FORM 10-Q
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2008
Commission File Number
001-16407
ZIMMER HOLDINGS, INC.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
13-4151777
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(IRS Employer
Identification No.)
|
345 East Main Street, Warsaw, IN 46580
(Address of principal executive
offices)
Telephone:
(574) 267-6131
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 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):
|
|
|
|
Large
accelerated
filer þ
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting
company o
|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of October 24, 2008, 224,570,530 shares of the
registrants $.01 par value common stock were
outstanding.
ZIMMER
HOLDINGS, INC.
INDEX TO
FORM 10-Q
September 30,
2008
2
Part I
Financial Information
|
|
Item 1.
|
Financial
Statements
|
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
(In
millions, except per share amounts, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net Sales
|
|
$
|
952.2
|
|
|
$
|
903.2
|
|
|
$
|
3,090.9
|
|
|
$
|
2,824.0
|
|
Cost of products sold
|
|
|
237.2
|
|
|
|
199.2
|
|
|
|
754.2
|
|
|
|
622.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
715.0
|
|
|
|
704.0
|
|
|
|
2,336.7
|
|
|
|
2,202.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
46.7
|
|
|
|
53.0
|
|
|
|
146.8
|
|
|
|
158.8
|
|
Selling, general and administrative
|
|
|
404.9
|
|
|
|
352.6
|
|
|
|
1,266.7
|
|
|
|
1,088.5
|
|
Certain claims (Note 12)
|
|
|
47.5
|
|
|
|
|
|
|
|
47.5
|
|
|
|
|
|
Settlement (Note 12)
|
|
|
|
|
|
|
169.5
|
|
|
|
|
|
|
|
169.5
|
|
Acquisition, integration and other expense
|
|
|
5.6
|
|
|
|
2.9
|
|
|
|
25.4
|
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
504.7
|
|
|
|
578.0
|
|
|
|
1,486.4
|
|
|
|
1,426.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit
|
|
|
210.3
|
|
|
|
126.0
|
|
|
|
850.3
|
|
|
|
775.7
|
|
Interest and other, net
|
|
|
28.2
|
|
|
|
1.8
|
|
|
|
36.0
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
|
238.5
|
|
|
|
127.8
|
|
|
|
886.3
|
|
|
|
778.6
|
|
Provision for income taxes
|
|
|
23.5
|
|
|
|
83.4
|
|
|
|
204.4
|
|
|
|
268.9
|
|
Minority interest
|
|
|
(0.3
|
)
|
|
|
0.1
|
|
|
|
(0.8
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
$
|
214.7
|
|
|
$
|
44.5
|
|
|
$
|
681.1
|
|
|
$
|
509.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.96
|
|
|
$
|
0.19
|
|
|
$
|
2.98
|
|
|
$
|
2.16
|
|
Diluted
|
|
$
|
0.95
|
|
|
$
|
0.19
|
|
|
$
|
2.97
|
|
|
$
|
2.14
|
|
Weighted Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
224.7
|
|
|
|
234.9
|
|
|
|
228.5
|
|
|
|
236.3
|
|
Diluted
|
|
|
225.6
|
|
|
|
236.8
|
|
|
|
229.7
|
|
|
|
238.4
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
3
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
(In
millions, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
542.4
|
|
|
$
|
463.9
|
|
Restricted cash
|
|
|
2.7
|
|
|
|
2.5
|
|
Accounts receivable, less allowance for doubtful accounts
|
|
|
691.6
|
|
|
|
674.3
|
|
Inventories, net
|
|
|
843.0
|
|
|
|
727.8
|
|
Prepaid expenses and other current assets
|
|
|
56.4
|
|
|
|
59.4
|
|
Deferred income taxes
|
|
|
197.2
|
|
|
|
154.8
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,333.3
|
|
|
|
2,082.7
|
|
Property, plant and equipment, net
|
|
|
1,188.0
|
|
|
|
971.9
|
|
Goodwill
|
|
|
2,649.2
|
|
|
|
2,621.4
|
|
Intangible assets, net
|
|
|
713.7
|
|
|
|
743.8
|
|
Other assets
|
|
|
194.6
|
|
|
|
213.9
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
7,078.8
|
|
|
$
|
6,633.7
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
165.6
|
|
|
$
|
174.1
|
|
Income taxes payable
|
|
|
48.2
|
|
|
|
85.1
|
|
Other current liabilities
|
|
|
624.7
|
|
|
|
489.4
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
838.5
|
|
|
|
748.6
|
|
Other long-term liabilities
|
|
|
284.4
|
|
|
|
328.4
|
|
Long-term debt
|
|
|
331.1
|
|
|
|
104.3
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,454.0
|
|
|
|
1,181.3
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
3.5
|
|
|
|
2.8
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, one billion shares
authorized, 253.5 million shares in 2008
(252.2 million in 2007) issued
|
|
|
2.5
|
|
|
|
2.5
|
|
Paid-in capital
|
|
|
3,114.2
|
|
|
|
2,999.1
|
|
Retained earnings
|
|
|
4,218.0
|
|
|
|
3,536.9
|
|
Accumulated other comprehensive income
|
|
|
354.7
|
|
|
|
290.3
|
|
Treasury stock, 28.9 million shares in 2008
(19.3 million in 2007)
|
|
|
(2,068.1
|
)
|
|
|
(1,379.2
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
5,621.3
|
|
|
|
5,449.6
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
7,078.8
|
|
|
$
|
6,633.7
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
4
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
(In
millions, unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
|
Months
|
|
|
|
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
681.1
|
|
|
$
|
509.4
|
|
Adjustments to reconcile net earnings to cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
196.0
|
|
|
|
167.6
|
|
Gain on sale of other assets
|
|
|
(38.8
|
)
|
|
|
|
|
Share-based compensation
|
|
|
50.4
|
|
|
|
53.5
|
|
Income tax benefit from stock option exercises
|
|
|
10.6
|
|
|
|
39.6
|
|
Excess income tax benefit from stock option exercises
|
|
|
(6.5
|
)
|
|
|
(26.5
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
(66.2
|
)
|
|
|
41.6
|
|
Receivables
|
|
|
(11.9
|
)
|
|
|
3.8
|
|
Inventories
|
|
|
(103.3
|
)
|
|
|
(66.4
|
)
|
Accounts payable and accrued expenses
|
|
|
141.3
|
|
|
|
(1.4
|
)
|
Other assets and liabilities
|
|
|
(21.5
|
)
|
|
|
(58.7
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
831.2
|
|
|
|
662.5
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
Additions to instruments
|
|
|
(186.5
|
)
|
|
|
(106.2
|
)
|
Additions to other property, plant and equipment
|
|
|
(189.2
|
)
|
|
|
(117.8
|
)
|
Proceeds from sale of other assets
|
|
|
54.9
|
|
|
|
|
|
Acquisitions, net of acquired cash
|
|
|
(18.6
|
)
|
|
|
(108.1
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(339.4
|
)
|
|
|
(332.1
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
Net borrowing under credit facilities
|
|
|
220.0
|
|
|
|
|
|
Proceeds from employee stock compensation plans
|
|
|
54.2
|
|
|
|
145.8
|
|
Excess income tax benefit from stock option exercises
|
|
|
6.5
|
|
|
|
26.5
|
|
Repurchase of common stock
|
|
|
(688.9
|
)
|
|
|
(460.6
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(408.2
|
)
|
|
|
(288.3
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and equivalents
|
|
|
(5.1
|
)
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and equivalents
|
|
|
78.5
|
|
|
|
47.3
|
|
Cash and equivalents, beginning of year
|
|
|
463.9
|
|
|
|
265.7
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents, end of period
|
|
$
|
542.4
|
|
|
$
|
313.0
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
5
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
|
|
1.
|
Significant
Accounting Polices
|
Basis of Presentation The financial data
presented herein is unaudited and should be read in conjunction
with the consolidated financial statements and accompanying
notes included in the 2007 Annual Report on
Form 10-K
filed by Zimmer Holdings, Inc. In the opinion of management, the
accompanying unaudited consolidated financial statements include
all adjustments necessary for a fair statement of the financial
position, results of operations and cash flows for the interim
periods presented. The December 31, 2007 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 three and
nine month periods ended September 30, 2007 have been
reclassified to conform to the current year presentation.
The words we, us, our and
similar words refer to Zimmer Holdings, Inc. and its
subsidiaries. Zimmer Holdings refers to the parent company only.
Revenue Recognition We sell product through
three principal channels: 1) direct to healthcare
institutions, referred to as direct channel accounts,
2) through stocking distributors and healthcare dealers and
3) directly to dental practices and dental laboratories.
The direct channel accounts represent approximately
80 percent of our net sales. Through this channel,
inventory is generally consigned to sales agents or customers so
that products are available when needed for surgical procedures.
No revenue is recognized upon the placement of inventory into
consignment as we retain title and maintain the inventory on our
balance sheet. Upon implantation, we issue an invoice and
revenue is recognized. Pricing for products is generally
predetermined by contracts with customers, agents acting on
behalf of customer groups or by government regulatory bodies,
depending on the market. Price discounts under group purchasing
contracts are generally linked to volume of implant purchases by
customer healthcare institutions within a specified group. At
negotiated thresholds within a contract buying period, price
discounts may increase. Sales to stocking distributors,
healthcare dealers, dental practices and dental laboratories
account for approximately 20 percent of our net sales. With
these types of sales, revenue is recognized when title to
product passes, either upon shipment of the product or in some
cases upon implantation of the product. Product is generally
sold at contractually fixed prices for specified periods.
Payment terms vary by customer, but are typically less than
90 days. In some cases sales incentives may be earned by a
customer for purchasing a specified amount of our product. We
estimate whether such incentives will be achieved and, if so,
recognize these incentives as a reduction in revenue in the same
period the underlying revenue transaction is recognized.
Occasionally products are returned and, accordingly, we maintain
an estimated sales return reserve that is recorded as a
reduction in revenue. Product returns were not significant for
the three and nine month periods ended September 30, 2008
and 2007.
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
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
Net Earnings
|
|
$
|
214.7
|
|
|
$
|
44.5
|
|
|
$
|
681.1
|
|
|
$
|
509.4
|
|
Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency cumulative translation adjustments
|
|
|
(102.9
|
)
|
|
|
80.9
|
|
|
|
27.0
|
|
|
|
86.5
|
|
Unrealized foreign currency hedge gains/(losses), net of tax
|
|
|
43.4
|
|
|
|
(33.6
|
)
|
|
|
(10.6
|
)
|
|
|
(46.0
|
)
|
Reclassification adjustments on foreign currency hedges, net of
tax
|
|
|
10.3
|
|
|
|
5.0
|
|
|
|
45.5
|
|
|
|
11.8
|
|
Unrealized gains (losses) on securities, net of tax
|
|
|
(1.5
|
)
|
|
|
(0.9
|
)
|
|
|
24.0
|
|
|
|
(1.2
|
)
|
Reclassification adjustments on securities, net of tax
|
|
|
(18.4
|
)
|
|
|
|
|
|
|
(23.8
|
)
|
|
|
|
|
Prior service cost and unrecognized losses in actuarial
assumptions, net of tax
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
2.3
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Income (Loss)
|
|
|
(68.5
|
)
|
|
|
51.7
|
|
|
|
64.4
|
|
|
|
55.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
146.2
|
|
|
$
|
96.2
|
|
|
$
|
745.5
|
|
|
$
|
565.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized loss and gain on securities in the three and nine
months ended September 30, 2008 relates primarily to an
investment previously accounted for under the equity method that
is now considered an
available-for-sale
investment and accounted for at fair value as we no longer
exercise significant influence over the third party investee.
