e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
Commission File Number
001-16407
ZIMMER HOLDINGS, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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13-4151777
(IRS Employer
Identification No.)
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345 East Main Street, Warsaw, IN 46580
(Address of principal executive
offices)
Telephone:
(574) 267-6131
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of October 20, 2009, 212,979,017 shares of the
registrants $.01 par value common stock were
outstanding.
ZIMMER
HOLDINGS, INC.
INDEX TO
FORM 10-Q
September 30,
2009
2
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Item 1.
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Financial
Statements
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ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
(In millions, except per share amounts,
unaudited)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2009
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2008
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2009
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2008
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Net Sales
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$
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975.6
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$
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952.2
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$
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2,988.1
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$
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3,090.9
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Cost of products sold
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249.3
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237.2
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716.4
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754.2
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Gross Profit
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726.3
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715.0
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2,271.7
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2,336.7
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Research and development
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52.1
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47.9
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153.8
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144.0
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Selling, general and administrative
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413.0
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403.7
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1,269.0
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1,269.5
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Certain claims (Note 14)
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35.0
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47.5
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35.0
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47.5
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Acquisition, integration, realignment and other (Note 2)
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22.2
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5.6
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65.7
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25.4
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Net curtailment and settlement (Note 11)
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(32.1
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)
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Operating expenses
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522.3
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504.7
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1,491.4
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1,486.4
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Operating Profit
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204.0
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210.3
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780.3
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850.3
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Interest and other income (expense), net
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(4.2
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)
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28.2
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(11.9
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)
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36.0
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Earnings before income taxes
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199.8
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238.5
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768.4
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886.3
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Provision for income taxes
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49.9
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23.5
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206.2
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204.4
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Net earnings
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149.9
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215.0
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562.2
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681.9
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Less: Net earnings attributable to noncontrolling interest
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(0.3
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)
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(0.8
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)
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Net Earnings of Zimmer Holdings, Inc.
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$
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149.9
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$
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214.7
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$
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562.2
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$
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681.1
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Earnings Per Common Share
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Basic
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$
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0.70
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$
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0.96
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$
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2.60
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$
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2.98
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Diluted
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$
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0.70
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$
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0.95
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$
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2.59
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$
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2.97
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Weighted Average Common Shares Outstanding
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Basic
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213.6
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224.7
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216.6
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228.5
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Diluted
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214.5
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225.6
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217.4
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229.7
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The accompanying notes are an integral part of these
consolidated financial statements.
3
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
(In millions, except share amounts,
unaudited)
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September 30 ,
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December 31,
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2009
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2008
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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439.7
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$
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212.6
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Restricted cash
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2.8
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2.7
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Accounts receivable, less allowance for doubtful accounts
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743.2
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732.8
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Inventories, net
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972.1
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928.3
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Prepaid expenses and other current assets
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65.5
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103.9
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Deferred income taxes
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225.5
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198.3
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Total current assets
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2,448.8
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2,178.6
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Property, plant and equipment, net
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1,239.7
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1,264.1
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Goodwill
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2,883.2
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2,774.8
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Intangible assets, net
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873.9
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872.1
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Other assets
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202.5
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149.4
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Total Assets
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$
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7,648.1
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$
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7,239.0
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current Liabilities:
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Accounts payable
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$
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121.0
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$
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186.4
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Income taxes payable
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15.6
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6.6
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Other current liabilities
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540.1
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578.1
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Total current liabilities
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676.7
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771.1
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Other long-term liabilities
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392.5
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353.9
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Long-term debt
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600.2
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460.1
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Total Liabilities
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1,669.4
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1,585.1
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Commitments and Contingencies (Note 14)
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Stockholders Equity:
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Zimmer Holdings, Inc. Stockholders Equity:
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Common stock, $0.01 par value, one billion shares
authorized, 253.9 million shares issued in 2009
(253.7 million in 2008)
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2.5
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2.5
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Paid-in capital
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3,197.9
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3,138.5
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Retained earnings
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4,947.7
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4,385.5
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Accumulated other comprehensive income
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351.2
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240.0
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Treasury stock, 40.9 million shares in 2009
(30.1 million in 2008)
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(2,520.6
|
)
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(2,116.2
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)
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Total Zimmer Holdings, Inc. stockholders equity
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5,978.7
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5,650.3
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Noncontrolling interest
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3.6
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Total Stockholders Equity
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5,978.7
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5,653.9
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Total Liabilities and Stockholders Equity
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$
|
7,648.1
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$
|
7,239.0
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The accompanying notes are an integral part of these
consolidated financial statements.
4
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
(In millions, unaudited)
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Zimmer Holdings, Inc. Stockholders
|
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Accumulated
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Other
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Total
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Common Shares
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Paid-in
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Retained
|
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Comprehensive
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Treasury Shares
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Noncontrolling
|
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Stockholders
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Number
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Amount
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Capital
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Earnings
|
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Income
|
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Number
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Amount
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Interest
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Equity
|
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Balance January 1, 2009
|
|
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253.7
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$
|
2.5
|
|
|
$
|
3,138.5
|
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|
$
|
4,385.5
|
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$
|
240.0
|
|
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|
(30.1
|
)
|
|
$
|
(2,116.2
|
)
|
|
$
|
3.6
|
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|
$
|
5,653.9
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
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562.2
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562.2
|
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Other comprehensive income
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111.2
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111.2
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Purchase of noncontrolling interest
|
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|
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(5.0
|
)
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(3.6
|
)
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(8.6
|
)
|
Stock compensation plans, including tax benefits
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0.2
|
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|
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64.4
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64.4
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Share repurchases
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|
|
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|
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|
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|
|
|
|
|
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|
|
|
|
|
|
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(10.8
|
)
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(404.4
|
)
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(404.4
|
)
|
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Balance September 30, 2009
|
|
|
253.9
|
|
|
$
|
2.5
|
|
|
$
|
3,197.9
|
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|
$
|
4,947.7
|
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|
$
|
351.2
|
|
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|
(40.9
|
)
|
|
$
|
(2,520.6
|
)
|
|
$
|
|
|
|
$
|
5,978.7
|
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|
|
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|
The accompanying notes are an integral part of these
consolidated financial statements.
5
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
(In millions, unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
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2009
|
|
|
2008
|
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Net earnings of Zimmer Holdings, Inc.
|
|
$
|
562.2
|
|
|
$
|
681.1
|
|
Adjustments to reconcile net earnings to cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
249.6
|
|
|
|
196.0
|
|
Net curtailment and settlement
|
|
|
(32.1
|
)
|
|
|
|
|
Gain on sale of investments
|
|
|
|
|
|
|
(38.8
|
)
|
Share-based compensation
|
|
|
57.7
|
|
|
|
50.4
|
|
Inventory
step-up
|
|
|
9.9
|
|
|
|
3.2
|
|
Income tax benefit from stock option exercises
|
|
|
0.7
|
|
|
|
10.6
|
|
Excess income tax benefit from stock option exercises
|
|
|
(0.1
|
)
|
|
|
(6.5
|
)
|
Changes in operating assets and liabilities, net of effect of
acquisitions:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
(4.9
|
)
|
|
|
(66.2
|
)
|
Receivables
|
|
|
10.9
|
|
|
|
(11.9
|
)
|
Inventories
|
|
|
(22.3
|
)
|
|
|
(106.5
|
)
|
Accounts payable and accrued expenses
|
|
|
(133.6
|
)
|
|
|
141.3
|
|
Other assets and liabilities
|
|
|
34.0
|
|
|
|
(21.5
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
732.0
|
|
|
|
831.2
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
Additions to instruments
|
|
|
(102.7
|
)
|
|
|
(186.5
|
)
|
Additions to other property, plant and equipment
|
|
|
(76.8
|
)
|
|
|
(189.2
|
)
|
Proceeds from sale of investments
|
|
|
|
|
|
|
54.9
|
|
Acquisition of intellectual property rights
|
|
|
(32.9
|
)
|
|
|
|
|
Investments in other assets
|
|
|
(35.5
|
)
|
|
|
(18.6
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(247.9
|
)
|
|
|
(339.4
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
Net borrowing under credit facilities
|
|
|
141.0
|
|
|
|
220.0
|
|
Proceeds from employee stock compensation plans
|
|
|
7.6
|
|
|
|
54.2
|
|
Excess income tax benefit from stock option exercises
|
|
|
0.1
|
|
|
|
6.5
|
|
Repurchase of common stock
|
|
|
(404.4
|
)
|
|
|
(688.9
|
)
|
Acquisition of noncontrolling interest
|
|
|
(8.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(264.3
|
)
|
|
|
(408.2
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
7.3
|
|
|
|
(5.1
|
)
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
227.1
|
|
|
|
78.5
|
|
Cash and cash equivalents, beginning of year
|
|
|
212.6
|
|
|
|
463.9
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
439.7
|
|
|
$
|
542.4
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
6
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
The financial data presented herein is unaudited and should be
read in conjunction with the consolidated financial statements
and accompanying notes included in the 2008 Annual Report on
Form 10-K
filed by Zimmer Holdings, Inc. In the opinion of management, the
accompanying unaudited consolidated financial statements include
all adjustments necessary for a fair statement of the financial
position, results of operations and cash flows for the interim
periods presented. The December 31, 2008 condensed balance
sheet data was derived from audited financial statements (other
than as it relates to the adjustments for the adoption of the
Financial Accounting Standards Boards (FASB) new guidance
related to noncontrolling interests as described below), but
does not include all disclosures required by accounting
principles generally accepted in the United States of America.
Results for interim periods should not be considered indicative
of results for the full year. Certain amounts in the three and
nine month periods ended September 30, 2008 have been
reclassified to conform to the current year presentation.
