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 JUNE 30, 2010
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 July 22, 2010, 200,961,162 shares of the
registrants $.01 par value common stock were
outstanding.
ZIMMER
HOLDINGS, INC.
INDEX TO
FORM 10-Q
June 30,
2010
2
Part I
Financial Information
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Item 1.
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Financial
Statements
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ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
(In millions, except per share amounts,
unaudited)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2010
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2009
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2010
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2009
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Net Sales
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$
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1,057.7
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$
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1,019.9
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$
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2,120.5
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$
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2,012.5
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Cost of products sold
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250.6
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236.8
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519.0
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467.0
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Gross Profit
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807.1
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783.1
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1,601.5
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1,545.5
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Research and development
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55.1
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49.9
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106.1
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101.8
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Selling, general and administrative
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437.4
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432.3
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884.1
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856.0
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Certain claims (Note 13)
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75.0
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75.0
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Net curtailment and settlement (Note 10)
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(32.1
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)
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(32.1
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)
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Acquisition, integration, realignment and other (Note 2)
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11.5
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36.5
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14.1
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43.5
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Operating expenses
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579.0
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486.6
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1,079.3
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969.2
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Operating Profit
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228.1
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296.5
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522.2
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576.3
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Interest and other, net
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(14.3
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)
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(4.0
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(28.9
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(7.7
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)
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Earnings before income taxes
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213.8
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292.5
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493.3
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568.6
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Provision for income taxes
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48.3
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82.4
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122.4
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156.3
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Net Earnings of Zimmer Holdings, Inc.
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$
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165.5
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$
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210.1
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$
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370.9
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$
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412.3
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Earnings Per Common Share
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Basic
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$
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0.82
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$
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0.98
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$
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1.83
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$
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1.89
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Diluted
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$
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0.82
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$
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0.98
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$
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1.82
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$
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1.88
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Weighted Average Common Shares Outstanding
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Basic
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201.9
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214.7
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202.4
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218.1
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Diluted
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203.0
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215.5
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203.6
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218.8
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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)
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June 30,
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December 31,
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2010
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2009
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(Unaudited)
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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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953.7
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$
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691.7
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Short-term investments
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33.0
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66.4
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Accounts receivable, less allowance for doubtful accounts
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765.1
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751.4
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Inventories, net
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885.8
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913.2
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Prepaid expenses and other current assets
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127.6
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105.4
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Deferred income taxes
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217.6
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209.9
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Total current assets
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2,982.8
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2,738.0
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Property, plant and equipment, net
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1,170.6
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1,221.7
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Goodwill
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2,637.6
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2,783.5
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Intangible assets, net
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818.5
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858.0
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Other assets
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217.8
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184.3
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Total Assets
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$
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7,827.3
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$
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7,785.5
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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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115.0
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$
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134.6
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Income taxes
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25.4
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57.5
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Other current liabilities
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461.4
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498.6
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Total current liabilities
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601.8
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690.7
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Other long-term liabilities
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360.4
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328.5
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Long-term debt
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1,130.6
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1,127.6
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Total Liabilities
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2,092.8
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2,146.8
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Commitments and Contingencies (Note 13)
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Stockholders Equity:
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Common stock, $0.01 par value, one billion shares
authorized, 254.3 million shares issued in 2010
(254.1 million in 2009)
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2.5
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2.5
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Paid-in capital
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3,252.9
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3,214.6
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Retained earnings
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5,473.4
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5,102.5
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Accumulated other comprehensive income
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224.1
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358.6
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Treasury stock, 52.8 million shares in 2010
(49.9 million in 2009)
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(3,218.4
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)
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(3,039.5
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)
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Total Stockholders Equity
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5,734.5
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5,638.7
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Total Liabilities and Stockholders Equity
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$
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7,827.3
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$
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7,785.5
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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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For the Six Months
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Ended June 30,
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2010
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2009
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Cash flows provided by (used in) operating activities:
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Net earnings of Zimmer Holdings, Inc.
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$
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370.9
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$
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412.3
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Adjustments to reconcile net earnings to cash provided by
operating activities:
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Depreciation and amortization
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165.8
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161.4
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Net curtailment and settlement
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(32.1
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)
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Share-based compensation
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30.6
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40.1
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Income tax benefit from stock option exercises
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2.9
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0.2
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Excess income tax benefit from stock option exercises
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(1.0
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)
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Inventory
step-up
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1.3
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7.0
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Changes in operating assets and liabilities, net of effect of
acquisitions:
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Income taxes
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(70.5
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)
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4.8
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Receivables
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(51.3
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)
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(29.8
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Inventories
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27.5
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(51.8
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)
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Accounts payable and accrued expenses
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(37.4
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)
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(119.4
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)
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Other assets and liabilities
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93.4
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(13.0
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)
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Net cash provided by operating activities
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532.2
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379.7
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Cash flows provided by (used in) investing activities:
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Additions to instruments
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(83.1
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)
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(75.9
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)
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Additions to other property, plant and equipment
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(26.7
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)
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(54.7
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)
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Purchases of short-term investments
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(4.0
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)
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Sales of short-term investments
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37.0
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Acquisition of intellectual property rights
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(8.2
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)
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(25.9
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)
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Investments in other assets
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(6.9
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)
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(17.8
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)
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Net cash used in investing activities
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(91.9
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)
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(174.3
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)
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Cash flows provided by (used in) financing activities:
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Net borrowing under credit facilities
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200.0
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Proceeds from employee stock compensation plans
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8.1
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3.6
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Excess income tax benefit from stock option exercises
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1.0
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Acquisition of noncontrolling interest
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(7.8
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)
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Repurchase of common stock
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(178.9
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)
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(337.8
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)
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Net cash used in financing activities
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(169.8
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)
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(142.0
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)
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Effect of exchange rates on cash and cash equivalents
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(8.5
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)
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1.5
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Increase in cash and cash equivalents
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262.0
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64.9
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Cash and cash equivalents, beginning of year
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691.7
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212.6
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Cash and cash equivalents, end of period
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$
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953.7
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$
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277.5
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The accompanying notes are an integral part of these
consolidated financial statements.
5
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 2009 Annual Report on
Form 10-K
filed by Zimmer Holdings, Inc. In our opinion, 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, 2009 condensed balance
sheet data was derived from audited financial statements, but
does not include all disclosures required by accounting
principles generally accepted in the United States of
America. Results for interim periods should not be considered
indicative of results for the full year. Certain amounts in the
2009 consolidated financial statements have been reclassified to
conform to the 2010 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.
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2.
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Significant
Accounting Policies
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Acquisition, Integration, Realignment and
Other We recognize expenses resulting
directly from our business combinations and other items as
Acquisition, integration, realignment and other
expenses. Acquisition, integration, realignment and other
expenses for the three and six month periods ended June 30,
2010 and 2009 included (in millions):
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Three Months
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Six Months
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Ended
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Ended
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June 30,
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June 30,
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2010
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2009
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2010
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2009
|
|
|
Impairment/loss on disposal of assets
|
|
$
|
7.7
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$
|
1.3
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|
$
|
8.1
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|
$
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1.3
|
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Consulting and professional fees
|
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|
0.9
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|
0.8
|
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1.9
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2.6
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Employee severance and retention, including share-based
compensation acceleration
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2.3
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16.6
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2.2
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16.8
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Information technology integration
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0.1
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0.1
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0.2
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Facility and employee relocation
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0.5
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0.9
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0.5
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1.8
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Vacated facilities
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1.4
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1.4
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Distributor acquisitions
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1.8
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|
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3.1
|
|
Certain litigation matters
|
|
|
(0.5
|
)
|
|
|
4.8
|
|
|
|
(1.3
|
)
|
|
|
4.8
|
|
Contract terminations
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|
0.6
|
|
|
|
6.9
|
|
|
|
2.6
|
|
|
|
7.9
|
|
Other
|
|
|
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|
1.9
|
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|
|
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3.6
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Acquisition, integration, realignment and other
|
|
$
|
11.5
|
|
|
$
|
36.5
|
|
|
$
|
14.1
|
|
|
$
|
43.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements There are no
recently issued accounting pronouncements that we have yet to
adopt that are expected to have a material effect on our
financial position, results of operations or cash flows.