During the three and nine month periods ended September 30,
2008, we sold this investment, and other less significant
investments for proceeds of $42.9 million and
$54.9 million, respectively, and recorded a gross realized
gain in interest and other of $30.1 million and
$38.8 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Finished goods
|
|
$
|
652.1
|
|
|
$
|
564.2
|
|
Work in progress
|
|
|
62.9
|
|
|
|
50.3
|
|
Raw materials
|
|
|
128.0
|
|
|
|
113.3
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
843.0
|
|
|
$
|
727.8
|
|
|
|
|
|
|
|
|
|
|
7
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Land
|
|
$
|
21.3
|
|
|
$
|
19.4
|
|
Buildings and equipment
|
|
|
936.0
|
|
|
|
855.3
|
|
Capitalized software costs
|
|
|
132.1
|
|
|
|
98.7
|
|
Instruments
|
|
|
1,075.9
|
|
|
|
903.8
|
|
Construction in progress
|
|
|
145.0
|
|
|
|
98.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,310.3
|
|
|
|
1,975.9
|
|
Accumulated depreciation
|
|
|
(1,122.3
|
)
|
|
|
(1,004.0
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
1,188.0
|
|
|
$
|
971.9
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Other
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
License and service agreements
|
|
$
|
198.2
|
|
|
$
|
149.9
|
|
Certain claims (Note 12)
|
|
|
45.8
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
94.0
|
|
|
|
59.3
|
|
Fair value of derivatives
|
|
|
21.8
|
|
|
|
50.0
|
|
Accrued liabilities
|
|
|
264.9
|
|
|
|
230.2
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
624.7
|
|
|
$
|
489.4
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Fair
Value Measurement of Assets and Liabilities
|
On January 1, 2008, we adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 157 Fair
Value Measurements (SFAS No. 157) as it
relates to financial assets and liabilities recorded at fair
value on a recurring basis. Financial Accounting Standards Board
Staff Position (FSP)
No. 157-2
has delayed the effective date of SFAS No. 157 for
nonfinancial assets and liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis. We do not expect that the full
adoption of SFAS No. 157 will have a material impact
on our consolidated financial statements or results of
operations.
8
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following financial assets and liabilities are recorded at
fair value on a recurring basis as of September 30, 2008
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using:
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Recorded
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Balance
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
0.8
|
|
|
$
|
0.8
|
|
|
$
|
|
|
|
$
|
|
|
Derivatives, current and non-current
|
|
|
14.2
|
|
|
|
|
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15.0
|
|
|
$
|
0.8
|
|
|
$
|
14.2
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, current and non-current
|
|
$
|
25.3
|
|
|
$
|
|
|
|
$
|
25.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25.3
|
|
|
$
|
|
|
|
$
|
25.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities are valued using a market approach, based on quoted
prices for the specific security from transactions in active
exchange markets. Derivatives relate to foreign exchange forward
contracts and foreign currency options entered into with various
third parties. We value these instruments using a market
approach based on foreign currency exchange rates obtained from
active markets.
In September 2007, we reached a settlement with the United
States Department of Justice to resolve an investigation into
financial relationships between major orthopaedic manufacturers
and consulting orthopaedic surgeons. Under the terms of the
settlement, we paid a civil settlement amount of
$169.5 million and we recorded an expense in that amount.
At the time, no tax benefit was recorded related to the
settlement expense due to the uncertainty as to the tax
treatment. During the third quarter of 2008, we reached an
agreement with the U.S. Internal Revenue Service (IRS)
confirming the deductibility of a portion of the settlement
payment. As a result, we recorded an estimated current tax
benefit of $30.8 million.
The U.S. federal returns for years 2003 and 2004 are
currently under examination by the IRS. On July 15, 2008,
the IRS issued its examination report. We filed a formal protest
on August 15, 2008 and requested a conference with the
Appeals Office regarding disputed issues. Although the appeals
process could take several years, we do not anticipate
resolution of the audit will result in any significant impact on
our results of operations, financial position or cash flows.
|
|
8.
|
Retirement
and Postretirement Benefit Plans
|
We have defined benefit pension plans covering certain
U.S. and Puerto Rico employees. The employees who are not
participating in the defined benefit plans do receive additional
benefits under our defined contribution plans. Plan benefits are
primarily based on years of credited service and the
participants compensation. In addition to the
U.S. and Puerto Rico defined benefit pension plans, we
sponsor various
non-U.S. pension
arrangements, including retirement and termination benefit plans
required by local law or coordinated with government sponsored
plans.
9
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We also provide comprehensive medical and group life insurance
benefits to certain U.S. and Puerto Rico retirees who elect
to participate in our comprehensive medical and group life
plans. The medical plan is contributory, and the life insurance
plan is non-contributory. No similar plans exist for employees
outside the U.S. and Puerto Rico.
The components of net pension expense for the three and nine
month periods ended September 30, 2008 and 2007, for our
U.S. and
non-U.S. defined
benefit retirement plans are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Service cost
|
|
$
|
6.3
|
|
|
$
|
6.7
|
|
|
$
|
18.9
|
|
|
$
|
20.3
|
|
Interest cost
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
13.5
|
|
|
|
11.5
|
|
Expected return on plan assets
|
|
|
(5.9
|
)
|
|
|
(6.8
|
)
|
|
|
(17.5
|
)
|
|
|
(15.7
|
)
|
Amortization of unrecognized prior service cost and actuarial
loss
|
|
|
0.6
|
|
|
|
0.8
|
|
|
|
2.1
|
|
|
|
2.3
|
|
Settlement
|
|
|
0.1
|
|
|
|
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
5.6
|
|
|
$
|
5.2
|
|
|
$
|
19.7
|
|
|
$
|
18.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net periodic benefit expense for the three and
nine month periods ended September 30, 2008 and 2007, for
our U.S. and Puerto Rico postretirement benefit plans are
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Service cost
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
$
|
1.2
|
|
|
$
|
1.2
|
|
Interest cost
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
1.8
|
|
|
|
1.8
|
|
Amortization of unrecognized prior service cost
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
Amortization of unrecognized actuarial loss
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1.0
|
|
|
$
|
1.1
|
|
|
$
|
3.0
|
|
|
$
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We contributed approximately $33 million during the nine
month period ended September 30, 2008 to our U.S. and
Puerto Rico defined benefit plans and do not anticipate making
additional contributions for the remainder of 2008. We
contributed approximately $9 million to our foreign-based
defined benefit plans in the nine month period ended
September 30, 2008 and expect to contribute an additional
$3 million to these foreign- based plans during the
remainder of 2008. Contributions for the U.S. and Puerto
Rico postretirement benefit plans are not expected to be
significant.
The following is a reconciliation of weighted average shares for
the basic and diluted shares computations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Weighted average shares outstanding for basic net earnings
per share
|
|
|
224.7
|
|
|
|
234.9
|
|
|
|
228.5
|
|
|
|
236.3
|
|
Effect of dilutive stock options and other equity awards
|
|
|
0.9
|
|
|
|
1.9
|
|
|
|
1.2
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted net earnings
per share
|
|
|
225.6
|
|
|
|
236.8
|
|
|
|
229.7
|
|
|
|
238.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the three and nine month periods ended September 30,
2008, an average of 11.4 million options and
10.0 million options, respectively, to purchase shares of
common stock were not included in the computation of diluted
earnings per share as the exercise prices of these options were
greater than the average market price of the common stock.
During the three and nine month periods ended September 30,
2007, an average of 2.5 million options and
1.2 million options, respectively, were not included.
In the three month period ended September 30, 2008, we
repurchased approximately 0.7 million shares of our common
stock at an average price of $67.50 per share for a total cash
outlay of $48.6 million, including commissions. In the nine
month period ended September 30, 2008, we repurchased
approximately 9.6 million shares of our common stock at an
average price of $72.25 per share for a total cash outlay of
$688.9 million, including commissions. In April 2008, we
announced that our Board of Directors authorized a
$1.25 billion share repurchase program which expires
December 31, 2009. Approximately $1.18 billion remains
authorized under this plan.
We design, develop, manufacture and market reconstructive
orthopaedic implants, including joint and dental, spinal
implants, trauma products and related orthopaedic surgical
products which include surgical supplies and instruments
designed to aid in orthopaedic surgical procedures and
post-operation rehabilitation. We also provide 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, settlement expense,
acquisition, integration and other expenses, inventory
step-up,
in-process research and development write-offs and intangible
asset amortization expense. Global operations include research,
development engineering, medical education, brand management,
corporate legal, finance, and human resource functions, and
U.S. and Puerto Rico based manufacturing operations and
logistics. Intercompany transactions have been eliminated from
segment operating profit. Net sales and segment operating profit
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit
|
|
|
|
Net Sales
|
|
|
Three Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Americas
|
|
$
|
563.3
|
|
|
$
|
547.0
|
|
|
$
|
291.2
|
|
|
$
|
285.8
|
|
Europe
|
|
|
251.0
|
|
|
|
226.0
|
|
|
|
87.6
|
|
|
|
79.7
|
|
Asia Pacific
|
|
|
137.9
|
|
|
|
130.2
|
|
|
|
55.5
|
|
|
|
60.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
952.2
|
|
|
$
|
903.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
(11.0
|
)
|
|
|
(12.4
|
)
|
Inventory
step-up
|
|
|
|
|
|
|
|
|
|
|
(1.4
|
)
|
|
|
0.1
|
|
Certain claims
|
|
|
|
|
|
|
|
|
|
|
(47.5
|
)
|
|
|
|
|
Settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(169.5
|
)
|
Acquisition, integration and other
|
|
|
|
|
|
|
|
|
|
|
(5.6
|
)
|
|
|
(2.9
|
)
|
Global operations and corporate functions
|
|
|
|
|
|
|
|
|
|
|
(158.5
|
)
|
|
|
(115.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
|
|
$
|
210.3
|
|
|
$
|
126.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Operating Profit
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Americas
|
|
$
|
1,764.9
|
|
|
$
|
1,682.9
|
|
|
$
|
915.0
|
|
|
$
|
879.3
|
|
Europe
|
|
|
882.3
|
|
|
|
752.0
|
|
|
|
341.4
|
|
|
|
298.6
|
|
Asia Pacific
|
|
|
443.7
|
|
|
|
389.1
|
|
|
|
190.6
|
|
|
|
184.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,090.9
|
|
|
$
|
2,824.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
(50.4
|
)
|
|
|
(53.5
|
)
|
Inventory
step-up
|
|
|
|
|
|
|
|
|
|
|
(3.2
|
)
|
|
|
(0.2
|
)
|
Certain claims
|
|
|
|
|
|
|
|
|
|
|
(47.5
|
)
|
|
|
|
|
Settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(169.5
|
)
|
Acquisition, integration and other
|
|
|
|
|
|
|
|
|
|
|
(25.4
|
)
|
|
|
(9.5
|
)
|
Global operations and corporate functions
|
|
|
|
|
|
|
|
|
|
|
(470.2
|
)
|
|
|
(353.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
|
|
$
|
850.3
|
|
|
$
|
775.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning in 2008, our Hips product category sales, which are
included in the Reconstructive implants product category in the
table below, no longer include bone cement and accessory sales,
which have been reclassified to our Orthopaedic Surgical
Products and Other (OSP and other) product category.