The words we, us, our and
similar words refer to Zimmer Holdings, Inc. and its
subsidiaries. Zimmer Holdings refers to the parent company only.
|
|
2.
|
Significant
Accounting Policies
|
Noncontrolling Interests On January 1,
2009, we adopted the FASBs newly issued guidance related
to noncontrolling interests. This new guidance changes the
accounting and reporting for minority interests, which are now
recharacterized as noncontrolling interests and classified as a
component of equity. This new guidance requires retroactive
adoption of the presentation and disclosure requirements for
existing noncontrolling interests. This adoption did not have a
material impact on our consolidated financial statements or
results of operations. During the nine month period ended
September 30, 2009, we acquired 100 percent ownership
of our only outstanding noncontrolling interest for
approximately $8.6 million. This purchase was recorded as
an equity transaction and is reflected as a financing activity
in our consolidated statement of cash flows. As a result, the
carrying balance of the noncontrolling interests of
$3.6 million was eliminated and the remaining
$5.0 million, representing the difference between the
purchase price and carrying balance, was recorded as a reduction
in paid-in capital. Transactions with noncontrolling interests
had the following effect on equity attributable to Zimmer
Holdings, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
Net earnings of Zimmer Holdings, Inc.
|
|
$
|
149.9
|
|
|
$
|
214.7
|
|
|
$
|
562.2
|
|
|
$
|
681.1
|
|
Transfers to noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in equity related to the purchase of noncontrolling
interests
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
(5.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from net earnings of Zimmer Holdings, Inc. and transfers
to noncontrolling interests
|
|
$
|
149.1
|
|
|
$
|
214.7
|
|
|
$
|
557.2
|
|
|
$
|
681.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition, Integration, Realignment and
Other We recognize incremental expenses
resulting directly from our business combinations and
significant nonrecurring and unusual items as Acquisition,
integration,
7
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
realignment and other expenses. Acquisition, integration,
realignment and other expenses for the three and nine month
periods ended September 30, 2009 and 2008 included (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Impairment of assets
|
|
$
|
0.9
|
|
|
$
|
|
|
|
$
|
2.2
|
|
|
$
|
1.6
|
|
Consulting and professional fees
|
|
|
0.6
|
|
|
|
2.0
|
|
|
|
3.2
|
|
|
|
5.4
|
|
Employee severance and retention, including share-based
compensation acceleration
|
|
|
1.6
|
|
|
|
|
|
|
|
18.4
|
|
|
|
|
|
Information technology integration
|
|
|
0.5
|
|
|
|
|
|
|
|
0.7
|
|
|
|
0.4
|
|
Facility and employee relocation
|
|
|
2.9
|
|
|
|
1.4
|
|
|
|
4.7
|
|
|
|
5.8
|
|
Vacated facilities
|
|
|
|
|
|
|
|
|
|
|
1.4
|
|
|
|
|
|
Distributor acquisitions
|
|
|
4.8
|
|
|
|
1.3
|
|
|
|
7.9
|
|
|
|
7.7
|
|
Certain litigation matters
|
|
|
9.3
|
|
|
|
|
|
|
|
14.1
|
|
|
|
|
|
Contract terminations
|
|
|
0.7
|
|
|
|
|
|
|
|
8.6
|
|
|
|
|
|
Other
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition, Integration, Realignment and Other
|
|
$
|
22.2
|
|
|
$
|
5.6
|
|
|
$
|
65.7
|
|
|
$
|
25.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine month period ending September 30, 2009, we
commenced a global realignment initiative to focus on business
opportunities that best support our strategic priorities. As
part of this realignment, we initiated changes in our work
force, including the elimination of positions in some areas and
planned increases in others, to balance the requirements
necessary to support long-term growth. Approximately
300 employees from across the globe were affected by these
actions. As a result of these changes in our work force and
severance costs from acquisitions, we recorded expense of
$18.4 million related to severance and other employee
termination-related costs. These termination benefits were
provided in accordance with our existing or local government
policies and are considered ongoing benefits. These costs were
accrued when they became probable and estimable and were
recorded as part of other current liabilities. The majority of
these costs were paid by September 30, 2009. Certain
litigation matters relate to costs recognized during the period
for the estimated settlement of various ongoing legal matters.
Contract termination costs relate to terminated agreements in
connection with the integration of acquired companies.
Consulting and professional fees relate to third-party
integration consulting performed in a variety of areas such as
tax, compliance, logistics and human resources and fees related
to matters involving severance and termination benefits.
Subsequent Events In May 2009, the FASB
issued new guidance related to the accounting for and disclosure
of subsequent events, which is effective for interim and annual
periods ending after June 15, 2009. This new guidance
establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
This guidance introduces new terminology but is based on the
same principles that previously existed in the auditing
standards. Under this new guidance we are required to provide
disclosure of the date through which we have evaluated
subsequent events and whether that date represents the date the
financial statements were issued or the date the financial
statements were available to be issued. For the financial
statements related to the three and nine month periods ending
September 30, 2009 and 2008 contained herein, we have
evaluated subsequent events through November 4, 2009
representing the date these financial statements were issued.
FASB Accounting Standards Codification
Effective for interim and annual periods ending after
September 15, 2009, the FASB has defined a new hierarchy
for U.S. GAAP and established the FASB Accounting Standards
Codification (ASC) as the sole source for authoritative guidance
to be applied by nongovernmental
8
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
entities. The adoption of the ASC changes the manner in which
U.S. GAAP guidance is referenced, but it does not have any
impact on our financial position or results of operations.
The reconciliation of net earnings to comprehensive income is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
Net Earnings
|
|
$
|
149.9
|
|
|
$
|
215.0
|
|
|
$
|
562.2
|
|
|
$
|
681.9
|
|
Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency cumulative translation adjustments
|
|
|
98.0
|
|
|
|
(102.9
|
)
|
|
|
145.2
|
|
|
|
27.0
|
|
Unrealized foreign currency hedge gains/(losses), net of tax
|
|
|
(25.5
|
)
|
|
|
43.4
|
|
|
|
(37.9
|
)
|
|
|
(10.6
|
)
|
Reclassification adjustments on foreign currency hedges, net of
tax
|
|
|
(4.6
|
)
|
|
|
10.3
|
|
|
|
(16.9
|
)
|
|
|
45.5
|
|
Unrealized gains/(losses) on securities, net of tax
|
|
|
0.2
|
|
|
|
(1.5
|
)
|
|
|
(0.3
|
)
|
|
|
24.0
|
|
Reclassification adjustments on securities, net of tax
|
|
|
|
|
|
|
(18.4
|
)
|
|
|
|
|
|
|
(23.8
|
)
|
Prior service cost and unrecognized gains/(losses) in actuarial
assumptions, net of tax
|
|
|
0.7
|
|
|
|
0.6
|
|
|
|
21.1
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Income / (Loss)
|
|
|
68.8
|
|
|
|
(68.5
|
)
|
|
|
111.2
|
|
|
|
64.4
|
|
Comprehensive (Loss) Attributable to Noncontrolling Interest
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income Attributable to Zimmer Holdings, Inc.
|
|
$
|
218.7
|
|
|
$
|
146.2
|
|
|
$
|
673.4
|
|
|
$
|
745.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Abbott
Spine Acquisition
|
In October 2008, we acquired Abbott Spine, a former subsidiary
of Abbott Laboratories, for an aggregate value of approximately
$363.0 million, including a $358.0 million cash
purchase price after certain working capital adjustments and
$5.0 million of direct acquisition costs. The acquisition
was funded by approximately $253 million of cash on-hand
and $110 million from new borrowings under our Senior
Credit Facility.
In the three month period ended June 30, 2009, we completed
the final purchase price allocation, which reflects additional
contract termination liabilities and changes to the preliminary
fair values assigned to acquired inventory.
9
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the fair values of the assets
acquired and liabilities assumed at the date of the Abbott Spine
acquisition (in millions):
|
|
|
|
|
|
|
As of
|
|
|
|
October 16, 2008
|
|
|
Current assets
|
|
$
|
61.4
|
|
Property, plant and equipment
|
|
|
6.5
|
|
Instruments
|
|
|
17.5
|
|
Intangible assets subject to amortization:
|
|
|
|
|
Customer relationships (10 year useful life)
|
|
|
8.6
|
|
Developed technology (10 year useful life)
|
|
|
64.3
|
|
In-process research and development
|
|
|
38.5
|
|
Other assets
|
|
|
10.0
|
|
Goodwill
|
|
|
205.1
|
|
|
|
|
|
|
Total assets acquired
|
|
|
411.9
|
|
|
|
|
|
|
Current liabilities
|
|
|
19.5
|
|
Deferred taxes
|
|
|
29.4
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
48.9
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
363.0
|
|
|
|
|
|
|
Goodwill of $132.5 million, $69.9 million and
$2.7 million was assigned to the Americas, Europe and Asia
Pacific reporting segments, respectively. None of the goodwill
is deductible for tax purposes.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Finished goods
|
|
$
|
762.9
|
|
|
$
|
731.2
|
|
Work in progress
|
|
|
47.2
|
|
|
|
52.6
|
|
Raw materials
|
|
|
162.0
|
|
|
|
144.5
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
972.1
|
|
|
$
|
928.3
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Land
|
|
$
|
21.8
|
|
|
$
|
21.7
|
|
Buildings and equipment
|
|
|
1,114.3
|
|
|
|
992.7
|
|
Capitalized software costs
|
|
|
156.5
|
|
|
|
136.7
|
|
Instruments
|
|
|
1,204.1
|
|
|
|
1,161.7
|
|
Construction in progress
|
|
|
76.0
|
|
|
|
149.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,572.7
|
|
|
|
2,461.8
|
|
Accumulated depreciation
|
|
|
(1,333.0
|
)
|
|
|
(1,197.7
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
1,239.7
|
|
|
$
|
1,264.1
|
|
|
|
|
|
|
|
|
|
|
10
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Other
Current and Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Other current liabilities:
|
|
|
|
|
|
|
|
|
License and service agreements
|
|
$
|
127.3
|
|
|
$
|
169.6
|
|
Accrued liabilities
|
|
|
412.8
|
|
|
|
408.5
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
540.1
|
|
|
$
|
578.1
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
Accrued retirement and postretirement benefit plans
|
|
$
|
46.0
|
|
|
$
|
129.9
|
|
Other long-term liabilities
|
|
|
346.5
|
|
|
|
224.0
|
|
|
|
|
|
|
|
|
|
|
Total other long-term liabilities
|
|
$
|
392.5
|
|
|
$
|
353.9
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Fair
Value Measurement of Assets and Liabilities
|
In September 2006, the FASB issued new guidance on fair value
measurements. The new guidance defines fair value, establishes a
framework for measuring fair value under U.S. GAAP, and
expands disclosures about fair value measurements. On
January 1, 2008, we adopted the FASBs guidance on
fair value measurements for certain financial assets and
liabilities. On January 1, 2009, we adopted the FASBs
guidance on fair value as it relates to nonfinancial assets and
liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis.
For the three and nine month periods ended September 30,
2009, there were no significant nonrecurring fair value
measurements made subsequent to initial recognition.
The following assets and liabilities are recorded at fair value
on a recurring basis as of September 30, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using:
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Recorded
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Balance
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
0.9
|
|
|
$
|
0.9
|
|
|
$
|
|
|
|
$
|
|
|
Derivatives, current and long-term
|
|
|
13.0
|
|
|
|
|
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13.9
|
|
|
$
|
0.9
|
|
|
$
|
13.0
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, current and long-term
|
|
$
|
46.3
|
|
|
$
|
|
|
|
$
|
46.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46.3
|
|
|
$
|
|
|
|
$
|
46.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities are valued using a market approach, based on quoted
prices for the specific security from transactions in active
exchange markets. Derivatives relate to foreign exchange forward
contracts and foreign currency options entered into with various
third parties. We value these instruments using a market
approach based on foreign currency exchange rates obtained from
active markets and perform an assessment of counterparty credit
risk.
