Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For year ended December 31, 2008
Commission file number
001-16407
ZIMMER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 13-4151777 | |
| (State of Incorporation) | (IRS Employer Identification No.) | |
| 345 East Main Street Warsaw, Indiana | 46580 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone
number, including area code:
(574) 267-6131
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Name of each exchange on which registered | |
|
Common Stock, $.01 par value
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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 checkmark whether the registrant is a shell company
(as defined Exchange Act
Rule 12b-2). Yes
o
No
þ
The aggregate market value of shares held by non-affiliates was
$15,309,609,246 (based on the closing price of these shares on
the New York Stock Exchange on June 30, 2008, and
assuming solely for the purpose of this calculation that all
directors and executive officers of the registrant are
“affiliates”). As of February 13, 2009,
222,839,490 shares of the registrant’s $.01 par
value common stock were outstanding.
Documents
Incorporated by Reference
|
Document
|
Form 10-K
|
|||
|
Portions of the Proxy Statement with respect to the 2009 Annual
Meeting of Stockholders
|
Part III | |||
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
This annual 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” 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 the important risks and uncertainties that may affect
our future operations that we describe in Part I,
Item 1A — Risk Factors of this report. We may
update that discussion in Part II, Item 1A
— Risk Factors in a Quarterly Report on
Form 10-Q
we file hereafter. 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.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| ITEM 1. | Business |
OVERVIEW
We are a global leader in the design, development, manufacture
and marketing of orthopaedic and dental reconstructive implants,
spinal implants, trauma products and related surgical products.
We also provide other healthcare related services. In this
report, “Zimmer,” “we,” “us,”
“our,” and similar words refer collectively to Zimmer
Holdings, Inc. and its subsidiaries. Zimmer Holdings refers to
the parent company only.
There were several developments in 2008 that had a significant
impact on our business.
We continued to meet our obligations under the Deferred
Prosecution Agreement (“DPA”) and the Corporate
Integrity Agreement (“CIA”) we signed in September
2007. During 2008, we devoted substantial resources to meet our
obligations under those agreements and implemented enhancements
to our corporate compliance program applicable in most respects
to all of our businesses on a global basis.
In the first half of 2008, we initiated voluntary product
recalls of certain Orthopaedic Surgical Products
(“OSP”) manufactured at our Dover, Ohio facility that
we determined did not meet internal quality standards.
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 into production by the end of the first quarter of
2009, with most other products coming back into production in
the second quarter of 2009.
In July 2008, we suspended marketing and distribution of the
Durom
®
Acetabular Component (
Durom
Cup) in the U.S. to
permit us to update product labeling 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. We received claims from a number of
Durom
Cup
patients seeking reimbursement for costs and payments for
alleged pain and suffering and we recorded a provision for
certain claims of $69.0 million in 2008, which represents
management’s estimate of liability to patients undergoing
revision surgeries related to the
Durom
Cup. In addition,
we expect that our entry into the 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.
In October 2008, we acquired Abbott Spine, previously a
subsidiary of Abbott Laboratories, for approximately
$360 million. This investment adds a number of innovative
products and helps build toward critical mass in the Spine
product category. The acquisition also enhances our research and
development capabilities in the Spine product category and
strengthens our sales coverage.
Zimmer Holdings was incorporated in Delaware in
2001. Our history dates to 1927, when Zimmer
Manufacturing Company, a predecessor, was founded in Warsaw, I
ndiana. On August 6, 2001, Zimmer Holdings was spun off
from its former parent and became an independent public company.
CUSTOMERS, SALES
AND MARKETING
Our primary customers include musculoskeletal surgeons,
neurosurgeons, oral surgeons, dentists, hospitals, stocking
distributors, healthcare dealers and, in their capacity as
agents, healthcare purchasing organizations or buying groups.
These customers range from large multinational enterprises to
independent surgeons.
We have operations in more than 25 countries and market products
in more than 100 countries, with corporate headquarters in
Warsaw, Indiana, and more than 100 manufacturing,
distribution and warehousing
and/or
office facilities worldwide. We manage our 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.
We market and sell products through three principal channels:
1) direct to healthcare institutions, such as hospitals or
direct channel accounts, 2) through stocking distributors
and, in the Asia Pacific region, healthcare dealers, and
3) directly to dental practices and dental laboratories.