Amounts in the three and nine month periods ended
September 30, 2007 related to sales of bone cement and
accessory products have been reclassified to conform to the 2008
presentation. Product category net sales are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Reconstructive implants
|
|
$
|
782.9
|
|
|
$
|
729.9
|
|
|
$
|
2,558.5
|
|
|
$
|
2,304.1
|
|
Trauma
|
|
|
54.2
|
|
|
|
49.6
|
|
|
|
164.4
|
|
|
|
150.0
|
|
Spine
|
|
|
50.1
|
|
|
|
45.8
|
|
|
|
158.8
|
|
|
|
141.5
|
|
OSP and other
|
|
|
65.0
|
|
|
|
77.9
|
|
|
|
209.2
|
|
|
|
228.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
952.2
|
|
|
$
|
903.2
|
|
|
$
|
3,090.9
|
|
|
$
|
2,824.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Recent
Accounting Pronouncements
|
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of SFAS No. 133
(SFAS No. 161). SFAS No. 161 will require
increased disclosure of our derivative and hedging activities,
including how derivative and hedging activities affect our
consolidated statement of earnings, balance sheet and cash
flows. SFAS No. 161 is effective for fiscal years
beginning on or after December 15, 2008 and interim periods
within those fiscal years. The adoption of
SFAS No. 161 will increase the required disclosure of
our derivative and hedging activities, but will not have any
impact on our financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS No. 141(R)),
which is a revision of SFAS No. 141.
SFAS No. 141(R) will change the way in which we
account for business combinations. The statement introduces new
purchase accounting concepts, expands the use of fair value
accounting related to business combinations and changes the
subsequent period accounting for certain acquired assets and
liabilities, among other things. SFAS No. 141(R) will
be applied prospectively on business combinations
12
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
with acquisition dates in fiscal years beginning on or after
December 15, 2008, and therefore, this statement will not
affect the accounting for business combinations that are
completed prior to the effective date. For deferred tax assets
and income tax reserves recorded as part of business
combinations, these assets and liabilities will be accounted for
under SFAS No. 109 and FIN 48 after the effective
date of SFAS No. 141(R), regardless of the acquisition
date. Therefore, if a remeasurement of those assets and
liabilities is warranted after the effective date of this
statement, it will not be reflected as an adjustment to purchase
accounting and may affect our income tax expense in the period
in which the remeasurement occurs.
In December 2007, the FASB also issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51
(SFAS No. 160). SFAS No. 160 will change the
accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a
component of equity. SFAS No. 160 requires retroactive
adoption of the presentation and disclosure requirements for
existing minority interests. SFAS No. 160 is effective
for fiscal years beginning on or after December 15, 2008
and interim periods within those fiscal years. We do not expect
that the adoption of SFAS No. 160 will have a material
impact on our consolidated financial statements or results of
operations.
|
|
12.
|
Commitments
and Contingencies
|
Intellectual
Property and Product Liability-Related Litigation
In July 2008, we announced that we were temporarily suspending
marketing and distribution of the
Durom®
Acetabular Component (Durom Cup) in the U.S. to
allow us to update product labeling to provide more detailed
surgical technique instructions to surgeons and implement a
surgical training program in the U.S. Following our
announcement, product liability lawsuits and other claims have
been asserted against us, some of which we settled in the three
month period ended September 30, 2008. There are a number
of claims still pending and we expect additional claims will be
submitted. We recorded a provision for certain claims of
$47.5 million in the third quarter of 2008, which
represents managements estimate of liability to patients
undergoing revisions associated with surgeries occurring before
July 2008 and within two years of the original surgery date.
These parameters are consistent with our data which indicates
that cup loosenings associated with surgical technique are most
likely to occur within that time period. Any claims received
outside of these defined parameters will be managed in the
normal course and reflected in our standard quarterly product
liability accruals.
On February 15, 2005, Howmedica Osteonics Corp.
(Howmedica) filed an action against us and an
unrelated party in the United States District Court for the
District of New Jersey alleging infringement 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. We continue to
believe that our defenses against infringement of the remaining
claims are valid and meritorious, and we intend to defend the
Howmedica lawsuit vigorously.
In addition to certain claims related to the Durom cup
discussed above, we are also subject to product liability and
other claims and lawsuits arising in the ordinary course of
business, for which we maintain insurance, subject to
self-insured retention limits. We establish accruals for product
liability and other claims in conjunction with outside counsel
based on current information and historical settlement
information for open claims, related fees and for claims
incurred but not reported. While it is not possible to predict
with certainty the outcome of these cases, it is the opinion of
management that, upon ultimate resolution, liabilities in excess
of those recorded, if any, from, these cases will not have a
material adverse effect on our consolidated financial position,
results of operations or cash flows.
13
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Government
Investigations
In March 2005, the United States Department of Justice through
the United States Attorneys Office in Newark, New Jersey
commenced an investigation of us and four other orthopaedic
companies pertaining to consulting contracts, professional
service agreements and other agreements by which remuneration is
provided to orthopaedic surgeons. On September 27, 2007, we
reached a settlement with the government to resolve all claims
related to this investigation. As part of the settlement, we
entered into a settlement agreement with the United States of
America through the United States Department of Justice and on
behalf of the Office of Inspector General of the Department of
Health and Human Services (the OIG-HHS). In
addition, we entered into a Deferred Prosecution Agreement (the
DPA) with the United States Attorneys Office
for the District of New Jersey (the
U.S. Attorney) and a Corporate Integrity
Agreement (the CIA) with the OIG-HHS. We did not
admit any wrongdoing, plead guilty to any criminal charges or
pay any criminal fines as part of the settlement.
We settled all civil and administrative claims related to the
federal investigation by making a settlement payment to the
United States government of $169.5 million.
Under the terms of the DPA, the U.S. Attorney filed a
criminal complaint in the United States District Court for the
District of New Jersey charging us with conspiracy to commit
violations of the Anti-Kickback Statute (42 U.S.C.
§ 1320a-7b)
during the years 2002 through 2006. The court deferred
prosecution of the criminal complaint during the
18-month
term of the DPA. The U.S. Attorney will seek dismissal of
the criminal complaint after the
18-month
period if we comply with the provisions of the DPA. The DPA
provides for oversight by a federally appointed monitor. Under
the CIA, which has a term of five years, we agreed, among other
provisions, to continue the operation of our enhanced Corporate
Compliance Program, designed to promote compliance with federal
healthcare program requirements, in accordance with the terms
set forth in the CIA. We also agreed to retain an independent
review organization (IRO) 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. Our obligation to
retain an IRO is suspended during the
18-month
term of the DPA. A material breach of the DPA or the CIA may
subject us to further criminal or civil action
and/or to
exclusion by OIG-HHS from participation in all federal
healthcare programs, which would have a material adverse effect
on our financial position, results of operations and cash flows.
In November 2007, we received a civil investigative demand from
the Massachusetts Attorney Generals office seeking
additional information regarding the financial relationships we
publicly disclosed pursuant to the DPA 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 SEC informed us that it was
conducting an informal investigation regarding potential
violations of the Foreign Corrupt Practices Act in the sale of
medical devices in a number of foreign countries by companies in
the medical device industry. We understand that at least four
other medical device companies received similar letters. We are
fully cooperating with the SEC and the U.S. Department of
Justice with regard to this informal investigation.
Derivative
Actions and Class Actions
Following announcement of our entry into the DPA and CIA and
commencement of the informal SEC investigation described above,
two shareholder derivative actions were filed in Kosciusko
Superior Court in Warsaw, Indiana. The first action, captioned
Bottner v. Dvorak et al., was filed on October 16,
2007. The second action, captioned Capizzi v. Dvorak et
al., was filed on October 30, 2007. On November 19,
2007, these two cases were consolidated under the caption In re
Zimmer, Inc. Derivative Litigation. The plaintiffs sought to
maintain the action purportedly on our behalf against five of
our current directors and three former directors. On
December 10, 2007, the plaintiffs filed a consolidated
amended derivative complaint, which alleged, among other things,
breaches of fiduciary duty by the individual defendants which
allegedly allowed misconduct to occur, including alleged
14
ZIMMER
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
illegal payments to doctors, and caused us financial harm,
including the cost of the settlement with the federal government
described above. The plaintiffs did not seek damages from us,
but instead requested damages of an unspecified amount on our
behalf. The plaintiffs also requested that the court order
(i) disgorgement of profits, benefits and other
compensation obtained by the individual defendants and
(ii) certain matters of corporate governance be placed
before our stockholders for a vote. On January 16, 2008, we
and the individual defendants filed separate motions to dismiss
the complaint and memoranda in support. We and the individual
defendants also filed a joint motion to stay discovery pending a
ruling on the motions to dismiss. The plaintiffs filed their
opposition to these motions on February 26, 2008. We and
the individual defendants filed joint reply briefs on
March 11, 2008. On August 8, 2008, one of the
plaintiffs, Savino Capizzi, filed a notice of voluntary
dismissal of his action. On August 28, 2008, the Court
entered an order granting the defendants motions to
dismiss and ordering the dismissal of the consolidated amended
derivative complaint. The plaintiffs did not pursue an appeal,
and we consider the matter to be closed.
On April 24, 2008, a complaint was filed in the United
States District Court for the Southern District of
New York, Thorpe v. Zimmer, Inc., et al., naming us
and two of our subsidiaries as defendants. The complaint relates
to a putative class action on behalf of certain residents of New
York who had hip or knee implant surgery involving Zimmer
products during an unspecified period. The complaint alleges
that our relationships with orthopaedic surgeons and others
violated the New York deceptive practices statute and unjustly
enriched us. The plaintiff requests actual damages or $50.00,
whichever is greater, on behalf of each class member, a
permanent injunction from our engaging in allegedly improper
practices in the future and restitution in an unspecified
amount. We believe this lawsuit is without merit, and we intend
to defend it vigorously.
On August 5, 2008, a complaint was filed in the United
States District Court for the Southern District of Indiana,
Plumbers and Pipefitters Local Union 719 Pension Fund v.
Zimmer Holdings, Inc., et al., naming us and two of our
executive officers as defendants. The complaint relates to a
putative class action on behalf of persons who purchased our
common stock between January 29, 2008 and July 22,
2008. The complaint alleges that we and two of our executive
officers engaged in violations of the Securities Exchange Act of
1934, as amended, by issuing false and misleading statements
concerning our business and financial results during the
relevant time period. The plaintiff seeks unspecified damages
and interest, attorneys fees, costs and other relief. We
believe this lawsuit is without merit, and we intend to defend
it vigorously.
On August 15, 2008, a shareholder derivative action,
Hays v. Dvorak et al., was filed in the United States
District Court for the Southern District of Indiana. The
plaintiff seeks to maintain the action purportedly on our behalf
against all of our current directors, one former director and
two
non-director
executive officers. The plaintiff alleges, among other things,
breaches of fiduciary duties, abuse of control, unjust
enrichment and gross mismanagement by the named defendants based
on substantially the same factual allegations as the putative
securities class action referenced above. The plaintiff does not
seek damages from us, but instead requests damages of an
unspecified amount on our behalf. The plaintiff also seeks
appropriate equitable relief to remedy the individual
defendants alleged misconduct, attorneys fees, costs
and other relief.
In October 2008, we completed the acquisition of Abbott Spine
for a purchase price of approximately $360 million. The
acquisition was funded by a combination of cash on-hand and new
borrowings under existing credit facilities. This investment
will add a number of innovative products and help build toward
critical mass in the Spine product category. We also expect it
will enhance our research and development capabilities in the
Spine product category and will strengthen our sales coverage.
We expect to record significant charges related to in-process
research and development and other acquisition and integration
costs as a result of this transaction in the fourth quarter of
2008.
