | | (3.4 | ) | | | (5.7 | ) | | | (5.9 | ) | | | (3.9 | ) | | | (4.2 | ) | | | (4.4 | ) | Amortization of unrecognized actuarial loss | | | 16.5 | | | | 17.4 | | | | 10.6 | | | | 6.4 | | | | 2.7 | | | | 0.5 | | | | 19.3 | | | | 23.7 | | | | 17.9 | | | | 2.5 | | | | 2.5 | | | | 4.2 | | | | | | | | | | | | | | | | | | | | Net periodic benefit cost | | $ | 4.4 | | | $ | 9.5 | | | $ | 3.6 | | | $ | 19.3 | | | $ | 14.6 | | | $ | 12.1 | | | $ | 0.4 | | | $ | 8.5 | | | $ | 2.7 | | | $ | 13.2 | | | $ | 12.6 | | | $ | 14.8 | | | | | | | | | | | | | | | | | | | |
In our consolidated statements of earnings, service cost is reported in the same location as other compensation costs arising from services rendered by the pertinent employees while the other components of net pension expense are reported in other expense, net. The weighted average actuarial assumptions used to determine net pension expense for our defined benefit retirement plans were as follows: | | | | For the Years Ended December 31, | | | For the Years Ended December 31, | | | | | U.S. and Puerto Rico | | | Foreign | | | U.S. and Puerto Rico | | | Foreign | | | | | 2016 | | | 2015 | | | 2014 | | | 2016 | | | 2015 | | | 2014 | | | 2019 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | | 2017 | | Discount rate | | | 4.32% | | | | 4.56% | | | | 4.98% | | | | 1.41% | | | | 1.94% | | | | 2.46% | | | | 4.38 | % | | | 3.79 | % | | | 4.33 | % | | | 1.44 | % | | | 1.18 | % | | | 1.38 | % | Rate of compensation increase | | | 3.29% | | | | 3.29% | | | | 3.29% | | | | 2.08% | | | | 2.00% | | | | 1.48% | | | | 3.29 | % | | | 3.29 | % | | | 3.29 | % | | | 2.50 | % | | | 2.09 | % | | | 2.20 | % | Expected long-term rate of return on plan assets | | | 7.75% | | | | 7.75% | | | | 7.75% | | | | 2.40% | | | | 3.05% | | | | 2.88% | | | | 7.75 | % | | | 7.75 | % | | | 7.75 | % | | | 2.14 | % | | | 2.19 | % | | | 2.30 | % |
The expected long-term rate of return on plan assets is based on the historical and estimated future rates of return on the different asset classes held in the plans. The expected long-term rate of return is the weighted average of the target asset allocation of each individual asset class. We believe that historical asset results approximate expected market returns applicable to the funding of a long-term benefit obligation. Discount rates were determined for each of our defined benefit retirement plans at their measurement date to reflect the yield of a portfolio of high quality bonds matched against the timing and amounts of projected future benefit payments. Beginning in 2016, we changed the method used to estimate the service and interest costs for pension and postretirement benefits. The new method utilizes a full yield curve approach to estimate service and interest costs by applying specific spot rates along the yield curve used to determine the benefit obligation of relevant projected cash outflows. Historically, we utilized a single weighted-average discount rate applied to projected cash outflows. We made the change to provide a more precise measurement of service and interest costs by aligning the timing of the plan’s liability cash flows to the corresponding spot rate on the yield curve. The change did not impact the measurement of the plan’s obligations. We accounted for this change as a change in accounting estimate. | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Changes in projected benefit obligations and plan assets were (in millions): | | | | | | | | | | For the Years Ended December 31, | | | | | For the Years Ended December 31, | | | U.S. and Puerto Rico | | | Foreign | | | | | U.S. and Puerto Rico | | Foreign | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | | | 2016 | | 2015 | | 2016 | | 2015 | | | Projected benefit obligation – beginning of year | | $ | 375.1 | | | $ | 386.6 | | | $ | 568.6 | | | $ | 423.7 | | | Obligation assumed from Biomet | | | – | | | | – | | | | – | | | | 159.4 | | | Projected benefit obligation - beginning of year | | | $ | 396.0 | | | $ | 420.7 | | | $ | 631.1 | | | $ | 623.6 | | Service cost | | | 9.6 | | | | 11.8 | | | | 19.0 | | | | 18.9 | | | | 7.1 | | | | 8.0 | | | | 19.0 | | | | 20.0 | | Interest cost | | | 13.8 | | | | 15.8 | | | | 10.0 | | | | 8.8 | | | | 16.2 | | | | 14.2 | | | | 9.0 | | | | 8.1 | | Plan amendments | | | – | | | | (21.9 | ) | | | (23.4 | ) | | | – | | | | 3.6 | | | | - | | | | - | | | | 2.2 | | Employee contributions | | | – | | | | – | | | | 23.6 | | | | 16.9 | | | | - | | | | - | | | | 20.6 | | | | 18.1 | | Benefits paid | | | (14.3 | ) | | | (12.3 | ) | | | (31.6 | ) | | | (24.1 | ) | | | (16.9 | ) | | | (20.3 | ) | | | (36.5 | ) | | | (36.9 | ) | Actuarial (gain) loss | | | (1.6 | ) | | | (4.9 | ) | | | 46.7 | | | | (18.9 | ) | | Actuarial loss (gain) | | | | 68.2 | | | | (21.1 | ) | | | 77.8 | | | | 6.0 | | Expenses paid | | | – | | | | – | | | | (0.2 | ) | | | (0.3 | ) | | | - | | | | - | | | | (0.3 | ) | | | (0.3 | ) | Settlement | | | (5.7 | ) | | | – | | | | – | | | | (0.2 | ) | | | (2.2 | ) | | | (5.5 | ) | | | - | | | | - | | Translation gain | | | – | | | | – | | | | (44.1 | ) | | | (15.6 | ) | | | | | | | | | | | | | | Projected benefit obligation – end of year | | $ | 376.9 | | | $ | 375.1 | | | $ | 568.6 | | | $ | 568.6 | | | | | | | | | | | | | | | Translation gain (loss) | | | | - | | | | - | | | | 19.7 | | | | (9.7 | ) | Projected benefit obligation - end of year | | | $ | 472.0 | | | $ | 396.0 | | | $ | 740.4 | | | $ | 631.1 | |
| | | | | | | | | | For the Years Ended December 31, | | | | | For the Years Ended December 31, | | | U.S. and Puerto Rico | | | Foreign | | | | | U.S. and Puerto Rico | | Foreign | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | | | 2016 | | 2015 | | 2016 | | 2015 | | | Plan assets at fair market value – beginning of year | | $ | 374.1 | | | $ | 402.2 | | | $ | 505.6 | | | $ | 385.4 | | | Assets contributed by Biomet | | | – | | | | – | | | | – | | | | 129.4 | | | Plan assets at fair market value - beginning of year | | | $ | 388.5 | | | $ | 433.6 | | | $ | 585.8 | | | $ | 574.9 | | Actual return on plan assets | | | 29.5 | | | | (16.6 | ) | | | 34.1 | | | | (4.0 | ) | | | 73.5 | | | | (25.7 | ) | | | 57.8 | | | | 7.5 | | Employer contributions | | | 5.8 | | | | 0.8 | | | | 15.9 | | | | 14.8 | | | | 2.0 | | | | 6.4 | | | | 20.1 | | | | 31.7 | | Employee contributions | | | – | | | | – | | | | 23.6 | | | | 16.9 | | | | - | | | | - | | | | 20.6 | | | | 18.1 | | Settlements | | | (5.7 | ) | | | – | | | | – | | | | – | | | | (2.2 | ) | | | (5.5 | ) | | | - | | | | - | | Plan amendments | | | – | | | | – | | | | – | | | | (0.2 | ) | | Benefits paid | | | (14.3 | ) | | | (12.3 | ) | | | (31.6 | ) | | | (24.1 | ) | | | (16.9 | ) | | | (20.3 | ) | | | (36.5 | ) | | | (36.9 | ) | Expenses paid | | | – | | | | – | | | | (0.2 | ) | | | (0.3 | ) | | | - | | | | - | | | | (0.3 | ) | | | (0.3 | ) | Translation loss | | | – | | | | – | | | | (40.4 | ) | | | (12.3 | ) | | | | | | | | | | | | | | Plan assets at fair market value – end of year | | $ | 389.4 | | | $ | 374.1 | | | $ | 507.0 | | | $ | 505.6 | | | | | | | | | | | | | | | | | Translation gain (loss) | | | | - | | | | - | | | | 17.7 | | | | (9.2 | ) | Plan assets at fair market value - end of year | | | $ | 444.9 | | | $ | 388.5 | | | $ | 665.2 | | | $ | 585.8 | | Funded status | | $ | 12.5 | | | $ | (1.0 | ) | | $ | (61.6 | ) | | $ | (63.0 | ) | | $ | (27.1 | ) | | $ | (7.5 | ) | | $ | (75.2 | ) | | $ | (45.3 | ) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | U.S. and Puerto Rico | | | Foreign | | | | | 2016 | | | 2015 | | | 2016 | | | 2015 | | Amounts recognized in consolidated balance sheet: | | | | | | | | | | | | | | | | | Prepaid pension | | $ | 24.0 | | | $ | 14.6 | | | $ | 10.2 | | | $ | 16.5 | | Short-term accrued benefit liability | | | (0.4 | ) | | | (1.0 | ) | | | (0.7 | ) | | | (0.6 | ) | Long-term accrued benefit liability | | | (11.1 | ) | | | (14.6 | ) | | | (71.1 | ) | | | (78.9 | ) | | | | | | | | | | | | | | | Net amount recognized | | $ | 12.5 | | | $ | (1.0 | ) | | $ | (61.6 | ) | | $ | (63.0 | ) | | | | | | | | | | | | | | |
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
| | For the Years Ended December 31, | | | | U.S. and Puerto Rico | | | Foreign | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | Amounts recognized in consolidated balance sheet: | | | | | | | | | | | | | | | | | Prepaid pension | | $ | - | | | $ | - | | | $ | 17.6 | | | $ | 15.3 | | Short-term accrued benefit liability | | | (0.2 | ) | | | (0.2 | ) | | | (1.1 | ) | | | (0.8 | ) | Long-term accrued benefit liability | | | (26.9 | ) | | | (7.3 | ) | | | (91.7 | ) | | | (59.8 | ) | Net amount recognized | | $ | (27.1 | ) | | $ | (7.5 | ) | | $ | (75.2 | ) | | $ | (45.3 | ) |
We estimate the following amounts recorded as part of accumulated other comprehensive incomeAOCI will be recognized as part of our net pension expense during 20172020 (in millions): | | | | | | U.S. and | | | | | | | | | U.S. and
Puerto Rico | | Foreign | | | Puerto Rico | | | Foreign | | Unrecognized prior service cost | | $ | (5.9 | ) | | $ | (4.2 | ) | | $ | 0.3 | | | $ | (4.2 | ) | Unrecognized actuarial loss | | | 16.4 | | | | 3.8 | | | | 6.7 | | | | 4.0 | | | | | | | | | $ | 7.0 | | | $ | (0.2 | ) | | | $ | 10.5 | | | $ | (0.4 | ) | | | | | | | |
The weighted average actuarial assumptions used to determine the projected benefit obligation for our defined benefit retirement plans were as follows: | | | | For the Years Ended December 31, | | | For the Years Ended December 31, | | | | | U.S. and Puerto Rico | | Foreign | | | U.S. and Puerto Rico | | | Foreign | | | | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | | 2019 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | | 2017 | | Discount rate | | | 4.32 | % | | | 4.36 | % | | | 4.10 | % | | | 1.41 | % | | | 1.86 | % | | | 1.38 | % | | | 3.40 | % | | | 4.38 | % | | | 3.78 | % | | | 0.74 | % | | | 1.41 | % | | | 1.27 | % | Rate of compensation increase | | | 3.29 | % | | | 3.29 | % | | | 3.29 | % | | | 2.08 | % | | | 2.02 | % | | | 1.43 | % | | | 3.29 | % | | | 3.29 | % | | | 3.29 | % | | | 2.45 | % | | | 2.13 | % | | | 2.19 | % |
Plans with projected benefit obligations in excess of plan assets were as follows (in millions): | | | | As of December 31, | | | As of December 31, | | | | | U.S. and Puerto Rico | | | Foreign | | | U.S. and Puerto Rico | | | Foreign | | | | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | Projected benefit obligation | | $ | 51.3 | | | $ | 53.8 | | | $ | 545.7 | | | $ | 393.4 | | | $ | 472.0 | | | $ | 396.0 | | | $ | 698.2 | | | $ | 451.4 | | Plan assets at fair market value | | | 39.8 | | | | 38.2 | | | | 480.2 | | | | 319.6 | | | | 444.9 | | | | 388.5 | | | | 619.1 | | | | 394.4 | |
Total accumulated benefit obligations and plans with accumulated benefit obligations in excess of plan assets were as follows (in millions): | | | | As of December 31, | | | As of December 31, | | | | | U.S. and Puerto Rico | | | Foreign | | | U.S. and Puerto Rico | | | Foreign | | | | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | Total accumulated benefit obligations | | $ | 364.8 | | | $ | 354.6 | | | $ | 556.4 | | | $ | 556.8 | | | $ | 472.0 | | | $ | 392.0 | | | $ | 721.5 | | | $ | 618.0 | | Plans with accumulated benefit obligations in excess of plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated benefit obligation | | | 32.0 | | | | 34.8 | | | | 530.1 | | | | 380.1 | | | | 472.0 | | | | 47.1 | | | | 674.0 | | | | 434.8 | | Plan assets at fair market value | | | 21.8 | | | | 20.6 | | | | 475.3 | | | | 314.9 | | | | 444.9 | | | | 41.6 | | | | 612.9 | | | | 388.8 | |
The benefits expected to be paid out in each of the next five years and for the five years combined thereafter are as follows (in millions): | | | | | | | | | | For the Years Ending December 31, | | U.S. and
Puerto Rico | | | Foreign | | 2017 | | $ | 15.7 | | | $ | 23.3 | | 2018 | | | 16.3 | | | | 23.2 | | 2019 | | | 17.5 | | | | 23.6 | | 2020 | | | 18.3 | | | | 24.0 | | 2021 | | | 19.0 | | | | 23.9 | | 2022-2026 | | | 104.9 | | | | 128.3 | |
For the Years Ending December 31, | | U.S. and Puerto Rico | | | Foreign | | 2020 | | $ | 20.2 | | | $ | 27.5 | | 2021 | | | 21.5 | | | | 29.7 | | 2022 | | | 22.4 | | | | 28.3 | | 2023 | | | 23.4 | | | | 29.5 | | 2024 | | | 23.8 | | | | 29.6 | | 2025-2029 | | | 126.1 | | | | 158.9 | |
The U.S. and Puerto Rico defined benefit retirement plans’ overall investment strategy is to maximizebalance total returns by emphasizing long-term growth of capital while mitigating risk. We have established target ranges of assets held by the plans of 4030 to 4565 percent for equity securities, 30 to 3550 percent for debt securities and 200 to 2515 percent innon-traditional investments. The plans strive to have sufficiently diversified assets so that adverse or unexpected results from one asset class will not have an unduly detrimental impact on the entire portfolio. We regularly review the investments in the plans and we may rebalance them fromtime-to-time based upon the target asset allocation of the plans. For the U.S. and Puerto Rico plans, we maintain an investment policy statement that guides the investment allocation in the plans. The investment policy statement describes the target asset allocation positions described above. Our benefits committee, along with our investment advisor, monitor compliance with and administer the investment policy statement and the plans’ assets and oversee the general investment strategy and objectives of the plans. Our benefits committee generally meets quarterly to review performance | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
performance. and to ensure that the current investment allocation is within the parameters of the investment policy statement.