6
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The reconciliation of net earnings to comprehensive income is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
Net earnings of Zimmer Holdings, Inc.
|
|
$
|
165.5
|
|
|
$
|
210.1
|
|
|
$
|
370.9
|
|
|
$
|
412.3
|
|
Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency cumulative translation adjustments
|
|
|
(97.0
|
)
|
|
|
88.9
|
|
|
|
(179.4
|
)
|
|
|
47.2
|
|
Unrealized foreign currency hedge gains/(losses), net of tax
|
|
|
24.3
|
|
|
|
(34.7
|
)
|
|
|
53.0
|
|
|
|
(12.4
|
)
|
Reclassification adjustments on foreign currency hedges, net of
tax
|
|
|
(8.3
|
)
|
|
|
(6.2
|
)
|
|
|
(9.2
|
)
|
|
|
(12.3
|
)
|
Unrealized losses on securities, net of tax
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.5
|
)
|
Adjustments to prior service cost and unrecognized actuarial
assumptions, net of tax
|
|
|
0.2
|
|
|
|
5.8
|
|
|
|
1.1
|
|
|
|
20.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Income
|
|
|
(80.8
|
)
|
|
|
53.7
|
|
|
|
(134.5
|
)
|
|
|
42.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income Attributable to Zimmer
Holdings, Inc.
|
|
$
|
84.7
|
|
|
$
|
263.8
|
|
|
$
|
236.4
|
|
|
$
|
454.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In millions)
|
|
|
Finished goods
|
|
$
|
707.1
|
|
|
$
|
718.6
|
|
Work in progress
|
|
|
58.0
|
|
|
|
48.0
|
|
Raw materials
|
|
|
120.7
|
|
|
|
146.6
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
885.8
|
|
|
$
|
913.2
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In millions)
|
|
|
Land
|
|
$
|
21.5
|
|
|
$
|
21.8
|
|
Buildings and equipment
|
|
|
1,120.5
|
|
|
|
1,147.7
|
|
Capitalized software costs
|
|
|
161.6
|
|
|
|
158.8
|
|
Instruments
|
|
|
1,255.8
|
|
|
|
1,210.2
|
|
Construction in progress
|
|
|
60.5
|
|
|
|
62.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,619.9
|
|
|
|
2,600.5
|
|
Accumulated depreciation
|
|
|
(1,449.3
|
)
|
|
|
(1,378.8
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
1,170.6
|
|
|
$
|
1,221.7
|
|
|
|
|
|
|
|
|
|
|
7
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term debt as of June 30, 2010 consisted of our
unsecured senior notes (Senior Notes) and borrowings under our
$1,350 million senior credit agreement (Senior Credit
Facility). Outstanding long-term debt as of June 30, 2010
was $1,130.6 million, comprised of $998.8 million from
our Senior Notes and $131.8 million from our Senior Credit
Facility. There was no short-term debt outstanding. The
estimated fair value of our Senior Notes as of June 30,
2010, based on quoted prices for the specific securities from
transactions in active markets, was $1,064.2 million. The
carrying value of the Senior Credit Facility approximates fair
value, as the underlying instruments have variable interest
rates at market value.
|
|
7.
|
Fair
Value Measurement of Assets and Liabilities
|
The following assets and liabilities are recorded at fair value
on a recurring basis as of June 30, 2010 (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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, current and long-term
|
|
$
|
51.0
|
|
|
$
|
|
|
|
$
|
51.0
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51.0
|
|
|
$
|
|
|
|
$
|
51.0
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, current and long-term
|
|
$
|
16.8
|
|
|
$
|
|
|
|
$
|
16.8
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16.8
|
|
|
$
|
|
|
|
$
|
16.8
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following assets and liabilities were recorded at fair value
on a recurring basis as of December 31, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, current and long-term
|
|
$
|
12.4
|
|
|
$
|
|
|
|
$
|
12.4
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12.4
|
|
|
$
|
|
|
|
$
|
12.4
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, current and long-term
|
|
$
|
32.7
|
|
|
$
|
|
|
|
$
|
32.7
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32.7
|
|
|
$
|
|
|
|
$
|
32.7
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives relate to foreign currency exchange forward
contracts 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
ongoing assessments of counterparty credit risk.
8
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Derivative
Instruments and Hedging Activities
|
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
currency exchange rate movements on net earnings, we enter into
derivative financial instruments in the form of foreign currency
exchange forward contracts and options with major financial
institutions. We are primarily exposed to foreign currency
exchange rate risk with respect to transactions and net assets
denominated in Euros, Swiss Francs, Japanese Yen, British
Pounds, Canadian Dollars, Australian Dollars, Korean Won,
Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South
African Rand, Russian Rubles and Indian Rupees. We do not use
derivative financial instruments for trading or speculative
purposes.
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
currency exchange rates may have different proportional effects
on our revenues compared to our cost of products sold. To
minimize the effects of foreign currency exchange rate movements
on cash flows, we hedge intercompany sales of inventory expected
to occur within the next 30 months with foreign currency
exchange forward contracts and options. We designate these
derivative instruments as cash flow hedges. We 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 six month periods ended
June 30, 2010 and 2009 due to ineffectiveness and amounts
excluded from the assessment of hedge effectiveness was not
significant.
For forward contracts and options outstanding at June 30,
2010, we have obligations to purchase U.S. Dollars and sell
Euros, Japanese Yen, British Pounds, Canadian Dollars,
Australian Dollars, Korean Won, Swedish Krona, Czech Koruna,
Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles
and Indian Rupees and purchase Swiss Francs and sell
U.S. Dollars at set maturity dates ranging from July 2010
through December 2012. The notional amounts of outstanding
forward contracts and options entered into with third parties to
purchase U.S. Dollars at June 30, 2010 were
$1.1 billion. The notional amounts of outstanding forward
contracts entered into with third parties to purchase Swiss
Francs at June 30, 2010 were $197.2 million.
As of June 30, 2010 and December 31, 2009, 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
9
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 June 30, 2010 and December 31,
2009 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
Balance
|
|
|
|
|
Balance
|
|
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
$
|
40.9
|
|
|
Other current assets
|
|
$23.3
|
Foreign exchange forward contracts
|
|
Other assets
|
|
|
20.0
|
|
|
Other assets
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
Total asset derivatives
|
|
|
|
$
|
60.9
|
|
|
|
|
$29.6
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current liabilities
|
|
$
|
19.7
|
|
|
Other current liabilities
|
|
$35.4
|
Foreign exchange forward contracts
|
|
Other long-term liabilities
|
|
|
7.0
|
|
|
Other long-term liabilities
|
|
14.5
|
|
|
|
|
|
|
|
|
|
|
|
Total liability derivatives
|
|
|
|
$
|
26.7
|
|
|
|
|
$49.9
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of outstanding derivative instruments recorded on
the balance sheet at June 30, 2010, together with settled
derivatives where the hedged item has not yet affected earnings,
was a net unrealized gain of $24.8 million, or
$29.8 million after taxes, which is deferred in other
comprehensive income, of which $19.7 million, or
$22.1 million after taxes, is expected to be reclassified
to earnings over the next twelve months.
Derivative instruments had the following effects on other
comprehensive income (OCI) on our consolidated balance sheet and
our consolidated statement of earnings on a gross basis for the
three and six month periods ended June 30, 2010 and 2009
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) Recognized
|
|
|
|
|
|
|
in OCI
|
|
|
Amount of Gain/(Loss) Reclassified from OCI to Cost of
Products Sold
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
Derivative Instrument
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Foreign exchange forward contracts
|
|
$
|
28.3
|
|
|
$
|
(42.8
|
)
|
|
$
|
58.9
|
|
|
$
|
(11.7
|
)
|
|
$
|
8.0
|
|
|
$
|
6.4
|
|
|
$
|
7.6
|
|
|
$
|
10.7
|
|
Foreign exchange options
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28.3
|
|
|
$
|
(43.9
|
)
|
|
$
|
58.9
|
|
|
$
|
(12.6
|
)
|
|
$
|
8.0
|
|
|
$
|
6.7
|
|
|
$
|
7.6
|
|
|
$
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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 $1.4 billion per quarter.