15
|
|
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 reconstructive orthopaedic implants, including
joint and dental, spinal implants, trauma products and related
orthopaedic surgical products (sometimes referred to in this
report as OSP). We also provide other healthcare
related services. Reconstructive orthopaedic implants restore
joint function lost due to disease or trauma in joints such as
knees, hips, shoulders and elbows. Dental reconstructive
implants restore function and aesthetics in patients that have
lost teeth due to trauma or disease. Spinal implants are
utilized by orthopaedic surgeons and neurosurgeons in the
treatment of degenerative diseases, deformities and trauma in
all regions of the spine. Trauma products are devices used
primarily to reattach or stabilize damaged bone and tissue to
support the bodys natural healing process. OSP includes
supplies and instruments designed to aid in predominantly
orthopaedic surgical procedures and post-operation
rehabilitation. We have operations in more than 25 countries and
market products in more than 100 countries. We manage operations
through three reportable geographic segments the
Americas, Europe and Asia Pacific.
Certain percentages presented in Managements Discussion
and Analysis are calculated from the underlying whole-dollar
amounts and therefore may not recalculate from the rounded
numbers used for disclosure purposes. Certain amounts in the
2007 consolidated financial statements have been reclassified to
conform to the 2008 presentation.
Beginning in 2008, our Hips product category sales no longer
include bone cement and accessory sales, which have been
reclassified to our OSP and Other product category. Amounts in
the three and nine month periods ended September 30, 2007
related to sales of bone cement and accessory products have been
reclassified to conform to the 2008 presentation.
We believe the following developments or trends are important in
understanding our financial condition, results of operations and
cash flows for the three and nine month periods ended
September 30, 2008 and our expected results for the
remainder of 2008.
Demand
(Volume and Mix) Trends
Increased volume and changes in the mix of product sales
contributed 3 percentage points of sales growth during the
three month period ended September 30, 2008, compared to
8 percentage points in the same 2007 period. The ongoing
shift in demand to premium products, such as
Longevity®
and
Durasul®
Highly Crosslinked Polyethylenes, Trabecular
MetalTM
Technology products, high-flex knees, knee revision products,
porous hip stems and the introduction of gender based devices
continues to positively affect sales growth.
We believe the market for orthopaedic procedure volume on a
global basis continues to rise at mid single digit rates driven
by an aging global population, obesity, proven clinical
benefits, new material technologies, advances in surgical
techniques and more active lifestyles, among other factors.
Pricing
Trends
Global selling prices were flat for the three month period ended
September 30, 2008, which is similar to the same 2007
period. Selling prices in the Americas were flat during the
three month period ended September 30, 2008, compared to a
1 percent increase in the same 2007 period. In Europe,
selling prices for the three month period ended
September 30, 2008 were flat, which is similar to the same
2007 period. Asia Pacific selling prices decreased
4 percent for the three month period ended
September 30, 2008, compared to flat selling prices in the
same 2007 period. Japan and Australia each reported a
5 percent decrease in average selling prices as a result of
scheduled reductions in government controlled reimbursement
prices. Japan and Australia combined currently represent
approximately 10 percent of our sales. With the effect of
governmental healthcare cost containment efforts and pressure
from group purchasing organizations, we expect global selling
prices will remain flat in 2008.
16
Foreign
Currency Exchange Rates
For the three month period ended September 30, 2008,
foreign currency exchange rates had a positive 2 percent
effect on sales. We estimate that an overall weaker
U.S. Dollar will have a positive effect of approximately
3 percent on sales for the year ending December 31,
2008 using average exchange rates in effect at the end of
September 2008. 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.
Compliance-Related
Matters
On September 27, 2007, we and other major
U.S. orthopaedic manufacturers reached a settlement with
the United States government to resolve all claims related to an
investigation into financial relationships between the industry
and consulting orthopaedic surgeons. We paid a
$169.5 million settlement amount and entered into a
Deferred Prosecution Agreement (DPA) with the United States
Attorneys Office for the District of New Jersey. Under the
DPA, we expect to remain subject to oversight by a federally
appointed monitor through March, 2009.
We also entered into a Corporate Integrity Agreement (CIA) with
the Office of the Inspector General of the U.S. Department
of Health and Human Services, which has a term of 5 years.
For more information regarding the settlement, see Note 12
to the consolidated financial statements included elsewhere in
this
Form 10-Q.
No tax benefit was recorded related the $169.5 million
settlement expense when it was recorded in the three month
period ended September 30, 2007. In the third quarter of
2008, we reached an agreement with the U.S. Internal
Revenue Service confirming the deductibility of a portion of the
settlement and recorded an estimated tax benefit of
approximately $30.8 million, resulting in a decrease to the
current period effective tax rate. For more information
regarding the tax treatment of the settlement expense, see
Note 7 to the consolidated financial statements included
elsewhere in this
Form 10-Q.
We are in the process of implementing an enhanced global
compliance program which addresses areas such as product
development, marketing, surgeon training and educational and
charitable funding. The principles of this program meet or
exceed the requirements of the DPA and CIA as they apply in most
respects to all product segments and reach all worldwide
operations. We currently estimate that the costs for complying
with the DPA and CIA and implementing the enhanced compliance
program in 2008 will be in a range of $50-$60 million,
including the fees incurred for the federally appointed monitor.
Durom
Acetabular Cup
In July 2008, we announced a temporary suspension of marketing
and distribution of the
Durom®
Acetabular Component (Durom Cup) in the U.S. to
permit us to update product labeling to provide more detailed
surgical technique instructions and implement a surgical
training program in the U.S. We resumed marketing and
distribution of the Durom Cup in the U.S. in August
2008. To date, we believe that approximately one-half of the
U.S. surgeons who were actively using the Durom Cup
prior to the suspension have completed the requisite training
program.
17
Following our announcement, we received claims from a number of
Durom Cup patients seeking reimbursement for costs and
payments for pain and suffering and we expect to receive
additional similar claims. We recorded a provision for certain
claims of $47.5 million in the three month period ended
September 30, 2008, which represents managements
estimate of liability to patients undergoing revision surgeries
related to the Durom Cup. The estimate is limited to
revisions associated with surgeries occurring before July 2008
and within two years of the original surgery date. Any claims
received outside of these defined parameters will be managed in
the normal course and reflected in our standard quarterly
product liability accruals.
We estimate that we will lose approximately $20-$30 million
in hip product sales during 2008, in large part, as a
consequence of the events involving the Durom Cup. In
addition, we expect that our entry into the growing
U.S. hip resurfacing market may be hindered or delayed as
the Durom Cup has been integral to our plans for entry
into that market.
Orthopaedic
Surgical Products (OSP) Actions
In April 2008, we initiated voluntary product recalls of certain
OSP patient care products manufactured at the Dover, Ohio
facility that we determined did not meet internal quality
standards. We do not expect these recalls to affect our core hip
and knee implants business. Additionally, we voluntarily and
temporarily suspended production and sales of certain OSP
products manufactured at the Dover facility. We expect to have a
significant portion of these products back in production by the
end of 2008, with the remainder of the products coming back into
production in the first quarter of 2009. We expect these actions
will adversely impact 2008 OSP revenues by $70-$80 million
and 2008 diluted earnings per share by $0.18-$0.20, including
$0.07 related to inventory charges, idle plant costs and other
non-recurring charges.
As a result of the disruptive factors discussed above, including
our temporary suspension of U.S. marketing and distribution of
the Durom Cup, our voluntary recall and suspension of
production of certain OSP patient care products, and the
implementation of our enhanced global compliance program, we
believe we suffered customer losses during the three month
period ended September 30, 2008. We estimate, based on
information currently available to us, that these customer
losses reduced our base of knee and hip revenues by
approximately 3 percent. We expect our sales growth to be
at a rate slower than the market in the near term due to these
disruptive factors.
Third
Quarter Results of Operations
Net
Sales by Operating Segment
The following table presents net sales by operating segment and
the components of the percentage changes (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
Volume/
|
|
|
|
|
|
Foreign
|
|
|
|
2008
|
|
|
2007
|
|
|
% Inc
|
|
|
Mix
|
|
|
Price
|
|
|
Exchange
|
|
|
Americas
|
|
$
|
563.3
|
|
|
$
|
547.0
|
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
|
%
|
|
|
|
%
|
Europe
|
|
|
251.0
|
|
|
|
226.0
|
|
|
|
11
|
|
|
|
4
|
|
|
|
|
|
|
|
7
|
|
Asia Pacific
|
|
|
137.9
|
|
|
|
130.2
|
|
|
|
6
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
952.2
|
|
|
$
|
903.2
|
|
|
|
5
|
|
|
|
3
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange as used in the tables in this
report represents the effect of changes in foreign exchange
rates on sales growth.
18
Net
Sales by Product Category
The following table presents net sales by product category and
the components of the percentage changes (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
Volume/
|
|
|
|
|
|
Foreign
|
|
|
|
2008
|
|
|
2007
|
|
|
% Inc (Dec)
|
|
|
Mix
|
|
|
Price
|
|
|
Exchange
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
$
|
411.2
|
|
|
$
|
376.9
|
|
|
|
9
|
%
|
|
|
8
|
%
|
|
|
(1
|
)%
|
|
|
2
|
%
|
Hips
|
|
|
292.3
|
|
|
|
278.9
|
|
|
|
5
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
4
|
|
Extremities
|
|
|
27.5
|
|
|
|
23.9
|
|
|
|
15
|
|
|
|
12
|
|
|
|
1
|
|
|
|
2
|
|
Dental
|
|
|
51.9
|
|
|
|
50.2
|
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
782.9
|
|
|
|
729.9
|
|
|
|
7
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
54.2
|
|
|
|
49.6
|
|
|
|
10
|
|
|
|
5
|
|
|
|
2
|
|
|
|
3
|
|
Spine
|
|
|
50.1
|
|
|
|
45.8
|
|
|
|
9
|
|
|
|
6
|
|
|
|
2
|
|
|
|
1
|
|
OSP and other
|
|
|
65.0
|
|
|
|
77.9
|
|
|
|
(17
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
952.2
|
|
|
$
|
903.2
|
|
|
|
5
|
|
|
|
3
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
NexGen®
Complete Knee Solution product line, including Gender
Solutionstm
Knee Femoral Implants, the NexGen LPS-Flex Knee, the
NexGen CR-Flex Knee and the NexGen LCCK Revision
Knee, led knee sales. In addition, the
Zimmer®
Unicompartmental High-Flex Knee, the NexGen Rotating
Hinge Knee and the
Natural-Knee®
exhibited strong growth.
The continued conversion to porous stems, including the
Zimmer M/L Taper Stem, the
CLS®
Spotorno®
Stem from the CLS Hip System, and the
Alloclassic®
Zweymüller®
Hip Stem, led hip stem sales, but were partially offset by
weaker sales of cemented stems. Trabecular Metal
Acetabular Cups and Longevity and Durasul
Highly Crosslinked Polyethylene Liners also had strong
growth. The temporary suspension of marketing and distribution
of the Durom Cup in the U.S. negatively impacted hip
sales growth in the quarter and we expect this trend to continue
for the remainder of 2008. Additionally, with the lack of a hip
resurfacing product within our U.S. hip portfolio, we
expect to face a continuing challenge in hip sales growth with
the adoption of hip resurfacing in the U.S. market.
The
Bigliani/Flatow®
Complete Shoulder Solution and the Zimmer Trabecular Metal
Reverse Shoulder System led extremities sales.
Orthobiologicals and prosthetic implants, including the
Tapered
Screw-Vent®
Implant System, led dental sales. Zimmer Periarticular
Locking Plates and the
I.T.S.T.tm
Intertrochanteric/Subtrochanteric Fixation System led trauma
sales. The
Dynesys®
Dynamic Stabilization System and the
Trinica®
Select Anterior Cervical Plate System led spine sales. OSP sales
were negatively affected by the patient care product recalls and
related voluntary suspension of production of certain products,
but these negative factors were partially offset by strong
growth in
PALACOS®
1 Bone
Cement.