With direct channel accounts, inventory is generally consigned
to sales agents or customers. With sales to stocking
distributors, healthcare dealers, dental practices and dental
laboratories, title to product passes generally upon shipment.
Direct channel accounts represented approximately
80 percent of our net sales in 2008. No individual direct
channel account, stocking distributor, healthcare dealer, dental
practice or dental laboratory accounted for more than
1 percent of our net sales for 2008.
We stock inventory in our warehouse facilities and retain title
to consigned inventory in sufficient quantities so that products
are available when needed for surgical procedures. Safety stock
levels are determined based on a number of factors, including
demand, manufacturing lead times and quantities required to
maintain service levels. We also carry trade accounts receivable
balances based on credit terms that are generally consistent
with local market practices.
We utilize a network of sales associates, sales managers and
support personnel, most of whom are employed or contracted by
independent distributors and sales agencies. We invest a
significant amount of time and expense in training sales
associates in how to use specific products and how to best
inform surgeons of product features and uses. Sales force
representatives must have strong technical selling skills and
medical education to provide technical support for surgeons.
In response to the different healthcare systems throughout the
world, our sales and marketing strategies and
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
organizational structures differ by region. We utilize a global
approach to sales force training, marketing and medical
education to provide consistent, high quality service.
Additionally, we keep current with key surgical developments and
other issues related to musculoskeletal surgeons, neurosurgeons,
dentists and oral surgeons and the medical procedures they
perform.
Americas.
The Americas is our largest
geographic segment, accounting for $2,353.9 million, or
57 percent, of 2008 net sales, with the United States
accounting for 94 percent of net sales in this region. The
United States sales force primarily consists of independent
sales agents, most of whom sell products exclusively for Zimmer.
Sales agents in the United States receive a commission on
product sales and are responsible for many operating decisions
and costs. Sales commissions are accrued at the time of sale.
In this region, we contract with group purchasing organizations
and managed care accounts and have promoted unit growth by
offering volume discounts to customer healthcare institutions
within a specified group. Generally, we are designated as one of
several preferred purchasing sources for specified products,
although members are not obligated to purchase our products.
Contracts with group purchasing organizations generally have a
term of three years with extensions as warranted.
A majority of hospitals in the United States belong to at least
one group purchasing organization. In 2008, individual hospital
orders purchased through contractual arrangements with our two
largest group purchasing organizations accounted for
approximately 35 percent of our net sales in the United
States. Contractual sales were highest through Novation, LLC and
Premier Purchasing Partners, L.P. No individual end-user,
however, accounted for over 1 percent of our net sales, and
the top ten end-users accounted for approximately 4 percent
of our aggregate net sales in the United States.
In the Americas, we monitor and rank independent sales agents
across a range of performance metrics including the achievement
of certain sales targets and maintenance of efficient levels of
working capital.
Europe.
The European geographic segment
accounted for $1,179.1 million, or 29 percent, of
2008 net sales, with France, Germany, Italy, Spain,
Switzerland and the United Kingdom collectively accounting for
over 75 percent of net sales in the region. This segment
also includes other key markets, including Benelux, Nordic,
Central and Eastern Europe, the Middle East and Africa. Our
sales force in this region is comprised of direct sales
associates, commissioned agents, independent distributors and
sales support personnel. In Europe, we emphasize the advantages
of our clinically proven, established designs and innovative
solutions, such as minimally invasive surgical procedures and
technologies and new and enhanced materials and surfaces.
Asia Pacific.
The Asia Pacific geographic
segment accounted for $588.1 million, or 14 percent,
of 2008 net sales, with Japan being the largest market
within this segment, accounting for approximately
55 percent of the region’s sales. This segment also
includes key markets such as Australia, New Zealand, Korea,
China, Taiwan, India, Thailand, Singapore, Hong Kong and
Malaysia. In Japan and most countries in the Asia Pacific
region, we maintain a network of dealers, who act as order
agents on behalf of hospitals in the region, and sales
associates, who build and maintain relationships with
musculoskeletal surgeons, neurosurgeons and dental surgeons in
their markets. These sales associates cover over 7,000 hospitals
in the region. The knowledge and skills of our sales associates
play a critical role in providing service, product information
and support to surgeons.