10
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
Derivative Instrument
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Foreign exchange forward contracts
|
|
$
|
11.1
|
|
|
$
|
(5.9
|
)
|
|
$
|
18.3
|
|
|
$
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11.1
|
|
|
$
|
(5.9
|
)
|
|
$
|
18.3
|
|
|
$
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This impact does not include any offsetting gains/losses
recognized in earnings as a result of foreign currency
remeasurement of monetary assets and liabilities denominated in
a currency other than an entitys functional currency.
We are currently under audit in numerous federal, state and
foreign jurisdictions. We expect that the net amount of tax
liability for unrecognized tax benefits will change in the next
twelve months due to changes in audit status, expiration of
statutes of limitations and other events which could impact our
determination of unrecognized tax benefits. Currently, we cannot
reasonably estimate the amount or the periods in which the
expected changes in the unrecognized tax benefits will occur.
|
|
10.
|
Retirement
Benefit Plans
|
We have defined benefit pension plans covering certain
U.S. and Puerto Rico employees. The employees who are not
participating in the defined benefit plans receive additional
benefits under our defined contribution plans. Plan benefits are
primarily based on years of credited service and the
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.
The components of net pension expense for the three and six
month periods ended June 30, 2010 and 2009, for our
U.S. and
non-U.S. defined
benefit retirement plans are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Service cost
|
|
$
|
6.2
|
|
|
$
|
5.9
|
|
|
$
|
12.5
|
|
|
$
|
12.8
|
|
Interest cost
|
|
|
4.4
|
|
|
|
3.7
|
|
|
|
9.0
|
|
|
|
8.6
|
|
Expected return on plan assets
|
|
|
(6.4
|
)
|
|
|
(5.3
|
)
|
|
|
(12.9
|
)
|
|
|
(12.2
|
)
|
Amortization of unrecognized prior service cost
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
Amortization of unrecognized actuarial loss
|
|
|
0.8
|
|
|
|
1.3
|
|
|
|
1.7
|
|
|
|
3.0
|
|
Curtailment
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
4.7
|
|
|
$
|
6.0
|
|
|
$
|
9.9
|
|
|
$
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We contributed $23.0 million during the six month period
ended June 30, 2010 to our U.S. and Puerto Rico
defined benefit plans and do not expect to contribute additional
funds to these plans during the remainder of 2010. We
contributed $6.8 million to our foreign-based defined
benefit plans in the six month period ended June 30, 2010
and expect to contribute approximately $7 million to these
foreign-based plans during the remainder of 2010.
During the three month period ended June 30, 2009, we
amended the postretirement healthcare benefit plans for certain
U.S. and Puerto Rico employees. Participants in the plans
between the ages of 55 and 65 who were previously receiving
benefits will continue to receive benefits until reaching the
age of 65. For all other participants
11
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in the plans, no benefits will be paid after January 1,
2010. Additionally, we contributed 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
six month periods ended June 30, 2010 and 2009, for our
U.S. and Puerto Rico postretirement benefit plans are as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
0.4
|
|
|
$
|
|
|
|
$
|
0.8
|
|
Interest cost
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
1.3
|
|
Amortization of unrecognized prior service cost
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.2
|
)
|
Amortization of unrecognized actuarial loss
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.3
|
|
Settlement
|
|
|
|
|
|
|
3.2
|
|
|
|
|
|
|
|
3.2
|
|
Curtailment
|
|
|
|
|
|
|
(35.3
|
)
|
|
|
|
|
|
|
(35.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
|
|
|
$
|
(31.0
|
)
|
|
$
|
|
|
|
$
|
(29.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of weighted average shares for
the basic and diluted shares computations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Weighted average shares outstanding for basic net earnings per
share
|
|
|
201.9
|
|
|
|
214.7
|
|
|
|
202.4
|
|
|
|
218.1
|
|
Effect of dilutive stock options and other equity awards
|
|
|
1.1
|
|
|
|
0.8
|
|
|
|
1.2
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted net earnings per
share
|
|
|
203.0
|
|
|
|
215.5
|
|
|
|
203.6
|
|
|
|
218.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six month periods ended June 30, 2010,
an average of 13.3 million options and 13.1 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
six month periods ended June 30, 2009, an average of
14.0 million options and 15.2 million options,
respectively, were not included in the computation.
In the three month period ended June 30, 2010, we
repurchased 1.4 million shares of our common stock at an
average price of $61.32 per share for a total cash outlay of
$85.4 million, including commissions. In the six month
period ended June 30, 2010, we repurchased 2.9 million
shares of our common stock at an average price of $60.95 per
share for a total cash outlay of $178.9 million, including
commissions, under the $1.25 billion share repurchase
program previously authorized by our Board of Directors that
expires on December 31, 2010. As of June 30, 2010,
$32.2 million remains authorized for future repurchases
under this program. In July 2010, the Board of Directors
approved an additional $1.5 billion share repurchase
program which will expire on December 31, 2013.
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
12
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Americas
|
|
$
|
609.3
|
|
|
$
|
589.6
|
|
|
$
|
306.5
|
|
|
$
|
296.0
|
|
Europe
|
|
|
276.5
|
|
|
|
280.4
|
|
|
|
101.8
|
|
|
|
108.2
|
|
Asia Pacific
|
|
|
171.9
|
|
|
|
149.9
|
|
|
|
65.7
|
|
|
|
69.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,057.7
|
|
|
$
|
1,019.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
(17.9
|
)
|
|
|
(23.0
|
)
|
Inventory
step-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.8
|
)
|
Acquisition, integration, realignment and other
|
|
|
|
|
|
|
|
|
|
|
(11.5
|
)
|
|
|
(36.5
|
)
|
Certain claims
|
|
|
|
|
|
|
|
|
|
|
(75.0
|
)
|
|
|
|
|
Net curtailment and settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
Global operations and corporate functions
|
|
|
|
|
|
|
|
|
|
|
(141.5
|
)
|
|
|
(147.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
|
|
$
|
228.1
|
|
|
$
|
296.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Operating Profit
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Americas
|
|
$
|
1,225.0
|
|
|
$
|
1,184.2
|
|
|
$
|
613.1
|
|
|
$
|
585.7
|
|
Europe
|
|
|
562.6
|
|
|
|
545.5
|
|
|
|
206.6
|
|
|
|
224.9
|
|
Asia Pacific
|
|
|
332.9
|
|
|
|
282.8
|
|
|
|
126.8
|
|
|
|
119.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,120.5
|
|
|
$
|
2,012.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
(30.6
|
)
|
|
|
(40.1
|
)
|
Inventory
step-up
|
|
|
|
|
|
|
|
|
|
|
(1.3
|
)
|
|
|
(7.0
|
)
|
Acquisition, integration, realignment and other
|
|
|
|
|
|
|
|
|
|
|
(14.1
|
)
|
|
|
(43.5
|
)
|
Certain claims
|
|
|
|
|
|
|
|
|
|
|
(75.0
|
)
|
|
|
|
|
Net curtailment and settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
Global operations and corporate functions
|
|
|
|
|
|
|
|
|
|
|
(303.3
|
)
|
|
|
(295.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
|
|
$
|
522.2
|
|
|
$
|
576.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net sales by product category are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Reconstructive implants
|
|
$
|
808.2
|
|
|
$
|
779.2
|
|
|
$
|
1,622.7
|
|
|
$
|
1,540.3
|
|
Dental
|
|
|
55.9
|
|
|
|
52.7
|
|
|
|
107.6
|
|
|
|
100.1
|
|
Trauma
|
|
|
57.8
|
|
|
|
56.7
|
|
|
|
118.2
|
|
|
|
113.6
|
|
Spine
|
|
|
57.9
|
|
|
|
64.2
|
|
|
|
117.9
|
|
|
|
128.8
|
|
OSP and other
|
|
|
77.9
|
|
|
|
67.1
|
|
|
|
154.1
|
|
|
|
129.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,057.7
|
|
|
$
|
1,019.9
|
|
|
$
|
2,120.5
|
|
|
$
|
2,012.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Commitments
and Contingencies
|
Product
Liability-Related Claims
We are subject to product liability claims and lawsuits arising
in the ordinary course of our business. We establish standard
accruals for product liability and other claims in conjunction
with outside counsel based on current information and historical
settlement information for open claims, related legal fees and
claims incurred but not reported. These standard product
liability accruals are recognized in selling, general and
administrative expense. We may also establish provisions for
certain product liability claims outside of the standard
accruals that are recorded separately on our statement of
earnings, such as the provision for the
Durom®
Acetabular Component (Durom Cup)-related claims discussed
below. We maintain insurance, subject to self-insured retention
requirements, for losses from these and other claims.