11
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Derivative
Instruments and Hedging Activities
|
On January 1, 2009, we adopted the FASBs new guidance
related to the disclosure of derivative and hedging activities.
The adoption of this guidance did not have a material impact on
our consolidated financial statements or results of operations.
The new guidance impacts disclosures only and requires
additional qualitative and quantitative information on the use
of derivatives and their impact on financial position, results
of operations and cash flows. These disclosures are provided
below.
We are exposed to certain market risks relating to our ongoing
business operations, including foreign currency 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 risk
that we manage through the use of derivative instruments is
foreign currency 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
exchange rate movements on net earnings, we enter into
derivative financial instruments in the form of foreign exchange
forward contracts and options with major financial institutions.
We are primarily exposed to foreign currency exchange rate risk
with respect to transactions and net assets denominated in
Euros, Swiss Francs, Japanese Yen, British Pounds, Canadian
Dollars, Australian Dollars, Korean Won and Swedish Krona. We do
not use derivative financial instruments for trading or
speculative purposes.
We report all derivative instruments as assets or liabilities on
the balance sheet at fair value.
Derivatives
Designated as Hedging Instruments
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
exchange rates may have different proportional effects on our
revenues compared to our cost of products sold. To minimize the
effects of foreign exchange rate movements on cash flows, we
hedge intercompany sales of inventory expected to occur within
the next 30 months with foreign exchange forward contracts
and options. We designate these derivative instruments as cash
flow hedges. We have not entered into any derivative instruments
designated as fair value or net investment in foreign operation
hedges.
We perform quarterly assessments of hedge effectiveness by
verifying and documenting the critical terms of the hedge
instrument and that forecasted transactions have not changed
significantly. We also assess on a quarterly basis whether there
have been adverse developments regarding the risk of a
counterparty default. For derivatives which qualify as hedges of
future cash flows, the effective portion of changes in fair
value is temporarily recorded in other comprehensive income and
then recognized in cost of products sold when the hedged item
affects net earnings. The ineffective portion of a
derivatives change in fair value, if any, is reported in
cost of products sold immediately. The net amount recognized in
earnings during the three and nine month periods ended
September 30, 2009 and 2008 due to ineffectiveness and
amounts excluded from the assessment of hedge effectiveness was
not significant.
For forward contracts and options outstanding at
September 30, 2009, we have obligations to purchase
U.S. Dollars and sell Euros, Japanese Yen, British Pounds,
Canadian Dollars, Australian Dollars, Korean Won and Swedish
Krona and purchase Swiss Francs and sell U.S. Dollars at
set maturity dates ranging from October 2009 through March 2012.
The notional amounts of outstanding forward contracts and
options entered into with third parties to purchase
U.S. Dollars at September 30, 2009 were
$1.2 billion. The notional amounts of outstanding forward
contracts entered into with third parties to purchase Swiss
Francs at September 30, 2009 were $236 million.
As of September 30, 2009 and December 31, 2008, all
derivative instruments designated as cash flow hedges are
recorded at fair value on the balance sheet. On our consolidated
balance sheet, we recognize individual forward contracts and
options with the same counterparty on a net asset/liability
basis if we have a master netting agreement
12
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
with the counterparty. The fair value of derivative instruments
on a gross basis as of September 30, 2009 and
December 31, 2008 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance
|
|
|
|
|
Balance
|
|
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
$
|
28.1
|
|
|
Other current assets
|
|
$53.7
|
Foreign exchange options
|
|
Other current assets
|
|
|
0.5
|
|
|
Other current assets
|
|
4.6
|
Foreign exchange forward contracts
|
|
Other assets
|
|
|
7.7
|
|
|
Other assets
|
|
30.3
|
|
|
|
|
|
|
|
|
|
|
|
Total asset derivatives
|
|
|
|
$
|
36.3
|
|
|
|
|
$88.6
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current liabilities
|
|
$
|
44.1
|
|
|
Other current liabilities
|
|
$34.4
|
Foreign exchange forward contracts
|
|
Other long-term liabilities
|
|
|
25.5
|
|
|
Other long-term liabilities
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
|
Total liability derivatives
|
|
|
|
$
|
69.6
|
|
|
|
|
$52.1
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of outstanding derivative instruments recorded on
the balance sheet at September 30, 2009, together with
settled derivatives where the hedged item has not yet affected
earnings, was a net unrealized loss of $33.3 million, or
$21.9 million net of taxes, which is deferred in other
comprehensive income, of which $10.1 million, or
$5.8 million net of taxes, is expected to be reclassified
to earnings over the next twelve months.
The following gross unrealized losses from derivative
instruments were recognized in other comprehensive income on our
consolidated balance sheet (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
Derivative Instrument
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Foreign exchange forward contracts
|
|
$
|
(34.2
|
)
|
|
$
|
50.9
|
|
|
$
|
(45.9
|
)
|
|
$
|
(16.2
|
)
|
Foreign exchange options
|
|
|
(1.0
|
)
|
|
|
1.2
|
|
|
|
(1.9
|
)
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(35.2
|
)
|
|
$
|
52.1
|
|
|
$
|
(47.8
|
)
|
|
$
|
(15.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following gross realized gains / (losses) from
derivative instruments were reclassified from other
comprehensive income on our consolidated balance sheet to cost
of products sold on our consolidated statement of earnings (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
Derivative Instrument
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Foreign exchange forward contracts
|
|
$
|
4.7
|
|
|
$
|
(12.9
|
)
|
|
$
|
15.4
|
|
|
$
|
(54.9
|
)
|
Foreign exchange options
|
|
|
0.2
|
|
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4.9
|
|
|
$
|
(12.9
|
)
|
|
$
|
16.5
|
|
|
$
|
(54.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
entitys functional currency. As a result, any foreign
currency remeasurement gains/losses recognized in earnings are
generally offset with gains/losses on the foreign currency
forward exchange contracts in the same reporting period. These
offsetting gains/losses are recorded in cost of products sold as
the underlying assets and liabilities exposed to remeasurement
13
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
include inventory-related transactions. These contracts are
settled on the last day of each reporting period. Therefore,
there is no outstanding balance related to these contracts
recorded on the balance sheet as of the end of the reporting
period. The notional amounts of these contracts are typically in
a range of $1.1 billion to $1.3 billion per quarter.
The following gains/(losses) from these derivative instruments
were recognized in cost of products sold on our consolidated
statement of earnings (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
Derivative Instrument
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Foreign exchange forward contracts
|
|
$
|
(9.6
|
)
|
|
$
|
1.8
|
|
|
$
|
(12.9
|
)
|
|
$
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(9.6
|
)
|
|
$
|
1.8
|
|
|
$
|
(12.9
|
)
|
|
$
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This impact does not include any offsetting gains/losses
recognized in earnings as a result of foreign currency
remeasurement of monetary assets and liabilities denominated in
a currency other than an entitys functional currency.
During the third quarter of 2009, we settled various tax matters
with the Internal Revenue Service (IRS) for all years prior to
2005. Our U.S. federal returns for years 2005 through 2007
are currently under IRS examination.
We expect that the amount of tax liability for unrecognized tax
benefits will change in the next twelve months; however, we do
not expect these changes will have a significant impact on our
results of operations or financial position.
During the third quarter of 2008, we reached an agreement with
the U.S. Internal Revenue Service (IRS) confirming the
deductibility of a portion of a 2007 civil settlement. As a
result, we recorded an estimated current tax benefit of
$30.8 million. The effective tax rate for the three and
nine month periods ended September 30, 2008 reflect this
benefit.
|
|
11.
|
Retirement
and Postretirement Benefit Plans
|
Defined
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 do receive additional
benefits under our defined contribution plans. Plan benefits are
primarily based on years of credited service and the
participants compensation. In addition to the
U.S. and Puerto Rico defined benefit pension plans, we
sponsor various
non-U.S. pension
arrangements, including retirement and termination benefit plans
required by local law or coordinated with government sponsored
plans.
14
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of net pension expense for the three and nine
month periods ended September 30, 2009 and 2008, for our
U.S. and
non-U.S. defined
benefit retirement plans are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Service cost
|
|
$
|
6.7
|
|
|
$
|
6.3
|
|
|
$
|
19.5
|
|
|
$
|
18.9
|
|
Interest cost
|
|
|
4.4
|
|
|
|
4.5
|
|
|
|
13.0
|
|
|
|
13.5
|
|
Expected return on plan assets
|
|
|
(6.3
|
)
|
|
|
(5.9
|
)
|
|
|
(18.5
|
)
|
|
|
(17.5
|
)
|
Amortization of unrecognized prior service cost and actuarial
loss
|
|
|
1.6
|
|
|
|
0.6
|
|
|
|
4.6
|
|
|
|
2.1
|
|
Curtailment
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
Settlement
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
6.4
|
|
|
$
|
5.6
|
|
|
$
|
19.0
|
|
|
$
|
19.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We contributed approximately $40 million during the nine
month period ended September 30, 2009 to our U.S. and
Puerto Rico defined benefit plans and do not expect to make any
additional contributions to these plans during the remainder of
2009. We contributed approximately $9 million to our
foreign-based defined benefit plans in the nine month period
ended September 30, 2009 and expect to contribute an
additional $5 million to these foreign-based plans during
the remainder of 2009.
Postretirement
Benefit Plans
During the nine month period ended September 30, 2009, we
amended the postretirement benefit plans for certain
U.S. and Puerto Rico employees. Participants in the plan
between the ages of 55 and 65 that were previously receiving
benefits will continue to receive benefits until reaching the
age of 65. For all other participants in the plan, no benefits
will be paid after January 1, 2010. Additionally, we funded
approximately $7 million to a Voluntary Employees
Beneficiary Association (VEBA) trust to settle any
future obligations. We recognized a curtailment gain and
settlement loss related to these actions.
The components of net periodic benefit expense for the three and
nine month periods ended September 30, 2009 and 2008, for
our U.S. and Puerto Rico postretirement benefit plans are
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
0.4
|
|
|
$
|
0.8
|
|
|
$
|
1.2
|
|
Interest cost
|
|
|
|
|
|
|
0.6
|
|
|
|
1.3
|
|
|
|
1.8
|
|
Amortization of unrecognized prior service cost
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
Amortization of unrecognized actuarial loss
|
|
|
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Settlement
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
|
|
|
|
Curtailment
|
|
|
|
|
|
|
|
|
|
|
(35.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
|
|
|
$
|
1.0
|
|
|
$
|
(29.9
|
)
|
|
$
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a reconciliation of weighted average shares for
the basic and diluted shares computations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Weighted average shares outstanding for basic net earnings per
share
|
|
|
213.6
|
|
|
|
224.7
|
|
|
|
216.6
|
|
|
|
228.5
|
|
Effect of dilutive stock options and other equity awards
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted net earnings per
share
|
|
|
214.5
|
|
|
|
225.6
|
|
|
|
217.4
|
|
|
|
229.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine month periods ended September 30,
2009, an average of 13.6 million options and
14.7 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.