1 Trademark
of Heraeus Kulzer GmbH
19
Americas
Net Sales
The following table presents Americas net sales (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Inc (Dec)
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
$
|
264.1
|
|
|
$
|
247.4
|
|
|
|
7
|
%
|
Hips
|
|
|
137.8
|
|
|
|
134.5
|
|
|
|
2
|
|
Extremities
|
|
|
20.3
|
|
|
|
16.9
|
|
|
|
19
|
|
Dental
|
|
|
28.3
|
|
|
|
28.9
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
450.5
|
|
|
|
427.7
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
30.8
|
|
|
|
29.8
|
|
|
|
3
|
|
Spine
|
|
|
39.2
|
|
|
|
38.2
|
|
|
|
2
|
|
OSP and other
|
|
|
42.8
|
|
|
|
51.3
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
563.3
|
|
|
$
|
547.0
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The NexGen Complete Knee Solution product line, including
the Gender Solutions Knee Femoral Implants, NexGen
LPS-Flex Knee, the NexGen LCCK Revision Knee and the
NexGen CR-Flex Knee, led knee sales. The Zimmer
Unicompartmental High-Flex Knee also made a strong
contribution.
Growth in porous stems, including growth of the Zimmer
M/L Taper Stem and the Zimmer M/L Taper Stem with
Kinectiv®
Technology, led hip stem sales, but were partially offset by
weaker sales of cemented stems. Trabecular Metal
Acetabular Cups and Longevity Highly Crosslinked
Polyethylene Liners also made a strong contribution. As noted
above, the temporary suspension of marketing and distribution of
the Durom Cup in the U.S. negatively impacted hip
sales and we also expect that the adoption of hip resurfacing in
the U.S. market will continue to adversely affect our hip
sales growth.
The Bigliani/Flatow Shoulder Solution and the Zimmer
Trabecular Metal Reverse Shoulder System led extremities
sales. Negative sales growth for our dental business reflects
disruptions caused by the implementation of our enhanced
compliance model and overall weakness in the U.S. economy.
Zimmer Periarticular Plates and the I.T.S.T.
Intertrochanteric/Subtrochanteric Fixation System led trauma
sales. The Dynesys Dynamic Stabilization System and the
Trinica Select Anterior Cervical Plate System led spine
sales. OSP sales were negatively affected by the patient care
product recalls and related voluntary suspension of production
of certain products, but these negative factors were partially
offset by strong growth in PALACOS Bone Cement.
20
Europe
Net Sales
The following table presents Europe net sales (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Inc (Dec)
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
$
|
94.5
|
|
|
$
|
81.0
|
|
|
|
17
|
%
|
Hips
|
|
|
106.8
|
|
|
|
98.3
|
|
|
|
9
|
|
Extremities
|
|
|
5.7
|
|
|
|
5.2
|
|
|
|
9
|
|
Dental
|
|
|
15.3
|
|
|
|
13.4
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
222.3
|
|
|
|
197.9
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
12.2
|
|
|
|
9.9
|
|
|
|
26
|
|
Spine
|
|
|
8.4
|
|
|
|
6.7
|
|
|
|
27
|
|
OSP and other
|
|
|
8.1
|
|
|
|
11.5
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
251.0
|
|
|
$
|
226.0
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in foreign exchange rates positively affected both knee
and hip sales by 8 percent. The NexGen Complete Knee
Solution product line, including the NexGen LPS-Flex
Knee, the NexGen LCCK Revision Knee and the NexGen
CR-Flex Knee, experienced strong sales growth in our
European region.
The continued conversion to porous stems, including the CLS
Spotorno Stem and the Alloclassic Zweymüller
Stem, led hip sales, but was offset by weaker sales of
cemented stems. Longevity and Durasul Highly
Crosslinked Polyethylene Liners, Trabecular Metal
Acetabular Cups and the
Allofit®
Hip Acetabular System also contributed to hip sales.
The Anatomical
Shouldertm
System and the Coonrad/Morrey Total Elbow led extremities sales.
The Tapered Screw-Vent Implant System led dental sales.
The
Cable-Ready®
Cable Grip System and the
NCB®
Plating System led trauma sales. The Dynesys Dynamic
Stabilization System and the
OptimaTM2
ZS Spinal Fixation System led spine sales. OSP sales were
negatively affected by the patient care product recalls and
related voluntary suspension of production of certain products,
but these negative factors were partially offset by strong
growth in Surgical Equipment products.
2 Trademark
of U&i Corporation
21
Asia
Pacific Net Sales
The following table presents Asia Pacific net sales (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Inc (Dec)
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
$
|
52.6
|
|
|
$
|
48.5
|
|
|
|
8
|
%
|
Hips
|
|
|
47.7
|
|
|
|
46.1
|
|
|
|
4
|
|
Extremities
|
|
|
1.5
|
|
|
|
1.8
|
|
|
|
(11
|
)
|
Dental
|
|
|
8.3
|
|
|
|
7.9
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
110.1
|
|
|
|
104.3
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
11.2
|
|
|
|
9.9
|
|
|
|
13
|
|
Spine
|
|
|
2.5
|
|
|
|
0.9
|
|
|
|
142
|
|
OSP and other
|
|
|
14.1
|
|
|
|
15.1
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
137.9
|
|
|
$
|
130.2
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in foreign exchange rates positively affected knee sales
by 4 percent and hip sales by 7 percent. Reported
decreases in average selling prices negatively affected knee
sales by 6 percent and hip sales by 5 percent. The
NexGen Complete Knee Solution product line, including the
NexGen CR-Flex Knee and the NexGen LPS-Flex Knee,
led knee sales. The Gender Solutions Knee Femoral Implant
in Australia also contributed to knee sales for the period.
The continued conversion to porous stems, including the Fiber
Metal Taper Stem from the
VerSys®
Hip System and the Alloclassic Zweymüller Hip
System, led hip stem sales. Sales of Longevity and
Durasul Highly Crosslinked Polyethylene Liners, the
Trilogy®
Acetabular System and Trabecular Metal Acetabular
Cups also grew during the quarter.
Extremities sales were led by the Coonrad/Morrey Total Elbow.
The Tapered Screw-Vent Implant System led dental sales.
Trauma sales were led by the I.T.S.T.
Intertrochanteric/Subtrochanteric Fixation System. The
Dynesys Dynamic Stabilization System led spine sales. OSP
sales were negatively affected by the patient care product
recalls and related voluntary suspension of production of
certain products.
Gross
Profit
Gross profit as a percentage of net sales was 75.1 percent
in the three month period ended September 30, 2008,
compared to 77.9 percent in the same 2007 period and
75.7 percent in the three month period ended June 30,
2008. The primary contributors to the decrease in gross profit
margin were the increase in period over period hedge losses,
idle plant costs at our Dover facility and an increase in excess
inventory and obsolescence charges due to increased inventory
levels. Under our hedging program, for derivatives which qualify
as hedges of future cash flows, the effective portion of changes
in fair value is temporarily recorded in other comprehensive
income, and then recognized in cost of products sold when the
hedged item affects earnings.
Operating
Expenses
R&D as a percentage of net sales was 4.9 percent for
the three month period ended September 30, 2008, compared
to 5.9 percent in the same 2007 period. R&D expense
decreased to $46.7 million for the three month period ended
September 30, 2008, from $53.0 million in the same
2007 period, reflecting decreased spending on certain
development, clinical and external research activities due to
delays connected with our operational compliance with the DPA
and CIA and implementation of our enhanced compliance program.
Many of the delayed development and research activities have now
resumed and we expect R&D spending to return to our
historical average of 5-6 percent of sales.
22
SG&A as a percentage of net sales was 42.5 percent for
the three month period ended September 30, 2008, compared
to 39.0 percent in the same 2007 period. SG&A expense
increased to $404.9 million for the three month period
ended September 30, 2008, from $352.6 million in the
same 2007 period. Increased SG&A costs include monitor fees
as well as consulting and legal fees associated with the
implementation of our enhanced compliance program globally. Such
costs resulted in an approximate $17 million increase over
the same prior year period. Expenses related to other operating
initiatives also caused an increase in SG&A as a percentage
of net sales. Such operating initiatives include the planned
implementation of a global IT system, improving quality systems
at our Dover facility, and a new manufacturing facility in
Ireland. Additionally, selling costs increased by 100 basis
points in the three month period ended September 30, 2008
compared to the same 2007 period. This increase was caused by
increased selling costs as a result of the ORTHOsoft
acquisition, an increase in the headcount of our sales force in
certain locations, increased commission incentives to sell
certain key products and a change in the mix of commissions
earned as a result of lower OSP sales. In a partial offset to
these unfavorable items, SG&A expense related to
share-based compensation was favorable by 20 basis points
relative to the same prior year period due to a favorable
adjustment as we recalculated estimated payouts on our three
year performance-based equity incentive program taking into
account recent operating performance.
Certain claims expense of $47.5 million is a provision for
estimated claims of Durom Cup patients undergoing
revision surgeries within specified times. Acquisition,
integration and other expenses for the three month period ended
September 30, 2008 were $5.6 million, compared to
$2.9 million in the same 2007 period. These expenses
pertain to current and prior period acquisitions, including
facility consolidation costs, legal fees and retention and
termination payments.
Operating
Profit, Income Taxes and Net Earnings
Operating profit for the three month period ended
September 30, 2008 increased 67 percent to
$210.3 million, from $126.0 million in the same 2007
period. The significant increase in operating profit is due to
the non-recurring settlement expense of $169.5 million that
was recorded in the 2007 period. Excluding the impact of the
settlement expense in the prior year, operating profit for the
three month period ended September 30, 2008 would have been
unfavorable compared to the same 2007 period as a result of
lower gross margins, significant but temporary increases in
SG&A costs attributable to the implementation of our
enhanced compliance program and certain claims expense of
$47.5 million.
Interest and other income for the three month period ended
September 30, 2008 increased to $28.2 million, from
$1.8 million in the same 2007 period. Interest and other
income for the three month period ended September 30, 2008
includes a realized gain of $30.1 million related to the
sale of certain marketable securities, partially offset by
increased interest expense as a result of an increase in
outstanding long-term debt.
The effective tax rate on earnings before income taxes and
minority interest decreased to 9.8 percent for the three
month period ended September 30, 2008, from
65.2 percent in the same 2007 period. The effective tax
rate for the 2007 period reflects the effect of the
$169.5 million settlement expense, for which no tax benefit
had previously been recognized. In the third quarter of 2008, we
recorded an estimated tax benefit of approximately
$30.8 million, resulting in a decrease of 12.9 percent
in the current period effective tax rate. The effective tax rate
for the three month period ended September 30, 2008 was
further reduced as a result of increased profits in lower tax
jurisdictions.
Net earnings increased to $214.7 million for the three
month period ended September 30, 2008, compared to
$44.5 million in the same 2007 period. The increase is
primarily due to the impact of the $169.5 million
settlement expense recorded in the 2007 period. Excluding the
effect of the settlement expense, net earnings would have
increased slightly from the 2007 period, reflecting increased
sales, realized gains on the sale of certain assets during the
current period and a lower effective tax rate, partially offset
by lower gross margins, planned increases in SG&A costs and
certain claims expense. Basic earnings per share increased to
$0.96, from $0.19 in the same 2007 period. Diluted earnings per
share increased to $0.95, from $0.19 in the same 2007 period.
The positive growth rate in earnings per share as compared with
net earnings is attributed to the effect of 2007 and
2008 share repurchases.