The investment strategies of foreign based plans vary according to the plan provisions and local laws. The majority of the assets in foreign based plans are located in Switzerland-based plans. These assets are held in trusts and are commingled with the assets of other Swiss companies with representatives of all the companies making the investment decisions. The overall strategy is to maximize total returns while avoiding risk. The trustees of the assets have established target ranges of assets held by the plans of 30 to 50 percent in debt securities, 20 to 37 percent in equity securities, 15 to 24 percent in real estate, 3 to 15 percent in cash funds and 0 to 12 percent in other funds. The fair value of our U.S. and Puerto Rico pension plan assets by asset category was as follows (in millions): | | | | | | | | | | | | | | | | | | | | As of December 31, 2016 | | | | | | | | Fair Value Measurements at Reporting Date Using: | | | Asset Category | | Total | | | Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | | | Significant
Other
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | Cash and cash equivalents | | $ | 2.7 | | | $ | 2.7 | | | $ | – | | | $ | – | | Equity securities: | | | | | | | | | | | | | | | | | U.S.large-cap | | | 87.4 | | | | – | | | | 87.4 | | | | – | | U.S.small-cap | | | 34.4 | | | | – | | | | 34.4 | | | | – | | International | | | 111.1 | | | | – | | | | 111.1 | | | | – | | Real estate | | | 14.4 | | | | – | | | | 14.4 | | | | – | | Commodity-linked mutual funds | | | – | | | | – | | | | – | | | | – | | Intermediate fixed income securities | | | 139.4 | | | | – | | | | 139.4 | | | | – | | | | | | | | | | | | | | | | Total | | $ | 389.4 | | | $ | 2.7 | | | $ | 386.7 | | | $ | – | | | | | | | | | | | | | | | |
| | As of December 31, 2019 | | | | | | | | Fair Value Measurements at Reporting Date Using: | | Asset Category | | Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | Cash and cash equivalents | | $ | 4.7 | | | $ | 4.7 | | | $ | - | | | $ | - | | Equity securities | | | 282.5 | | | | - | | | | 282.5 | | | | - | | Intermediate fixed income securities | | | 157.7 | | | | - | | | | 157.7 | | | | - | | Total | | $ | 444.9 | | | $ | 4.7 | | | $ | 440.2 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | As of December 31, 2015 | | | | | | | | Fair Value Measurements at Reporting Date Using: | | | Asset Category | | Total | | | Quoted Prices
in Active
Markets for
Identical
Assets (Level 1) | | | Significant
Other
Observable
Inputs (Level 2) | | | Significant
Unobservable
Inputs (Level 3) | | Cash and cash equivalents | | $ | 2.5 | | | $ | 2.5 | | | $ | – | | | $ | – | | Equity securities: | | | | | | | | | | | | | | | | | U.S. large-cap | | | 79.2 | | | | – | | | | 79.2 | | | | – | | U.S. small-cap | | | 25.6 | | | | – | | | | 25.6 | | | | – | | International | | | 93.2 | | | | – | | | | 93.2 | | | | – | | Real estate | | | 27.0 | | | | – | | | | 27.0 | | | | – | | Commodity-linked mutual funds | | | 16.4 | | | | – | | | | 16.4 | | | | – | | Intermediate fixed income securities | | | 130.2 | | | | – | | | | 130.2 | | | | – | | | | | | | | | | | | | | | | Total | | $ | 374.1 | | | $ | 2.5 | | | $ | 371.6 | | | $ | – | | | | | | | | | | | | | | | |
| | As of December 31, 2018 | | | | | | | | Fair Value Measurements at Reporting Date Using: | | Asset Category | | Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | Cash and cash equivalents | | $ | 3.1 | | | $ | 3.1 | | | $ | - | | | $ | - | | Equity securities | | | 231.7 | | | | - | | | | 231.7 | | | | - | | Intermediate fixed income securities | | | 153.7 | | | | - | | | | 153.7 | | | | - | | Total | | $ | 388.5 | | | $ | 3.1 | | | $ | 385.4 | | | $ | - | |
The fair value of our foreign pension plan assets was as follows (in millions): | | | | | | | | | | | | | | | | | | | | As of December 31, 2016 | | | | | | | | Fair Value Measurements at Reporting Date Using: | | | Asset Category | | Total | | | Quoted Prices
in Active
Markets for
Identical
Assets (Level 1) | | | Significant
Other
Observable
Inputs (Level 2) | | | Significant
Unobservable
Inputs (Level 3) | | Cash and cash equivalents | | $ | 37.8 | | | $ | 37.8 | | | $ | – | | | $ | – | | Equity securities: | | | | | | | | | | | | | | | | | Energy | | | 3.2 | | | | 3.2 | | | | – | | | | – | | Materials | | | 8.6 | | | | 8.6 | | | | – | | | | – | | Industrials | | | 9.3 | | | | 9.3 | | | | – | | | | – | | Consumer discretionary | | | 5.8 | | | | 5.8 | | | | – | | | | – | | Consumer staples | | | 8.4 | | | | 8.4 | | | | – | | | | – | | Healthcare | | | 10.3 | | | | 10.3 | | | | – | | | | – | | Financials | | | 16.8 | | | | 16.8 | | | | – | | | | – | | Information technology | | | 5.2 | | | | 5.2 | | | | – | | | | – | | Telecommunication services | | | 2.1 | | | | 2.1 | | | | – | | | | – | | Utilities | | | 3.3 | | | | 3.3 | | | | – | | | | – | | Other | | | 71.7 | | | | 68.3 | | | | 3.4 | | | | – | | Fixed income securities: | | | | | | | | | | | | | | | | | Government bonds | | | 113.9 | | | | – | | | | 113.9 | | | | – | | Corporate bonds | | | 68.2 | | | | – | | | | 68.2 | | | | – | | Asset-backed securities | | | 9.9 | | | | – | | | | 9.9 | | | | – | | Other debt | | | 11.1 | | | | – | | | | 11.1 | | | | – | | Other types of investments: | | | | | | | | | | | | | | | | | Mortgage loans | | | 10.8 | | | | – | | | | 10.8 | | | | – | | Insurance contracts | | | 5.8 | | | | – | | | | 5.8 | | | | – | | Other investments | | | 16.9 | | | | – | | | | 16.9 | | | | – | | Real estate | | | 87.9 | | | | – | | | | 9.2 | | | | 78.7 | | | | | | | | | | | | | | | | Total | | $ | 507.0 | | | $ | 179.1 | | | $ | 249.2 | | | $ | 78.7 | | | | | | | | | | | | | | | |
| | As of December 31, 2019 | | | | | | | | Fair Value Measurements at Reporting Date Using: | | Asset Category | | Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 31.8 | | | $ | 31.8 | | | $ | - | | | $ | - | | Equity securities | | | 140.9 | | | | 116.0 | | | | 24.9 | | | | - | | Fixed income securities | | | 245.2 | | | | - | | | | 245.2 | | | | - | | Other types of investments | | | 123.6 | | | | - | | | | 123.6 | | | | - | | Real estate | | | 123.7 | | | | - | | | | - | | | | 123.7 | | Total | | $ | 665.2 | | | $ | 147.8 | | | $ | 393.7 | | | $ | 123.7 | |
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
| | As of December 31, 2018 | | | | | | | | Fair Value Measurements at Reporting Date Using: | | Asset Category | | Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 14.6 | | | $ | 14.6 | | | $ | - | | | $ | - | | Equity securities | | | 138.6 | | | | 109.3 | | | | 29.3 | | | | - | | Fixed income securities | | | 226.9 | | | | - | | | | 226.9 | | | | - | | Other types of investments | | | 96.8 | | | | - | | | | 96.8 | | | | - | | Real estate | | | 108.9 | | | | - | | | | - | | | | 108.9 | | Total | | $ | 585.8 | | | $ | 123.9 | | | $ | 353.0 | | | $ | 108.9 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
| | | | | | | | | | | | | | | | | | | | As of December 31, 2015 | | | | | | | | Fair Value Measurements at Reporting Date Using: | | | Asset Category | | Total | | | Quoted Prices
in Active
Markets for
Identical
Assets (Level 1) | | | Significant
Other
Observable
Inputs (Level 2) | | | Significant
Unobservable
Inputs (Level 3) | | Cash and cash equivalents | | $ | 34.0 | | | $ | 34.0 | | | $ | – | | | $ | – | | Equity securities: | | | | | | | | | | | | | | | | | Energy | | | 4.7 | | | | 4.7 | | | | – | | | | – | | Materials | | | 6.7 | | | | 6.7 | | | | – | | | | – | | Industrials | | | 8.2 | | | | 8.2 | | | | – | | | | – | | Consumer discretionary | | | 6.3 | | | | 6.3 | | | | – | | | | – | | Consumer staples | | | 8.5 | | | | 8.5 | | | | – | | | | – | | Healthcare | | | 8.6 | | | | 8.6 | | | | – | | | | – | | Financials | | | 17.4 | | | | 17.4 | | | | – | | | | – | | Information technology | | | 5.7 | | | | 5.7 | | | | – | | | | – | | Telecommunication services | | | 2.0 | | | | 2.0 | | | | – | | | | – | | Utilities | | | 3.3 | | | | 3.3 | | | | – | | | | – | | Other | | | 80.7 | | | | 40.6 | | | | 40.1 | | | | – | | Fixed income securities: | | | | | | | | | | | | | | | | | Government bonds | | | 104.0 | | | | – | | | | 104.0 | | | | – | | Corporate bonds | | | 74.5 | | | | – | | | | 74.5 | | | | – | | Asset-backed securities | | | 14.8 | | | | – | | | | 14.8 | | | | – | | Other debt | | | 11.3 | | | | – | | | | 11.3 | | | | – | | Other types of investments: | | | | | | | | | | | | | | | | | Mortgage loans | | | 9.8 | | | | – | | | | 9.8 | | | | – | | Insurance contracts | | | 5.8 | | | | – | | | | 5.8 | | | | – | | Other investments | | | 14.7 | | | | – | | | | 14.7 | | | | – | | Real estate | | | 84.6 | | | | – | | | | 10.7 | | | | 73.9 | | | | | | | | | | | | | | | | Total | | $ | 505.6 | | | $ | 146.0 | | | $ | 285.7 | | | $ | 73.9 | | | | | | | | | | | | | | | |
As of December 31, 20162019 and 2015,2018, our defined benefit pension plans’ assets did not hold any direct investment in Zimmer Biomet Holdings common stock. Equity securities are valued using a market approach, based on quoted prices for the specific security from transactions in active exchange markets (Level 1), or in some cases where we are invested in mutual or collective funds, based upon the net asset value per unit of the fund which is determined from quoted market prices of the underlying securities in the fund’s portfolio (Level 2). Fixed income securities are valued using a market approach, based upon quoted prices for the specific security or from institutional bid evaluations. Real estate is valued by discounting to present value the cash flows expected to be generated by the specific properties. The following table provides a reconciliation of the beginning and ending balances of our foreign pension plan assets measured at fair value that used significant unobservable inputs (Level 3) (in millions): | | | | December 31, 2016 | | | December 31, 2019 | | Beginning Balance | | $ | 73.9 | | | $ | 108.9 | | Gains on assets sold | | | 0.1 | | | Gain on assets sold | | | | 0.2 | | Change in fair value of assets | | | 2.7 | | | | 6.9 | | Net purchases and sales | | | 5.0 | | | | 4.8 | | Translation loss | | | (3.0 | ) | | | | | Translation gain | | | | 2.9 | | Ending Balance | | $ | 78.7 | | | $ | 123.7 | | | | |
We expect that we will have nominimal legally required minimum funding requirements in 20172020 for the qualified U.S. and Puerto Rico defined benefit retirement plans, norand we do wenot expect to voluntarily contribute to these plans during 2017.2020. Contributions to foreign defined benefit plans are estimated to be $14.9$19.6 million in 2017.2020. We do not expect the assets in any of our plans to be returned to us in the next year. Defined Contribution Plans We also sponsor defined contribution plans for substantially all of the U.S. and Puerto Rico employees and certain employees in other countries. The benefits offered under these plans are reflective of local customs and practices in the countries concerned. We expensed $42.5$52.6 million, $40.2$48.9 million and $32.8$47.9 million related to these plans for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. 16.Income Taxes A public referendum held in Switzerland passed the Federal Act on Tax Reform and AHV Financing (“TRAF”), effective January 1, 2020 and includes the abolishment of various favorable federal and cantonal tax regimes. Swiss Tax Reform provides transitional relief measures for companies that are losing the tax benefit of a ruling, including a "step-up" for amortizable goodwill, equal to the amount of future tax benefit they would have received under their
existing ruling, subject to certain limitations. Certain provisions of the TRAF were enacted in the third quarter of 2019, resulting in us recognizing a provisional net tax benefit of $263.8 million. In the fourth quarter of 2019, we recognized an additional $51.2 million related to TRAF as well as the tax impact of certain restructuring transactions in Switzerland. The 2017 Tax Act was enacted on December 22, 2017 and contained several key provisions including, among other things: 16. | Income Taxes• | a one-time tax on the mandatory deemed repatriation of post-1986 untaxed foreign earnings and profits (“E&P”), referred to as the toll charge; |
| • | a reduction in the corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017; |
| • | the introduction of a new U.S. tax on certain off-shore earnings referred to as global intangible low-taxed income (“GILTI”) at an effective tax rate of 10.5 percent for tax years beginning after December 31, 2017 (increasing to 13.125 percent for tax years beginning after December 31, 2025), with a partial offset by foreign tax credits; and |
| • | the introduction of a territorial tax system beginning in 2018 by providing a 100 percent dividend received deduction on certain qualified dividends from foreign subsidiaries. |
In March 2018, the FASB issued ASU 2018-05, "Income Taxes - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118." The guidance provided for a provisional one-year measurement period for entities to finalize their accounting for certain tax effects related to the 2017 Tax Act. In 2017, we recorded a $1,272.4 million income tax benefit related to provisional amounts for which the accounting had not been finalized. In 2018, we completed our calculation of the post-1986 E&P and related foreign taxes of our foreign subsidiaries, as well as the classification of the E&P as cash or non-cash and the finalization of all provisional items. Based on the completed calculations related to the effects of the 2017 Tax Act, and consideration of proposed regulations and other guidance issued during 2018, we recorded additional income tax expense of $8.3 million. The additional $8.3 million of tax expense consists of an adjustment to the toll charge or transition tax provision of $11.3 million and a benefit of $3.0 million related to the remeasurement of our deferred tax assets and liabilities. The 2017 Tax Act created a provision known as GILTI that imposes a U.S. tax on certain earnings of foreign subsidiaries that are subject to foreign tax below a certain threshold. The Company has made an accounting policy election to reflect GILTI taxes, if any, as a current income tax expense in the period incurred. The components of earnings (loss) before income taxes consisted of the following (in millions): | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | United States operations | | $ | (251.8 | ) | | $ | (246.2 | ) | | $ | 403.3 | | Foreign operations | | | 651.4 | | | | 399.4 | | | | 536.1 | | | | | | | | | | | | Total | | $ | 399.6 | | | $ | 153.2 | | | $ | 939.4 | | | | | | | | | | | | | The provision for income taxes and the income taxes paid consisted of the following (in millions): | | | | | | Current: | | | | | | | | | | | | | Federal | | $ | 134.2 | | | $ | 55.8 | | | $ | 178.2 | | State | | | 12.4 | | | | 18.9 | | | | 16.5 | | Foreign | | | 101.6 | | | | 96.3 | | | | 116.0 | | | | | | | | | | | | | | | | | | 248.2 | | | | 171.0 | | | | 310.7 | | | | | | | | | | | | | | | Deferred: | | | | | | | | | | | | | Federal | | | (108.5 | ) | | | (120.6 | ) | | | (54.8 | ) | State | | | 2.3 | | | | (20.0 | ) | | | (6.6 | ) | Foreign | | | (47.0 | ) | | | (23.4 | ) | | | (29.1 | ) | | | | | | | | | | | | | | | | | (153.2 | ) | | | (164.0 | ) | | | (90.5 | ) | | | | | | | | | | | | | | Provision for income taxes | | $ | 95.0 | | | $ | 7.0 | | | $ | 220.2 | | | | | | | | | | | | | | | Income taxes paid | | $ | 269.6 | | | $ | 193.6 | | | $ | 340.1 | |
| | For the Years Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | United States operations | | $ | (125.9 | ) | | $ | (382.8 | ) | | $ | (114.0 | ) | Foreign operations | | | 1,031.7 | | | | 111.7 | | | | 578.6 | | Total | | $ | 905.8 | | | $ | (271.1 | ) | | $ | 464.6 | |
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The (benefit)/provision for income taxes and the income taxes paid consisted of the following (in millions): Current: | | | | | | | | | | | | | Federal | | $ | 65.5 | | | $ | (46.2 | ) | | $ | 438.5 | | State | | | 9.8 | | | | 24.4 | | | | 2.4 | | Foreign | | | 237.7 | | | | 116.6 | | | | (13.7 | ) | | | | 313.0 | | | | 94.8 | | | | 427.2 | | Deferred: | | | | | | | | | | | | | Federal | | | (90.2 | ) | | | 37.9 | | | | (1,728.5 | ) | State | | | (4.2 | ) | | | (8.8 | ) | | | (95.5 | ) | Foreign | | | (444.3 | ) | | | (15.7 | ) | | | 48.0 | | | | | (538.7 | ) | | | 13.4 | | | | (1,776.0 | ) | (Benefit) provision for income taxes | | $ | (225.7 | ) | | $ | 108.2 | | | $ | (1,348.8 | ) | Net income taxes paid | | $ | 192.5 | | | $ | 237.1 | | | $ | 266.9 | |
A reconciliation of the U.S. statutory income tax rate to our effective tax rate is as follows: | | | | For the Years Ended December 31, | | | For the Years Ended December 31, | | | | | | 2016 | | 2015 | | 2014 | | | 2019 | | | 2018 | | | | 2017 | | | U.S. statutory income tax rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 21.0 | | % | | | 21.0 | | % | | | 35.0 | | % | State taxes, net of federal deduction | | | 2.0 | | | | (1.7 | ) | | | 0.8 | | | | 0.8 | | | | (2.5 | ) | | | 1.8 | | | Tax impact of foreign operations, including foreign tax credits | | | (11.0 | ) | | | (62.3 | ) | | | (14.2 | ) | | Tax impact of foreign operations, including U.S. taxes on international income and foreign tax credits | | | | (10.2 | ) | | | 54.3 | | | | (32.0 | ) | | Change in valuation allowance | | | – | | | | (3.7 | ) | | | – | | | | 1.5 | | | | (4.9 | ) | | | 0.8 | | | Non-deductible expenses | | | 0.9 | | | | 2.4 | | | | – | | | | 0.4 | | | | 1.7 | | | | 2.7 | | | Tax impact of certain significant transactions | | | 1.6 | | | | 21.6 | | | | 1.4 | | | Tax benefit relating to U.S. manufacturer’s deduction and export sales | | | (4.7 | ) | | | (6.2 | ) | | | (1.9 | ) | | R&D credit | | | (1.9 | ) | | | (4.2 | ) | | | (0.2 | ) | | Share based compensation | | | (2.9 | ) | | | 1.1 | | | | 0.2 | | | Goodwill impairment | | | | - | | | | (75.2 | ) | | | 22.5 | | | Tax rate change | | | | 0.6 | | | | (12.2 | ) | | | (24.0 | ) | | Tax benefit relating to foreign derived intangible income and U.S. manufacturer’s deduction | | | | (4.5 | ) | | | (0.2 | ) | | | (1.7 | ) | | R&D tax credit | | | | (1.2 | ) | | | 6.0 | | | | (1.2 | ) | | Share-based compensation | | | | (0.4 | ) | | | 0.1 | | | | (2.6 | ) | | Net uncertain tax positions, including interest and penalties | | | 4.2 | | | | 22.9 | | | | 2.2 | | | | 1.9 | | | | (25.5 | ) | | | (17.0 | ) | | U.S. tax reform | | | | 0.1 | | | | (3.1 | ) | | | (273.8 | ) | | Switzerland tax reform and certain restructuring transactions | | | | (34.8 | ) | | | - | | | | - | | | Other | | | 0.6 | | | | (0.3 | ) | | | 0.1 | | | | (0.1 | ) | | | 0.6 | | | | (0.8 | ) | | | | | | | | | | | | | Effective income tax rate | | | 23.8 | % | | | 4.6 | % | | | 23.4 | % | | | (24.9 | ) | % | | | (39.9 | ) | % | | | (290.3 | ) | % | | | | | | | | | | | |
Our operations in Puerto Rico and Switzerland benefit from various tax incentive grants. These grants expire between fiscal years 20192026 and 2029. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are recorded to reduce deferred income tax assets when it is more likely than not that an income tax benefit will not be realized.