During the three and nine month periods ended September 30,
2008, an average of 11.4 million options and
10.0 million options, respectively, were not included.
In the three month period ended September 30, 2009, we
repurchased approximately 1.5 million shares of our common
stock at an average price of $45.89 per share for a total cash
outlay of $66.6 million, including commissions. In the nine
month period ended September 30, 2009, we repurchased
approximately 10.8 million shares of our common stock at an
average price of $37.17 per share for a total cash outlay of
$404.4 million, including commissions. In April 2008, we
announced that our Board of Directors authorized a
$1.25 billion share repurchase program which was originally
set to expire on December 31, 2009. In September 2009, the
Board of Directors extended this program to December 31,
2010. Approximately $730.2 million remains authorized for
future repurchases under this plan.
We design, develop, manufacture and market orthopaedic
reconstructive implants, dental implants, spinal implants,
trauma products and related surgical products which include
surgical supplies and instruments designed to aid in surgical
procedures and post-operation rehabilitation. We also provide
other healthcare related services. Revenue related to these
other healthcare related services currently represents less than
1 percent of our total net sales. We manage operations
through three major geographic segments the
Americas, which is comprised principally of the United States
and includes other North, Central and South American markets;
Europe, which is comprised principally of Europe and includes
the Middle East and Africa; and Asia Pacific, which is comprised
primarily of Japan and includes other Asian and Pacific markets.
This structure is the basis for our reportable segment
information discussed below. Management evaluates operating
segment performance based upon segment operating profit
exclusive of operating expenses pertaining to global operations
and corporate expenses, share-based compensation, certain
claims, acquisition, integration, realignment and other, net
curtailment and settlement, inventory
step-up and
intangible asset amortization expense. Global operations include
research, development engineering, medical education, brand
management, corporate legal, finance, and human resource
functions, and
16
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
U.S. and Puerto Rico based manufacturing operations and
logistics. Intercompany transactions have been eliminated from
segment operating profit. Net sales and segment operating profit
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Operating Profit
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Americas
|
|
$
|
584.5
|
|
|
$
|
563.3
|
|
|
$
|
291.1
|
|
|
$
|
291.2
|
|
Europe
|
|
|
242.4
|
|
|
|
251.0
|
|
|
|
75.8
|
|
|
|
89.1
|
|
Asia Pacific
|
|
|
148.7
|
|
|
|
137.9
|
|
|
|
62.7
|
|
|
|
55.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
975.6
|
|
|
$
|
952.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
(17.6
|
)
|
|
|
(11.0
|
)
|
Inventory
step-up
|
|
|
|
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
(1.4
|
)
|
Certain claims
|
|
|
|
|
|
|
|
|
|
|
(35.0
|
)
|
|
|
(47.5
|
)
|
Acquisition, integration, realignment and other
|
|
|
|
|
|
|
|
|
|
|
(22.2
|
)
|
|
|
(5.6
|
)
|
Global operations and corporate functions
|
|
|
|
|
|
|
|
|
|
|
(147.9
|
)
|
|
|
(160.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
|
|
$
|
204.0
|
|
|
$
|
210.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Operating Profit
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Americas
|
|
$
|
1,768.7
|
|
|
$
|
1,764.9
|
|
|
$
|
876.8
|
|
|
$
|
915.0
|
|
Europe
|
|
|
787.9
|
|
|
|
882.3
|
|
|
|
300.9
|
|
|
|
344.4
|
|
Asia Pacific
|
|
|
431.5
|
|
|
|
443.7
|
|
|
|
182.2
|
|
|
|
190.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,988.1
|
|
|
$
|
3,090.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
(56.2
|
)
|
|
|
(50.4
|
)
|
Inventory
step-up
|
|
|
|
|
|
|
|
|
|
|
(9.9
|
)
|
|
|
(3.2
|
)
|
Certain claims
|
|
|
|
|
|
|
|
|
|
|
(35.0
|
)
|
|
|
(47.5
|
)
|
Acquisition, integration, realignment and other
|
|
|
|
|
|
|
|
|
|
|
(65.7
|
)
|
|
|
(25.4
|
)
|
Net curtailment and settlement
|
|
|
|
|
|
|
|
|
|
|
(32.1
|
)
|
|
|
|
|
Global operations and corporate functions
|
|
|
|
|
|
|
|
|
|
|
(380.7
|
)
|
|
|
(473.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
|
|
$
|
780.3
|
|
|
$
|
850.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Beginning in 2009, we no longer include our Dental product
category sales within our Reconstructive products category.
Prior year amounts related to Dental product category sales have
been reclassified to conform to the current year presentation.
Net sales by product category are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Reconstructive implants
|
|
$
|
738.2
|
|
|
$
|
731.0
|
|
|
$
|
2,279.8
|
|
|
$
|
2,387.6
|
|
Dental
|
|
|
48.0
|
|
|
|
51.8
|
|
|
|
148.1
|
|
|
|
170.9
|
|
Trauma
|
|
|
57.6
|
|
|
|
54.6
|
|
|
|
171.2
|
|
|
|
165.2
|
|
Spine
|
|
|
61.7
|
|
|
|
49.7
|
|
|
|
190.5
|
|
|
|
158.0
|
|
OSP and other
|
|
|
70.1
|
|
|
|
65.1
|
|
|
|
198.5
|
|
|
|
209.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
975.6
|
|
|
$
|
952.2
|
|
|
$
|
2,988.1
|
|
|
$
|
3,090.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
Commitments
and Contingencies
|
Intellectual
Property and Product Liability-Related Litigation
In July 2008, we temporarily suspended marketing and
distribution of the
Durom®
Acetabular Component (Durom Cup) in the
U.S. Following our announcement, product liability lawsuits
and other claims have been asserted against us, some of which we
have settled. There are a number of claims still pending and we
expect additional claims will be submitted. We recorded a
provision of $69.0 million in 2008, representing
managements estimate of these Durom Cup-related
claims. Based on claims information we received since we made
our initial estimate in 2008, we have increased our estimate of
the number of claims we expect to receive. Accordingly, we
increased the provision by $35.0 million in the third
quarter of 2009. The current reserve is $77.5 million as of
September 30, 2009. The provision is limited to revisions
within two years of an original surgery that occurred prior to
July 2008. These parameters are consistent with our data which
indicates that cup loosenings associated with surgical technique
are most likely to occur within that time period. Any claims
received outside of these defined parameters will be managed in
the normal course and reflected in our standard product
liability accruals.
On February 15, 2005, Howmedica Osteonics Corp. filed an
action against us and an unrelated party in the United States
District Court for the District of New Jersey alleging
infringement of U.S. Patent Nos. 6,174,934; 6,372,814;
6,664,308; and 6,818,020. On June 13, 2007, the Court
granted our motion for summary judgment on the invalidity of the
asserted claims of U.S. Patent Nos. 6,174,934; 6,372,814;
and 6,664,308 by ruling that all of the asserted claims are
invalid for indefiniteness. On August 19, 2008, the Court
granted our motion for summary judgment of non-infringement of
certain claims of U.S. Patent No. 6,818,020, reducing
the number of claims at issue in the suit to five. On
April 9, 2009, in response to our earlier petition, the
U.S. Patent and Trademark Office instituted re-examination
proceedings against U.S. Patent No. 6,818,020. The
U.S. Patent and Trademark Office rejected all previously
issued claims of U.S. Patent No. 6,818,020 as being
unpatentable in light of one or more prior art references. On
September 30, 2009, the Court issued an order staying
proceedings in the litigation pending the outcome of the
re-examination process. Subsequent to that stay order, Howmedica
filed a motion seeking to certify an appeal of the summary
judgment ruling on the 934, 814 and 308
patents. That motion is pending. We continue to believe that our
defenses against infringement are valid and meritorious, and we
intend to continue to defend this lawsuit vigorously.
In addition to certain claims related to the Durom Cup
within the parameters discussed above, we are also subject to
product liability and other claims and lawsuits arising in the
ordinary course of business, for which we maintain insurance,
subject to self-insured retention limits. We establish accruals
for product liability and other claims in conjunction with
outside counsel based on current information and historical
settlement information for open claims, related fees and claims
incurred but not reported. While it is not possible to predict
with certainty the
18
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
outcome of these cases, it is the opinion of management that,
upon ultimate resolution, liabilities from these cases in excess
of those recorded, if any, will not have a material adverse
effect on our consolidated financial position, results of
operations or cash flows.
Government
Investigations
In September 2007, we and other orthopaedic companies settled a
U.S. government investigation pertaining to consulting
contracts, professional services agreements and other agreements
by which remuneration is provided to orthopaedic surgeons. As
part of the settlement, we entered into a Corporate Integrity
Agreement (the CIA) with the Office of Inspector
General of the Department of Health and Human Services (the
OIG-HHS). Under the CIA, which has a term expiring
in 2012, we agreed, among other provisions, to continue the
operation of our enhanced Corporate Compliance Program, designed
to promote compliance with federal healthcare program
requirements, in accordance with the terms set forth in the CIA.
We also agreed to retain an independent review organization to
perform annual reviews to assist us in assessing our compliance
with the obligations set forth in the CIA to ensure that
arrangements we enter into do not violate the Anti-Kickback
Statute (42 U.S.C.
§ 1320a-7b).
A material breach of the CIA may subject us to exclusion by
OIG-HHS from participation in all federal healthcare programs,
which would have a material adverse effect on our financial
position, results of operations and cash flows.
In November 2007, we received a civil investigative demand from
the Massachusetts Attorney Generals office seeking
additional information regarding our financial relationships
with a number of Massachusetts healthcare providers. We received
a similar inquiry from the Oregon Attorney Generals office
in October 2008. We are cooperating fully with the investigators
with regard to these matters.
In September 2007, the Staff of the U.S. Securities and
Exchange Commission (SEC) informed us that it was
conducting an informal investigation regarding potential
violations of the Foreign Corrupt Practices Act
(FCPA) in the sale of medical devices in a number of
foreign countries by companies in the medical device industry.
In November 2007, we received a letter from the
U.S. Department of Justice (DOJ) requesting
that any information provided to the SEC also be provided to the
DOJ on a voluntary basis. We are continuing to provide
information and cooperate fully with the SEC and the DOJ with
regard to this pending investigation. In addition, as part of
our global compliance program, we have been conducting our own
proactive reviews regarding FCPA compliance in jurisdictions
that have not been involved in the pending investigation. These
reviews have yielded information indicating that certain
third-party, independent distributors of our products in two
South American countries made certain payments that may have
potential FCPA implications. In the course of continuing
dialogues with the agencies, we voluntarily disclosed
information relating to these matters to the SEC and the DOJ,
and the reviews are ongoing. We cannot currently predict the
outcome of the investigation or the impact of our voluntary
disclosures to the authorities.