SEASONALITY
Our business is somewhat seasonal in nature, as many of our
products are used in elective procedures, which typically
decline during the summer months and holiday seasons.
DISTRIBUTION
We operate distribution facilities domestically in Warsaw,
Indiana; Dover, Ohio; Statesville, North Carolina; Memphis,
Tennessee; Carlsbad, California; Austin, Texas and
internationally, in Australia, Austria, Belgium, Canada, China,
Finland, France, Germany, Hong Kong, India, Italy, Japan, Korea,
the Netherlands, Portugal, Russia, Singapore, Spain, Sweden,
Switzerland, Taiwan, Thailand and the United Kingdom. We
generally ship our orders via expedited courier. Our operations
support local language labeling requirements for the European
Union member countries, as well as specific Asia Pacific
countries. Our backlog of firm orders is not considered material
to an understanding of our business.
PRODUCTS
Our products include orthopaedic and dental reconstructive
implants, spinal implants, trauma products, and related surgical
products. Orthopaedic reconstructive 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 who have lost teeth
due to trauma or disease. Orthopaedic surgeons and neurosurgeons
use spinal implants in the treatment of degenerative diseases,
deformities and trauma. Trauma products are used primarily to
reattach or stabilize damaged bone and tissue to support the
body’s natural healing process. Our related surgical
products include supplies and instruments designed to aid in
orthopaedic surgical procedures and post-operation
rehabilitation.
We utilize our exclusive
Trabecular
Metal
tm
Technology across various product categories.
Trabecular
Metal
material is a structural biomaterial whose cellular
architecture resembles bone and approximates its physical and
mechanical properties more closely than other prosthetic
materials. The highly porous trabecular configuration is
conducive to more normal bone formation and bone in-growth.
Trabecular Metal
implants are fabricated using elemental
tantalum metal and a patented vapor deposition technique that
creates a metallic strut configuration resembling cancellous
bone with nano-textured surface features.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Orthopaedic
Reconstructive Implants
| Knee Implants |
Total knee replacement surgeries typically include a femoral
component, a patella (knee cap), a tibial tray and an articular
surface (placed on the tibial tray). Knee replacement surgeries
include first-time, or primary, joint replacement procedures and
revision procedures for the replacement, repair or enhancement
of an implant or component from a previous procedure. Knee
implants are designed to accommodate different levels of
ligament stabilization of the joint. While some knee implant
designs, called cruciate retaining (CR) designs, require the
retention of the posterior cruciate ligament, other designs,
called posterior stabilized (PS) and ultracongruent (UC)
designs, provide joint stability without the posterior cruciate
ligament. There are also procedures for partial reconstruction
of the knee, which treat limited knee degeneration and involve
the replacement of only one side, or compartment, of the knee
with a unicompartmental knee prosthesis.
Our portfolio of
Minimally Invasive
Solutions
tm
Procedures (“MIS”) includes the MIS Mini-Incision
Total Knee Procedure. The MIS Mini-Incision Total Knee
Instruments feature smaller instruments which accommodate a
smaller incision and less disruption of the surrounding soft
tissues.
We offer a wide range of products for specialized knee
procedures, including the following:
NexGen
®
Complete Knee Solution. The
NexGen
Knee
product line is a comprehensive system for knee replacement
surgery which has had significant application in PS, CR and
revision procedures. The
NexGen
Knee System offers joint
stability and sizing that can be tailored to individual patient
needs while providing surgeons with a unified system of
interchangeable components. The
NexGen
Knee System
provides surgeons with complete and versatile knee instrument
options, including MIS Mini-Incision Instruments, milling and
multiple traditional saw blade cutting instrument systems. The
breadth and versatility of the
NexGen
Knee System allows
surgeons to change from one type of implant to another during
surgery, according to the needs of the patient, and to support
current surgical philosophies.