On July 22, 2008, we temporarily suspended marketing and
distribution of the Durom Cup in the
U.S. Subsequently, a number of product liability lawsuits
and other claims have been asserted against us. We have settled
some of these claims and the others are still pending.
Additional claims may be asserted in the future.
We recorded a provision of $69.0 million in 2008 as
Certain Claims on our statement of earnings
representing our estimate of the Durom Cup-related claims
we expected to be made for revision surgeries occurring within
two years of the original surgery. In the third quarter of 2009,
based on claims information received after our initial estimate,
we increased our estimate of the number of claims for revision
surgeries occurring within two years of the original surgery
and, accordingly, increased the Certain Claims
provision by $35.0 million. In the second quarter of 2010,
based on more recent claims information available and after
consultation with an independent actuary, we revised our
estimate to include all claims for revisions of original
surgeries performed before July 22, 2008 on a worldwide
basis, regardless of the amount of time between the revision
surgery and the original surgery. As a result, we increased the
Certain Claims provision by $75.0 million, for
a total of $179.0 million.
From 2008 through March 31, 2010, we recorded
$42.7 million as part of our standard product liability
accruals for worldwide claims relating to revisions of Durom
Cup cases where the revisions had occurred, or were
estimated to occur, more than two years after the original
surgery. Of this amount, $0.9 million was recorded in the
first quarter of 2009, $6.0 million in the second quarter
of 2009 and $10.9 million in the first quarter of 2010.
Beginning with the second quarter of 2010, any provisions for
such claims are recorded as part of the Certain
Claims accrual, as described above. We will continue to
record any provisions for claims relating to Durom Cup
cases where the original surgery was performed after
July 22, 2008 as part of our standard product liability
accruals. As of June 30, 2010, we have recorded provisions
totaling $2.6 million for such post-suspension claims.
Our estimate as of June 30, 2010 of the remaining liability
for all Durom Cup-related claims relating to original
surgeries performed before July 22, 2008 is
$156.8 million, of which $42.5 million is classified
as short-term in Other
14
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
current liabilities and $114.3 million is classified
as long-term in Other long-term liabilities on our
consolidated balance sheet. We expect to pay the majority of the
Durom Cup-related claims within the next three years.
There are significant estimates involved in determining the
provisions for Durom Cup-related claims, including
estimates of the number of claims that we may eventually
receive. The actual number of claims that we receive may differ
from our estimates, which could result in further changes to the
provision.
Intellectual
Property-Related Claims
We are subject to claims of patent infringement and other
intellectual property-related claims and lawsuits in the
ordinary course of our business. We maintain insurance, subject
to self-insured retention requirements, for losses from these
and other claims.
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 (USPTO) instituted
re-examination proceedings against U.S. Patent
No. 6,818,020. The USPTO rejected all previously issued
claims of U.S. Patent No. 6,818,020 as being
unpatentable in light of one or more prior art references. On
September 30, 2009, the Court issued an order staying
proceedings in the litigation pending the outcome of the
re-examination process. Subsequent to that stay order, Howmedica
filed a motion seeking to certify an appeal of the summary
judgment ruling on the 934, 814 and 308
patents. That motion was granted on January 13, 2010. We
expect that the U.S. Court of Appeals for the Federal
Circuit will hear the appeal of that ruling in 2010. We continue
to believe that our defenses against infringement are valid and
meritorious, and we intend to continue to defend this lawsuit
vigorously.
While it is not possible to predict the outcome of these
lawsuits and claims with any certainty, we believe that the
liability, if any, resulting from these claims 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 (CIA) with the Office of Inspector General of the
Department of Health and Human Services (OIG-HHS). Under the
CIA, which has a term expiring in 2012, we agreed, among other
provisions, to continue the operation of our enhanced Corporate
Compliance Program, designed to promote compliance with federal
healthcare program requirements. We also agreed to retain an
independent review organization to perform annual reviews to
assist us in assessing our compliance with the obligations set
forth in the CIA to ensure that arrangements we enter into do
not violate the Anti-Kickback Statute (42 U.S.C.
§ 1320a-7b).
A material breach of the CIA may subject us to exclusion by
OIG-HHS from participation in all federal healthcare programs,
which would have a material adverse effect on our financial
position, results of operations and cash flows.
15
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
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. In the course of
continuing dialogues with the agencies, we have voluntarily
disclosed information relating to sales of our products by
independent distributors in two South American countries to the
SEC and the DOJ. We cannot currently predict the outcome of the
investigation or the impact of our voluntary disclosures to the
authorities.
Putative
Class Actions
On August 5, 2008, a complaint was filed in the
U.S. District Court for the Southern District of Indiana,
Plumbers and Pipefitters Local Union 719 Pension Fund v.
Zimmer Holdings, Inc., et al., naming us and two of our
executive officers as defendants. The complaint related to a
putative class action on behalf of persons who purchased our
common stock between January 29, 2008 and July 22,
2008. The complaint alleged that the defendants violated the
federal securities law by allegedly failing to disclose
developments relating to our orthopaedic surgical products
manufacturing operations in Dover, Ohio and the Durom
Cup. The plaintiff sought unspecified damages and interest,
attorneys fees, costs and other relief. On
December 24, 2008, the lead plaintiff filed a consolidated
complaint that alleged the same claims and related to the same
time period. The defendants filed a motion to dismiss the
consolidated complaint on February 23, 2009. On
December 1, 2009, the Court granted defendants motion
to dismiss, without prejudice. On January 15, 2010, the
plaintiff filed a motion for leave to amend the consolidated
complaint. That motion is pending. We believe this lawsuit is
without merit, and we and the individual defendants intend to
defend it vigorously.
On November 20, 2008, a complaint was filed in the
U.S. District Court for the Northern District of Indiana,
Dewald v. Zimmer Holdings, Inc., et al., naming us and
certain of our current and former directors and employees as
defendants. The complaint relates to a putative class action on
behalf of all persons who were participants in or beneficiaries
of our U.S. or Puerto Rico Savings and Investment Programs
(plans) between October 5, 2007 and the date of filing and
whose accounts included investments in our common stock. The
complaint alleges, among other things, that the defendants
breached their fiduciary duties in violation of the Employee
Retirement Income Security Act of 1974, as amended, by
continuing to offer Zimmer stock as an investment option in the
plans when the stock purportedly was no longer a prudent
investment and that defendants failed to provide plan
participants with complete and accurate information sufficient
to advise them of the risks of investing their retirement
savings in Zimmer stock. The plaintiff seeks an unspecified
monetary payment to the plans, injunctive and equitable relief,
attorneys fees, costs and other relief. On
January 23, 2009, the plaintiff filed an amended complaint
that alleges the same claims and clarifies that the class period
is October 5, 2007 through September 2, 2008. The
defendants filed a motion to dismiss the amended complaint on
March 23, 2009. The motion to dismiss is pending with the
court. On June 12, 2009, the U.S. Judicial Panel on
Multidistrict Litigation entered an order transferring the
Dewald case to the U.S. District Court for the Southern
District of Indiana for coordinated or consolidated pretrial
proceedings with the Plumbers & Pipefitters Local
Union 719 Pension Fund case referenced above. We believe this
lawsuit is without merit, and we and the individual defendants
intend to defend it vigorously.