23
Nine
Months Results of Operations
Net
Sales by Operating Segment
The following table presents net sales by operating segment and
the components of the percentage changes (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
Volume/
|
|
|
|
|
|
Foreign
|
|
|
|
2008
|
|
|
2007
|
|
|
% Inc
|
|
|
Mix
|
|
|
Price
|
|
|
Exchange
|
|
|
Americas
|
|
$
|
1,764.9
|
|
|
$
|
1,682.9
|
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
|
%
|
|
|
1
|
%
|
Europe
|
|
|
882.3
|
|
|
|
752.0
|
|
|
|
17
|
|
|
|
6
|
|
|
|
|
|
|
|
11
|
|
Asia Pacific
|
|
|
443.7
|
|
|
|
389.1
|
|
|
|
14
|
|
|
|
7
|
|
|
|
(2
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,090.9
|
|
|
$
|
2,824.0
|
|
|
|
9
|
|
|
|
5
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales by Product Category
The following table presents net sales by product category and
the components of the percentage changes (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
Volume/
|
|
|
|
|
|
Foreign
|
|
|
|
2008
|
|
|
2007
|
|
|
% Inc (Dec)
|
|
|
Mix
|
|
|
Price
|
|
|
Exchange
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
$
|
1,332.0
|
|
|
$
|
1,190.0
|
|
|
|
12
|
%
|
|
|
8
|
%
|
|
|
|
%
|
|
|
4
|
%
|
Hips
|
|
|
965.2
|
|
|
|
884.0
|
|
|
|
9
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
6
|
|
Extremities
|
|
|
90.4
|
|
|
|
74.4
|
|
|
|
21
|
|
|
|
17
|
|
|
|
1
|
|
|
|
3
|
|
Dental
|
|
|
170.9
|
|
|
|
155.7
|
|
|
|
10
|
|
|
|
4
|
|
|
|
1
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,558.5
|
|
|
|
2,304.1
|
|
|
|
11
|
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
164.4
|
|
|
|
150.0
|
|
|
|
10
|
|
|
|
4
|
|
|
|
1
|
|
|
|
5
|
|
Spine
|
|
|
158.8
|
|
|
|
141.5
|
|
|
|
12
|
|
|
|
7
|
|
|
|
3
|
|
|
|
2
|
|
OSP and other
|
|
|
209.2
|
|
|
|
228.4
|
|
|
|
(8
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,090.9
|
|
|
$
|
2,824.0
|
|
|
|
9
|
|
|
|
5
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The NexGen Complete Knee Solution product line, including
Gender Solutions Knee Femoral Implants, the NexGen
LPS-Flex Knee, the NexGen CR-Flex Knee and the
NexGen LCCK Revision Knee, led knee sales. In addition,
the Zimmer Unicompartmental High-Flex Knee and the
NexGen Rotating Hinge Knee exhibited strong growth.
The continued conversion to porous stems, including the
Zimmer M/L Taper Stem, the Zimmer M/L Taper Stem
with Kinectiv Technology, the CLS Spotorno Stem
from the CLS Hip System, and the Alloclassic
Zweymüller Hip Stem, led hip stem sales, but were
partially offset by weaker sales of cemented stems.
Trabecular Metal Acetabular Cups and Longevity and
Durasul Highly Crosslinked Polyethylene Liners also had
strong growth. The temporary suspension of marketing and
distribution of the Durom Cup in the U.S. negatively
impacted hip sales growth and we expect this trend to continue
for the remainder of 2008. Additionally, with the lack of a hip
resurfacing product within our U.S. hip portfolio, we
expect to face a continuing challenge in hip sales growth with
the adoption of hip resurfacing in the U.S. market.
The Bigliani/Flatow Complete Shoulder Solution and the
Zimmer Trabecular Metal Reverse Shoulder System led
extremities sales. Orthobiologicals and prosthetic implants,
including strong growth of the Tapered Screw-Vent Implant
System, led dental sales. Zimmer Periarticular Locking
Plates and the I.T.S.T. Intertrochanteric/Subtrochanteric
Fixation System led trauma sales. The Dynesys Dynamic
Stabilization System and the Trinica Select Anterior
Cervical Plate System led spine sales. OSP sales were negatively
affected by the patient care product recalls and related
voluntary suspension of production of certain products, but
these negative factors were partially offset by strong growth in
PALACOS Bone Cement.
24
Americas
Net Sales
The following table presents Americas net sales (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Inc (Dec)
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
$
|
824.0
|
|
|
$
|
765.2
|
|
|
|
8
|
%
|
Hips
|
|
|
435.5
|
|
|
|
420.7
|
|
|
|
4
|
|
Extremities
|
|
|
65.3
|
|
|
|
53.1
|
|
|
|
23
|
|
Dental
|
|
|
87.5
|
|
|
|
88.4
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,412.3
|
|
|
|
1,327.4
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
94.7
|
|
|
|
91.1
|
|
|
|
4
|
|
Spine
|
|
|
124.2
|
|
|
|
116.7
|
|
|
|
6
|
|
OSP and other
|
|
|
133.7
|
|
|
|
147.7
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,764.9
|
|
|
$
|
1,682.9
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The NexGen Complete Knee Solution product line, including
the Gender Solutions Knee Femoral Implants, NexGen
LPS-Flex Knee, the NexGen LCCK Revision Knee and the
NexGen CR-Flex Knee, led knee sales. The Zimmer
Unicompartmental High-Flex Knee also made a strong
contribution.
Growth in porous stems, including growth of the Zimmer
M/L Taper Stem and the Zimmer M/L Taper Stem with
Kinectiv Technology, led hip stem sales, but were
partially offset by weaker sales of cemented stems.
Trabecular Metal Acetabular Cups and Longevity
Highly Crosslinked Polyethylene Liners also made a strong
contribution. As noted above, the temporary suspension of
marketing and distribution of the Durom Cup in the
U.S. will continue to negatively impact hip sales and we
also expect that the adoption of hip resurfacing in the
U.S. market will continue to adversely affect our hip sales
growth.
The Bigliani/Flatow Shoulder Solution and the Zimmer
Trabecular Metal Reverse Shoulder System led extremities
sales. Negative sales growth for our dental business reflects
disruptions caused by the implementation of our enhanced
business model and overall weakness in the U.S. economy.
Zimmer Periarticular Plates and the I.T.S.T.
Intertrochanteric/Subtrochanteric Fixation System led trauma
sales. The Dynesys Dynamic Stabilization System and the
Trinica Select Anterior Cervical Plate System led spine
sales. OSP sales were negatively affected by the patient care
product recalls and related voluntary suspension of production
of certain products, but these negative factors were partially
offset by strong growth in PALACOS Bone Cement.
25
Europe
Net Sales
The following table presents Europe net sales (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Inc (Dec)
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
$
|
339.7
|
|
|
$
|
283.7
|
|
|
|
20
|
%
|
Hips
|
|
|
372.7
|
|
|
|
323.9
|
|
|
|
15
|
|
Extremities
|
|
|
19.8
|
|
|
|
16.4
|
|
|
|
21
|
|
Dental
|
|
|
58.7
|
|
|
|
44.9
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
790.9
|
|
|
|
668.9
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
35.4
|
|
|
|
28.8
|
|
|
|
23
|
|
Spine
|
|
|
27.7
|
|
|
|
21.0
|
|
|
|
32
|
|
OSP and other
|
|
|
28.3
|
|
|
|
33.3
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
882.3
|
|
|
$
|
752.0
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in foreign exchange rates positively affected knee sales
by 12 percent and hip sales by 11 percent. The
NexGen Complete Knee Solution product line, including the
NexGen LPS-Flex Knee, the NexGen LCCK Revision
Knee and the NexGen CR-Flex Knee, experienced positive
sales growth in our Europe region.
Growth in porous stems, including the CLS Spotorno Stem,
led hip stem sales. Longevity and Durasul Highly
Crosslinked Polyethylene Liners, Trabecular Metal
Acetabular Cups and the Allofit Hip Acetabular System
also contributed to hip sales.
The Anatomical Shoulder System and the Coonrad/Morrey
Total Elbow led extremities sales. The Tapered Screw-Vent
Implant System led dental sales. The Cable-Ready
Cable Grip System and the NCB Plating System led
trauma sales, which were offset by weaker sales of our
intramedullary fixation systems. The Dynesys Dynamic
Stabilization System and the Optima ZS Spinal Fixation
System led spine sales. OSP sales were negatively affected by
the patient care product recalls and related voluntary
suspension of production of certain products, but these negative
factors were partially offset by strong growth in Surgical
Equipment products.
Asia
Pacific Net Sales
The following table presents Asia Pacific net sales (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Inc
|
|
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
Knees
|
|
$
|
168.3
|
|
|
$
|
141.1
|
|
|
|
19
|
%
|
Hips
|
|
|
157.0
|
|
|
|
139.4
|
|
|
|
13
|
|
Extremities
|
|
|
5.3
|
|
|
|
4.9
|
|
|
|
9
|
|
Dental
|
|
|
24.7
|
|
|
|
22.4
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
355.3
|
|
|
|
307.8
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
34.3
|
|
|
|
30.1
|
|
|
|
14
|
|
Spine
|
|
|
6.9
|
|
|
|
3.8
|
|
|
|
80
|
|
OSP and other
|
|
|
47.2
|
|
|
|
47.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
443.7
|
|
|
$
|
389.1
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Changes in foreign exchange rates positively affected knee sales
by 9 percent and hip sales by 11 percent. Reported
decreases in average selling prices negatively affected knee
sales by 3 percent and hip sales by 4 percent. The
NexGen Complete Knee Solution product line, the NexGen
CR-Flex Knee and the NexGen LPS-Flex Knee led knee
sales. The Gender Solutions Knee Femoral Implant in
Australia also contributed to strong knee sales for the period.
The continued conversion to porous stems, including the Fiber
Metal Taper Stem from the VerSys Hip System, the
Alloclassic Zweymüller Hip System and the CLS
Spotorno Stem, led hip stem sales. Sales of Longevity
and Durasul Highly Crosslinked Polyethylene Liners,
the Trilogy Acetabular System and Trabecular Metal
Acetabular Cups also increased.
The Bigliani/Flatow Shoulder Solution and the
Coonrad/Morrey Total Elbow led extremities sales. The Tapered
Screw-Vent Implant System led dental sales. Trauma sales
were led by the I.T.S.T.
Intertrochanteric/Subtrochanteric Fixation System. The
Dynesys Dynamic Stabilization System led spine sales. OSP
sales were negatively affected by the patient care product
recalls and related voluntary suspension of production of
certain products.
Gross
Profit
Gross profit as a percentage of net sales was 75.6 percent
in the nine month period ended September 30, 2008, compared
to 78.0 percent in the same 2007 period. The primary
contributors to the decrease in gross profit margin were the
increase in period over period hedge losses, idle plant costs at
our Dover facility and an increase in excess inventory and
obsolescence charges due to increased inventory levels. Under
our hedging program, we temporarily record the effective portion
of changes in fair value of derivatives which qualify as hedges
of future cash flows in other comprehensive income, and then
recognize the hedged item in cost of products sold when it
affects earnings.
Operating
Expenses
R&D as a percentage of net sales was 4.7 percent for
the nine month period ended September 30, 2008, compared to
5.6 percent in the same 2007 period. R&D expense
decreased to $146.8 million for the nine month period ended
September 30, 2008, from $158.8 million in the same
2007 period, reflecting decreased spending on certain
development, clinical and external research activities due to
delays connected with our operational compliance with the DPA
and CIA and implementation of our enhanced compliance and ethics
initiatives. Many development and external research activities
have now resumed and we expect R&D spending to return to
our historical average of 5-6 percent of sales.