The components of deferred taxes consisted of the following (in millions): | | | | As of December 31, | | | As of December 31, | | | | | 2016 | | 2015 | | | 2019 | | | 2018 | | Deferred tax assets: | | | | | | | | | | | | | Inventory | | $ | 260.3 | | | $ | 159.7 | | | $ | 295.6 | | | $ | 271.5 | | Net operating loss carryover | | | 181.3 | | | | 117.4 | | | | 514.4 | | | | 374.3 | | Tax credit carryover | | | 110.4 | | | | 207.8 | | | | 33.8 | | | | 29.2 | | Capital loss carryover | | | 2.3 | | | | 4.2 | | | | 8.3 | | | | 7.9 | | Product liability and litigation | | | | 40.4 | | | | 92.6 | | Accrued liabilities | | | 182.2 | | | | 190.2 | | | | 45.5 | | | | 35.3 | | Share-based compensation | | | 60.3 | | | | 59.0 | | | | 28.6 | | | | 27.3 | | Accounts receivable | | | 22.3 | | | | 23.7 | | | | 24.6 | | | | 15.2 | | Other | | | 101.9 | | | | 133.6 | | | | 79.0 | | | | 48.8 | | | | | | | | | | Total deferred tax assets | | | 921.0 | | | | 895.6 | | | | 1,070.2 | | | | 902.1 | | Less: Valuation allowances | | | (88.3 | ) | | | (72.7 | ) | | | (546.1 | ) | | | (390.9 | ) | | | | | | | | | Total deferred tax assets after valuation allowances | | | 832.7 | | | | 822.9 | | | | 524.1 | | | | 511.2 | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | | | Fixed assets | | $ | 138.7 | | | $ | 144.6 | | | $ | 77.6 | | | $ | 94.4 | | Intangible assets | | | 2,343.7 | | | | 2,337.2 | | | | 772.3 | | | | 1,301.3 | | Unremitted earnings of foreign subsidiaries | | | 1,159.4 | | | | 1,374.8 | | | Other | | | – | | | | 4.3 | | | | 42.9 | | | | 14.1 | | | | | | | | | | Total deferred tax liabilities | | | 3,641.8 | | | | 3,860.9 | | | | 892.8 | | | | 1,409.8 | | | | | | | | | | Total net deferred income taxes | | $ | (2,809.1 | ) | | $ | (3,038.0 | ) | | $ | (368.7 | ) | | $ | (898.6 | ) | | | | | | | | |
Net operating loss carryovers are available to reduce future federal, state and foreign taxable earnings. At December 31, 2016, $157.12019, $391.6 million of these net operating loss carryovers generally expire within a period of 1 to 20 years and $24.2$122.8 million of these net operating loss carryovers have an indefinite life. Valuation allowances for net operating loss carryovers have been established in the amount of $70.8$493.4 million and $47.0$348.9 million at December 31, 20162019 and 2015,2018, respectively. Deferred tax assets related to tax credit carryovers are available to offset future federal state and foreignstate tax liabilities. At December 31, 2016, the Company’s total2019, $33.8 million of these tax credit carryovers of $110.4 million generally expire within a period of 1 to 1016 years. Valuation allowances for certain tax credit carryovers have been established in the amount of $11.9$32.3 million and $14.4$25.2 million at December 31, 20162019 and 2015,2018, respectively. Deferred tax assets related to capital loss carryovers are also available to reduce future federal and foreign capital gains. At December 31, 2016, the Company’s2019, $1.8 million of these capital loss carryovers of $2.3 million generally expire within a period of 21 year to 4 years.3 years and $6.5 million of these capital loss carryovers have an indefinite life. Valuation allowances for certain capital loss carryovers have been established in the amount of $0.2$8.3 million and $4.2$7.9 million at December 31, 20162019 and 2015,2018, respectively. The remaining valuation allowances booked against deferred tax assets of $5.4$12.1 million and $7.1$8.9 million at December 31, 20162019 and 2015, | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
2018, respectively, relate primarily to accrued liabilities and intangible assets and potential capital losses that management believes, more likely than not, will not be realized. At December 31, 2016, we had an aggregate of approximately $4,677.0 million
We intend to repatriate at least $5.0 billion of unremitted earnings, of foreign subsidiaries that have been, or are intended to be, indefinitely reinvested for continued use in foreign operations. If the total undistributed earnings of foreign subsidiaries were remitted, a portion of the additional tax would be offset by the allowable foreign tax credits. It is not practical for us to determinewhich the additional tax related to remitting earnings is deemed immaterial as a portion of these earnings.earnings has already been taxed as toll tax or GILTI and is not subject to further U.S. federal tax. Portions of the additional tax would also be offset by allowable foreign tax credits. Of the $5.0 billion amount, we have an estimated $2.2 billion of cash and intercompany notes available to repatriate and the remainder is invested in the operations of our foreign entities. The remaining amounts earned overseas are expected to be permanently reinvested outside of the United States. If the Company decides at a later date to repatriate these earnings to the U.S., the Company would be required to provide for the net tax effects on these amounts. The Company estimates that the total tax effect of this repatriation would not be significant under current enacted tax laws and regulations and at current currency exchange rates.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in millions): | | | | For the Years Ended December 31, | | | For the Years Ended December 31, | | | | | 2016 | | 2015 | | 2014 | | | 2019 | | | 2018 | | | 2017 | | Balance at January 1 | | $ | 591.9 | | | $ | 321.7 | | | $ | 311.0 | | | $ | 685.5 | | | $ | 626.8 | | | $ | 649.3 | | Increases related to business combinations* | | | 70.2 | | | | 247.6 | | | | – | | | Increases related to business combinations | | | | - | | | | 4.5 | | | | 70.2 | | Increases related to prior periods | | | 36.7 | | | | 1.3 | | | | 0.9 | | | | 24.7 | | | | 34.6 | | | | 172.8 | | Decreases related to prior periods | | | (94.7 | ) | | | – | | | | (3.8 | ) | | | (35.6 | ) | | | (14.4 | ) | | | (262.2 | ) | Increases related to current period | | | 53.0 | | | | 25.7 | | | | 18.3 | | | | 133.2 | | | | 41.9 | | | | 24.8 | | Decreases related to settlements with taxing authorities | | | (3.2 | ) | | | (1.4 | ) | | | (3.0 | ) | | | (60.2 | ) | | | (3.8 | ) | | | (21.7 | ) | Decreases related to lapse of statute of limitations | | | (4.6 | ) | | | (3.0 | ) | | | (1.7 | ) | | | (5.8 | ) | | | (4.1 | ) | | | (6.4 | ) | | | | | | | | | | | | Balance at December 31 | | $ | 649.3 | | | $ | 591.9 | | | $ | 321.7 | | | $ | 741.8 | | | $ | 685.5 | | | $ | 626.8 | | | | | | | | | | | | | Amounts impacting effective tax rate, if recognized balance at December 31* | | $ | 511.5 | | | $ | 443.7 | | | $ | 186.3 | | | | | | | | | | | | | | Amounts impacting effective tax rate, if recognized balance at December 31 | | | $ | 599.2 | | | $ | 549.1 | | | $ | 499.6 | |
* Subject to change during measurement period of business combinations.
We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. During 2016,2019, we accrued interest and penalties of $19.3$15.0 million, and as of December 31, 2016,2019, had a recognized liability for interest and penalties of $110.8$109.2 million, which included a $8.6 milliondoes not include any increase from December 31, 2015 related to the Biomet merger.business combinations. During 2015,2018, we accrued interest and penalties of $4.8$18.5 million, and as of December 31, 2015,2018, had a recognized a liability for interest and penalties of $82.9$94.2 million, which included an increase of $29.8 million from December 31, 2014does 0t include any increases related to the Biomet merger.business combinations. During 2014,2017, we accrued released interest and penalties of $5.9$38.3 million, and as of December 31, 2014,2017, had a recognized a liability for interest and penalties of $48.3 million.$75.7 million, which included $3.0 million of increase related to the Biomet merger. We operate on a global basis and are subject to numerous and complex tax laws and regulations. Additionally, tax laws have and continue to undergo rapid changes in both application and interpretation by various countries, including state aid interpretations and the Organization for Economic Cooperation and Development led initiatives. Our income tax filings are subject to examinations by taxing authorities throughout the world. Income tax audits may require an extended period of time to reach resolution and may result in significant income tax adjustments when interpretation of tax laws or allocation of company profits is disputed. Although ultimate timing is uncertain, the net amount of tax liability for unrecognized tax benefits may change within the next twelve months due to changes in audit status, expiration of statutes of limitations, settlements of tax assessments and other events. Management’s best estimate of such change is within the range of a $290 million decrease to a $30 million increase. Our U.S. Federal income tax returns have been audited by the IRS through 20092012 and are currently under audit by the IRS for years 2010-2014.2013-2015. The IRS has proposed adjustments for years 2005-2009,2005-2012, primarily related to reallocating profits between certain of our U.S. and foreign subsidiaries. We have disputed these adjustments and intend to continue to vigorously defend our positions. For years 2005-2007,positions as we have filed a petitionpursue resolution through petitions with the U.S. Tax Court. ForCourt for years 2008-2009, we are pursuing resolution through2005-2009 and the administrative process with the IRS AdministrativeIndependent Office of Appeals Process. The U.S. federal income tax returns of the acquired Biomet consolidated group have been audited through fiscal year 2008.for years 2010-2012. State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return. The state impact of any federal changes generally remains subject to examination by various states for a period of up to one year after formal notification to the states. We have various state income tax return positions in the process of examination, administrative appeals or litigation. In other major jurisdictions, open years are generally 20092011 or later. 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 $300 million decrease to $50 million increase.
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
17. | Capital Stock and Earnings per Share |
We are authorized to issue 250.0 million shares of preferred stock, noneNaN of which were issued or outstanding as of December 31, 2016.2019.
The numerator for both basic and diluted earnings per share is net earnings available to common stockholders. The denominator for basic earnings per share is the weighted average number of common shares outstanding during the period. The denominator for diluted earnings per share is weighted average shares outstanding adjusted for the effect of dilutive stock options and other equity awards. The following is a reconciliation of weighted average shares for the basic and diluted share computations (in millions): | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | Weighted average shares outstanding for basic net earnings per share | | | 200.0 | | | | 187.4 | | | | 169.0 | | Effect of dilutive stock options and other equity awards | | | 2.4 | | | | 2.4 | | | | 2.7 | | | | | | | | | | | | | | | Weighted average shares outstanding for diluted net earnings per share | | | 202.4 | | | | 189.8 | | | | 171.7 | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Weighted average shares outstanding for basic net earnings per share | | | 205.1 | | | | 203.5 | | | | 201.9 | | Effect of dilutive stock options and other equity awards | | | 1.6 | | | | - | | | | 1.8 | | Weighted average shares outstanding for diluted net earnings per share | | | 206.7 | | | | 203.5 | | | | 203.7 | |
For the years ended December 31, 20162019 and 2015,2017, an average of 0.9 million and 0.51.0 million options, respectively, to purchase shares of common stock were not included in the computation of diluted earnings per share as the exercise prices of these options were greater than the average market price of the common stock. InSince we incurred a net loss in the year ended December 31, 2014, all outstanding2018, 0 dilutive stock options to purchase shares of common stockor other equity awards were included in the computation ofas diluted earnings per share as the exercise prices of all options were less than the average market price of the common stock.shares. During 2016, we repurchased 4.2 million shares of our common stock at an average price of $98.50 per share for a total cash outlay of $415.5 million, including commissions.