In July 2010 we entered into a definitive agreement to acquire
Beijing Montagne Medical Device Co., Ltd., a leader in the
rapidly growing Chinese orthopaedic implant market. Subject to
regulatory approvals and certain other conditions, the
acquisition is expected to close in late 2010 or early 2011. The
acquisition is not expected to have a material impact on our
financial position, results of operations or cash flows.
16
|
|
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. 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 2009 consolidated financial statements have been
reclassified to conform to the 2010 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 six month periods ended
June 30, 2010 and our expected results for the remainder of
2010.
Demand
(Volume and Mix) Trends
Increased volume and changes in the mix of product sales
contributed 4 percentage points of sales growth during the
three month period ended June 30, 2010, compared to flat
volume and mix in the same 2009 period.
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 are
expected to continue to positively affect sales growth.
Pricing
Trends
Global selling prices decreased 1 percent during the three
month periods ended June 30, 2010 and 2009. Selling prices
in the Americas decreased 1 percent during the three month
periods ended June 30, 2010 and 2009. Europe selling prices
increased 1 percent during the three month period ended
June 30, 2010 compared to flat pricing in the same 2009
period. Primarily due to the bi-annual pricing adjustments in
Japan that went into effect on April 1, 2010, Asia Pacific
selling prices decreased 3 percent during the three month
period ended June 30, 2010, compared to a 1 percent
decrease in the same 2009 period. We continue to expect selling
prices will be down approximately 1 to 2 percent on a
global basis for 2010 largely due to governmental healthcare
cost containment efforts and continuing pricing pressure from
local hospitals and health systems.
Foreign
Currency Exchange Rates
A strengthening of the Australian Dollar, Canadian Dollar and
Japanese Yen versus the U.S. Dollar offset a decline in the
Euro resulting in a 1 percent increase in sales from
foreign currency exchange rate fluctuations in the three month
period ended June 30, 2010. For the year ending
December 31, 2010, we estimate that an overall stronger
U.S. Dollar versus foreign currency exchange rates will
have a negative effect of approximately 0-1 percent on
sales. We address currency risk through regular operating and
financing activities, and, under appropriate circumstances and
subject to proper authorization, through the use of forward
contracts 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.
17
Global
Economic Conditions
Although certain markets for our products have been impacted by
the global economic downturn, particularly in our Europe
segment, we have experienced some level of stabilization. For
the third straight quarter, volume/mix for our core
reconstructive business contributed 4 to 5 percentage
points of growth, which are the largest contributions since the
third quarter of 2008 when volume/mix trends were in the mid to
high single digits. Dental sales volume/mix was positive for the
second straight quarter after more than a year of negative
growth, as that category had been more affected by the recession
than our other categories.
Second
Quarter and
Year-To-Date
Results of Operations
Net
Sales by Operating Segment
The following tables present net sales by operating segment and
the components of the percentage changes (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
% Inc /
|
|
|
Volume/
|
|
|
|
|
|
Foreign
|
|
|
|
2010
|
|
|
2009
|
|
|
(Dec)
|
|
|
Mix
|
|
|
Price
|
|
|
Exchange
|
|
|
Americas
|
|
$
|
609.3
|
|
|
$
|
589.6
|
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
(1
|
)%
|
|
|
|
%
|
Europe
|
|
|
276.5
|
|
|
|
280.4
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
1
|
|
|
|
(4
|
)
|
Asia Pacific
|
|
|
171.9
|
|
|
|
149.9
|
|
|
|
15
|
|
|
|
9
|
|
|
|
(3
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,057.7
|
|
|
$
|
1,019.9
|
|
|
|
4
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
Volume/
|
|
|
|
|
|
Foreign
|
|
|
|
2010
|
|
|
2009
|
|
|
% Inc
|
|
|
Mix
|
|
|
Price
|
|
|
Exchange
|
|
|
Americas
|
|
$
|
1,225.0
|
|
|
$
|
1,184.2
|
|
|
|
3
|
%
|
|
|
4
|
|
|
|
(1
|
)%
|
|
|
|
%
|
Europe
|
|
|
562.6
|
|
|
|
545.5
|
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
1
|
|
Asia Pacific
|
|
|
332.9
|
|
|
|
282.8
|
|
|
|
18
|
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,120.5
|
|
|
$
|
2,012.5
|
|
|
|
5
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange as used in the tables in this
report represents the effect of changes in foreign currency
exchange rates on sales growth.
Net
Sales by Product Category
The following tables present net sales by product category and
the components of the percentage changes (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
% Inc /
|
|
|
Volume/
|
|
|
|
|
|
Foreign
|
|
|
|
2010
|
|
|
2009
|
|
|
(Dec)
|
|
|
Mix
|
|
|
Price
|
|
|
Exchange
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
$
|
452.9
|
|
|
$
|
437.4
|
|
|
|
4
|
%
|
|
|
5
|
%
|
|
|
(2
|
)%
|
|
|
1
|
%
|
Hips
|
|
|
317.1
|
|
|
|
308.1
|
|
|
|
3
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
|
|
Extremities
|
|
|
38.2
|
|
|
|
33.7
|
|
|
|
13
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
808.2
|
|
|
|
779.2
|
|
|
|
4
|
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental
|
|
|
55.9
|
|
|
|
52.7
|
|
|
|
6
|
|
|
|
5
|
|
|
|
3
|
|
|
|
(2
|
)
|
Trauma
|
|
|
57.8
|
|
|
|
56.7
|
|
|
|
2
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Spine
|
|
|
57.9
|
|
|
|
64.2
|
|
|
|
(10
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
(1
|
)
|
OSP and other
|
|
|
77.9
|
|
|
|
67.1
|
|
|
|
16
|
|
|
|
14
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,057.7
|
|
|
$
|
1,019.9
|
|
|
|
4
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
% Inc/
|
|
|
Volume/
|
|
|
|
|
|
Foreign
|
|
|
|
2010
|
|
|
2009
|
|
|
(Dec)
|
|
|
Mix
|
|
|
Price
|
|
|
Exchange
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
$
|
913.3
|
|
|
$
|
865.9
|
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
(2
|
)%
|
|
|
2
|
%
|
Hips
|
|
|
632.8
|
|
|
|
607.7
|
|
|
|
4
|
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
2
|
|
Extremities
|
|
|
76.6
|
|
|
|
66.7
|
|
|
|
15
|
|
|
|
13
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,622.7
|
|
|
|
1,540.3
|
|
|
|
5
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental
|
|
|
107.6
|
|
|
|
100.1
|
|
|
|
7
|
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
Trauma
|
|
|
118.2
|
|
|
|
113.6
|
|
|
|
4