SG&A as a percentage of net sales was 41.0 percent for
the nine month period ended September 30, 2008, compared to
38.5 percent in the same 2007 period. SG&A expense
increased to $1,266.7 million for the nine month period
ended September 30, 2008, from $1,088.5 million in the
same 2007 period. Increased SG&A costs include monitor fees
as well as consulting and legal fees associated with the global
implementation of our enhanced compliance program. Such costs
resulted in an approximate $47 million increase over the
same prior year period. Expenses related to other operating
initiatives also caused an increase in SG&A as a percentage
of net sales. Such operating initiatives include the planned
implementation of a global IT system, improving quality systems
at our Dover facility, and a new manufacturing facility in
Ireland. Additionally, selling costs increased by 90 basis
points in the nine month period ended September 30, 2008
compared to the same 2007 period. This increase was caused by
increased selling costs as a result of the ORTHOsoft
acquisition, an increase in the headcount of our sales force in
certain locations, increased commission incentives to sell
certain key products and a change in the mix of commissions
earned as a result of lower OSP sales. In a partial offset to
these unfavorable items, SG&A expense related to
share-based compensation was favorable by 20 basis points
relative to the same prior year period due to a favorable
adjustment as we recalculated estimated payouts on our three
year performance-based equity incentive program taking into
account recent operating performance.
Certain claims expense of $47.5 million is a provision for
estimated claims of Durom Cup patients undergoing
revision surgeries within specified times. Acquisition,
integration and other expenses for the nine month period ended
September 30, 2008 were $25.4 million, compared to
$9.5 million in the same 2007 period. These expenses
pertain to current and prior period acquisitions, including
facility consolidation costs, legal fees and retention and
termination payments.
27
Operating
Profit, Income Taxes and Net Earnings
Operating profit for the nine month period ended
September 30, 2008 increased 10 percent to
$850.3 million, from $775.7 million in the same 2007
period. The increase in operating profit is due to the
non-recurring settlement expense of $169.5 million that was
recorded in the same 2007 period. Excluding the impact of the
settlement expense in the prior year, operating profit for the
nine month period ended September 30, 2008 would have been
unfavorable compared to the same 2007 period as a result of
lower gross margins, significant but temporary increases in
SG&A costs attributable to the implementation of our
enhanced compliance program and certain claims expense of
$47.5 million.
Interest and other income for the nine month period ended
September 30, 2008 increased to $36.0 million, from
$2.9 million in the same 2007 period. Interest and other
income for the nine month period ended September 30, 2008
includes a realized gain of $38.8 million related to the
sale of certain marketable securities, partially offset by
increased interest expense as a result of an increase in
outstanding long-term debt during the period.
The effective tax rate on earnings before income taxes and
minority interest decreased to 23.1 percent for the nine
month period ended September 30, 2008, from
34.5 percent in the same 2007 period. The effective tax
rate for the 2007 period reflects the effect of the
$169.5 million settlement expense, for which no tax benefit
had previously been recognized. In the third quarter of 2008, we
recorded an estimated tax benefit of approximately
$30.8 million, resulting in a decrease of 3.5 percent
to the current period effective tax rate. The effective tax rate
for the nine month period ended September 30, 2008 was
further reduced as a result of increased profits in lower tax
jurisdictions.
Net earnings increased to $681.1 million for the nine month
period ended September 30, 2008, compared to
$509.4 million in the same 2007 period. The increase is
primarily due to the impact of the $169.5 million
settlement expense recorded in the 2007 period. Excluding the
effect of the settlement expense, net earnings would have
increased slightly from the 2007 period, reflecting increased
sales, realized gains on the sale of certain assets during the
current period and a lower effective tax rate, partially offset
by lower gross margins, planned increases in SG&A costs and
certain claims expense. Basic earnings per share increased to
$2.98, from $2.16 in the same 2007 period. Diluted earnings per
share increased to $2.97, from $2.14 in the same 2007 period.
The higher growth rate in earnings per share as compared with
net earnings is attributed to the effect of 2008 and
2007 share repurchases.
Liquidity
and Capital Resources
Cash flows provided by operating activities were
$831.2 million for the nine month period ended
September 30, 2008, compared to $662.5 million in the
same 2007 period. The principal source of cash was net earnings
of $681.1 million. Non-cash items included in net earnings
accounted for another $207.6 million of operating cash. All
other items of operating cash flows reflect a use of
$57.5 million of cash, primarily related to pension funding
and working capital investments to support sales growth.
Operating cash flows continued to be positively affected by
delayed payments related to various contractual arrangements
with healthcare professionals or institutions. In the nine month
period ended September 30, 2008, we estimate this delay had
a positive effect on operating cash flows of approximately
$52 million.
We are currently in the process of evaluating alternative means
of meeting certain of our contractual obligations with
healthcare professionals and institutions. We anticipate making,
and in certain cases have agreed to make, significant lump-sum
payments to certain healthcare professionals or institutions in
place of future royalty payments that otherwise would have been
due under the terms of the original contractual arrangement.
Such lump-sum payments are based upon a third party fair market
valuation of the current net present value of the contractual
arrangement. We expect to make significant payments over the
next six months. Management believes that cash flows from
operations will be sufficient to meet these cash needs.
We continue to focus on working capital management. At
September 30, 2008, we had 59 days of sales
outstanding in trade accounts receivable, which is similar to
June 30, 2008 and favorable to September 30, 2007 by
1 day. At September 30, 2008, we had 321 days of
inventory on hand, favorable to September 30, 2007 by
9 days and unfavorable to June 30, 2008 by
46 days. The third quarter increase in 2008 over second
quarter reflects the pattern of seasonality in our
reconstructive business.
28
Cash flows used in investing activities were $339.4 million
for the nine month period ended September 30, 2008,
compared to $332.1 million used in investing in the same
2007 period. Additions to instruments increased during the nine
month period ended September 30, 2008 due to an increase in
instrument deployments related to new product launches.
Additions to other property, plant and equipment increased
compared to the same 2007 period, reflecting investments in our
planned infrastructure initiatives. Also included in investing
activities for the nine month period ended September 30,
2008 was $54.9 million in proceeds received from the sale
of equity securities. Cash payments related to acquisitions
during the nine month period ended September 30, 2008 were
$18.6 million, compared to $108.1 million in the same
2007 period. Cash payments related to acquisitions during the
2008 period relate to investments in the expansion of our global
distribution network.
Cash flows used in financing activities were $408.2 million
for the nine month period ended September 30, 2008,
compared to $288.3 million used in financing activities in
the same 2007 period. We borrowed approximately
$220.0 million under our credit facilities during the nine
month period ended September 30, 2008 to repurchase shares
of our common stock. Our current share repurchase program can be
financed in whole or in part with third party debt. For the nine
months ended September 30, 2008, we purchased
9.6 million common shares for a total of
$688.9 million, including commissions, under our stock
repurchase programs authorized by our Board of Directors,
compared to $460.6 million in the same 2007 period.
Proceeds from our stock compensation plans have decreased in the
nine month period ended September 30, 2008, compared to the
same 2007 period due to a decrease in employee stock option
exercises.
We have a five year $1,350 million revolving,
multi-currency, senior unsecured credit facility maturing
November 30, 2012 (the Senior Credit Facility).
We had $331.1 million outstanding under the Senior Credit
Facility at September 30, 2008, and, therefore, our
available borrowings were $1,018.9 million. The Senior
Credit Facility contains provisions whereby borrowings may be
increased to $1,750 million and we may request that the
maturity date be extended for two additional one-year periods.
We and certain of our wholly owned foreign subsidiaries are the
borrowers under the Senior Credit Facility. Borrowings under the
Senior Credit Facility are used for general corporate purposes
and bear interest at a LIBOR-based rate plus an applicable
margin determined by reference to our senior unsecured long-term
credit rating and the amounts drawn under the Senior Credit
Facility, at an alternate base rate, or at a fixed rate
determined through a competitive bid process. The Senior Credit
Facility contains customary affirmative and negative covenants
and events of default for an unsecured financing arrangement,
including, among other things, limitations on consolidations,
mergers and sales of assets. Financial covenants include a
maximum leverage ratio of 3.0 to 1.0 and a minimum interest
coverage ratio of 3.5 to 1.0. If we fall below an investment
grade credit rating, additional restrictions would result,
including restrictions on investments, payment of dividends and
stock repurchases. We were in compliance with all covenants
under the Senior Credit Facility as of September 30, 2008.
Commitments under the Senior Credit Facility are subject to
certain fees, including a facility fee and a utilization fee.
The Senior Credit Facility is rated A- by Standard &
Poors Ratings Services and is not rated by Moodys
Investors Service, Inc. Notwithstanding recent
interruptions in global credit markets, as of the date of this
report our access to our Senior Credit Facility has not been
impaired.
We also have available uncommitted credit facilities totaling
$72.7 million.
We may use excess cash or further borrow against our Senior
Credit Facility to repurchase additional common stock under the
$1.25 billion program which expires December 31, 2009.
In October 2008, we completed our acquisition of Abbott Spine
for a purchase price of approximately $360 million in cash.
The acquisition was funded by approximately $250 million of
cash on-hand and approximately $110 million from new
borrowings under the Senior Credit Facility. Each of the lenders
under the Senior Credit Facility funded its portion of the new
borrowings in accordance with its commitment percentage.
Management believes that cash flows from operations, together
with available borrowings under the Senior Credit Facility, are
sufficient to meet our working capital, capital expenditure and
debt service needs. Should investment opportunities arise, we
believe that our earnings, balance sheet and cash flows will
allow us to obtain additional capital, if necessary.
29
Recent
Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of SFAS No. 133
(SFAS No. 161). SFAS No. 161 will require
increased disclosure of our derivative and hedging activities,
including how derivative and hedging activities affect our
consolidated statement of earnings, balance sheet and cash
flows. SFAS No. 161 is effective for fiscal years
beginning on or after December 15, 2008 and interim periods
within those fiscal years. The adoption of
SFAS No. 161 will increase the required disclosure of
our derivative and hedging activities, but will not have any
impact on our financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS No. 141(R)),
which is a revision of SFAS No. 141.
SFAS No. 141(R) will change the way in which we
account for business combinations. The statement introduces new
purchase accounting concepts, expands the use of fair value
accounting related to business combinations and changes the
subsequent period accounting for certain acquired assets and
liabilities, among other things. SFAS No. 141(R) will
be applied prospectively on business combinations with
acquisition dates in fiscal years beginning on or after
December 15, 2008, and therefore, this statement will not
affect the accounting for business combinations that are
completed prior to the effective date. For deferred tax assets
and income tax reserves recorded as part of business
combinations, these assets and liabilities will be accounted for
under SFAS No. 109 and FIN 48 after the effective
date of SFAS No. 141(R), regardless of the acquisition
date. Therefore, if a remeasurement of those assets and
liabilities is warranted after the effective date of this
statement, it will not be reflected as an adjustment to purchase
accounting and may affect our income tax expense in the period
in which the remeasurement occurs.
In December 2007, the FASB also issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51
(SFAS No. 160). SFAS No. 160 will change the
accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a
component of equity. SFAS No. 160 requires retroactive
adoption of the presentation and disclosure requirements for
existing minority interests. SFAS No. 160 is effective
for fiscal years beginning on or after December 15, 2008
and interim periods within those fiscal years. We do not expect
that the adoption of SFAS No. 160 will have a material
impact on our consolidated financial statements or results of
operations.
Critical
Accounting Policies
Except as set forth below, there were no changes in the nine
month period ended September 30, 2008 to the application of
critical accounting estimates as described in our Annual Report
on
Form 10-K
for the year ended December 31, 2007.