Derivative
Actions and Class Actions
On April 24, 2008, a complaint was filed in the
U.S. District Court for the Southern District of New York,
Thorpe v. Zimmer, Inc., et al., naming us and two of our
subsidiaries as defendants. The complaint related to a putative
class action on behalf of certain residents of New York who had
hip or knee implant surgery involving Zimmer products during an
unspecified period. The complaint alleged that our relationships
with orthopaedic surgeons and others violated the New York
deceptive practices statute and unjustly enriched us. The
plaintiff requested actual damages or $50.00, whichever is
greater, on behalf of each class member, a permanent injunction
from our engaging in allegedly improper practices in the future
and restitution in an unspecified amount. The parties have
stipulated to the dismissal of all claims made in this action
and this case has been dismissed with prejudice.
On August 5, 2008, a complaint was filed in the
U.S. District Court for the Southern District of Indiana,
Plumbers and Pipefitters Local Union 719 Pension Fund v.
Zimmer Holdings, Inc., et al., naming us and two of our
executive officers as defendants. The complaint relates to a
putative class action on behalf of persons who purchased our
common stock between January 29, 2008 and July 22,
2008. The complaint alleges that the defendants violated the
federal securities law by allegedly failing to disclose
developments relating to our orthopaedic surgical products
19
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
manufacturing operations in Dover, Ohio and problems relating to
the Durom Cup. The plaintiff seeks unspecified damages
and interest, attorneys fees, costs and other relief. On
December 24, 2008, the lead plaintiff filed a consolidated
complaint that alleges the same claims and relates to the same
time period. The defendants filed a motion to dismiss the
consolidated complaint on February 23, 2009. The motion to
dismiss is pending with the court. We believe this lawsuit is
without merit, and we and the individual defendants intend to
defend it vigorously.
On August 15, 2008, a shareholder derivative action,
Hays v. Dvorak et al., was filed in the U.S. District
Court for the Southern District of Indiana. The plaintiff sought
to maintain the action purportedly on our behalf against certain
of our current and former directors and two
non-director
executive officers. The plaintiff alleged, among other things,
breaches of fiduciary duties, abuse of control, unjust
enrichment and gross mismanagement by the named defendants based
on substantially the same factual allegations as the putative
federal securities class action referenced above brought by the
Plumbers and Pipefitters Local Union 719 Pension Fund. The
plaintiff did not seek damages from us, but instead requested
damages of an unspecified amount on our behalf. The plaintiff
also sought equitable relief to remedy the individual
defendants alleged misconduct, attorneys fees, costs
and other relief. On August 20, 2009, the parties submitted
a Joint Motion for Dismissal Without Prejudice. The court
granted that motion on August 27, 2009 and dismissed the
matter without prejudice.
On November 20, 2008, a complaint was filed in the
U.S. District Court for the Northern District of Indiana,
Dewald v. Zimmer Holdings, Inc., et al., naming us and
certain of our current and former directors and employees as
defendants. The complaint relates to a putative class action on
behalf of all persons who were participants in or beneficiaries
of our U.S. or Puerto Rico Savings and Investment Programs
(plans) between October 5, 2007 and the date of
filing and whose accounts included investments in our common
stock. The complaint alleges, among other things, that the
defendants breached their fiduciary duties in violation of the
Employee Retirement Income Security Act of 1974, as amended, by
continuing to offer Zimmer stock as an investment option in the
plans when the stock purportedly was no longer a prudent
investment and that defendants failed to provide plan
participants with complete and accurate information sufficient
to advise them of the risks of investing their retirement
savings in Zimmer stock. The plaintiff seeks an unspecified
monetary payment to the plans, injunctive and equitable relief,
attorneys fees, costs and other relief. On
January 23, 2009, the plaintiff filed an amended complaint
that alleges the same claims and clarifies that the class period
is October 5, 2007 through September 2, 2008. The
defendants filed a motion to dismiss the amended complaint on
March 23, 2009. The motion to dismiss is pending with the
court. On June 12, 2009, the U.S. Judicial Panel on
Multidistrict Litigation entered an order transferring the
Dewald case to the U.S. District Court for the Southern
District of Indiana for coordinated or consolidated pretrial
proceedings with the Plumbers & Pipefitters Local
Union 719 Pension Fund case referenced above. We believe this
lawsuit is without merit, and we and the individual defendants
intend to defend it vigorously.
20
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We are a global leader in the design, development, manufacture
and marketing of orthopaedic reconstructive implants, dental
implants, spinal implants, trauma products and related surgical
products (sometimes referred to in this report as
OSP). We also provide other healthcare related
services. Reconstructive orthopaedic implants restore joint
function lost due to disease or trauma in joints such as knees,
hips, shoulders and elbows. Dental implants restore function and
aesthetics in patients who have lost teeth due to trauma or
disease. Spinal implants are utilized by orthopaedic surgeons
and neurosurgeons in the treatment of degenerative diseases,
deformities and trauma in all regions of the spine. Trauma
products are devices used primarily to reattach or stabilize
damaged bone and tissue to support the bodys natural
healing process. OSP includes supplies and instruments designed
to aid in predominantly orthopaedic surgical procedures and
post-operation rehabilitation. We have operations in more than
25 countries and market products in more than 100 countries. We
manage operations through three reportable geographic
segments the Americas, Europe and Asia Pacific.
Certain percentages presented in Managements Discussion
and Analysis are calculated from the underlying whole-dollar
amounts and therefore may not recalculate from the rounded
numbers used for disclosure purposes. In addition, certain
amounts in the 2008 consolidated financial statements have been
reclassified to conform to the 2009 presentation. Beginning in
2009, we no longer include our Dental product category sales
within our Reconstructive products category. Prior year amounts
related to Dental product category sales have been reclassified
to conform to the current year presentation.
We believe the following developments or trends are important in
understanding our financial condition, results of operations and
cash flows for the three and nine month periods ended
September 30, 2009 and our expected results for the
remainder of 2009.
Demand
(Volume and Mix) Trends
Volume and mix of products increased 4 percent during the
three month period ended September 30, 2009, compared to a
3 percent increase in the same 2008 period. The sales
growth rate increase demonstrates the broad acceptance of
patient specific solutions.
We believe the market for orthopaedic procedure volume
temporarily decelerated from mid single digit growth rates to
low single digit growth rates on a global basis due to the
weakened global economy. We believe long-term market growth
rates will be driven by an aging global population, obesity,
proven clinical benefits, new material technologies, advances in
surgical techniques and more active lifestyles, among other
factors. In addition, the ongoing shift in demand to premium
products, such as
Longevity®
and
Prolong®
Highly Crosslinked Polyethylenes, Trabecular
MetalTM
Technology products, hip stems with Kinectiv Technology,
high-flex knees, knee revision products, porous hip stems and
the introduction of patient specific devices continues to
positively affect sales growth.
Pricing
Trends
Global selling prices decreased 1 percent during the three
month period ended September 30, 2009 compared to flat
pricing in the same 2008 period. Selling prices in both the
Americas and Europe decreased 1 percent during the three
month period ended September 30, 2009, compared to flat
pricing in the same 2008 period. Asia Pacific selling prices
were flat for the three month period ended September 30,
2009, compared to a 4 percent decrease in the same 2008 period,
as we anniversaried out of scheduled reductions in reimbursement
prices in Japan. With the effect of governmental healthcare cost
containment efforts and continuing pressure from local hospitals
and health systems, we expect selling prices will be down
approximately 1 percent on a global basis for 2009.
Foreign
Currency Exchange Rates
For the three month period ended September 30, 2009,
foreign currency exchange rates resulted in a 1 percent
decline in sales. We estimate that an overall stronger
U.S. Dollar versus foreign currency exchange rates will
have a negative effect of approximately 2 percent on sales
for the year ending December 31, 2009. We address currency
21
risk through regular operating and financing activities, and
under appropriate circumstances and subject to proper
authorization, through the use of forward contracts and foreign
currency options solely for managing foreign currency volatility
and risk. Changes to foreign currency exchange rates affect
sales growth, but due to offsetting gains/losses on hedge
contracts, which are recorded in cost of products sold, the
effect on net earnings in the near term is expected to be
minimal.
Disruptive
Events
We believe that we suffered customer losses as a result of
disruptive factors experienced during 2008, including the
implementation of our enhanced global compliance initiatives,
our temporary suspension of U.S. marketing and distribution
of the Durom Cup and our voluntary recall and suspension
of production of certain OSP patient care products. We estimated
that these customer losses reduced our global knee market share
by approximately 1.5 percent and hip market share by
approximately 2.0 percent on a cumulative basis through the
end of 2008. We believe these share losses have stabilized
during 2009 and expect this stabilization to continue as we
anniversary out of the majority of the 2008 customer and
product-related losses and as we launch new products in
sufficient quantities to recover some of the product-related
losses. However, we expect our sales growth may continue to be
at a rate slower than the market in the near term due to these
disruptive factors.
Global
Economic Conditions
We believe conditions in the broader economy have resulted in a
temporary slowdown in elective hospital procedures. Although
many of our products are used in elective procedures, we believe
our core knee and hip franchises remain more insulated than many
medical product categories from swings in the broader economy
because the need for these procedures does not diminish, even if
the timing is affected. In particular, our dental revenues have
experienced pressure due to the weak economic environment as
many of those procedures are not reimbursed by third-party
payors.
Third
Quarter and
Year-to-Date
Results of Operations
Net
Sales by Operating Segment
The following table presents net sales by operating segment and
the components of the percentage changes (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
Volume/
|
|
|
|
|
|
Foreign
|
|
|
|
2009
|
|
|
2008
|
|
|
% Inc (Dec)
|
|
|
Mix
|
|
|
Price
|
|
|
Exchange
|
|
|
Americas
|
|
$
|
584.5
|
|
|
$
|
563.3
|
|
|
|
4
|
%
|
|
|
5
|
%
|
|
|
(1
|
)%
|
|
|
|
%
|
Europe
|
|
|
242.4
|
|
|
|
251.0
|
|
|
|
(3
|
)
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
(6
|
)
|
Asia Pacific
|
|
|
148.7
|
|
|
|
137.9
|
|
|
|
8
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
975.6
|
|
|
$
|
952.2
|
|
|
|
2
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
Volume/
|
|
|
|
|
|
Foreign
|
|
|
|
2009
|
|
|
2008
|
|
|
% (Dec)
|
|
|
Mix
|
|
|
Price
|
|
|
Exchange
|
|
|
Americas
|
|
$
|
1,768.7
|
|
|
$
|
1,764.9
|
|
|
|
|
%
|
|
|
2
|
%
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
Europe
|
|
|
787.9
|
|
|
|
882.3
|
|
|
|
(11
|
)
|
|
|
1
|
|
|
|
|
|
|
|
(12
|
)
|
Asia Pacific
|
|
|
431.5
|
|
|
|
443.7
|
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,988.1
|
|
|
$
|
3,090.9
|
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange as used in the tables in this
report represents the effect of changes in foreign exchange
rates on sales growth.