The
NexGen
Complete Knee Solution
Legacy
®
Knee-Posterior
Stabilized product line provides stability in the absence of the
posterior cruciate ligament. The PS capabilities were augmented
through the introduction of the
NexGen Legacy
Posterior
Stabilized Flex Knee (the “LPS-Flex Knee”), a
high-flexion implant that has the potential to accommodate knee
flexion up to a
155-degree
range of motion in some patients. In late 2007, the Premarket
Approval (PMA) application for the
NexGen
LPS-Flex Mobile
Knee was approved by the FDA. With the staged rollout of this
product in the U.S., we are now one of only two companies that
can offer a mobile-bearing total knee treatment option in the
U.S.
The
NexGen
CR product line is designed to be used in
conjunction with a functioning posterior cruciate ligament. The
NexGen
CR-Flex Fixed Bearing Knee is designed with
components to provide a greater range of motion for patients who
require deep bending in their daily activities. The
NexGen
CR-Flex Femoral Components allow the surgeon to adjust
component sizing without removing additional bone.
The
NexGen
Revision Knee product line consists of several
different products that are designed to provide clinical
solutions to surgeons for various revision situations, including
a bone augmentation implant system made from our
Trabecular
Metal
Technology material. These augments are designed to
address significant bone loss in revision surgery.
NexGen
Knee
Gender
Solutions
tm
femorals represent the first knee implants specifically shaped
to offer fit and function optimized for anatomic features that
are more commonly seen in female patients. Gender implants are
an important strategic focus, as more than half of total knee
arthroplasty patients are female.
Gender Solutions
femorals are available in both
NexGen
CR-Flex and
LPS-Flex configurations.
We offer improved polyethylene performance in the
NexGen
Knee System with our conventional polyethylene and
Prolong
®
Highly Crosslinked Polyethylene, which offers reduced wear,
resistance to oxidation, pitting and cracking.
Prolong
Highly Crosslinked Polyethylene is available in designs
compatible with both
NexGen
CR-Flex and LPS-Flex femoral
components.
The
Natural-Knee
®
II System. The
Natural-Knee
II System
consists of a range of interchangeable, anatomically designed
implants which include a proprietary
Cancellous-Structured
Titanium
tm
(
CSTi
tm
)
Porous Coating option for stable fixation in active patients and
Durasul
®
Highly Crosslinked Polyethylene.
Gender Solutions Natural-Knee
Flex System. The
Gender Solutions Natural-Knee
Flex System was fully
released in 2008 and adds our unique High Flex and
Gender
Solutions
design concepts to the
Natural-Knee
System.
The
Gender Solutions Natural-Knee
Flex System recognizes
that two distinct populations exist in total knee arthroplasty
(female and male) and offers two distinct implant shapes for
enhanced fit. The system is compatible with muscle sparing MIS
procedures and accommodates high flexion capacity up to 155
degrees. The system features the proven clinical success of our
asymmetric tibial plate,
CSTi
porous coating,
Prolong
Highly Crosslinked Polyethylene and the ultracongruent
articular surface.
The
Innex
®
Total Knee System. The
Innex
Knee System
offers fixed bearing and mobile bearing knee components all
designed within the same system philosophy. While the
Innex
Knee System is best known for its mobile bearing knee
offering, the availability of differing levels of articular
constraint and the
Innex
Revision Knee components provide
for a comprehensive mobile and fixed bearing knee system.
Gender Solutions
design features were added to this
comprehensive knee system in late 2008. The
Innex
Knee
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
System is distributed in Europe and Asia Pacific, and is not
available for commercial distribution in the United States.
Unicompartmental Knee Systems.
The
Zimmer
®
Unicompartmental Knee System offers a high flexion design
for unicompartmental knee surgery. The high flexion product was
designed specifically for MIS Procedures and Technologies. The
system offers the surgeon the ability to conserve bone by
replacing only the compartment of the knee that has had
degenerative changes. The
Gender Solutions
Patello-Femoral Joint System was fully commercialized in
2008 and incorporates key gender specific design features and a
proprietary guided milling surgical technique for use in
patello-femoral joint replacement.
| Hip Implants |
Total hip replacement surgeries replace both the head of the
femur and the socket portion of the pelvis (acetabulum) of the
natural hip. Hip procedures include first time, or primary,
joint replacement as well as revision procedures. Approximately
30 percent of hip implant procedures involve the use of
bone cement to attach or affix the prosthetic components to the
surrounding bone. The remaining are press-fit into bone, which
means that they have a surface that bone affixes to through
either ongrowth or ingrowth technologies.