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Spine
|
|
|
117.9
|
|
|
|
128.8
|
|
|
|
(8
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
1
|
|
OSP and other
|
|
|
154.1
|
|
|
|
129.7
|
|
|
|
19
|
|
|
|
17
|
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,120.5
|
|
|
$
|
2,012.5
|
|
|
|
5
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present net sales by product category by
region (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
% Inc/
|
|
|
Six Months Ended June 30,
|
|
|
% Inc/
|
|
|
|
2010
|
|
|
2009
|
|
|
(Dec)
|
|
|
2010
|
|
|
2009
|
|
|
(Dec)
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
279.8
|
|
|
$
|
271.1
|
|
|
|
3
|
%
|
|
$
|
566.0
|
|
|
$
|
546.9
|
|
|
|
3
|
%
|
Europe
|
|
|
106.1
|
|
|
|
107.8
|
|
|
|
(1
|
)
|
|
|
219.7
|
|
|
|
212.6
|
|
|
|
3
|
|
Asia Pacific
|
|
|
67.0
|
|
|
|
58.5
|
|
|
|
15
|
|
|
|
127.6
|
|
|
|
106.4
|
|
|
|
20
|
|
Hips
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
148.4
|
|
|
|
143.3
|
|
|
|
4
|
|
|
|
295.2
|
|
|
|
284.9
|
|
|
|
4
|
|
Europe
|
|
|
109.2
|
|
|
|
111.5
|
|
|
|
(2
|
)
|
|
|
221.0
|
|
|
|
219.4
|
|
|
|
1
|
|
Asia Pacific
|
|
|
59.5
|
|
|
|
53.3
|
|
|
|
12
|
|
|
|
116.6
|
|
|
|
103.4
|
|
|
|
13
|
|
Extremities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
29.6
|
|
|
|
25.8
|
|
|
|
14
|
|
|
|
59.2
|
|
|
|
51.4
|
|
|
|
15
|
|
Europe
|
|
|
6.2
|
|
|
|
6.0
|
|
|
|
5
|
|
|
|
12.7
|
|
|
|
11.7
|
|
|
|
9
|
|
Asia Pacific
|
|
|
2.4
|
|
|
|
1.9
|
|
|
|
26
|
|
|
|
4.7
|
|
|
|
3.6
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
808.2
|
|
|
|
779.2
|
|
|
|
4
|
|
|
|
1,622.7
|
|
|
|
1,540.3
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
28.5
|
|
|
|
26.0
|
|
|
|
10
|
|
|
|
55.7
|
|
|
|
52.1
|
|
|
|
7
|
|
Europe
|
|
|
21.4
|
|
|
|
20.4
|
|
|
|
5
|
|
|
|
40.2
|
|
|
|
37.1
|
|
|
|
8
|
|
Asia Pacific
|
|
|
6.0
|
|
|
|
6.3
|
|
|
|
(6
|
)
|
|
|
11.7
|
|
|
|
10.9
|
|
|
|
7
|
|
Trauma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
31.3
|
|
|
|
31.2
|
|
|
|
1
|
|
|
|
63.9
|
|
|
|
63.6
|
|
|
|
1
|
|
Europe
|
|
|
11.2
|
|
|
|
12.7
|
|
|
|
(12
|
)
|
|
|
23.0
|
|
|
|
23.3
|
|
|
|
(2
|
)
|
Asia Pacific
|
|
|
15.3
|
|
|
|
12.8
|
|
|
|
19
|
|
|
|
31.3
|
|
|
|
26.7
|
|
|
|
17
|
|
Spine
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
41.7
|
|
|
|
48.5
|
|
|
|
(14
|
)
|
|
|
85.7
|
|
|
|
100.0
|
|
|
|
(14
|
)
|
Europe
|
|
|
12.6
|
|
|
|
12.0
|
|
|
|
5
|
|
|
|
25.5
|
|
|
|
22.5
|
|
|
|
13
|
|
Asia Pacific
|
|
|
3.6
|
|
|
|
3.7
|
|
|
|
(2
|
)
|
|
|
6.7
|
|
|
|
6.3
|
|
|
|
7
|
|
OSP and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
50.0
|
|
|
|
43.7
|
|
|
|
14
|
|
|
|
99.3
|
|
|
|
85.3
|
|
|
|
16
|
|
Europe
|
|
|
9.8
|
|
|
|
10.0
|
|
|
|
(2
|
)
|
|
|
20.5
|
|
|
|
18.9
|
|
|
|
8
|
|
Asia Pacific
|
|
|
18.1
|
|
|
|
13.4
|
|
|
|
34
|
|
|
|
34.3
|
|
|
|
25.5
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,057.7
|
|
|
$
|
1,019.9
|
|
|
|
4
|
|
|
$
|
2,120.5
|
|
|
$
|
2,012.5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Knees
The
NexGen®
Complete Knee Solution product line, including Gender
SolutionsTM
Knee Femoral Implants, the NexGen LPS-Flex Knee and the
NexGen CR-Flex Knee, together with the Gender
Solutions
Natural-Knee®
Flex System led knee sales. In addition, sales of partial knee
devices, including the
Zimmer®
Uni Knee and the recently released Gender Solutions
Patello Femoral Joint, contributed to knee growth. We also
continue to see growth in our new line of Patient Specific
Instruments. In Europe, changes in foreign currency exchange
rates negatively affected knee sales in the three month period
ended June 30, 2010 by 4 percent and positively
affected knee sales in the six month period ended June 30,
2010 by 1 percent. In Asia Pacific, changes in foreign
currency exchange rates positively affected knee sales in the
three and six month periods ended June 30, 2010 by
10 percent and 12 percent, respectively.
Hips
The Zimmer M/L Taper Stem, the Zimmer M/L Taper
Stem with Kinectiv Technology, the
CLS®
Spotorno®
Stem from the CLS Hip System and the
Alloclassic®
Zweymüller®
Hip Stem led hip stem sales. In addition, sales of revision Hip
products such as the
ZMR®
Hip System and the Trabecular Metal Revision Shell and
Augment Cups were strong when compared to the prior year period,
as were sales of
BIOLOX®1
delta Heads and
Fitmore®
Hip Stems. Sales of our recently launched
ContinuumTM
Acetabular System also contributed to growth in the three month
period ended June 30, 2010. In Europe, changes in foreign
currency exchange rates negatively affected hip sales in the
three month period ended June 30, 2010 by 4 percent
and positively affected hip sales in the six month period ended
June 30, 2010 by 2 percent. In Asia Pacific, changes
in foreign currency exchange rates positively affected hip sales
in the three and six month periods ended June 30, 2010 by
8 percent and 9 percent, respectively.
Extremities
Extremities sales growth was strong across all regions as these
types of procedures have become more widely accepted. The
Bigliani/Flatow®
Complete Shoulder Solution and the Zimmer Trabecular Metal
Reverse Shoulder System led extremities sales.
Dental
Dental sales improved for the second straight quarter following
a year of weaker demand caused by the global economic downturn
in 2009, reflecting a stabilizing trend in this market. Sales
were led by the Tapered
Screw-Vent®
Implant System. Regenerative product sales exhibited strong
growth.
Trauma
Zimmer Periarticular Locking Plates and the ITST
®
Intertrochanteric/Subtrochanteric Fixation System led trauma
sales, while sales of cable products also made a strong
contribution in the quarter. Tibial nail and interlocking screw
sales within the Zimmer Natural Nail
TM
system increased as we continued the launch of this product line.
Spine
Our spine business in the Americas continued to experience
operational challenges, a difficult reimbursement landscape and
challenges related to the
Dynesys®
Dynamic Stabilization System. Growth in spine sales in Europe
and Asia Pacific for the six month period ended June 30,
2010 was driven by the stabilization of our distribution
channels, which followed the Abbott Spine integration activity
of 2009. Solid sales of the
PathFinder®
and
Sequoia®
Pedicle Screw Systems, our Universal
Clamp®
System and our
Trinica®
Anterior Cervical Plate System partly offset a decline in sales
of the Dynesys system in the three and six month periods
ended June 30, 2010.
1 Registered
trademark of CeramTec AG
20
OSP
and other
OSP sales were led by
PALACOS®2
Bone Cement and powered instruments. Our wound debridement
products also made a strong contribution as we continue to make
progress recovering market share after a voluntary recall and
temporary suspension of production.