Commitments and Contingencies Accruals for
product liability and other claims are established with internal
and external legal counsel based on current information and
historical settlement information for claims, related fees and
for claims incurred but not reported. We use an actuarial model
to assist management in determining an appropriate level of
accruals for product liability claims. Historical patterns of
claim loss development over time are statistically analyzed to
arrive at factors which are then applied to loss estimates in
the actuarial model. During the three month period ended
September 30, 2008, in addition to our general product
liability estimates, we recorded a provision for certain claims
of $47.5 million representing managements estimate of
liability to Durom Cup patients undergoing revisions
associated with surgeries occurring before July 2008 and within
two years of the original surgery date. These parameters are
consistent with our data which indicates that cup loosenings
associated with surgical technique are most likely to occur
within that time period. Any claims received outside of these
defined parameters will be managed in the normal course and
reflected in our standard quarterly product liability accruals.
30
Forward-Looking
Statements
This quarterly report contains certain statements that are
forward-looking statements within the meaning of federal
securities laws. When used in this report, the words
may, will, should,
anticipate, estimate,
expect, plan, believe,
predict, potential, project,
target, forecast, intend,
assume, guide seek and
similar expressions are intended to identify forward-looking
statements. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties
include, but are not limited to:
|
|
|
|
|
competition;
|
|
|
|
pricing pressures;
|
|
|
|
dependence on new product development, technological advances
and innovation;
|
|
|
|
reductions in reimbursement levels by third-party payors and
cost containment efforts of health care purchasing organizations;
|
|
|
|
our compliance with the DPA through March 2009 and the CIA
through 2012;
|
|
|
|
the costs of defending or resolving lawsuits, investigations or
other proceedings resulting from our September 2007 settlement
with the United States government;
|
|
|
|
the impact of our enhanced healthcare compliance global
initiatives and business practices on our relationships with
customers and consultants, our market share and our overall
financial performance;
|
|
|
|
the success of our quality initiatives;
|
|
|
|
the outcome of the informal investigation by the
U.S. Securities and Exchange Commission into Foreign
Corrupt Practices Act matters announced in October 2007;
|
|
|
|
challenges relating to changes in and compliance with
governmental laws and regulations affecting our U.S. and
international businesses, including regulations of the
U.S. Food and Drug Administration and foreign government
regulators and tax obligations and risks;
|
|
|
|
retention of our independent agents and distributors;
|
|
|
|
changes in customer demand for our products and services caused
by demographic changes or other factors;
|
|
|
|
changes in general domestic and international economic
conditions, including interest rate and currency exchange rate
fluctuations;
|
|
|
|
our ability to protect proprietary technology and other
intellectual property and claims for infringement of the
intellectual property rights of third parties;
|
|
|
|
product liability claims;
|
|
|
|
the impact of our recent temporary, voluntary suspension of
U.S. marketing and distribution of our Durom Cup hip
product on our revenues, our customer relationships, our entry
into the U.S. hip resurfacing market and on product
liability claims;
|
|
|
|
the costs of defending or resolving putative class action
securities litigation;
|
|
|
|
the possible disruptive effect of additional strategic
acquisitions and our ability to successfully integrate acquired
companies;
|
|
|
|
our ability to form strategic alliances with other orthopaedic
and biotechnology companies;
|
|
|
|
changes in prices of raw materials and products and our ability
to control costs and expenses;
|
|
|
|
changes in general industry and market conditions, including
domestic and international growth rates;
|
|
|
|
our dependence on a limited number of suppliers for key raw
materials and outsourced activities; and
|
|
|
|
shifts in our product category sales mix or our regional sales
mix away from products or geographic regions that generate
higher operating margins.
|
31
We discuss these and other important risks and uncertainties
that may affect our future operations in Part I,
Item 1A Risk Factors in our Annual Report on
Form 10-K
filed February 29, 2008. We updated that discussion in
Part II, Item 1A Risk Factors in our
Quarterly Reports on
Form 10-Q
filed May 12, 2008 and August 5, 2008 and we further
update it in Part II, Item 1A Risk Factors
in this report. 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.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
There have been no material changes from the information
provided in our Annual Report on
Form 10-K
for the year ended December 31, 2007.
|
|
Item 4.
|
Controls
and Procedures
|
We have established disclosure controls and procedures and
internal controls over financial reporting to provide reasonable
assurance that material information relating to us, including
our consolidated subsidiaries, is made known on a timely basis
to management and the Board of Directors. However, no control
system, no matter how well designed and operated, can provide
absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if
any, within a company have been detected.
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of our disclosure controls and
procedures (as defined in
Rule 13a-15(e)
of the Securities Exchange Act of 1934). Based upon that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures as
of the end of the period covered by this report are effective.
There was no change in our internal control over financial
reporting (as defined in
Rule 13a-15(f)
of the Securities Exchange Act of 1934) that occurred
during the quarter ended September 30, 2008, that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Part II
Other Information
|
|
Item 1.
|
Legal
Proceedings
|
Information pertaining to legal proceedings can be found in
Note 12 to the interim consolidated financial statements
included in Part I of this report.
Except as set forth below or in a previously filed Quarterly
Report on
Form 10-Q,
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, 2007.
The following risk factor should be added to RISKS RELATED
TO OUR BUSINESS and updates the risk factors set forth in
our previously filed Quarterly Reports on
Form 10-Q
for the periods ended March 31, 2008 and June 30, 2008:
Our recent temporary suspension of the U.S. marketing
and distribution of one of our hip products has adversely
affected sales, resulted in claims and may adversely affect our
ability to compete in the growing hip resurfacing market in the
U.S.
In July 2008, we announced that we temporarily suspended the
marketing and distribution of our Durom Acetabular
Component (Durom Cup) in the U.S. We believe this
action adversely affected our hip product sales in the
U.S. in the third quarter of 2008. Although we resumed
U.S. marketing and distribution in August and more than
50 percent of the U.S. surgeons who were active users
of the Durom Cup at the time of the suspension have
completed the requisite surgical skills training on the product,
we expect this trend will continue to have a negative impact
through at least the end of 2008.
32
Following our announcement, product liability lawsuits and other
claims have been asserted against us by Durom Cup
patients undergoing revision surgeries, and we expect additional
similar claims will be asserted. These claims could have a
material adverse affect on our business and reputation. We
recorded a provision of $47.5 million in the third quarter
of 2008, representing managements estimate of these
Durom Cup-related claims. The provision is limited to
revisions within two years of an original surgery that occurred
prior to July 2008. The assumptions management used to determine
the amount of this provision may prove inaccurate and the claims
and related costs that we ultimately may incur may exceed the
provision.
We estimate that we will lose approximately $20-$30 million
in hip product sales during 2008, in large part, as a
consequence of the events involving the Durom Cup. In
addition, we expect that our entry into the growing
U.S. hip resurfacing market may be hindered or delayed as
the Durom Cup has been integral to our plans for entry
into that market.
The following risk factor under RISKS RELATED TO OUR
BUSINESS has been revised as follows:
The implementation of our enhanced global compliance
program is requiring us to devote substantial resources, is
disruptive to normal business activities and may place us at a
competitive disadvantage.
We are devoting substantial resources to meet our obligations
under the DPA and CIA. Since entering into those agreements, we
have worked to implement an enhanced Corporate Compliance
Program applicable in most respects to all of our businesses on
a global basis. Successful implementation of this enhanced
program requires the full cooperation of our employees,
distributors and sales agents and the healthcare professionals
with whom they interact. These efforts not only involve expense,
but also require management and other key employees to focus
extensively on these matters, preventing them from devoting as
much time as they otherwise would to other business matters.
In addition, implementation of our enhanced global compliance
program may disrupt research and development activities, delay
new product introductions and adversely affect our interactions
with healthcare professionals. If our competitors do not make
similar enhancements to their compliance programs, this may
place us at a competitive disadvantage and adversely affect our
results of operations.
The following two risk factors should be added to RISKS
RELATED TO OUR BUSINESS:
We believe we have lost market share as a result of recent
events. If we are not able to recover or grow our market share,
our operating results could be materially adversely
affected.
As a result of recent events, including our temporary suspension
of U.S. marketing and distribution of the Durom Cup,
our voluntary recall and suspension of production of certain OSP
patient care products, and the implementation of our enhanced
global compliance program, we believe we suffered customer
losses during the three month period ended September 30,
2008. We estimate, based on information currently available to
us, that these customer losses reduced our base of knee and hip
revenues by approximately 3 percent. We may not be able to
recapture market share lost due to these events and we may
continue to lose customers due to these factors in the future,
which could have a material adverse effect on our results of
operations.
We are subject to a putative stockholder class action
lawsuit that could be costly to defend and distracting to
management.
We and two of our executive officers have been named as
defendants in a putative stockholder class action lawsuit
brought on behalf of persons who purchased our common stock
between January 29, 2008 and July 22, 2008. The
lawsuit alleges that we and two of our executive officers
engaged in violations of the Securities Exchange Act of 1934, as
amended, by issuing false and misleading statements concerning
our business and financial results during the relevant time
period. We believe this lawsuit is without merit, and we intend
to defend it vigorously. We may incur significant expenses
associated with the defense of this lawsuit, however, and the
necessary participation of these executive officers could
detract from their ability to devote their full time and
attention to our business operations.
33
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
The following table summarizes repurchases of common stock
settled during the three month period ended September 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Dollar Value of
|
|
|
|
|
|
|
|
|
|
as Part of
|
|
|
Shares that May
|
|
|
|
Total Number
|
|
|
|
|
|
Publicly
|
|
|
Yet Be Purchased
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Announced Plans
|
|
|
Under Plans
|
|
|
|
Purchased
|
|
|
Paid per Share
|
|
|
or Programs*
|
|
|
or Programs
|
|
|
July 2008
|
|
|
620,400
|
|
|
$
|
67.45
|
|
|
|
28,777,400
|
|
|
$
|
1,189,240,073
|
|
August 2008
|
|
|
100,000
|
|
|
|
67.77
|
|
|
|
28,877,400
|
|
|
|
1,182,463,563
|
|
September 2008
|
|
|
|
|
|
|
|
|
|
|
28,877,400
|
|
|
|
1,182,463,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
720,400
|
|
|
$
|
67.50
|
|
|
|
28,877,400
|
|
|
$
|
1,182,463,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes repurchases made under expired programs as well as the
program announced in April 2008 authorizing $1.25 billion
of repurchases through December 31, 2009. |
|
|
Item 5.
|
Other
Information
|
During the period covered by this report, the Audit Committee of
our Board of Directors was not asked to, and did not, approve
the engagement of PricewaterhouseCoopers LLP, our independent
registered public accounting firm, to perform any non-audit
services. This disclosure is made pursuant to
Section 10A(i)(2) of the Securities Exchange Act of 1934,
as added by Section 202 of the Sarbanes-Oxley Act of 2002.
The following documents are filed as exhibits to this report:
|
|
|
|
|
|
2
|
.1
|
|
Stock Purchase Agreement dated as of September 4, 2008
(incorporated by reference to Exhibit 2.1 to the
Registrants Current Report on
Form 8-K
filed September 4, 2008).
|
|
10
|
.1
|
|
Form of Indemnification Agreement with Non-Employee Directors
and Officers (incorporated by reference to Exhibit 10.1 to
the Registrants Current Report on
Form 8-K
filed July 31, 2008)
|
|
10
|
.2*
|
|
Change in Control Severance Agreement with Mark C. Throdahl
|
|
31
|
.1
|
|
Certification pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934 of the Chief Executive
Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Certification pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934 of the Chief Financial
Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32
|
|
|
Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
* |
|
Indicates management contract or compensatory plan or arrangement |
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ZIMMER HOLDINGS, INC.
(Registrant)
James T. Crines
Executive Vice President, Finance and
Chief Financial Officer
Date: November 7, 2008
Derek M. Davis
Vice President, Finance and Corporate
Controller and Chief Accounting Officer
Date: November 7, 2008
35