18.Segment Data We design, manufacture and market orthopaedicorthopedic reconstructive products; sports medicine, biologics, extremities and trauma products; office based technologies; spine, craniomaxillofacial and thoracic products (“CMF”); office based technologies; dental implants; and related surgical products. We allocateOur chief operating decision maker (“CODM”) allocates resources to achieve our operating profit goals through seven7 operating segments. Our operating segments are comprised of both geographic and product category business units. The geographic operating segments are the Americas, which is comprised principally of the U.S. and includes other North, Central and South American markets; EMEA, which is comprised principally of Europe and includes the Middle East and African markets; and Asia Pacific, which is comprised primarily of Japan, China and Australia and includes other Asian and Pacific markets. The product category operating segments are Americas Spine, Office Based Technologies, CMF and Dental. The geographic operating segments include results from all of our product categories except those in the product category operating segments. The Office Based Technologies, CMF and Dental product category operating segments reflect those respective product category results from all regions, whereas the Americas Spineproduct category operating segment only includes all spine product results excluding those from the Americas.Asia Pacific. As it relates to the geographic operating segments, managementour CODM evaluates performance based upon segment operating profit exclusive of operating expenses pertaining to inventorystep-up and certain other inventory and manufacturing relatedmanufacturing-related charges, “Certain claims,” goodwill impairment, intangible asset amortization, “Special items,”goodwill and intangible asset impairment, quality remediation, restructuring and other cost reduction initiatives, acquisition, integration and related, litigation, litigation settlement gain, certain EU Medical Device Regulation expenses, other charges, and global operations and corporate functions. Global operations and corporate functions include research, development engineering, medical education, brand management, corporate legal, finance and human resource functions, manufacturing operations and logistics and share-based payment expense. As it relates to each product category operating segment, research, development engineering, medical education, brand management and other various costs that are specific to the product category operating segment’s operations are reflected in its operating profit results. Due to these additional costs included in the product category operating segments, profitability metrics betweenamong the geographic operating segments and product category operating segments are not comparable. Intercompany transactions have been eliminated from segment operating profit. ManagementOur CODM does not review asset information by operating segment. Instead, managementour CODM reviews cash flow and other financial ratios by operating segment.
These seven operating segments are the basis for our reportable segment information provided below. The four product category operating segments are individually insignificant to our consolidated results and therefore do not constitute a reporting segment either individually or combined. For presentation purposes, these product category operating segments have been aggregated. PriorCertain insignificant prior period reportable segment financial information has been restatedreclassified to conform to the current period.presentation.
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
As discussed in Note 4, in 2019 we initiated a restructuring program. As of December 31, 2019, our operating segments have not changed. However, it is likely in 2020 there will be changes in either our operating segments or the composition of operating profit in our current operating segments. We cannot determine at this time what the impact of those changes may be. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Net sales and other information by segment is as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | Americas | | | EMEA | | | Asia
Pacific | | | Immaterial
Product
Category
Operating
Segments | | | Global
Operations
and
Corporate
Functions | | | Total | | As of and for the Year Ended December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 3,947.6 | | | $ | 1,566.1 | | | $ | 1,092.2 | | | $ | 1,078.0 | | | $ | – | | | $ | 7,683.9 | | Depreciation and amortization | | | 135.6 | | | | 70.7 | | | | 51.6 | | | | 34.7 | | | | 746.7 | | | | 1,039.3 | | Segment operating profit | | | 2,134.4 | | | | 503.3 | | | | 440.8 | | | | 249.1 | | | | (854.9 | ) | | | 2,472.7 | | Inventorystep-up and certain other inventory and manufacturing related charges | | | | | | | | | | | | | | | | | | | | | | | (469.1 | ) | Intangible asset amortization | | | | | | | | | | | | | | | | | | | | | | | (565.9 | ) | Certain claims | | | | | | | | | | | | | | | | | | | | | | | – | | Special items | | | | | | | | | | | | | | | | | | | | | | | | | Biomet merger related | | | | | | | | | | | | | | | | | | | | | | | (487.3 | ) | Other special items | | | | | | | | | | | | | | | | | | | | | | | (124.5 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | | | | | | | | | | | | | | | | | | | | | 825.9 | | | | As of and for the Year Ended December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 3,109.4 | | | $ | 1,302.9 | | | $ | 881.6 | | | $ | 703.9 | | | $ | – | | | $ | 5,997.8 | | Depreciation and amortization | | | 110.0 | | | | 62.4 | | | | 37.9 | | | | 21.0 | | | | 481.1 | | | | 712.4 | | Segment operating profit | | | 1,633.5 | | | | 449.0 | | | | 422.2 | | | | 162.2 | | | | (673.9 | ) | | | 1,993.0 | | Inventorystep-up and certain other inventory and manufacturing related charges | | | | | | | | | | | | | | | | | | | | | | | (348.8 | ) | Intangible asset amortization | | | | | | | | | | | | | | | | | | | | | | | (337.4 | ) | Certain claims | | | | | | | | | | | | | | | | | | | | | | | (7.7 | ) | Special items | | | | | | | | | | | | | | | | | | | | | | | | | Biomet merger related | | | | | | | | | | | | | | | | | | | | | | | (619.1 | ) | Other special items | | | | | | | | | | | | | | | | | | | | | | | (212.7 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | | | | | | | | | | | | | | | | | | | | | 467.3 | | | | As of and for the Year Ended December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 2,320.2 | | | $ | 1,189.1 | | | $ | 789.2 | | | $ | 374.8 | | | $ | – | | | $ | 4,673.3 | | Depreciation and amortization | | | 70.5 | | | | 48.8 | | | | 30.2 | | | | 7.5 | | | | 218.8 | | | | 375.8 | | Segment operating profit | | | 1,215.4 | | | | 407.8 | | | | 371.0 | | | | 76.4 | | | | (541.9 | ) | | | 1,528.7 | | Inventorystep-up and certain other inventory and manufacturing related charges | | | | | | | | | | | | | | | | | | | | | | | (36.3 | ) | Intangible asset amortization | | | | | | | | | | | | | | | | | | | | | | | (92.5 | ) | Certain claims | | | | | | | | | | | | | | | | | | | | | | | (21.5 | ) | Special items | | | | | | | | | | | | | | | | | | | | | | | | | Biomet merger related | | | | | | | | | | | | | | | | | | | | | | | (61.9 | ) | Other special items | | | | | | | | | | | | | | | | | | | | | | | (279.2 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | | | | | | | | | | | | | | | | | | | | | 1,037.3 | | | |
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
| | Americas | | | EMEA | | | Asia Pacific | | | Immaterial Product Category Operating Segments | | | Global Operations and Corporate Functions | | | Total | | For the Year Ended December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 3,978.1 | | | $ | 1,538.6 | | | $ | 1,297.0 | | | $ | 1,168.5 | | | $ | - | | | $ | 7,982.2 | | Depreciation and amortization | | | 109.3 | | | | 71.0 | | | | 65.2 | | | | 45.5 | | | | 715.1 | | | | 1,006.1 | | Segment operating profit | | | 2,163.2 | | | | 477.1 | | | | 458.9 | | | | 208.2 | | | | (1,124.1 | ) | | | 2,183.3 | | Inventory and manufacturing-related charges | | | | | | | | | | | | | | | | | | | | | | | (53.9 | ) | Intangible asset amortization | | | | | | | | | | | | | | | | | | | | | | | (584.3 | ) | Intangible asset impairment | | | | | | | | | | | | | | | | | | | | | | | (70.1 | ) | Quality remediation | | | | | | | | | | | | | | | | | | | | | | | (82.4 | ) | Restructuring and other cost reduction initiatives | | | | | | | | | | | | | | | | | | | | | | | (50.0 | ) | Acquisition, integration and related | | | | | | | | | | | | | | | | | | | | | | | (12.2 | ) | Litigation | | | | | | | | | | | | | | | | | | | | | | | (65.0 | ) | Litigation settlement gain | | | | | | | | | | | | | | | | | | | | | | | 23.5 | | European Union Medical Device Regulation | | | | | | | | | | | | | | | | | | | | | | | (30.9 | ) | Other charges | | | | | | | | | | | | | | | | | | | | | | | (120.5 | ) | Operating profit | | | | | | | | | | | | | | | | | | | | | | | 1,137.5 | | For the Year Ended December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 3,932.6 | | | $ | 1,576.1 | | | $ | 1,236.9 | | | $ | 1,187.3 | | | $ | - | | | $ | 7,932.9 | | Depreciation and amortization | | | 120.4 | | | | 70.3 | | | | 66.6 | | | | 45.0 | | | | 738.2 | | | | 1,040.5 | | Segment operating profit | | | 2,084.4 | | | | 479.3 | | | | 435.3 | | | | 206.6 | | | | (995.3 | ) | | | 2,210.3 | | Inventory and manufacturing-related charges | | | | | | | | | | | | | | | | | | | | | | | (32.5 | ) | Intangible asset amortization | | | | | | | | | | | | | | | | | | | | | | | (595.9 | ) | Goodwill and intangible asset impairment | | | | | | | | | | | | | | | | | | | | | | | (979.7 | ) | Quality remediation | | | | | | | | | | | | | | | | | | | | | | | (165.4 | ) | Restructuring and other cost reduction initiatives | | | | | | | | | | | | | | | | | | | | | | | (34.2 | ) | Acquisition, integration and related | | | | | | | | | | | | | | | | | | | | | | | (99.5 | ) | Litigation | | | | | | | | | | | | | | | | | | | | | | | (186.0 | ) | European Union Medical Device Regulation | | | | | | | | | | | | | | | | | | | | | | | (3.7 | ) | Other charges | | | | | | | | | | | | | | | | | | | | | | | (79.6 | ) | Operating profit | | | | | | | | | | | | | | | | | | | | | | | 33.8 | | For the Year Ended December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 3,928.9 | | | $ | 1,523.4 | | | $ | 1,158.3 | | | $ | 1,192.7 | | | $ | - | | | $ | 7,803.3 | | Depreciation and amortization | | | 127.6 | | | | 71.7 | | | | 60.2 | | | | 45.7 | | | | 757.5 | | | | 1,062.7 | | Segment operating profit | | | 2,126.8 | | | | 478.1 | | | | 417.6 | | | | 262.9 | | | | (859.8 | ) | | | 2,425.6 | | Inventory step-up and other inventory and manufacturing-related charges | | | | | | | | | | | | | | | | | | | | | | | (70.8 | ) | Intangible asset amortization | | | | | | | | | | | | | | | | | | | | | | | (603.9 | ) | Goodwill and intangible asset impairment | | | | | | | | | | | | | | | | | | | | | | | (331.5 | ) | Quality remediation | | | | | | | | | | | | | | | | | | | | | | | (195.1 | ) | Restructuring and other cost reduction initiatives | | | | | | | | | | | | | | | | | | | | | | | (17.6 | ) | Acquisition, integration and related | | | | | | | | | | | | | | | | | | | | | | | (262.2 | ) | Litigation | | | | | | | | | | | | | | | | | | | | | | | (104.0 | ) | Other charges | | | | | | | | | | | | | | | | | | | | | | | (41.2 | ) | Operating profit | | | | | | | | | | | | | | | | | | | | | | | 799.3 | |
We conduct business in the following countries that hold 10 percent or more of our total consolidated Property, plant and equipment, net (in millions): | | | | As of December 31, | | | As of December 31, | | | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | United States | | $ | 1,181.3 | | | $ | 1,188.6 | | | $ | 1,295.0 | | | $ | 1,235.1 | | Other countries | | | 856.6 | | | | 874.0 | | | | 782.4 | | | | 780.3 | | | | | | | | Property, plant and equipment, net | | $ | 2,037.9 | | | $ | 2,062.6 | | | $ | 2,077.4 | | | $ | 2,015.4 | | | | | | | |
U.S. sales were $4,541.3$4,592.1 million, $3,447.2$4,560.0 million, and $2,397.9$4,582.2 million for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. Sales within any other individual country were less than 10 percent of our consolidated sales in each of those years. Sales are attributable to a country based upon the customer’scustomer's country of domicile. Net sales
We own most of our manufacturing facilities, but lease various office space, vehicles and other less significant assets throughout the world. Our contracts contain a lease if they convey a right to control the use of an identified asset, either explicitly or implicitly, in exchange for consideration. Our lease contracts are a necessary part of our business, but we do not believe they are significant to our overall operations. We do not have any significant finance leases. Additionally, we do not have significant leases: where we are considered a lessor; where we sublease our assets; with an initial term of twelve months or less; with related parties; with residual value guarantees; that impose restrictions or covenants on us; or that have not yet commenced, but create significant rights and obligations against us. Our real estate leases generally have terms of between 5 to 10 years and contain lease extension options that can vary from month-to-month extensions to up to 5 year extensions. We include extension options in our lease term if we are reasonably certain to exercise that option. In determining whether an extension is reasonably certain, we consider the uniqueness of the property for our needs, the availability of similar properties, whether the extension period payments remain the same or may change due to market rates or fixed price increases in the contract, and other economic factors. Our vehicle leases generally have terms of between 3 to 5 years and contain lease extension options on a month-to-month basis. Our vehicle leases are generally not reasonably certain to be extended. Under GAAP, we are required to discount our lease liabilities to present value using the rate implicit in the lease, or our incremental borrowing rate for a similar term as the lease term if the implicit rate is not readily available. We generally do not have adequate information to know the implicit rate in a lease and therefore use our incremental borrowing rate. Under GAAP, the incremental borrowing rate must be on a collateralized basis, but our debt arrangements are unsecured. We have determined our incremental borrowing rate by product categoryusing our credit rating to estimate our unsecured borrowing rate and applying reasonable assumptions to reduce the unsecured rate for a risk adjustment effect from collateral. We adopted ASU 2016-02 – Leases (Topic 842) effective January 1, 2019. Since we adopted the new standard using the period of adoption transition method (see Note 2 for additional information regarding the new standard), we are not required to present 2018 and 2017 comparative disclosures under the new standard. However, we are required to present the required annual disclosures under the previous GAAP lease accounting standard. Information on our leases is as follows ($ in millions): | | For the Years Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Lease cost | | $ | 76.0 | | | $ | 72.2 | | | $ | 87.2 | | Cash paid for leases recognized in operating cash flows | | $ | 73.6 | | | | | | | | | | Right-of-use assets obtained in exchange for new lease liabilities | | $ | 55.0 | | | | | | | | | |
| | | | | | As of | | | | | | | | December 31, 2019 | | Right-of-use assets recognized in Other assets | | | | | | $ | 266.7 | | Lease liabilities recognized in Other current liabilities | | | | | | $ | 64.2 | | Lease liabilities recognized in Other long-term liabilities | | | | | | $ | 215.5 | | Weighted-average remaining lease term | | | | | | 6.3 years | | Weighted-average discount rate | | | | | | | 2.7 | % |
Our variable lease costs are not significant. Our future minimum lease payments as of December 31, 2019 were (in millions): | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | Knees | | $ | 2,751.9 | | | $ | 2,276.8 | | | $ | 1,895.2 | | Hips | | | 1,867.9 | | | | 1,533.0 | | | | 1,326.4 | | S.E.T | | | 1,645.4 | | | | 1,214.6 | | | | 863.2 | | Dental | | | 427.9 | | | | 335.7 | | | | 242.8 | | Spine & CMF | | | 662.0 | | | | 404.4 | | | | 207.2 | | Other | | | 328.8 | | | | 233.3 | | | | 138.5 | | | | | | | | | | | | Total | | $ | 7,683.9 | | | $ | 5,997.8 | | | $ | 4,673.3 | | | | | | | | | | | |
For the Years Ending December 31, | | | | | | | | | 2020 | | | | | | $ | 70.5 | | 2021 | | | | | | | 57.4 | | 2022 | | | | | | | 42.0 | | 2023 | | | | | | | 34.3 | | 2024 | | | | | | | 29.0 | | Thereafter | | | | | | | 74.1 | | Total | | | | | | | 307.3 | | Less imputed interest | | | | | | | 27.6 | | Total | | | | | | $ | 279.7 | |
Total rent expense for the years ended December 31, 2016, 2015 and 2014 aggregated $74.0 million, $60.1 million, and $48.4 million, respectively.