Expenses
as a Percent of Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Inc (Dec)
|
|
|
2010
|
|
|
2009
|
|
|
Inc (Dec)
|
|
|
Cost of products sold
|
|
|
23.7
|
%
|
|
|
23.2
|
%
|
|
|
0.5
|
|
|
|
24.5
|
%
|
|
|
23.2
|
%
|
|
|
1.3
|
|
Research and development
|
|
|
5.2
|
|
|
|
4.9
|
|
|
|
0.3
|
|
|
|
5.0
|
|
|
|
5.1
|
|
|
|
(0.1
|
)
|
Selling, general and administrative
|
|
|
41.4
|
|
|
|
42.4
|
|
|
|
(1.0
|
)
|
|
|
41.7
|
|
|
|
42.5
|
|
|
|
(0.8
|
)
|
Acquisition, integration, realignment and other
|
|
|
1.1
|
|
|
|
3.6
|
|
|
|
(2.5
|
)
|
|
|
0.7
|
|
|
|
2.2
|
|
|
|
(1.5
|
)
|
Certain claims
|
|
|
7.1
|
|
|
|
|
|
|
|
7.1
|
|
|
|
3.5
|
|
|
|
|
|
|
|
3.5
|
|
Net curtailment and settlement
|
|
|
|
|
|
|
(3.2
|
)
|
|
|
3.2
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
1.6
|
|
Operating profit
|
|
|
21.6
|
|
|
|
29.1
|
|
|
|
(7.5
|
)
|
|
|
24.6
|
|
|
|
28.6
|
|
|
|
(4.0
|
)
|
Interest and other, net
|
|
|
(1.4
|
)
|
|
|
(0.4
|
)
|
|
|
1.0
|
|
|
|
(1.4
|
)
|
|
|
(0.4
|
)
|
|
|
1.0
|
|
Cost
of Products Sold
The increase in cost of products sold as a percentage of net
sales for the three and six month periods ended June 30,
2010 compared to the same 2009 periods was driven by higher
manufacturing costs per unit due to lower production levels in
late 2009 into 2010. Additionally, foreign currency hedge gains
recognized in the six month period ended June 30, 2010 were
less significant than foreign currency hedge gains recognized in
the same 2009 period.
Under our hedging program, for derivatives which qualify as
hedges of future cash flows, the effective portion of changes in
fair value is temporarily recorded in other comprehensive
income, and then recognized in cost of products sold when the
hedged item affects earnings.
The increases in cost of products sold were partially offset by
lower excess inventory and obsolescence charges recognized in
the three and six month periods ended June 30, 2010 as
compared to the same 2009 periods due to improved inventory
management.
Operating
Expenses
Research and development expense, or R&D, increased to
$55.1 million and $106.1 million for the three and six
month periods ended June 30, 2010, respectively, from
$49.9 million and $101.8 million in the same 2009
periods. This increase reflects higher spending on new product
development across nearly all of our product categories as well
as spending on external research, clinical, regulatory and
quality initiatives. We continue to expect R&D spending in
2010 to be between 5 to 6 percent of sales for the full
year.
Selling, general and administrative expense, or SG&A,
increased to $437.4 million and $884.1 million for the
three and six month periods ended June 30, 2010,
respectively, from $432.3 million and $856.0 million
in the same 2009 periods. This is an improvement in SG&A as
a percentage of sales by 100 basis points in the three
month period ended June 30, 2010 and an 80 basis point
improvement in the six month period ended June 30, 2010.
This improvement represents controlled spending during a time of
increasing sales.
The overall dollar increase in spending was driven by medical
education and training activities and incremental costs
associated with certain operational excellence and growth
initiatives.
2 Registered
trademark of Heraeus Kulzer GmbH
21
Acquisition, integration, realignment and other expenses for the
three and six month periods ended June 30, 2010 decreased
to $11.5 million and $14.1 million, respectively, from
$36.5 million and $43.5 million in the same 2009
periods. The 2010 expenses primarily relate to a transformation
of our information technology infrastructure. This included
outsourcing our data center to a third party and severance and
retention costs for employees in various information technology
areas. As a result of the data center outsourcing, we sold
certain assets at a loss. Acquisition, integration, realignment
and other expenses were higher in the 2009 periods due to
severance and termination-related expenses that we incurred as a
result of the initiation of our global workforce realignment in
the second quarter of 2009. The decrease in acquisition,
integration, realignment and other expenses is also due to a
reduction in contract termination costs and lower legal fees due
to the settlement of certain litigation matters.
Certain Claims expense is a provision for estimated
liabilities to Durom Cup patients undergoing revision
surgeries. A provision of $104.0 million was originally
recorded during 2008 and 2009 with an additional
$75.0 million recorded during the three month period ended
June 30, 2010, bringing the total provision to
$179.0 million for these claims. For more information
regarding these claims, see Note 13 to the consolidated
financial statements.
We recognized a net curtailment and settlement gain of
$32.1 million during the three month period ended
June 30, 2009 related to amending our U.S. and Puerto
Rico postretirement benefit plans.
Operating
Profit, Interest and Other Expense, Income Taxes and Net
Earnings
Operating profit for the three and six month periods ended
June 30, 2010 decreased to $228.1 million and
$522.2 million, respectively, from $296.5 million and
$576.3 million in the same 2009 periods. The decrease in
operating profit is due to higher operating expenses, most
notably the Certain Claims provision recorded on our
statement of earnings.
Interest and other, net for the three and six month periods
ended June 30, 2010, increased to $14.3 million and
$28.9 million, respectively, compared to $4.0 million
and $7.7 million in the same 2009 periods. The increase in
interest expense is a result of the senior unsecured notes that
we issued in November 2009.
The effective tax rate on earnings before income taxes for the
three month period ended June 30, 2010 decreased to
22.6 percent, from 28.2 percent in the same 2009
period. The effective tax rate on earnings before income taxes
for the six month period ended June 30, 2010 decreased to
24.8 percent, from 27.5 percent in the same 2009
period. The decrease in the effective tax rate in the 2010
periods is primarily due to the tax effect of the Certain
Claims provision as well as the favorable resolution of
certain tax positions.
Net earnings decreased 21 percent to $165.5 million
for the three month period ended June 30, 2010, compared to
$210.1 million in the same 2009 period. Net earnings
decreased 10 percent to $370.9 million for the six
month period ended June 30, 2010, compared to
$412.3 million in the same 2009 period. For the three month
2010 period, basic and diluted earnings per share both decreased
16 percent to $0.82, from $0.98 in the same 2009 period.
For the six month 2010 period, basic and diluted earnings per
share both decreased 3 percent to $1.83 and $1.82,
respectively, from $1.89 and $1.88 in the same 2009 period. The
disproportional change in earnings per share as compared with
net earnings is attributed to the effect of 2010 and
2009 share repurchases.
Liquidity
and Capital Resources
Cash flows provided by operating activities were
$532.2 million for the six month period ended June 30,
2010, compared to $379.7 million in the same 2009 period.
The principal source of cash from operating activities was net
earnings. Non-cash items included in net earnings accounted for
another $197.7 million of operating cash. All other items
of operating cash flows reflect a use of $36.4 million of
cash, compared to a use of $209.0 million in the same 2009
period. In the 2009 period we resolved outstanding payments to
healthcare professionals and institutions, resulting in
substantial cash outflows. A reduction in inventory levels
during the 2010 period compared to an increase in inventory
levels during the 2009 period also contributed to the
improvement in cash flows from operating activities, partially
offset by higher tax payments in the 2010 period.
At June 30, 2010, we had 61 days of sales outstanding
in trade accounts receivable, which represents an increase of
1 day compared to March 31, 2010 and a decrease of
2 days compared to June 30, 2009. At June 30,
22
2010, we had 318 days of inventory on hand, which is an
increase of 16 days compared to March 31, 2010 and an
improvement of 57 days from June 30, 2009.
Cash flows used in investing activities were $91.9 million
for the three month period ended June 30, 2010, compared to
$174.3 million in the same 2009 period. Additions to
instruments increased by $7.2 million during the six month
period ended June 30, 2010 compared to the same 2009
period. Spending on other property, plant and equipment
decreased by $28.0 million during the six month period
ended June 30, 2010 compared to the same 2009 period. We
expect to increase spending on property, plant and equipment and
instruments over the remainder of 2010 as we replace machinery
and equipment in the normal course of business and invest in
instruments to support our new product launches. During the
first two quarters of 2010, we purchased and sold approximately
$4.0 million and $37.0 million, respectively, in
short-term investments that have original maturities greater
than 90 days. Acquired intellectual property rights of
$8.2 million in the six month period ended June 30,
2010 and $25.9 million in the same 2009 period 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 in both 2010 and 2009
primarily relate to payments to acquire certain foreign-based
distributors.