22
Net
Sales by Product Category
The following table presents net sales by product category and
the components of the percentage changes (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
Volume/
|
|
|
|
|
|
Foreign
|
|
|
|
2009
|
|
|
2008
|
|
|
% Inc (Dec)
|
|
|
Mix
|
|
|
Price
|
|
|
Exchange
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
$
|
417.4
|
|
|
$
|
411.2
|
|
|
|
2
|
%
|
|
|
4
|
%
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
Hips
|
|
|
288.2
|
|
|
|
292.3
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Extremities
|
|
|
32.6
|
|
|
|
27.5
|
|
|
|
19
|
|
|
|
21
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
738.2
|
|
|
|
731.0
|
|
|
|
1
|
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental
|
|
|
48.0
|
|
|
|
51.8
|
|
|
|
(8
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
(2
|
)
|
Trauma
|
|
|
57.6
|
|
|
|
54.6
|
|
|
|
6
|
|
|
|
4
|
|
|
|
2
|
|
|
|
|
|
Spine
|
|
|
61.7
|
|
|
|
49.7
|
|
|
|
24
|
|
|
|
27
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
OSP and other
|
|
|
70.1
|
|
|
|
65.1
|
|
|
|
8
|
|
|
|
6
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
975.6
|
|
|
$
|
952.2
|
|
|
|
2
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
Volume/
|
|
|
|
|
|
Foreign
|
|
|
|
2009
|
|
|
2008
|
|
|
% Inc (Dec)
|
|
|
Mix
|
|
|
Price
|
|
|
Exchange
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
$
|
1,284.6
|
|
|
$
|
1,332.0
|
|
|
|
(4
|
)
|
|
|
1
|
%
|
|
|
(1
|
)%
|
|
|
(4
|
)%
|
Hips
|
|
|
895.9
|
|
|
|
965.2
|
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
Extremities
|
|
|
99.3
|
|
|
|
90.4
|
|
|
|
10
|
|
|
|
14
|
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,279.8
|
|
|
|
2,387.6
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental
|
|
|
148.1
|
|
|
|
170.9
|
|
|
|
(13
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
(3
|
)
|
Trauma
|
|
|
171.2
|
|
|
|
165.2
|
|
|
|
4
|
|
|
|
5
|
|
|
|
1
|
|
|
|
(2
|
)
|
Spine
|
|
|
190.5
|
|
|
|
158.0
|
|
|
|
21
|
|
|
|
24
|
|
|
|
|
|
|
|
(3
|
)
|
OSP and other
|
|
|
198.5
|
|
|
|
209.2
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,988.1
|
|
|
$
|
3,090.9
|
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
The following table presents net sales by product category by
region (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Inc (Dec)
|
|
|
2009
|
|
|
2008
|
|
|
% Inc (Dec)
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
270.5
|
|
|
$
|
264.0
|
|
|
|
2
|
%
|
|
$
|
818.3
|
|
|
$
|
824.0
|
|
|
|
(1
|
)%
|
Europe
|
|
|
89.6
|
|
|
|
94.5
|
|
|
|
(5
|
)
|
|
|
302.6
|
|
|
|
339.7
|
|
|
|
(11
|
)
|
Asia Pacific
|
|
|
57.3
|
|
|
|
52.7
|
|
|
|
9
|
|
|
|
163.7
|
|
|
|
168.3
|
|
|
|
(3
|
)
|
Hips
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
138.1
|
|
|
|
137.8
|
|
|
|
|
|
|
|
423.0
|
|
|
|
435.5
|
|
|
|
(3
|
)
|
Europe
|
|
|
99.4
|
|
|
|
106.8
|
|
|
|
(7
|
)
|
|
|
318.8
|
|
|
|
372.7
|
|
|
|
(14
|
)
|
Asia Pacific
|
|
|
50.7
|
|
|
|
47.7
|
|
|
|
6
|
|
|
|
154.1
|
|
|
|
157.0
|
|
|
|
(2
|
)
|
Extremities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
25.3
|
|
|
|
20.3
|
|
|
|
25
|
|
|
|
76.7
|
|
|
|
65.3
|
|
|
|
17
|
|
Europe
|
|
|
5.3
|
|
|
|
5.7
|
|
|
|
(5
|
)
|
|
|
17.0
|
|
|
|
19.8
|
|
|
|
(14
|
)
|
Asia Pacific
|
|
|
2.0
|
|
|
|
1.5
|
|
|
|
33
|
|
|
|
5.6
|
|
|
|
5.3
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
738.2
|
|
|
|
731.0
|
|
|
|
1
|
|
|
|
2,279.8
|
|
|
|
2,387.6
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
25.4
|
|
|
|
28.3
|
|
|
|
(10
|
)
|
|
|
77.5
|
|
|
|
87.5
|
|
|
|
(11
|
)
|
Europe
|
|
|
16.2
|
|
|
|
15.3
|
|
|
|
6
|
|
|
|
53.3
|
|
|
|
58.7
|
|
|
|
(9
|
)
|
Asia Pacific
|
|
|
6.4
|
|
|
|
8.2
|
|
|
|
(23
|
)
|
|
|
17.3
|
|
|
|
24.7
|
|
|
|
(30
|
)
|
Trauma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
31.2
|
|
|
|
31.1
|
|
|
|
|
|
|
|
94.8
|
|
|
|
95.4
|
|
|
|
(1
|
)
|
Europe
|
|
|
13.2
|
|
|
|
12.3
|
|
|
|
7
|
|
|
|
36.5
|
|
|
|
35.5
|
|
|
|
3
|
|
Asia Pacific
|
|
|
13.2
|
|
|
|
11.2
|
|
|
|
19
|
|
|
|
39.9
|
|
|
|
34.3
|
|
|
|
16
|
|
Spine
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
48.0
|
|
|
|
38.9
|
|
|
|
24
|
|
|
|
148.0
|
|
|
|
123.5
|
|
|
|
20
|
|
Europe
|
|
|
9.8
|
|
|
|
8.3
|
|
|
|
18
|
|
|
|
32.3
|
|
|
|
27.6
|
|
|
|
17
|
|
Asia Pacific
|
|
|
3.9
|
|
|
|
2.5
|
|
|
|
55
|
|
|
|
10.2
|
|
|
|
6.9
|
|
|
|
48
|
|
OSP and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
46.0
|
|
|
|
42.9
|
|
|
|
7
|
|
|
|
130.4
|
|
|
|
133.7
|
|
|
|
(2
|
)
|
Europe
|
|
|
8.9
|
|
|
|
8.1
|
|
|
|
9
|
|
|
|
27.4
|
|
|
|
28.3
|
|
|
|
(3
|
)
|
Asia Pacific
|
|
|
15.2
|
|
|
|
14.1
|
|
|
|
7
|
|
|
|
40.7
|
|
|
|
47.2
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
975.6
|
|
|
$
|
952.2
|
|
|
|
2
|
|
|
$
|
2,988.1
|
|
|
$
|
3,090.9
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
The
NexGen®
Complete Knee Solution product line, including Gender
Solutions Knee Femoral Implants, the NexGen LPS-Flex
Knee, the NexGen CR-Flex Knee and the NexGen LCCK
Revision Knee, led knee sales. In addition, the Gender
Solutions Natural-Knee Flex System made a strong
contribution. In Europe, changes in foreign exchange rates
negatively affected knee sales in the three and nine month
periods ending September 30, 2009 by 6 percent and
12 percent, respectively. In Asia Pacific, changes in
foreign exchange rates positively affected knee sales in the
three month period ending September 30, 2009 by
2 percent and negatively affected knee sales by
4 percent on a
year-to-date
basis.
24
Hips
The continued conversion to porous stems, including the
Zimmer®
M/L Taper Stem, the Zimmer M/L Taper Stem with
Kinectiv Technology, the
CLS®
Spotorno®
Stem from the CLS Hip System, and the
Alloclassic®
Zweymüller®
Hip Stem, led hip stem sales, but was partially offset by weaker
sales of cemented stems. Trabecular Metal Acetabular Cups
and Longevity and Durasul Highly Crosslinked
Polyethylene Liners also made strong contributions. With the
lack of a hip resurfacing product within our U.S. hip
portfolio, we face a continuing challenge in hip sales growth
with the adoption of hip resurfacing in the U.S. market. In
Europe, changes in foreign exchange rates negatively affected
hip sales in the three and nine month periods ending
September 30, 2009 by 6 percent and 10 percent,
respectively. In Asia Pacific, changes in foreign exchange rates
positively affected hip sales in the three and nine month
periods ending September 30, 2009 by 5 percent and
1 percent, respectively.
Extremities
The
Bigliani/Flatow®
Complete Shoulder Solution and the Zimmer Trabecular
Metal Reverse Shoulder System led extremities sales.
Dental
Negative sales growth for our dental business reflects overall
weakness in the global economy. While dental sales in the
Americas and Asia Pacific reflect this weakness, dental sales in
Europe in the three month period increased 6 percent, led by the
Tapered
Screw-Vent®
Implant System.
Trauma
Zimmer Periarticular Locking Plates and the
I.T.S.T.TM
Intertrochanteric/Subtrochanteric Fixation System led trauma
sales but were partially offset by declining sales of
compression hip screws. Femoral and tibial nails within the new
Zimmer Natural
NailTM
system also made a contribution during the three month period.
Spine
In the fourth quarter of 2008, we acquired Abbott Spine. As a
result of the acquisition, spine sales have increased but the
increase is offset in part by sales dis-synergies associated
with the integration of the business. Solid sales of acquired
fusion devices as well as legacy vertebral body replacement
devices and bone graft substitutes partly offset a decline in
sales of the
Dynesys®
Dynamic Stabilization System in the three month period.
OSP
and other
OSP sales were led by
PALACOS®1
Bone Cement. OSP products had positive sales growth of
8 percent for the three month period ended
September 30, 2009 and a negative growth rate of
5 percent on a
year-to-date
basis. This improvement in the third quarter 2009 was driven by
the effect of anniversarying out of the voluntary suspension and
recall of certain products during 2008 and by the reintroduction
of wound debridement products in 2009.