Future minimum rental commitments undernon-cancelable operating leases in effect as of December 31, 2016 were (in millions):
| | | | | | For the Years Ending December 31, | | | | 2017 | | $ | 69.5 | | 2018 | | | 58.7 | | 2019 | | | 47.6 | | 2020 | �� | | 38.9 | | 2021 | | | 28.4 | | Thereafter | | | 88.7 | |
20. | Commitments and Contingencies |
On a quarterly and annual basis, we review relevant information with respect to loss contingencies and update our accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews. We establish liabilities for loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made. 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 premature revision of the device. We have settled somethe majority of these claims and others are still pending. The majority of the pending U.S. lawsuits are currently in a federal Multidistrict Litigation (“MDL”) in the District of New Jersey (In Re: Zimmer Durom Hip Cup Products Liability Litigation). Multi-plaintiff state court cases are pending in St. Clair County, Illinois (Santas, et al. v. Zimmer, Inc., et al.) and Los Angeles County, California (McAllister, et al. v. Zimmer, Inc., et al.). The initial trial inSantas took place in November 2014, the initial trial in the MDL took place in May 2015 and the initial trial inMcAllister took place in July 2015. As of December 31, 2016, all litigationLitigation activity in the MDLSantas andMcAllisteris stayed untilmid-2017 to allow participation inpending finalization of the U.S. Durom Cup Settlement Program, an extrajudicial program created to resolve actions and claims of eligible U.S. plaintiffs and claimants. Other lawsuits are pending in various domestic and foreign jurisdictions, and additional claims may be asserted in the future. The majority of claims outside the U.S. are pending in Canada, Germany, Netherlands and the U.K. A Canadian class settlement was approved in late 2016. Trials have commenced in Germany, and the majority of claims in the U.K. are consolidated in a Group Litigation Order.Italy. Since 2008, we have recognized net expense of $479.4$443.0 million for DuromCup-related claims. Our estimate of our total liability for these claims as of December 31, 2016 remains consistent with our estimate as of December 31, 2015, and, accordingly, we did not record any additional expense duringIn the yearyears ended December 31, 2016. 2019 and 2018, we lowered our estimate of the number of Durom Cup-related claims we expect to settle and, as a result, we recognized gains of $9.5 million and $37.2 million, respectively, in selling, general and administrative expense. We recognized $7.7 million and $21.5$10.3 million in expense for DuromCup-related claims in 2015 and 2014, respectively.2017. We maintain insurance for product liability claims, subject to self-insurance retention requirements. As of December 31, 2016, we have exhausted our self-insured retention under our insurance program and have a claim for insurance proceeds for ultimate losses which exceed the self-insured retention amount, subject to a 20 percentco-payment requirement and a cap. We believe our contracts with the insurance carriers are enforceable for these claims and, therefore, it is probable that we will recover some amount from our insurance carriers. We have received a portion of the insurance proceeds we estimate we will recover. We have a $95.3 million receivable in “Other assets” remaining on our consolidated balance sheet as of
| | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2016 for estimated insurance recoveries for DuromCup-related claims. As is customary in this process, our insurance carriers have reserved all rights under their respective policies and could still ultimately deny coverage for some or all of our insurance claims.
Our estimate as of December 31, 20162019 of the remaining liability for all DuromCup-related claims is $293.6 million, of which $75.0 million is classified as short-term in “Other current liabilities” and $218.6 million is classified as long-term in “Other long-term liabilities” on our consolidated balance sheet.$59.9 million. We expect to pay the majority of theDurom Cup-related claims within the next few years. Our understanding of clinical outcomes with the Durom Cup and other large diameter hip cups continues to evolve. We rely on significant estimates in determining the provisions for DuromCup-related claims, including our estimate of the number of claims that we will receive and the average amount we will pay per claim. The actual
number of claims and the actual amount we pay per claim may differ from our estimates. Among other factors, since our understanding of the clinical outcomes is still evolving, we cannot reasonably estimate the possible loss or range of loss that may result from DuromCup-related claims in excess of the losses we have accrued. Margo and Daniel Polett v. Zimmer, Inc. et al.: On August 20, 2008, Margo and Daniel Polett filed an action against us and an unrelated third party, Public Communications, Inc. (“PCI”), in the Court of Common Pleas, Philadelphia, Pennsylvania seeking an unspecified amount of damages for injuries and loss of consortium allegedly suffered by Mrs. Polett and her spouse, respectively. The complaint alleged that defendants were negligent in connection with Mrs. Polett’s participation in a promotional video featuring one of our knee products. The case was tried in November 2010 and the jury returned a verdict in favor of plaintiffs. The jury awarded $27.6 million in compensatory damages and apportioned fault 30 percent to plaintiffs, 34 percent to us and 36 percent to PCI. Under applicable law, we may be liable for any portion of the damages apportioned to PCI that it does not pay. On December 2, 2010, we and PCI filed a motion for post-trial relief seeking a judgment notwithstanding the verdict, a new trial or a remittitur. On June 10, 2011, the trial court entered an order denying our motion for post-trial relief and affirming the jury verdict in full and entered judgment for $20.3 million against us and PCI. On June 29, 2011, we filed a notice of appeal to the Superior Court of Pennsylvania and posted a bond for the verdict amount plus interest. Oral argument before the appellate court in Philadelphia, Pennsylvania was held on March 13, 2012. On March 1, 2013, the Superior Court of Pennsylvania vacated the $27.6 million judgment and remanded the case for a new trial. On March 15, 2013, plaintiffs filed a motion forre-argumenten banc, and on March 28, 2013, we filed our response in opposition. On May 9, 2013, the Superior Court of Pennsylvania granted plaintiffs’ motion forre-argument en banc. Oral argument(re-argument en banc) before the Superior Court of
Pennsylvania was held on October 16, 2013. On December 20, 2013, the Court issued its opinion again vacating the trial court judgment and remanding the case for a new trial. On January 21, 2014, plaintiffs filed a petition for allowance of appeal in the Supreme Court of Pennsylvania, which was granted on May 21, 2014. Oral argument before the Supreme Court of Pennsylvania took place on October 8, 2014. On October 27, 2015, the Supreme Court of Pennsylvania reversed the order of the Superior Court of Pennsylvania and remanded the case to that court to consider the question of whether the trial court erred in refusing to remit the jury’s compensatory damages award. On June 6, 2016, an en bancpanel of the Superior Court of Pennsylvania vacated the $27.6 million verdict and remanded the case back to the trial court for remittitur. On December 2, 2016, the trial court remitted the verdict to $21.5 million. On December 5, 2016, we filed a notice of appeal to the Superior Court of Pennsylvania. Although we are defending this lawsuit vigorously, its ultimate resolution is uncertain. In the future, we could be required to record a charge that could have a material adverse effect on our results of operations and cash flows.
NexGen® Knee System claims: Following a wide-spread advertising campaign conducted by certain law firms beginning in 2010, a number of product liability lawsuits have been filed against us in various jurisdictions. The plaintiffs seek damages for personal injury, alleging that certain products within the NexGen Knee System suffer from defects that cause them to loosen prematurely. The majority of the cases are currently pending in a federal MDL in the Northern District of Illinois (In Re: Zimmer NexGen Knee Implant Products Liability Litigation). Other cases are pending in other state and federal courts, and additional lawsuits may be filed. As of December 31, 2016, discovery in these lawsuits was ongoing. The initial bellwether trial took place in October 2015 and resulted in a defense verdict. The next scheduled bellwether trial, which was set to commence in November 2016, was dismissed following the court’s grant of summary judgment in our favor in October 2016. The second bellwether trial took place in January 2017 and resulted in a defense verdict. We have not accrued an estimated loss relating to these lawsuits because we believe the plaintiffs’ allegations are not consistent with the record of clinical success for these products. As a result, we do not believe that it is probable that we have incurred a liability, and we cannot reasonably estimate any loss that might eventually be incurred. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain.
Zimmer M/L Taper, M/L Taper with Kinectiv Technology, and Versys Femoral Head-related claims: 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 created on October 3, 2018 in the U.S. District Court for the Southern District of New York (In Re: Zimmer M/L Taper Hip Prosthesis or M/L Taper Hip Prosthesis with Kinectiv Technology and Versys Femoral Head Products Liability Litigation). Other related cases are pending in various state and federal courts. Additional lawsuits are likely to be filed. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain. Biometmetal-on-metal hip implant claims: Biomet is a defendant in a number of product liability lawsuits relating tometal-on-metal hip implants. The majorityimplants, most of these caseswhich involve theM2a-Magnum™ hip system. The majority of the casesCases are currently consolidated in one federalan MDL proceeding in the U.S. District Court for the Northern District of Indiana(In Re: Biomet M2a Magnum Hip Implant Product Liability Litigation). Other cases are pending andin various state, federal and foreign courts. | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
courts, with the majority of domestic state court cases pending in Indiana and Florida.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On February 3, 2014, Biomet announced the settlement of the MDL. Lawsuits filed in the MDL by April 15, 2014 maywere eligible to participate in the settlement. Biomet continues to evaluateThose claims that did not settle via the inventory of lawsuitsMDL settlement program have re-commenced litigation in the MDL pursuant to the categories and procedures set forthunder a new case management plan, or are in the settlement agreement. The final amountprocess of payments under the settlement is uncertain.being remanded to their originating jurisdictions. The settlement does not affect certain other claims relating to Biomet’smetal-on-metal hip products that are pending in various state and foreign courts, or other claims that may be filed in the future. Our estimate as of December 31, 20162019 of the remaining liability for all Biometmetal-on-metal hip implant claims is $57.4$50.1 million. Biomet has exhausted the self-insured retention in its insurance program and has been reimbursed for claims related to itsmetal-on-metal products up to its policy limits in the program. Zimmer Biomet will be responsible for any amounts by which the ultimate losses exceed the amount of Biomet’s third-party insurance coverage. As of December 31, 2016, Biomet had received all of the insurance proceeds it expects to recover under the excess policies. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain.
Heraeus trade secret misappropriation lawsuits: lawsuits: In December 2008, Heraeus Kulzer GmbH (together with its affiliates, “Heraeus”) initiated legal proceedings in Germany against Biomet, Inc., Biomet Europe BV, certain other entities and certain employees alleging that the defendants misappropriated Heraeus trade secrets when developing Biomet Europe’s Refobacin and Biomet Bone Cement line of cements (“European Cements”). The lawsuit sought to preclude the defendants from producing, marketing and offering for sale their currentthen-current line of European Cements and to compensate Heraeus for any damages incurred (alleged at that time to be in excess of €30.0 million).incurred. Germany: On June 5, 2014, the German appeals court in Frankfurt (i) enjoined Biomet, Inc., Biomet Europe BV and Biomet Deutschland GmbH from manufacturing, selling or offering the European Cements to the extent they contain certain raw materials in particular specifications; (ii) held the defendants jointly and severally liable to Heraeus for any damages from the sale of European Cements since 2005; and (iii) ruled that no further review may be sought (the “Frankfurt Decision”). The Heraeus and Biomet parties both sought appeal against the Frankfurt Decision. In a decision dated June 16, 2016, the German Supreme Court dismissed the parties’ appeals without reaching the merits, rendering that decision final. In December 2016, Heraeus filed papers to restart proceedings against Biomet Orthopaedics Switzerland GmbH, seeking to require that entity to relinquish its CE certificates for the European Cements. In January 2017, Heraeus notified Biomet it had filed a claim for damages in the amount of €121.9 million for sales in Germany.Germany, which it first increased to €125.9 million and with a filing in June 2019 further increased to €146.7 million plus statutory interest. As of December 31, 2019, these two proceedings remained pending in front of the dateDarmstadt court. In September 2017, Heraeus filed an enforcement action in the Darmstadt court against Biomet Europe, requesting that a fine be imposed against Biomet Europe for failure to disclose the amount of filingthe European Cements which Biomet Orthopaedics Switzerland had ordered to be manufactured in Germany (e.g., for the Chinese market). In June 2018, the Darmstadt court dismissed Heraeus’ request. Heraeus appealed the decision. Also in September 2017, Heraeus filed suit against Zimmer Biomet Deutschland in the court of first instance in Freiberg concerning the sale of the European Cements with certain changed raw materials. Heraeus seeks an injunction on the basis that the continued use of the product names for the European Cements is misleading for customers and thus an act of unfair competition. On June 29, 2018, the court in Freiberg, Germany dismissed Heraeus’ request for an injunction prohibiting the marketing of the European Cements under their current names on the grounds that the same request had already been decided upon by the Frankfurt Decision which became final and binding. Heraeus has appealed this report,decision to the Biomet entities had not yet been served formally with that claim.Court of Appeals in Karlsruhe, Germany. The appeals hearing occurred in December 2019.