Cash flows used in financing activities were $169.8 million
for the six month period ended June 30, 2010, compared to
$142.0 million in the same 2009 period. For the six months
ended June 30, 2010, we repurchased 2.9 million common
shares for a total of $178.9 million, including
commissions, under our share repurchase program authorized by
our Board of Directors, compared to $337.8 million in the
same 2009 period. In the 2009 period, we borrowed against our
senior credit facility, in part, to fund these share
repurchases. Proceeds from our stock compensation plans
increased in the six month period ended June 30, 2010,
compared to the same 2009 period, due to an increase in employee
stock option exercises.
We have two outstanding tranches of unsecured senior notes
(Senior Notes): $500 million aggregate principal amount of
4.625% Senior Notes due November 30, 2019 and
$500 million aggregate principal amount of
5.75% Senior Notes due November 30, 2039. Interest on
the Senior Notes is payable on May 30 and November 30 of each
year until maturity. We may redeem the Senior Notes at our
election in whole or in part at any time prior to maturity at
the applicable redemption prices.
We have a five year $1,350 million revolving,
multi-currency, senior unsecured credit facility maturing
November 30, 2012 (Senior Credit Facility). We had
$131.8 million in outstanding borrowings under the Senior
Credit Facility at June 30, 2010, and an availability of
$1,218.2 million.
We also have available uncommitted credit facilities totaling
$80.4 million.
We may use excess cash to repurchase additional common stock
under our share repurchase programs. We had $32.2 million
available at June 30, 2010 under our $1.25 billion share
repurchase program which expires December 31, 2010. In July
2010, the Board of Directors approved an additional
$1.5 billion share repurchase program which will expire on
December 31, 2013.
Management believes that cash flows from operations and
available borrowings under the Senior Credit Facility are
sufficient to meet our working capital, capital expenditure and
debt service needs. Should investment opportunities arise, we
believe that our earnings, balance sheet and cash flows will
allow us to obtain additional capital, if necessary.
Recent
Accounting Pronouncements
There are no recently issued accounting pronouncements that we
have yet to adopt that are expected to have a material effect on
our financial position, results of operations or cash flows.
Critical
Accounting Estimates
There were no changes in the six month period ended
June 30, 2010 to the application of critical accounting
policies as described in our Annual Report on
Form 10-K
for the year ended December 31, 2009. The information below
provides an update on how certain of those critical accounting
policies were applied in the current year.
23
Commitments and Contingencies During the
three month period ended June 30, 2010, we recorded an
additional provision for certain claims of $75.0 million,
and we revised the definition of Certain Claims
recorded in our statement of earnings to include worldwide
claims relating to all revisions of Durom Cup cases where
the original surgery was performed before our July 22, 2008
suspension of marketing and distribution, regardless of the time
period elapsed between the original surgery and the revision
surgery. This additional provision represents managements
updated estimate of liability to Durom Cup patients
undergoing revisions associated with original surgeries
occurring before July 22, 2008.
Goodwill and Intangible Assets In the
fourth quarter of 2009 we incurred a goodwill impairment charge
of $73.0 million related to our U.S. Spine reporting
unit. Although there were signs of improvement in the three
month period ended March 31, 2010, such as growth in sales
of acquired Abbott Spine products, our U.S. Spine reporting
unit continued to experience challenges, so we performed another
impairment test in the first quarter of 2010.
Using methodology similar to that used in the fourth quarter of
2009, we determined the estimated fair value of the reporting
unit using an equal weighting of income and market approaches.
The estimated fair value of the reporting unit was greater
(although not substantially greater) than the carrying value of
the net assets, so we did not record a goodwill impairment
charge.
Although revenues of the U.S. Spine reporting unit
decreased in the three month period ended June 30, 2010,
the revenue and underlying cash flows were in line with our
estimates. Therefore, no impairment test was performed on this
reporting unit in the second quarter of 2010.
If the estimated cash flows of the U.S. Spine reporting
unit decrease relative to our current estimates, we may have to
record impairment charges in the future. Factors that could
result in our cash flows being lower than our current estimates
include: 1) decreased revenues caused by changes in the
healthcare market, poor execution of our operating plans, or our
inability to generate new product revenue from our research and
development activities, and 2) our inability to achieve the
estimated operating margins in our forecasts due to unforeseen
factors. Additionally, changes in the broader economic
environment could cause changes to our estimated discount rates
which will impact our estimated fair values, or may cause
changes to the comparable transaction methodology we employed
under the market approach of estimating fair value.
We have five other reporting units subject to goodwill
impairment testing, but no interim impairment testing was
performed on these reporting units as there were no events or
circumstances that would warrant an interim test. For each of
those five reporting units, the estimated fair value
substantially exceeded its carrying value at the last annual
impairment test.
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:
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competition;
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pricing pressures;
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dependence on new product development, technological advances
and innovation;
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the impact of the recently enacted federal healthcare reform
legislation, including the new excise tax on medical devices;
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reductions in reimbursement levels by third-party payors and
cost containment efforts of healthcare purchasing organizations;
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the costs of defending or resolving putative class action
litigation arising out of trading or ownership of our stock;
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24
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our compliance through 2012 with the Corporate Integrity
Agreement we entered into as part of the September 2007
settlement with the United States government;
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the success of our quality initiatives;
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the outcome of the investigation by the U.S. government
into Foreign Corrupt Practices Act matters announced in October
2007;
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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;
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tax reform measures, tax authority examinations and associated
tax risks and potential obligations;
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retention of our independent agents and distributors;
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changes in customer demand for our products and services caused
by demographic changes or other factors;
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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 possible disruptive effect of additional strategic
acquisitions and our ability to successfully integrate acquired
companies;
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our ability to form and implement 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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Readers of this report are cautioned not to place undue reliance
on these forward-looking statements. While we believe the
assumptions on which the forward-looking statements are based
are reasonable, there can be no assurance that these
forward-looking statements will prove to be accurate. This
cautionary statement is applicable to all forward-looking
statements contained in this report.
We disclaim any intention or obligation to update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be set
forth in our periodic reports and our other filings with the
Securities and Exchange Commission.
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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, 2009.
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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.
25
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 June 30, 2010 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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Item 1.
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Legal
Proceedings
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Information pertaining to legal proceedings can be found in
Note 13 to the interim consolidated financial statements
included in Part I of this report.
Except as set forth in our Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2010, 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, 2009.
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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The following table summarizes repurchases of common stock
settled during the three month period ended June 30, 2010:
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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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April 2010
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989,600
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$
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61.26
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52,372,848
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$
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56,981,767
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May 2010
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403,300
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61.47
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52,776,148
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32,191,360
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June 2010
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52,776,148
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32,191,360
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Total
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1,392,900
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$
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61.32
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52,776,148
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$
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32,191,360
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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. We have also announced that our
Board of Directors has authorized an additional share repurchase
program authorizing $1.5 billion of repurchases through
December 31, 2013. |
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Item 5.
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Other
Information
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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.
26
The following exhibits are filed or furnished as part of this
report:
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31
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.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
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.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
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32
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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
|
.INS
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XBRL Instance Document*
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101
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.SCH
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XBRL Taxonomy Extension Schema Document*
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101
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.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document*
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101
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.LAB
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XBRL Taxonomy Extension Label Linkbase Document*
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101
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.PRE
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|
XBRL Taxonomy Extension Presentation Linkbase Document*
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101
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.DEF
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XBRL Taxonomy Extension Definition Linkbase Document*
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* |
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Pursuant to
Regulation S-T,
this interactive data file is deemed not filed or part of a
registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, is deemed
not filed for purposes of Section 18 of the Securities
Exchange Act of 1934, and otherwise is not subject to liability
under these sections. |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
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ZIMMER HOLDINGS, INC.
(Registrant)
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Date: August 5, 2010
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By:
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/s/ James
T.
Crines
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James T. Crines
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Executive Vice President, Finance and
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Chief Financial Officer
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Date: August 5, 2010
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By:
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/s/ Derek
M.
Davis
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Derek M. Davis
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Vice President, Finance and Corporate
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Controller and Chief Accounting Officer
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28