1 Trademark
of Heraeus Kulzer GmbH
25
Expenses
as a Percent of Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Inc (Dec)
|
|
|
2009
|
|
|
2008
|
|
|
Inc (Dec)
|
|
|
Cost of products sold
|
|
|
25.6
|
%
|
|
|
24.9
|
%
|
|
|
0.7
|
|
|
|
24.0
|
%
|
|
|
24.4
|
%
|
|
|
(0.4
|
)
|
Research and development
|
|
|
5.3
|
|
|
|
5.0
|
|
|
|
0.3
|
|
|
|
5.1
|
|
|
|
4.7
|
|
|
|
0.4
|
|
Selling, general and administrative
|
|
|
42.3
|
|
|
|
42.4
|
|
|
|
(0.1
|
)
|
|
|
42.5
|
|
|
|
41.1
|
|
|
|
1.4
|
|
Certain claims
|
|
|
3.6
|
|
|
|
5.0
|
|
|
|
(1.4
|
)
|
|
|
1.2
|
|
|
|
1.5
|
|
|
|
(0.3
|
)
|
Acquisition, integration, realignment and other
|
|
|
2.3
|
|
|
|
0.6
|
|
|
|
1.7
|
|
|
|
2.2
|
|
|
|
0.8
|
|
|
|
1.4
|
|
Net curtailment and settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
53.5
|
|
|
|
53.0
|
|
|
|
0.5
|
|
|
|
49.9
|
|
|
|
48.1
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
20.9
|
|
|
|
22.1
|
|
|
|
(1.2
|
)
|
|
|
26.1
|
|
|
|
27.5
|
|
|
|
(1.4
|
)
|
Interest and other income (expense),net
|
|
|
(0.4
|
)
|
|
|
3.0
|
|
|
|
3.4
|
|
|
|
(0.4
|
)
|
|
|
1.2
|
|
|
|
1.6
|
|
Cost
of Products Sold
The increase in cost of products sold as a percent of net sales
for the three month 2009 period compared to the same 2008 period
was driven by higher manufacturing costs per unit due to lower
production levels during 2009. These costs were partially offset
by foreign currency hedge gains recognized in the 2009 period
compared to hedge losses recognized in the 2008 period. On a
year-to-date
basis, the improvement in gross margin is due to foreign
currency hedge gains recognized in the 2009 period compared to
hedge losses recognized in the 2008 period. These hedge gains
were partially offset by higher manufacturing costs per unit as
well as increased inventory
step-up as a
result of the Abbott Spine acquisition.
Under our hedging program, for derivatives which qualify as
hedges of future cash flows, the effective portion of changes in
fair value is temporarily recorded in other comprehensive
income, and then recognized in cost of products sold when the
hedged item affects earnings.
Operating
Expenses
Research and development expense, or R&D, increased to
$52.1 million and $153.8 million for the three and
nine month periods ended September 30, 2009, respectively,
from $47.9 million and $144.0 million in the same 2008
periods, respectively. This increase reflects additional
spending on certain development, clinical and external research
activities compared to the delay in activities experienced in
2008 as we implemented our enhanced compliance program. We
expect R&D spending in 2009 to be over 5 percent of
sales for the full year.
Selling, general and administrative expense, or SG&A,
increased to $413.0 million from $403.7 million for
the three month period ended September 30, 2009 compared to
the same 2008 period. This is a slight improvement in SG&A
margin by ten basis points. SG&A expense in the 2008 period
included approximately $20 million of non-recurring costs,
such as monitor fees and consulting and legal fees associated
with the global roll-out of our enhanced compliance program. In
this challenging economic environment, we are carefully managing
our SG&A spend, reducing expenses in certain areas in order
to fund growth and productivity initiatives. Areas of investment
include marketing and promotion and medical education and
training. Additionally, the acquisition of Abbott Spine
increased SG&A costs for items such as selling expenses,
increased instrument depreciation and amortization of the
acquired intangible assets.
On a
year-to-date
basis, SG&A expense decreased modestly from the same 2008
period, but SG&A margin has increased by 140 basis
points. SG&A expense in the 2008 period included
approximately $50 million of non-recurring costs such as
monitor fees and consulting and legal fees associated with the
global roll-out of our enhanced compliance program. The savings
from these non-recurring costs have been partially offset by
increased spending in 2009 to fund initiatives and Abbott Spine
costs, as discussed above. Additionally, SG&A margin is
negatively impacted by the decrease in revenues caused by
changes in foreign currency rates. A majority of our SG&A
spend is incurred in the U.S., primarily from our corporate
headquarters and similar functions at our various
26
businesses such as Dental, Trauma, Spine and OSP. Therefore,
SG&A expense does not respond to changes in foreign
currency rates proportionally to our revenue, which has caused
SG&A margin to increase.
Certain claims expense is a provision for estimated Durom
Cup patients undergoing revision surgeries within specified
times. A provision of $69.0 million was originally recorded
during 2008 with an additional $35.0 million recorded
during the three month period ended September 30, 2009,
bringing the total provision to $104.0 million for these
claims. For more information regarding certain claims, see
Note 14 to the consolidated financial statements.
Acquisition, integration, realignment and other expenses for the
three and nine month periods ended September 30, 2009 were
$22.2 million and $65.7 million, respectively,
compared to $5.6 million and $25.4 million in the same
2008 periods. The increase in the three month 2009 period
compared to the same 2008 period relates primarily to
approximately $9.3 million of certain litigation matters
recognized during the 2009 period as well as costs incurred
related to acquired distributors. During the nine month 2009
period, we initiated a workforce realignment, which included the
elimination of positions in some areas and planned increases in
others, to balance the requirements necessary to support
long-term growth. As a result of this realignment and severance
costs from acquisitions, we incurred approximately
$18.4 million of severance and termination-related
expenses. Other items contributing to the increase on a
year-to-date
basis include $8.6 million of expenses related to contract
termination costs, $14.1 million of certain litigation
matters that were recognized during the period and various costs
incurred to integrate the Abbott Spine business acquired in the
fourth quarter of 2008.
We recognized a net curtailment and settlement gain of
$32.1 million during the nine month period ended
September 30, 2009 related to amending our U.S. and
Puerto Rico postretirement benefit plans. For more information
regarding the net curtailment and settlement gain, see
Note 11 to the consolidated financial statements.
Operating
Profit, Interest and Other Expense, Income Taxes and Net
Earnings
Operating profit for the three and nine month periods ended
September 30, 2009 was $204.0 million and
$780.3 million, respectively, from $210.3 million and
$850.3 million in the same 2008 periods. The decrease in
operating profit is due to higher operating expenses as a
percent of sales and lower reported revenues on a
year-to-date
basis.
Interest and other expense, net for the three and nine month
periods ended September 30, 2009, increased to
$4.2 million and $11.9 million, respectively, compared
to income of $28.2 million and $36.0 million in the
same 2008 periods. Interest and other income in the 2008 periods
reflects realized gains of $30.1 million for the three
month period and $38.8 million for the nine month period,
related to the sale of certain marketable securities. Excluding
the effect of these gains in 2008, interest expense increased in
the 2009 periods as the result of increased long-term debt used
to partially fund the Abbott Spine acquisition and share
repurchases.
The effective tax rate on earnings before income taxes increased
to 25.0 percent for the three month period ended
September 30, 2009, from 9.8 percent in the same 2008
period. The effective tax rate for the 2008 period reflected a
tax benefit of approximately $30.8 million related to a
2007 civil settlement. Additionally, the effective tax rate on
earnings for the nine month period ended September 30, 2008
was impacted by this tax benefit. The effective tax rate for the
nine month period ended September 30, 2009 increased to
26.8 percent from 23.1 percent in the same 2008 period.
Net earnings decreased 30 percent to $149.9 million
for the three month period ended September 30, 2009,
compared to $214.7 million in the same 2008 period. Net
earnings decreased 17 percent to $562.2 million for
the nine month period ended September 30, 2009, compared to
$681.1 million in the same 2008 period. For the three month
2009 period, basic earnings per share decreased 27 percent
to $0.70 from $0.96. Diluted earnings per share for the three
month 2009 period decreased 26 percent to $0.70 from $0.95
in the same 2008 period. For the nine month 2009 period, basic
earnings per share decreased 13 percent to $2.60 from $2.98
in the same 2008 period and diluted earnings per share also
decreased 13 percent to $2.59 from $2.97 in the same 2008
period. The disproportional change in earnings per share as
compared with net earnings is attributed to the effect of 2009
and 2008 share repurchases.
27
Liquidity
and Capital Resources
Cash flows provided by operating activities were
$732.0 million for the nine month period ended
September 30, 2009, compared to $831.2 million in the
same 2008 period. The principal source of cash was net earnings
of $562.2 million. Non-cash items included in net earnings
accounted for another $285.1 million of operating cash. All
other items of operating cash flows reflect a use of
$115.3 million of cash. The resolution of outstanding
payments to healthcare professionals and institutions resulted
in increased cash outflows during the 2009 period compared to
the delay in similar payments during the 2008 period as we
implemented our enhanced global compliance program. The
resolution of these outstanding payments, along with a change in
the timing of employee bonus payments compared to the 2008
period, contributed to a decrease in accrued expenses for the
nine month period ended September 30, 2009.
At September 30, 2009, we had 63 days of sales
outstanding in trade accounts receivable, which is an increase
of 4 days compared to September 30, 2008 and flat
compared June 30, 2009. At September 30, 2009, we had
353 days of inventory on hand, a decrease of 22 days
compared to June 30, 2009. Over the past two years we have
made significant investments in inventory, including investments
in response to growing demand for systems that provide more
versatility and better fit for patients. In the third quarter of
2009, we have made progress rationalizing these investments
through reductions in field-based consignments and through the
use of new inventory management tools to speed returns and
redeployments. The continued build out of pipeline inventory for
planned product launches will partially offset these reductions
in field consignments.
Cash flows used in investing activities were $247.9 million
for the nine month period ended September 30, 2009,
compared to $339.4 million used in investing in the same
2008 period. Additions to instruments decreased during the nine
month period ended September 30, 2009 compared to the 2008
period, as
year-over-year
spending on instruments is expected to decrease compared to the
significant investments made in 2008. Spending on other
property, plant and equipment decreased to $76.8 million
during the nine month period ended September 30, 2009
compared to $189.2 million in the same 2008 period. We
expect decreased spending on property, plant and equipment
compared to 2008 levels, as certain planned infrastructure
initiatives from 2008 are completed and as we adjust spending to
lower production volumes. Acquired intellectual property rights
of $32.9 million relate to lump-sum payments made to
certain healthcare professionals and institutions in place of
future royalty payments that otherwise would have been due under
the terms of an existing contractual arrangement. Investments in
other assets of $35.5 million primarily relates to payments
to acquire certain foreign-based distributors.
Cash flows used in financing activities were $264.3 million
for the nine month period ended September 30, 2009,
compared to $408.2 million used in financing activities in
the same 2008 period. We borrowed $141.0 million from our
credit facilities during the nine month period ended
September 30, 2009 to repurchase shares of our common
stock. For the nine months ended September 30, 2009, we
purchased 10.8 million common shares for a total of
$404.4 million, including commissions, under our stock
repurchase program authorized by our Board of Directors,
compared to $688.9 million in the same 2008 period.