United States: On September 8, 2014, Heraeus filed a complaint against a Biomet supplier, Esschem, Inc. (“Esschem”), in the United StatesU.S. District Court for the Eastern District of Pennsylvania. The lawsuit containscontained allegations that focusfocused on two copolymer compounds that Esschem sellssold to Biomet, which Biomet incorporatesincorporated into certain bone cement products that compete with Heraeus’ bone cement products. The complaint allegesalleged that Biomet helped Esschem to develop these copolymers, using Heraeus trade secrets that Biomet allegedly misappropriated. The complaint assertsasserted a claim under the Pennsylvania Uniform Trade Secrets Act, as well as other various common law tort claims, all based upon the same trade secret misappropriation theory. Heraeus is seekingsought to enjoin Esschem from supplying the copolymers to any third party and actual damages in an unspecified amount.damages. The complaint also seekssought punitive damages, costs and attorneys’ fees. If Esschem is enjoined,Although Biomet maywas not be able to obtain the copolymers from another supplier and as a result may not be able to continue to manufacture the subject bone cement products. Although Heraeus has not named Biomet as a party to this lawsuit, Biomet has agreed, at Esschem’s request and subject to certain limitations, to indemnify Esschem for any liability, damages and legal costs related to this matter. On November 3, 2014, the court entered an order denying Heraeus’ motion for a temporary restraining order. On June 30, 2016, the court entered an order denying Heraeus’ request to give preclusive effect to the factual findings in the Frankfurt Decision. A trial is scheduledOn June 6, 2017, the court entered an order denying Heraeus’ motion to commenceadd Biomet as a party to the lawsuit. On January 26, 2018, the court entered an order granting Esschem’s motion for summary judgment and dismissed all of Heraeus’ claims with prejudice. On February 21, 2018, Heraeus filed a notice of appeal to the U.S. Court of Appeals for the Third Circuit, which heard oral argument on the appeal on October 23, 2018. On June 19, 2017.21, 2019, the Third Circuit partially reversed the decision of the U.S. District Court for the Eastern District of Pennsylvania granting Esschem summary judgment and remanded the case back to the lower court. On July 5, 2019, Esschem filed a petition in the Third Circuit for rehearing en banc and a motion in the alternative to certify a question of state law to the Supreme Court of Pennsylvania, which was denied on August 1, 2019. On December 7, 2017, Heraeus filed a complaint against Zimmer Biomet Holdings, Inc. and Biomet, Inc. in the U.S. District Court for the Eastern District of Pennsylvania alleging a single claim of trade secret misappropriation under the Pennsylvania Uniform Trade Secrets Act based on the same factual allegations as the Esschem litigation. On March 5, 2018, Heraeus filed an amended complaint adding a second claim of trade secret misappropriation under Pennsylvania common law. Heraeus seeks to enjoin the Zimmer Biomet parties from future use of the allegedly misappropriated trade secrets and recovery of unspecified damages for alleged past use. On April 18, 2018, the Zimmer Biomet parties filed a motion to dismiss both claims. On March 8, 2019, the court stayed the case pending the Third Circuit’s decision in the Esschem case described above. In September 2019, the Zimmer Biomet parties filed a motion to stay the proceedings pending (1) the court’s decision on Esschem’s motion for summary judgment in the Esschem case described above and (2) the outcome of the U.S. International Trade Commission complaint filed by Heraeus asserting similar claims, described below under “Regulatory Matters, Government Investigations and Other Matters.” The Zimmer Biomet parties’ motion remained pending as of December 31, 2019. Other European Countries: Heraeus continues to pursue other related legal proceedings in Europe seeking various forms of relief, including injunctive relief and damages, against Biomet-related entities relating to the European Cements. On October 2, 2018, the Belgian Court of Appeal of Mons issued a judgment in favor of Heraeus relating to its request for past damages caused by the alleged misappropriation of its trade secrets, and an injunction preventing future sales of certain European Cements in Belgium (the “Belgian Decision”). We appealed this judgment to the Belgian Supreme Court. The Belgian Supreme Court dismissed our appeal in October 2019 and this decision is final. Heraeus filed a suit in Belgium concerning the continued sale of the European Cements with certain changed materials. Like its suit in Germany, Heraeus seeks an injunction on the basis that the continued use of the product names for the European Cements is misleading for customers and thus an act of unfair competition. On May 7, 2019, the Liège Commercial Court issued a judgment that Zimmer Biomet failed to inform its hospital and surgeon customers of the changes made to the composition of the cement with certain changed materials and ordered, as a sole remedy, that Zimmer Biomet send letters to those customers, which we have done. We and Heraeus have each filed an appeal to the judgment. On February 13, 2019, a Norwegian court of first instance issued a judgment in favor of Heraeus on its claim for misappropriation of trade secrets. The court awarded damages of 19,500,000 NOK, or approximately $2.3 million, plus attorneys’ fees, and issued an injunction, which is not final and thus not currently being enforced, preventing Zimmer Biomet Norway from marketing in Norway bone cements identified with the current product names and bone cements making use of the trade secrets which were acknowledged in the Frankfurt Decision. We have appealed the Norwegian judgment to the court of second instance. On October 29, 2019, an Italian court of first instance issued a judgment in favor of Heraeus on its claim of misappropriation of trade secrets, but did not yet order an award of damages. We intend to appeal the decision. Heraeus is pursuing damages and injunctive relief in France in an effort to prevent us from manufacturing, marketing and selling the European Cements (the “France Litigation”). The European Cements are manufactured at
our facility in Valence, France. On December 11, 2018, a hearing was held in the France Litigation before the commercial court in Romans-sur-Isère. On May 23, 2019, the commercial court ruled in our favor. On July 12, 2019, Hereaus filed an appeal to the court of second instance in Grenoble, France. Although we are vigorously defending the France Litigation, the ultimate outcome is uncertain. An adverse ruling in the France Litigation could have a material adverse effect on our business, financial condition and results of operations. We have accrued an estimated loss relating to the Frankfurt Decision, but have not recognized any losses for Heraeus-related lawsuits in other jurisdictions because we do not believe it is probable that we have incurred a liability, and we cannot reasonably estimate any loss that might eventually be incurred.collective trade secret litigation, including estimated legal costs to defend. Damages relating to the Frankfurt Decision are subject to separate proceedings, and the Belgian court appointed an expert to determine the amount of damages related to the Belgian Decision. Thus, it is reasonably possible that our estimate of the loss we may incur may change in the future. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain. Stryker patent infringement lawsuit: On December 10, 2010, Stryker Corporation and related entities (“Stryker”) filed suit against us in the U.S. District Court for the Western District of Michigan, alleging that certain of our Pulsavac® Plus Wound Debridement Products infringe three 3U.S. patents assigned to Stryker. The case was tried beginning on January 15, 2013, and on February 5, 2013, the jury found that we infringed certain claims of the subject patents. The jury awarded $70.0 million in monetary damages for lost profits. The jury also found that we willfully infringed the subject patents. We filed multiple post-trial motions, including a motion seeking a new trial. On August 7, 2013, the trial court issued a ruling denying all of our motions and awarded treble damages and attorneys’ fees to Stryker. We filed a notice of appeal to the Court of Appeals for the Federal Circuit to seek reversal of both the jury’s verdict and the trial court’s rulings | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
on our post-trial motions. Oral argument before the Court of Appeals for the Federal Circuit took place on September 8, 2014. On December 19, 2014, the Federal Circuit issued a decision affirming the $70.0 million lost profits award but reversed the willfulness finding, vacating the treble damages award and vacating and remanding the attorneys’ fees award. We accrued an estimated loss of $70.0 million related to this matter in the three month period ended December 31, 2014. On January 20, 2015, Stryker filed a motion with the Federal Circuit for a rehearingen banc. On March 23, 2015, the Federal Circuit denied Stryker’s petition. Stryker subsequently filed a petition for certiorari to the U.S. Supreme Court. In July 2015, we paid the final lost profits award of $90.3 million, which includes the original $70.0 million pluspre-and pre- and post-judgment interest and damages for sales that occurred post-trial but prior to our entry into a license agreement with Stryker. On October 19, 2015, the U.S. Supreme Court granted Stryker’s petition for certiorari. Oral argument took place on February 23, 2016. On June 13, 2016, the U.S. Supreme Court issued its decision, vacating the judgment of the Federal Circuit and remanding the case for further proceedings related to the willfulness issue. On September 12, 2016, the Federal Circuit issued an opinion affirming the jury’s willfulness finding and vacating and remanding the District Court’strial court’s award of treble damages, its finding that this was an exceptional case and its award of attorneys’ fees. The case is now beingwas remanded back to the District Court.trial court. Oral argument on Stryker’s renewed consolidated motion for enhanced damages and attorneys’ fees is scheduled fortook place on June 28, 2017. AlthoughOn July 12, 2017, the trial court issued an order reaffirming its award of treble damages, its finding that this was an exceptional case and its award of attorneys’ fees. On July 24, 2017, we are defending this lawsuit vigorously,appealed the ultimate resolutionruling to the Federal Circuit and obtained a supersedeas bond staying enforcement of this matter is uncertain.the judgment pending appeal. Oral argument before the Federal Circuit took place on December 3, 2018 and the Federal Circuit affirmed the trial court’s ruling in full on December 10, 2018. We accrued an estimated loss of approximately $168.0 million related to the award of treble damages and attorneys’ fees in the three-month period ended December 31, 2018. On January 23, 2019, we filed a petition with the Federal Circuit for a rehearing en banc. On March 19, 2019, the petition for rehearing en banc was denied. In late March 2019, we paid the future,outstanding judgment of approximately $168.0 million. On June 17, 2019, we could be required to recordfiled a chargepetition for certiorari seeking U.S. Supreme Court review of up to $165.0 million that could have a material adverse effect on our results of operations and cash flows.the Federal Circuit’s decision. On October 7, 2019, the U.S. Supreme Court denied certiorari. Putative Securities Class Action: On December 2, 2016, a complaint was filed in the U.S. District Court for the Northern District of Indiana (Shah v. Zimmer Biomet Holdings, Inc. et al.), naming us, and threeone of our officers and two of our now former officers as defendants. On June 28, 2017, the plaintiffs filed a corrected amended complaint, naming as defendants, in addition to those previously named, current and former members of our Board of Directors, one additional officer, and the underwriters in connection with secondary offerings of our common stock by certain selling stockholders in 2016. On October 6, 2017, the plaintiffs voluntarily dismissed the underwriters without prejudice. On October 8, 2017, the plaintiffs filed a second amended complaint, naming as defendants, in addition to those current and former officers and Board members previously named, certain former stockholders of ours who sold shares of our common stock in secondary public offerings in 2016. We and our current and former officers and Board members named as defendants are sometimes hereinafter referred to as the “Zimmer Biomet Defendant group”. The former stockholders of ours who sold shares of our common stock in secondary public offerings in 2016 are sometimes hereinafter referred to as the “Private Equity Fund Defendant group”. The second amended complaint relates to a putative class action on behalf of persons who purchased our common stock between SeptemberJune 7, 2016 and October 31,November 7, 2016. The second amended complaint generally alleges 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 failingDrug Administration (“FDA”) regulations and our ability to disclose that supply chain issues ledcontinue to a decrease in order fulfillment ratesaccelerate our organic revenue growth rate in the third quartersecond half of 2016 and would cause us to lower our revenue and earnings guidance for full-year 2016. The plaintiff seeksdefendants filed their respective motions to dismiss on December 20, 2017, plaintiffs filed their omnibus response to the motions to dismiss on March 13, 2018 and the defendants filed their respective reply briefs on May 18, 2018. On September 27, 2018, the court denied the Zimmer Biomet Defendant group’s motion to dismiss in its entirety. The court granted the Private Equity Fund Defendant group’s motion to dismiss, without prejudice. On October 9, 2018, the Zimmer Biomet Defendant group filed a motion (i) to amend the court’s order on the motion to certify two issues for interlocutory appeal, and (ii) to stay proceedings pending appeal. On February 21, 2019, that motion was denied. On April 11, 2019, the plaintiffs moved for class certification. On June 20, 2019, the Zimmer Biomet Defendant group filed its response. The plaintiffs’ motion remained pending as of February 18, 2020. The plaintiffs seek unspecified damages and interest, attorneys’ fees, costs, and other relief. WeAlthough we believe this lawsuit is without merit, during a mediation in December 2019, plaintiffs and defendants, along with Zimmer Biomet’s insurers, reached a settlement in principle to resolve the claims. We have made an accrual for the proposed settlement that we expect to be fully covered by our insurers. 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 intend to defend it vigorously.and insider trading against two individual defendants and the private equity fund defendants, based on substantially the same factual allegations as the putative federal securities class action referenced above (Shah v. Zimmer Biomet Holdings, Inc. et al.). The plaintiffs do not seek damages from us, but instead request damages on our behalf from the defendants of an unspecified amount. The plaintiffs also seek attorneys’ fees, costs and other relief. Regulatory Matters, Government Investigations and Other Matters U.S. International Trade Commission Investigation: On March 5, 2019, Heraeus filed a complaint with the U.S. International Trade Commission (“ITC”) against us and certain of our subsidiaries. The complaint alleges that Biomet misappropriated Heraeus’ trade secrets in the formulation and manufacture of two bone cement products now sold by Zimmer Biomet, both of which are imported from our Valence, France facility. Heraeus requested that the ITC institute an investigation and, after the investigation, issue a limited exclusion order and cease and desist orders. On April 5, 2019, the ITC ordered an investigation be instituted into whether we have committed an “unfair act” in the importation, sale for importation, or sale after importation of certain bone cement products, and the investigation is ongoing. An evidentiary hearing in front of an administrative law judge at the ITC was held in January 2020 and an initial determination is expected to issue by May 2020. We cannot currently predict the outcome of this investigation. An adverse outcome in this ITC proceeding could have a material adverse effect on our business, financial condition and results of operations. FDA warning letters: In August 2018, we received a warning letter from the FDA related to observed non-conformities with current good manufacturing practice requirements of the FDA’s 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”). InSeptember 2012, Zimmerwe received a warning letter from the FDA citing concerns relating to certain processes pertaining to products manufactured at our Ponce, Puerto Rico manufacturing facility. In June 2015, Biomet received a warning letter from the FDA that requested additional information to allow the FDA to evaluate the adequacy of Biomet’s responses to certain Form 483 observations issued following an inspection of Biomet’s Zhejiang, China manufacturing facility in January 2015. In May 2016, Zimmer received a warning letter from the FDA related to observed non-conformities with current good manufacturing practice requirements of the QSR at our facility in Montreal, Quebec, Canada. 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 Ponce, ZhejiangWarsaw and Montreal.Ponce. As of December 31, 2016, these2019, the Warsaw and Ponce warning letters remained pending. Until the violations cited in the pending warning letters 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 related to products manufactured at certain of our facilities may not be granted and premarket approval applications for Class III devices to which the QSR deviations at these facilities are reasonably related will not be approved until the violations have been corrected. In addition to responding to the warning letters described above, we are in the process of addressing various FDA Form 483 inspectional observations at certain of our manufacturing facilities, including at bothnew observations issued by the legacy Zimmer andFDA following an inspection of the legacy Biomet manufacturing facilitiesWarsaw North Campus in Warsaw, Indiana.January 2020. 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, onat one or more facilities, enjoining and restraining certain violations of applicable law pertaining to medical devicesproducts, 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.injunction with us. The FDA may also recommend prosecution by the DOJ.U.S. Department of Justice (“DOJ”). Any adverse regulatory action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and selling our products and could have a material adverse effect on our business, financial condition and results of operations. DPADeferred Prosecution Agreement (“DPA”) relating to FCPA matters:U.S. Foreign Corrupt Practices Act (“FCPA”) matters: On January 12, 2017, we resolved previously-disclosed FCPA matters involving Biomet and certain of its subsidiaries. As part of the settlement, (i) Biomet resolved matters with the SECU.S. Securities and Exchange Commission (the “SEC”) through an administrativecease-and-desist order (the “Order”); (ii) we entered into a DPA with the DOJ; and (iii) JERDS Luxembourg Holding S.à r.l. (“JERDS”), the direct parent company of Biomet 3i Mexico SA de CV and an indirect, wholly-owned subsidiary of Biomet, entered into a plea agreement (the “Plea Agreement”) with the DOJ. The conduct underlying these resolutions occurred prior to the Biomet merger.our acquisition of Biomet.
Pursuant to the terms of the Order, Biomet resolved claims with the SEC related to violations of the books and records, internal controls and anti-bribery provisions of the FCPA by disgorging profits to the U.S. government in an | | | ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES | | 2016 FORM 10-K ANNUAL REPORT |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
aggregate amount of approximately $6.5 million, inclusive ofpre-judgment interest, and paying a civil penalty in the amount of $6.5 million (collectively, the “Civil Settlement Payments”). We also agreed to pay a criminal penalty of approximately $17.5 million (together(together with the Civil Settlement Payments, the “Settlement Payments”) to the U.S. government pursuant to the terms of the DPA. We made the Settlement Payments in January 2017 and, as previously disclosed, had accrued, as of June 24, 2015, the closing date of the Biomet merger, an amount sufficient to cover this matter. Under the DPA, which has a term of three years, the DOJ agreed to defer criminal prosecution of us in connection with the charged violation of the internal controls provision of the FCPA as long as we comply with the terms of the DPA. In addition, we will beare subject to oversight by an independent compliance monitor, for at least 12 months.who was appointed effective as of August 7, 2017. The monitor will focus on legacy Biomet operations as integrated into our operations.monitorship may remain in place until August 7, 2020. If we remain in compliance with the DPA during its term, the charges against us will be dismissed with prejudice. The term of the DPA and monitorship may be extended for up to one additional year at the DOJ’s discretion. In addition, under its Plea Agreement with the DOJ, JERDS pleaded guilty on January 13, 2017 to aiding and abetting a violation of the books and records provision of the FCPA. In light of the DPA we entered into, JERDS paid only a nominal assessment and no criminal penalty. If we do not comply with the terms of the DPA, we could be subject to prosecution for violating the internal controls provisions of the FCPA and the conduct of Biomet and its subsidiaries described in the DPA, which conductpre-dated our acquisition of Biomet, as well as any new or continuing violations. We could also be subject to exclusion byOIG-HHS the Office of Inspector General of the Department of Health and Human Services (“OIG”) from participation in federal healthcare programs, including Medicaid and Medicare. Any of these events could have a material adverse effect on our business, financial condition, results of operations and cash flows. 21. | Quarterly Financial Information (Unaudited) |
(in millions, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2019 Quarter Ended | | | 2018 Quarter Ended | | | | Mar | | | Jun | | | Sep | | | Dec | | | Mar | | | Jun | | | Sep | | | Dec | | Net sales | | $ | 1,975.5 | | | $ | 1,988.6 | | | $ | 1,892.4 | | | $ | 2,125.7 | | | $ | 2,017.6 | | | $ | 2,007.6 | | | $ | 1,836.7 | | | $ | 2,071.0 | | Gross profit | | | 1,278.7 | | | | 1,260.4 | | | | 1,210.1 | | | | 1,396.1 | | | | 1,291.0 | | | | 1,274.4 | | | | 1,160.1 | | | | 1,339.6 | | Net earnings (loss) of Zimmer Biomet Holdings, Inc. | | | 246.1 | | | | 133.7 | | | | 431.1 | | | | 320.7 | | | | 174.7 | | | | 185.0 | | | | 162.2 | | | | (901.1 | ) | Earnings (loss) per common share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 1.20 | | | | 0.65 | | | | 2.10 | | | | 1.56 | | | | 0.86 | | | | 0.91 | | | | 0.80 | | | | (4.42 | ) | Diluted | | | 1.20 | | | | 0.65 | | | | 2.08 | | | | 1.54 | | | | 0.85 | | | | 0.90 | | | | 0.79 | | | | (4.42 | ) |
(in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 Quarter Ended | | | 2015 Quarter Ended | | | | | Mar | | | Jun | | | Sep | | | Dec | | | Mar | | | Jun | | | Sep | | | Dec | | Net sales | | $ | 1,904.0 | | | $ | 1,934.0 | | | $ | 1,832.8 | | | $ | 2,013.1 | | | $ | 1,134.4 | | | $ | 1,167.6 | | | $ | 1,762.2 | | | $ | 1,933.6 | | Gross profit | | | 1,136.8 | | | | 1,160.1 | | | | 1,189.2 | | | | 1,250.1 | | | | 829.1 | | | | 840.3 | | | | 1,087.5 | | | | 1,102.9 | | Net earnings (loss) of Zimmer Biomet Holdings, Inc. | | | 108.8 | | | | (31.3 | ) | | | 158.8 | | | | 69.6 | | | | 171.4 | | | | (173.6 | ) | | | 22.2 | | | | 127.0 | | Earnings (loss) per common share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 0.54 | | | | (0.16 | ) | | | 0.79 | | | | 0.35 | | | | 1.01 | | | | (1.00 | ) | | | 0.11 | | | | 0.62 | | Diluted | | | 0.54 | | | | (0.16 | ) | | | 0.78 | | | | 0.34 | | | | 0.99 | | | | (1.00 | ) | | | 0.11 | | | | 0.62 | |
In the three month period ended September 30, 2016, we recognized $21.0 million of tax benefits and $12.2 million of pre-tax operating expenses that were related to previous periods. The majority of the tax benefits were related to adjusting certain Biomet purchase accounting values. In the three month period ended December 31, 2016,2019, we recognized $13.0a $51.2 million of tax provisions that werebenefit related to previous periods. We have evaluatedTRAF as well as the effecttax impact of these out-of-period adjustments on the applicable interim and annual periods of 2016 and prior yearscertain restructuring transactions in which they should have been recognized, and concluded for both quantitative and qualitative reasons that these adjustments were not material to any of the periods affected.
| | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
Switzerland. In the three month period ended December 31, 2018, we recorded goodwill impairment charges of $975.9 million. | | | Item 9. | | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None. | | | Item 9A. | | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 13a-15(f)15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures.procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2016,2019, the end of the period covered by this report, our disclosure controls and procedures were not effective dueat a reasonable assurance level. Management’s Annual Report on Internal Control over Financial Reporting The management of Zimmer Biomet Holdings, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the material weaknessreliability of financial reporting and the preparation of financial statements for external purposes in ouraccordance with generally accepted accounting principles and includes those policies and procedures that: | • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting discussedmay not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in Management’s Report on Internal Control Over Financial Reporting included in item 7A. In light of this material weakness, the Company performed additional analysis and other post-closing procedures to ensure our consolidated financial statements are prepared in accordance with generally accepted
accounting principles. Accordingly, management concludedconditions, or that the financial statements included in this report fairly present in all material respects our financial condition, resultsdegree of operations and cash flows forcompliance with the periods presented.policies or procedures may deteriorate.
Remediation Plan. Management has begun implementing a remediation plan to addressThe Company’s management assessed the control deficiencies that led toeffectiveness of the material weakness. The remediation plan includes adding additional resources and strengthening our income tax controls with improved technical oversight and training. We believe these additional resources will enhance our review procedures and will effectively remediate the material weakness, but the material weakness will not be considered remediated until the applicable measures have been implemented for a sufficient period of time and management has concluded, through testing, that the enhanced control is operating effectively. As we continue to evaluate and improve ourCompany’s internal control over financial reporting we may decide to take additional measures to addressas of December 31, 2019. In making this material weakness, which may require additional implementation time. Further, we cannot provide any assuranceassessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on their assessment, management has concluded that, our remediation efforts will be successful or that ouras of December 31, 2019, the Company’s internal control over financial reporting will beis effective based on those criteria.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company’s internal control over financial reporting as a result of these efforts.December 31, 2019, as stated in its report which appears in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 20162019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As previously reported, on January 1, 2019 we adopted ASU 2016-02 – Leases (Topic 842). This ASU requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet. As a result, we added additional internal controls to comply with the new standard in the first quarter of 2019. Item 9B. | | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORTOther Information |
| | | Item 9B. | | Other Information |
During the fourth quarter of 2016, 2019, the Audit Committee of our Board of Directors was not asked to, and did not, approveapproved the engagement of PricewaterhouseCoopers LLP, our independent registered public accounting firm, to perform anycertain non-audit services. This disclosure is made pursuant to Section 10A(i)(2) of the Exchange Act. | | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
PART III | | | Item 10. | | Directors, Executive Officers and Corporate Governance |
Information required by this item is incorporated by reference from our definitive Proxy Statement for the annual meeting of stockholders to be held on May 12, 20178, 2020 (the “2017“2020 Proxy Statement”). We have adopted the Zimmer Biomet Code of Ethics for Chief Executive Officer and Senior Financial Officers (the “finance code of ethics”), a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Corporate Controller, and other finance organization senior employees. The finance code of ethics is publicly available in the Investor Relations section of our website, which may be accessed from our homepage at www.zimmerbiomet.com or directly at http:https://investor.zimmerbiomet.com. If we make any substantive amendments to the finance code of ethics or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive Officer, Chief Financial Officer, or Chief Accounting Officer and Corporate Controller, we will disclose the nature of that amendment in the Investor Relations section of our website. | | | Item 11. | | Executive Compensation |
Information required by this item is incorporated by reference from our 20172020 Proxy Statement. | | | Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information required by this item is incorporated by reference from our 20172020 Proxy Statement. | | | Item 13. | | Certain Relationships and Related Transactions and Director Independence |
Information required by this item is incorporated by reference from our 20172020 Proxy Statement. | | | Item 14. | | Principal AccountingAccountant Fees and Services |
Information required by this item is incorporated by reference from of our 20172020 Proxy Statement.
PART IV | | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
PART IV
| | | Item 15. | | Exhibits and Financial Statement Schedules |
(a) 1. | Financial Statements |
The following consolidated financial statements of Zimmer Biomet Holdings, Inc. and its subsidiaries are set forth in Part II, Item 8. Report of Independent Registered Public Accounting Firm Consolidated Statements of Earnings for the Years Ended December 31, 2016, 20152019, 2018 and 20142017 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 20152019, 2018 and 20142017 Consolidated Balance Sheets as of December 31, 20162019 and 20152018 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016, 20152019, 2018 and 20142017 Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 20152019, 2018 and 20142017 Notes to Consolidated Financial Statements | 2. | Financial Statement Schedule |
Schedule II. Valuation and Qualifying Accounts (in millions): | | | | | | Additions | | | | | | | | | | | | | | | | | | | | Balance at | | | Charged | | | Deductions / | | | Effects of | | | | | | | Balance at | | | | Beginning | | | (Credited) | | | Other Additions | | | Foreign | | | Acquired | | | End of | | Description | | of Period | | | to Expense | | | to Reserve | | | Currency | | | Allowances | | | Period | | Allowance for Doubtful Accounts: | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2017 | | $ | 51.6 | | | $ | 13.6 | | | $ | (5.1 | ) | | $ | 0.1 | | | $ | - | | | $ | 60.2 | | Year Ended December 31, 2018 | | | 60.2 | | | | 10.7 | | | | (3.6 | ) | | | (1.6 | ) | | | - | | | | 65.7 | | Year Ended December 31, 2019 | | | 65.7 | | | | 5.5 | | | | (5.3 | ) | | | (0.9 | ) | | | - | | | | 65.0 | | Deferred Tax Asset Valuation Allowances: | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2017 | | $ | 88.3 | | | $ | 41.3 | | | $ | (10.3 | ) | | $ | 2.8 | | | $ | 18.5 | | | $ | 140.6 | | Year Ended December 31, 2018 | | | 140.6 | | | | 48.2 | | | | 206.2 | | (1) | | (4.1 | ) | | | - | | | | 390.9 | | Year Ended December 31, 2019 | | | 390.9 | | | | (6.6 | ) | | | 165.7 | | (1) | | (3.9 | ) | | | - | | | | 546.1 | |
| (1) | Primarily relate to amounts generated by tax rate changes or current year activity which have offsetting changes to the associated attribute and therefore there is no resulting impact on tax expense in the consolidated financial statements. |
Other financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits and is incorporated herein by reference.
None
| | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.INDEX TO EXHIBITS
Exhibit No | | | ZIMMER BIOMET HOLDINGS, INC. | | | By: | | /s/ David C. Dvorak | | | David C. Dvorak | | | President and Chief Executive OfficerDescription |
Dated: March 1, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
3.1 | | | | | | SIGNATURE | | TITLE | | DATE | | | | /s/ David C. Dvorak
David C. Dvorak
| | President, Chief Executive Officer and Director (Principal Executive Officer) | | March 1, 2017 | | | | /s/ Daniel P. Florin
Daniel P. Florin
| | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | | March 1, 2017 | | | | /s/ Tony W. Collins
Tony W. Collins
| | Vice President, Corporate Controller and Chief Accounting
Officer (Principal Accounting Officer)
| | March 1, 2017 | | | | /s/ Christopher B. Begley
Christopher B. Begley
| | Director | | March 1, 2017 | | | | /s/ Betsy J. Bernard
Betsy J. Bernard
| | Director | | March 1, 2017 | | | | /s/ Paul M. Bisaro
Paul M. Bisaro
| | Director | | March 1, 2017 | | | | /s/ Gail K. Boudreaux
Gail K. Boudreaux
| | Director | | March 1, 2017 | | | | /s/ Michael J. Farrell
Michael J. Farrell
| | Director | | March 1, 2017 | | | | /s/ Larry C. Glasscock
Larry C. Glasscock
| | Director | | March 1, 2017 | | | | /s/ Robert A. Hagemann
Robert A. Hagemann
| | Director | | March 1, 2017 | | | | /s/ Arthur J. Higgins
Arthur J. Higgins
| | Director | | March 1, 2017 | | | | /s/ Michael W. Michelson
Michael W. Michelson
| | Director | | March 1, 2017 | | | | /s/ Cecil B. Pickett, Ph.D.
Cecil B. Pickett, Ph.D.
| | Director | | March 1, 2017 | | | | /s/ Jeffrey K. Rhodes
Jeffrey K. Rhodes
| | Director | | March 1, 2017 |
| | | ZIMMER BIOMET HOLDINGS, INC. | | 2016 FORM 10-K ANNUAL REPORT |
INDEX TO EXHIBITS
| | | Exhibit No | | Description† | 2.1 | | Agreement and Plan of Merger, dated as of June 6, 2016, by and among Zimmer Biomet Holdings, Inc., LH Merger Sub, Inc. and LDR Holding Corporation (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form8-K filed June 7, 2016) | 3.1 | | Restated Certificate of Incorporation of Zimmer Biomet Holdings, Inc., dated June 24, 2015 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form8-K filed June 26, 2015) | 3.2 | | RestatedBy-Laws of Zimmer Biomet Holdings, Inc., effective June 24, 2015 dated October 11, 2019 (incorporated by reference to Exhibit 3.33.1 to the Registrant’s Current Report on Form8-K filed June 26, 2015) October 11, 2019) | 4.1 | | Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934 | 4.2 | | Specimen Common Stock certificateCertificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form10-Q filed August 10, 2015)5, 2019) | 4.24.3 | | Indenture dated as of November 17, 2009 between Zimmer Holdings, Inc. (now known as Zimmer Biomet Holdings, Inc.) and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form8-K filed December 13, 2016) | 4.34.4 | | First Supplemental Indenture to the Indenture dated as of November 17, 2009 between Zimmer Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form8-K filed November 17, 2009) | 4.44.5 | | Form of 4.625% Note due 2019 (incorporated by reference to Exhibit 4.3 above) | 4.5 | | Form of 5.750% Note due 2039 (incorporated by reference to Exhibit 4.34.4 above) | 4.6 | | Second Supplemental Indenture dated as of November 10, 2011, to the Indenture dated as of November 17, 2009 between Zimmer Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form8-K filed November 10, 2011) | 4.7 | | Form of 3.375% Note due 2021 (incorporated by reference to Exhibit 4.6 above) | 4.8 | | Third Supplemental Indenture, dated as of March 19, 2015, to the Indenture dated as of November 17, 2009 between Zimmer Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form8-K filed March 19, 2015) | 4.9 | | Form of 1.450% Notes due 2017 (incorporated by reference to Exhibit 4.8 above) | 4.10 | | Form of 2.000% Notes due 2018 (incorporated by reference to Exhibit 4.8 above) | 4.11 | | Form of 2.700% Notes due 2020 (incorporated by reference to Exhibit 4.8 above) | 4.124.10 | | Form of 3.150% Notes due 2022 (incorporated by reference to Exhibit 4.8 above) | 4.134.11 | | Form of 3.550% Notes due 2025 (incorporated by reference to Exhibit 4.8 above) | 4.144.12 | | Form of 4.250% Notes due 2035 (incorporated by reference to Exhibit 4.8 above) | 4.154.13 | | Form of 4.450% Notes due 2045 (incorporated by reference to Exhibit 4.8 above) | 4.164.14 | | Fourth Supplemental Indenture, dated as of December 13, 2016, between Zimmer Biomet Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form8-K filed December 13, 2016) | 4.174.15 | | Form of 1.414% Notes due 2022 (incorporated by reference to Exhibit 4.14 above) | 4.16 | | Form of 2.425% Notes due 2026 (incorporated by reference to Exhibit 4.14 above) | 4.17 | | Agency Agreement, dated as of December 13, 2016, by and among Zimmer Biomet Holdings, Inc., as issuer, Elavon Financial Services DAC, UK Branch, as paying agent, Elavon Financial Services DAC, as registrar and transfer agent, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form8-K filed December 13, 2016) | 4.18 | | Amendment No. 1, dated as of January 4, 2017, to the Agency Agreement dated as of December 13, 2016, by and among Zimmer Biomet Holdings, Inc., as issuer, Elavon Financial Services DAC, UK Branch, as paying agent, Elavon Financial Services DAC, as original registrar and original transfer agent, U.S. Bank National Association, as successor registrar and successor transfer agent, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form8-A filed January 4, 2017) | 4.19 | | FormFifth Supplemental Indenture, dated as of 1.414% Notes due 2022March 19, 2018, between Zimmer Biomet Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.16 above) | 4.20 | | Form of 2.425% Notes due 2026 (incorporated by reference to Exhibit 4.16 above) | 10.1* | | Zimmer Holdings, Inc. 2006 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.14.2 to the Registrant’s Current Report on Form8-K filed December 13, 2006)March 19, 2018) | 10.2*4.20 | | Form of Floating Rate Notes due 2021 (incorporated by reference to Exhibit 4.19 above) | 4.21 | | Form of 3.700% Notes due 2023 (incorporated by reference to Exhibit 4.19 above) | 4.22 | | Sixth Supplemental Indenture, dated as of November 15, 2019, between Zimmer Biomet Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed November 15, 2019) |
4.23 | | Form of 1.164% Notes due 2027 (incorporated by reference to Exhibit 4.22 above) | 4.24 | | Agency Agreement, dated as of November 15, 2019, by and between Zimmer Biomet Holdings, Inc., as issuer, Elavon Financial Services DAC, UK Branch, as paying agent, U.S. Bank National Association, as transfer agent and registrar, and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed on November 15, 2019) | 10.1* | | Zimmer Biomet Holdings, Inc. Executive Performance Incentive Plan, as amended May 7, 2013 and further amended as of June 24, 2015 (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form10-Q filed November 9, 2015) |
| | | ZIMMER BIOMET HOLDINGS, INC.10.2* | | 2016 FORM 10-K ANNUAL REPORT |