Proceeds from our stock compensation plans have decreased in the
nine month period ended September 30, 2009, compared to the
same 2008 period, due to a decrease in employee stock option
exercises.
We have a five year $1,350 million revolving,
multi-currency, senior unsecured credit facility maturing
November 30, 2012 (the Senior Credit Facility).
We had $600.2 million outstanding under the Senior Credit
Facility at September 30, 2009, and, therefore, our
available borrowings were $749.8 million. The Senior Credit
Facility contains provisions whereby borrowings may be increased
to $1,750 million and we may request that the maturity date
be extended for two additional one-year periods.
We and certain of our wholly-owned foreign subsidiaries are the
borrowers under the Senior Credit Facility. Borrowings under the
Senior Credit Facility are used for general corporate purposes
and bear interest at a LIBOR-based rate plus an applicable
margin determined by reference to our senior unsecured long-term
credit rating and the amounts drawn under the Senior Credit
Facility, at an alternate base rate, or at a fixed rate
determined through a competitive bid process. The Senior Credit
Facility contains customary affirmative and negative covenants
and events of default for an unsecured financing arrangement,
including, among other things, limitations on consolidations,
mergers and sales of assets. Financial covenants include a
maximum leverage ratio of 3.0 to 1.0 and a minimum interest
coverage ratio of 3.5 to 1.0. If we fall below an investment
grade credit rating, additional restrictions would
28
result, including restrictions on investments, payment of
dividends and stock repurchases. We were in compliance with all
covenants under the Senior Credit Facility as of
September 30, 2009. Commitments under the Senior Credit
Facility are subject to certain fees, including a facility fee
and a utilization fee. The Senior Credit Facility is rated A- by
Standard & Poors Ratings Services and is not
rated by Moodys Investors Service, Inc.
We also have available uncommitted credit facilities totaling
$106.5 million.
We may use excess cash or further borrow against our Senior
Credit Facility, subject to limits set by our Board of
Directors, to repurchase additional common stock under the
$1.25 billion program which expires December 31, 2010.
Management believes that cash flows from operations, together
with available borrowings under the Senior Credit Facility, are
sufficient to meet our working capital, capital expenditure and
debt service needs. Should investment opportunities arise, we
believe that our earnings, balance sheet and cash flows will
allow us to obtain additional capital, if necessary.
Recent
Accounting Pronouncements
Effective for interim and annual periods ending after
September 15, 2009, the FASB has defined a new hierarchy
for U.S. GAAP and established the FASB Accounting Standards
Codification (ASC) as the sole source for authoritative guidance
to be applied by nongovernmental entities. The adoption of the
ASC changes the manner in which U.S. GAAP guidance is
referenced, but it does not have any impact on our financial
position or results of operations.
Critical
Accounting Policies
Except as set forth below, there were no changes in the nine
month period ended September 30, 2009 to the application of
critical accounting estimates as described in our Annual Report
on
Form 10-K
for the year ended December 31, 2008.
Commitments and Contingencies Accruals for
product liability and other claims are established with internal
and external legal counsel based on current information and
historical settlement information for claims, related fees and
for claims incurred but not reported. We use an actuarial model
to assist management in determining an appropriate level of
accruals for product liability claims. Historical patterns of
claim loss development over time are statistically analyzed to
arrive at factors which are then applied to loss estimates in
the actuarial model. During the three month period ended
September 30, 2009, in addition to our general product
liability estimates and the $69.0 million provision
recorded in 2008 related to the Durom Cup, we recorded an
additional provision for certain claims of $35.0 million
representing managements updated estimate of liability to
Durom Cup patients undergoing revisions associated with
surgeries occurring before July 2008 and within two years of the
original surgery date. These parameters are consistent with our
data which indicates that cup loosenings associated with
surgical technique are most likely to occur within that time
period. Any claims received outside of these defined parameters
will be managed in the normal course and reflected in our
standard quarterly product liability accruals.
Forward-Looking
Statements
This quarterly report contains certain statements that are
forward-looking statements within the meaning of federal
securities laws. When used in this report, the words
may, will, should,
anticipate, estimate,
expect, plan, believe,
predict, potential, project,
target, forecast, intend,
assume, guide, seek and
similar expressions are intended to identify forward-looking
statements. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties
include, but are not limited to:
|
|
|
|
|
competition;
|
|
|
|
pricing pressures;
|
|
|
|
dependence on new product development, technological advances
and innovation;
|
29
|
|
|
|
|
healthcare reform measures in the U.S. and elsewhere,
reductions in reimbursement levels by third-party payors and
cost containment efforts of healthcare purchasing organizations;
|
|
|
|
the costs of defending or resolving putative class action
litigation and lawsuits, investigations or other proceedings
resulting from our September 2007 settlement with the United
States government and other matters;
|
|
|
|
our compliance through 2012 with the Corporate Integrity
Agreement we entered into as part of the September 2007
settlement;
|
|
|
|
the success of our quality initiatives;
|
|
|
|
the outcome of the informal investigation by the
U.S. Securities and Exchange Commission into Foreign
Corrupt Practices Act matters announced in October 2007;
|
|
|
|
challenges relating to changes in and compliance with
governmental laws and regulations affecting our U.S. and
international businesses, including regulations of the
U.S. Food and Drug Administration and foreign government
regulators, such as more stringent requirements for regulatory
clearance of our products;
|
|
|
|
tax reform measures, tax authority examinations and associated
tax risks and potential obligations;
|
|
|
|
retention of our independent agents and distributors;
|
|
|
|
changes in customer demand for our products and services caused
by demographic changes or other factors;
|
|
|
|
changes in general domestic and international economic
conditions, including interest rate and currency exchange rate
fluctuations;
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our ability to protect proprietary technology and other
intellectual property and claims for infringement of the
intellectual property rights of third parties;
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product liability claims;
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the impact of temporarily suspending U.S. marketing and
distribution of the Durom Cup on our revenues, our
customer relationships, our entry into the U.S. hip
resurfacing market and product liability claims;
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the possible disruptive effect of additional strategic
acquisitions and our ability to successfully integrate acquired
companies;
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our ability to form strategic alliances;
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changes in prices of raw materials and products and our ability
to control costs and expenses;
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changes in general industry and market conditions, including
domestic and international growth rates;
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our dependence on a limited number of suppliers for key raw
materials and outsourced activities; and
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shifts in our product category sales mix or our regional sales
mix away from products or geographic regions that generate
higher operating margins.
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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There have been no material changes from the information
provided in our Annual Report on
Form 10-K
for the year ended December 31, 2008.
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Item 4.
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Controls
and Procedures
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We have established disclosure controls and procedures and
internal controls over financial reporting to provide reasonable
assurance that material information relating to us, including
our consolidated subsidiaries, is made known on a timely basis
to management and the Board of Directors. However, no control
system, no matter how well designed and operated, can provide
absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if
any, within a company have been detected.
30
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of our disclosure controls and
procedures (as defined in
Rule 13a-15(e)
of the Securities Exchange Act of 1934). Based upon that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures as
of the end of the period covered by this report are effective.
There was no change in our internal control over financial
reporting (as defined in
Rule 13a-15(f)
of the Securities Exchange Act of 1934) that occurred
during the quarter ended September 30, 2009 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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Item 1.
|
Legal
Proceedings
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Information pertaining to legal proceedings can be found in
Note 14 to the interim consolidated financial statements
included in Part I of this report.
Except as set forth below and in our Quarterly Reports on
Form 10-Q
for the quarters ended March 31, 2009 and June 30,
2009, there have been no material changes from the risk factors
disclosed in Part I Item 1A of our Annual
Report on
Form 10-K
for the year ended December 31, 2008.
The following risk factor under RISKS RELATED TO OUR
INDUSTRY has been revised as follows:
The
impact of healthcare reform in the U.S. on us is
uncertain.
There is increasing emphasis within the federal government to
reform healthcare in the U.S. Although various proposals
have received support in the House of Representatives or Senate
committees, there still is no consensus on key issues such as
whether there will be an employer mandate for healthcare
insurance or a public healthcare insurance program and how to
pay for increased costs. To the extent that the number of
uninsured or underinsured patients is reduced, demand for our
products could increase. However, efforts to pay for healthcare
reform through a proposed new tax on medical device companies
and efforts to contain healthcare costs, directly through
pricing or reimbursement controls or indirectly by
government-sponsored healthcare insurance, could have a material
adverse effect on our sales and results of operations.
Accordingly, the impact of healthcare reform on the medical
device industry in general or us in particular remains uncertain.
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Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
The following table summarizes repurchases of common stock
settled during the three month period ended September 30,
2009:
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Total Number of
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Approximate
|
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Shares Purchased
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Dollar Value of
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as Part of
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Shares that May
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Total Number
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Publicly
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Yet Be Purchased
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of Shares
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Average Price
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Announced Plans
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Under Plans
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Purchased
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Paid per Share
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or Programs*
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or Programs
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July 2009
|
|
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$
|
|
|
|
|
39,490,867
|
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|
$
|
796,726,122
|
|
August 2009
|
|
|
1,450,000
|
|
|
|
45.89
|
|
|
|
40,940,867
|
|
|
|
730,190,146
|
|
September 2009
|
|
|
|
|
|
|
|
|
|
|
40,940,867
|
|
|
|
730,190,146
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
|
|
|
1,450,000
|
|
|
$
|
45.89
|
|
|
|
40,940,867
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|
$
|
730,190,146
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* |
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Includes repurchases made under expired programs as well as the
current program authorizing $1.25 billion of repurchases
through December 31, 2010. |
31
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Item 5.
|
Other
Information
|
During the period covered by this report, the Audit Committee of
our Board of Directors was not asked to, and did not, approve
the engagement of PricewaterhouseCoopers LLP, our independent
registered public accounting firm, to perform any non-audit
services. This disclosure is made pursuant to
Section 10A(i)(2) of the Securities Exchange Act of 1934,
as added by Section 202 of the Sarbanes-Oxley Act of 2002.
The following exhibits are filed or furnished as part of this
report:
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31.1
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Certification pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934 of the Chief Executive
Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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31.2
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|
Certification pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934 of the Chief Financial
Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32
|
|
|
Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
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101
|
|
|
The following materials from Zimmer Holdings, Inc.s
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2009, formatted in XBRL
(Extensible Business Reporting Language): (1) the
Consolidated Statements of Earnings, (2) the Consolidated
Balance Sheets, (3) the Consolidated Statements of
Stockholders Equity, (4) the Consolidated Statements
of Cash Flows, and (5) Notes to Consolidated Financial
Statements, tagged as blocks of text.
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32