| | | Exhibit No | | Description† | 10.3* | | Amendment to Zimmer Biomet Holdings, Inc. Executive Performance Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed January 7, 2016) | 10.4*10.3* | | Zimmer Biomet Deferred Compensation Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed January 7, 2016) | 10.4* | | Restated Zimmer Biomet Holdings, Inc. Long Term Disability Income Plan for Highly Compensated Employees (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form8-K filed January 7, 2016) | 10.5* | | Change in Control Severance Agreement with David C. Dvorak (incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form10-K filed February 28, 2009) | 10.6* | | Change in Control Severance Agreement with KatarzynaMazur-Hofsaess (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form10-Q filed August 7, 2013) | 10.7* | | Form of Change in Control Severance Agreement with Chad F. Phipps (incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form10-K filed February 28, 2009) | 10.8* | | Form of Change in Control Severance Agreement with Daniel P. Florin, Tony W. Collins, Adam R. Johnson, David A. Nolan, Jr. and Daniel E. Williamson (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form10-Q filed August 10, 2015) | 10.9* | | Change in Control Severance Agreement with Sang Yi (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form10-Q filed November 9, 2015) | 10.10* | | Form of Change in Control Severance Agreement with Robert D. Delp | 10.11* | | Restated Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Savings and Investment Program (incorporated by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form10-K filed February 28,27, 2009) | 10.12*10.6* | | First Amendment to the Restated Benefit Equalization Plan of Zimmer Holdings, Inc. and its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Savings and Investment Program (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form8-K filed January 7, 2016) | 10.13*10.7* | | Restated Benefit Equalization PlanOffer Letter, dated as of December 18, 2017, by and between Zimmer Biomet Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income PlanBryan C. Hanson (incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form10-K filed February 28, 2009) | 10.14* | | First Amendment to the Restated Benefit Equalization Plan of Zimmer Holdings, Inc. and its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan (incorporated by reference to Exhibit 10.510.1 to the Registrant’s Current Report on Form8-K filed January 7, 2016)December 21, 2017) | 10.15*10.8* | | Form of Confidentiality,Non-Competition andNon-SolicitationChange in Control Severance Agreement with U.S.-BasedBryan C. Hanson (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed December 21, 2017) | 10.9* | | Chief Executive OfficersOfficer Confidentiality, Intellectual Property, Non-Competition and Non-Solicitation Agreement with Bryan C. Hanson (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form8-K filed June 26, 2015)December 21, 2017) | 10.16*10.10* | | Confidentiality,Non-CompetitionOffer Letter by andNon-Solicitation between Zimmer Biomet Holdings, Inc. and Ivan Tornos dated as of October 11, 2018 (incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K filed February 26, 2019) | 10.11* | | Form of Change in Control Severance Agreement with KatarzynaMazur-HofsaessSuketu Upadhyay, Ivan Tornos and Carrie Nichol (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K filed February 26, 2019) | 10.12* | | Form of Confidentiality, Non-Competition and Non-Solicitation Agreement with Suketu Upadhyay, Ivan Tornos and Carrie Nichol (incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K filed February 26, 2019) | 10.13* | | Swiss Employment Agreement by and between Zimmer GmbH and Didier Deltort dated as of June 28, 2018 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed November 1, 2018) | 10.14* | | Offer Letter by and between Zimmer Biomet Holdings, Inc. and Didier Deltort dated as of June 28, 2018 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed November 1, 2018) | 10.15* | | Change in Control Severance Agreement by and between Zimmer GmbH and Didier Deltort dated as of October 9, 2018 (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed November 1, 2018) | 10.16* | | Confidentiality, Non-Competition and Non-Solicitation Agreement by and between Zimmer GmbH and Didier Deltort dated as of June 28, 2018 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed November 1, 2018) | 10.17* | | Form of Change in Control Severance Agreement with Daniel P. Florin (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form10-Q filed August 7, 2013)10, 2015) | 10.17*10.18* | | Change in Control Severance Agreement with Sang Yi (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed November 9, 2015) | 10.19* | | Form of Change in Control Severance Agreement with Chad F. Phipps (incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed February 27, 2009) | 10.20* | | Offer Letter between Zimmer Biomet Holdings, Inc. and Suketu Upadhyay dated June 13, 2019 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 19, 2019) |
10.21* | | Form of Confidentiality,Non-Competition andNon-Solicitation Agreement with Daniel P. Florin (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed November 6, 2017) | 10.22* | | Confidentiality, Non-Competition and Non-Solicitation Agreement with Sang Yi (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form10-Q filed November 9, 2015) | 10.18*10.23* | | Form of Confidentiality,Non-Competition andNon-Solicitation Agreement with Robert D. Delp Chad F. Phipps (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed June 26, 2015) | 10.19*10.24* | | Restated Zimmer Biomet Holdings, Inc. Executive Severance Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 6, 2018) | 10.25* | | Zimmer Biomet Holdings, Inc. Amended Stock Plan forNon-Employee Directors, as amended May 5, 2015 and further amended as of June 24, 2015 (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form10-Q filed November 9, 2015) | 10.20*10.26* | | Form of Nonqualified Stock Option Award Letter under the Zimmer Biomet Holdings, Inc. Stock Plan forNon-Employee Directors (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form8-K filed April 5, 2005) | 10.21*10.27* | | Form of Restricted Stock Unit Award Letter under the Zimmer Biomet Holdings, Inc. Stock Plan forNon-Employee Directors (incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form10-K filed February 29, 2016) | 10.22*10.28* | | Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form8-K filed December 13, 2006) | 10.23* | | Amended and Restated Zimmer Biomet Holdings, Inc. Deferred Compensation Plan forNon-Employee Directors, as amended May 5, 2015 and further amended as of June 24, 2015 (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form10-Q filed November 9, 2015) | 10.24*10.29* | | Form of Indemnification Agreement with Non-Employee Directors and Officers (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 31, 2008) | 10.30* | | Zimmer Biomet Deferred CompensationHoldings, Inc. Executive Physical Sub Plan (incorporated by reference to Exhibit 10.310.47 to the Registrant’s CurrentAnnual Report on Form8-K 10-K filed January 7, 2016) |
| | February 26, 2019) | ZIMMER BIOMET HOLDINGS, INC.10.31* | | 2016 FORM 10-K ANNUAL REPORT |
| | | Exhibit No | | Description† | 10.25* | | Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan (As Amended on May 3, 2016) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed May 9, 2016) | 10.26*10.32* | | Form of Nonqualified Stock Option Award LetterAgreement (four-year vesting) under the Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form10-K filed February 29, 2016) | 10.27*10.33* | | Form of RestrictedNonqualified Stock UnitOption Award Letter(two-yearAgreement (two-year vesting) under the Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.3010.37 to the Registrant’s Annual Report on Form10-K filed February 23, 2015) 27, 2018) | 10.28*10.34* | | Form of Performance-Based Restricted Stock Unit Award Letter (three-year performance period)Agreement under the Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report on Form10-K filed February 29, 2016) | 10.29*10.35* | | Form of IndemnificationPerformance-Based Restricted Stock Unit Award Agreement withNon-Employee Directors and Officers(2018) under the Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s CurrentQuarterly Report on Form8-K 10-Q filed July 31, 2008) May 8, 2018) | 10.30*10.36* | | SettlementForm of Performance-Based Restricted Stock Unit Award Agreement between(2019) under the Zimmer Pte Ltd and Stephen Ooi Hong Liang datedBiomet Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K filed February 5, 201626, 2019) | 10.37* | | Form of Performance-Based Restricted Stock Unit Award Agreement (2020) under the Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan | 10.38* | | Form of Restricted Stock Unit Award Agreement (four-year vesting) under the Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan | 10.39* | | Form of Restricted Stock Unit Award Agreement (two-year cliff vesting) under the Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form10-Q filed May 10, 2016)August 6, 2018) | 10.31*10.40* | | Form of Nonqualified Stock Option Award Agreement by and between Stephen Ooi Hong Liang,(Hanson one-time award) under the Zimmer Pte Ltd and Zimmer,Biomet Holdings, Inc. dated February 5, 20162009 Stock Incentive Plan (incorporated by reference to Exhibit 10.310.4 to the Registrant’s QuarterlyCurrent Report on Form10-Q 8-K filed May 10, 2016) December 21, 2017) | 10.3210.41* | | Term LoanForm of Performance-Based Restricted Stock Unit Award Agreement ¥11,700,000,000 dated as(Hanson one-time award) under the Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed December 21, 2017) |
10.42* | | Form of May 24, 2012Restricted Stock Unit Award Agreement (Hanson one-time award) under the Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed December 21, 2017) | 10.43* | | Form of Performance-Based Restricted Stock Unit Award Agreement (Upadhyay one-time award) under the Zimmer Biomet Holdings, Inc. 2009 Stock Incentive Plan | 10.44* | | Aircraft Time Sharing Agreement by and between Zimmer, Inc. and Bryan C. Hanson (incorporated by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K filed February 27, 2018) | 10.45* | | First Amendment to Aircraft Time Sharing Agreement by and between Zimmer, Inc. and Bryan C. Hanson (incorporated by reference to Exhibit 10.1 to the Registrant’s CurrentQuarterly Report on Form8-K 10-Q filed May 31, 2012)August 5, 2019) | 10.3310.46 | | Letter of Guarantee dated as of May 24, 2012 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form8-K filed May 31, 2012) | 10.34 | | First Amendment, dated October 31, 2014, to the ¥11,700,000,000 Term Loan Agreement dated as of May 24, 2012 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed November 5, 2014) | 10.35 | | Credit Agreement, dated as of September 30, 2016,November 1, 2019, among Zimmer Biomet Holdings, Inc., Zimmer Biomet G.K., ZB InvestmentZimmer Luxembourg II S.à r.l.À.R.L., the other borrowing subsidiaries referred to therein, JPMorgan Chase Bank, N.A., as General Administrative Agent, JPMorgan Chase Bank, N.A., Tokyo Branch, as Japanese Administrative Agent, J.P. Morgan Europe Limited, as European Administrative Agent, and the lenders named thereinparty thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed November 5, 2019) | 10.47 | | Term Loan Agreement ¥21,300,000,000, dated as of September 22, 2017, between Zimmer Biomet G.K. and Sumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed October 5, 2016)September 28, 2017) | 10.3610.48 | | CreditAmended and Restated Term Loan Agreement ¥11,700,000,000, dated as of May 29, 2014, amongSeptember 22, 2017, between Zimmer Holdings, Inc., Zimmer K.K., Zimmer Investment Luxembourg S.à r.l., the borrowing subsidiaries referred to therein, JPMorgan Chase Bank, N.A., as General Administrative Agent, JPMorgan Chase Bank, N.A., Tokyo Branch, as Japanese Administrative Agent, J. P. Morgan Europe Limited, as European Administrative Agent,Biomet G.K. and the lenders named thereinSumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form8-K filed June 4, 2014) September 28, 2017) | 10.3710.49 | | First Amendment, dated as of September 30, 2016,April 23, 2018, to the Amended and Restated Term Loan Agreement ¥11,700,000,000 dated as of September 22, 2017 between Zimmer Biomet G.K. and Sumitomo Mitsui Banking Corporation | 10.50 | | Amended and Restated Letter of Guarantee, dated as of September 22, 2017, made by Zimmer Biomet Holdings, Inc. in favor of Sumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed September 28, 2017) | 10.51 | | Credit Agreement, dated as of May 29, 2014December 14, 2018, among Zimmer Biomet Holdings, Inc., Zimmer Biomet G.K., ZB Investment Luxembourg S.à r.l., the borrowing subsidiaries from time to time party thereto, JPMorgan Chase Bank of America, N.A., as General Administrative Agent, JPMorgan Chase Bank, N.A., Tokyo Branch, as Japanese Administrative Agent, and J.P. Morgan Europe Limited, as European Administrative Agent, and the lenders from time to time party thereto (incorporated by reference to Exhibit 10.210.1 to the Registrant’s Current Report on Form8-K filed October 5, 2016)December 20, 2018) | 10.3810.52 | | Deferred Prosecution Agreement, dated as of January 12, 2017, between Zimmer Biomet Holdings, Inc. and the U.S. Department of Justice, Criminal Division, Fraud Section (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed January 18, 2017) | 10.3910.53 | | OrderInstituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities and Exchange Act of 1934, Making Findings and Imposinga Cease-and-Desist Order against Biomet, Inc., dated January 12, 2017 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form8-K filed January 18, 2017) | 10.4010.54 | | Plea Agreement, dated as of January 12, 2017, between JERDS Luxembourg Holding S.à r.l. and the U.S. Department of Justice, Criminal Division, Fraud Section (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form8-K filed January 18, 2017) | 21 | | List of Subsidiaries of Zimmer Biomet Holdings, Inc. | 23 | | Consent of PricewaterhouseCoopers LLP | 31.1 | | Certification pursuant to Rule13a-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 Rule13a-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 |
| | | ZIMMER BIOMET HOLDINGS, INC.32 | | 2016 FORM 10-K ANNUAL REPORT |
101.INS101 | | 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.LAB101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | Management contract or compensatory plan or arrangement. |
Item 16. | Form 10-K Summary |
None
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | ZIMMER BIOMET HOLDINGS, INC. | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | By: | | /s/ Bryan Hanson | Dated: February 21, 2020 | | | | Bryan Hanson | | | | | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE | | TITLE | | DATE | /s/ Bryan Hanson | | President, Chief Executive Officer and Director | | February 21, 2020 | Bryan Hanson | | (Principal Executive Officer) | | | | | | | | /s/ Suketu Upadhyay | | Executive Vice President and Chief Financial Officer | | February 21, 2020 | Suketu Upadhyay | | (Principal Financial Officer) | | | | | | | | /s/ Carrie Nichol | | Vice President, Controller and Chief Accounting Officer | | February 21, 2020 | Carrie Nichol | | (Principal Accounting Officer) | | | | | | | | /s/ Christopher Begley | | Director | | February 21, 2020 | Christopher Begley | | | | | | | | | | /s/ Betsy Bernard | | Director | | February 21, 2020 | Betsy Bernard | | | | | | | | | | /s/ Gail Boudreaux | | Director | | February 21, 2020 | Gail Boudreaux | | | | | | | | | | /s/ Michael Farrell | | Director | | February 21, 2020 | Michael Farrell | | | | | | | | | | /s/ Larry Glasscock | | Director | | February 21, 2020 | Larry Glasscock | | | | | | | | | | /s/ Robert Hagemann | | Director | | February 21, 2020 | Robert Hagemann | | | | | | | | | | /s/ Arthur Higgins | | Director | | February 21, 2020 | Arthur Higgins | | | | | | | | | | | | Director | | February 21, 2020 | Maria Teresa Hilado | | | | | | | | | | /s/ Syed Jafry | | Director | | February 21, 2020 | Syed Jafry | | | | | | | | | | /s/ Michael Michelson | | Director | | February 21, 2020 | Michael Michelson | | | | | | | | | | | | | | | | | | | |
† Unless otherwise indicated, exhibits incorporated by reference herein were originally filed under SEC FileNo. 001-16407.105
* Management contract or compensatory plan or arrangement.
SCHEDULE II
ZIMMER HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | Description | | Balance at
Beginning
of Period | | | Additions
Charged
(Credited)
to Expense | | | Deductions
to Reserve | | | Effects of
Foreign
Currency | | | Acquired
Allowances | | | Balance
at End of
Period | | Allowance for Doubtful Accounts: | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2014 | | $ | 22.7 | | | $ | 2.0 | | | $ | (1.4 | ) | | $ | (1.0 | ) | | $ | – | | | $ | 22.3 | | Year Ended December 31, 2015 | | | 22.3 | | | | 13.5 | | | | (0.4 | ) | | | (1.3 | ) | | | – | | | | 34.1 | | Year Ended December 31, 2016 | | | 34.1 | | | | 22.3 | | | | (4.5 | ) | | | (0.3 | ) | | | – | | | | 51.6 | | Deferred Tax Asset Valuation Allowances: | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2014 | | $ | 42.7 | | | $ | 74.7 | | | $ | (9.2 | ) | | $ | – | | | $ | 14.6 | | | $ | 122.8 | | Year Ended December 31, 2015 | | | 122.8 | | | | (53.7 | ) | | | (5.6 | ) | | | (1.6 | ) | | | 10.8 | | | | 72.7 | | Year Ended December 31, 2016 | | | 72.7 | | | | 24.8 | | | | (12.4 | ) | | | (1.1 | ) | | | 4.3 | | | | 88.3 | |
84
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