Our portfolio of MIS Techniques includes the
Zimmer
MIS
Anterior Supine Technique, the MIS Posterior Procedure, the
Zimmer
MIS Anterolateral Technique and
MIS
2-Incision
tm
Hip Replacement Procedure. The MIS Techniques are designed to be
less invasive to soft tissues and to shorten recovery time.
Our key hip replacement products include:
Zimmer
M/L Taper Hip Prosthesis with
Kinectiv
®
Technology. The
Zimmer
M/L Taper Hip
Prosthesis offers a proximally porous-coated wedge-shaped design
based on long term clinically proven concepts. The M/L Taper has
become widely used in MIS Procedures due to several key design
features. The
Zimmer
M/L Taper Hip Prosthesis with
Kinectiv
Technology is a system of modular stem and neck
components designed to help the surgeon restore the natural hip
joint center intraoperatively by addressing the key variables of
leg length, offset and version independently. The M/L Taper hip
product family is our fastest growing hip stem family.
Alloclassic
®
(
Zweymüller
®
)
Hip System. The
Alloclassic (Zweymüller)
Hip System has become one of the most used, primary,
cementless hip systems in the world. This is one of the few
stems available today that is practically unchanged since its
introduction in 1979. A new offset design was added in 2004 and
offers the surgeon increased capability to restore the
patient’s anatomical joint movement.
CLS
®
Spotorno
®
Hip System. The
CLS Spotorno
Stem is one
of our largest selling hip prostheses, especially in the
European markets. Additions to the product line provide the
capability for restoration of the physiological center of
rotation. The
CLS Spotorno
Stem has excellent clinical
results, confirmed by the 2006 Swedish Hip Registry.
Fitmore
®
Hip Stem. The
Fitmore
Hip Stem was released in
2008 and offers the surgeon a short, bone preserving stem.
Maintaining bone stock is particularly important for patients
who may undergo a later revision procedure. Its unique shape
facilitates MIS procedures, especially the MIS Anterior Supine
approach which is gaining in popularity.
VerSys
®
Hip System. The
VerSys
Hip System is supported
by a common instrumentation set and is an integrated family of
hip products with design-specific options to meet varying
surgical philosophies and patient needs. A unique offering
within the
VerSys
Hip System, the
VerSys
Epoch
®
Fullcoat Hip System is the first reduced-stiffness stem
specifically designed to address varying patient femoral
anatomies and minimize implant-related complications such as
thigh pain, bone resorption and leg lengthening. In 2008, we
introduced a line extension to this family to enhance the stem
fit in osteoporotic patients.
Trabecular Metal
Primary Hip Prosthesis. The
Trabecular Metal
Primary Hip Prosthesis product was our
first utilization of
Trabecular Metal
technology on a hip
prosthesis. The prosthesis utilizes an innovative proximal
design to aggressively lock the prosthesis in the bone and
provide for an optimized environment for biological ingrowth to
occur into the highly porous
Trabecular Metal
material.
Trilogy
®
Acetabular System. The
Trilogy
Acetabular
System, including titanium alloy shells, polyethylene liners,
screws and instruments, is our primary acetabular cup system.
The
Trilogy
family of products offers versatile component
designs and instrumentation. One option, the
Longevity
®
Highly Crosslinked Polyethylene Liner, is designed to address
the issue of wear and reduce the generation of debris in total
hip arthroplasty. Polyethylene debris may cause the degeneration
of bone surrounding reconstructive implants, a painful condition
called osteolysis.
We offer the
Trabecular Metal
Modular Primary Acetabular
System, which incorporates design features from the
Trilogy
family of acetabular shells augmented with the advanced
fixation surface of
Trabecular Metal
material. In
addition to the
Trabecular Metal
Acetabular System, we
also offer a
Trabecular Metal
Acetabular Revision System
that provides the surgeon with a variety of off-the-shelf
options to address a wide range of bone deficiencies encountered
during acetabular revisions and achieve a stable
construct – without the need for custom implants or
bone graft, which carries with it the potential for resorption
and disease transmission.
Alternative Bearing Technology.
We have a
broad portfolio of alternative bearing technologies which
include
Longevity
and
Durasul
Highly Crosslinked
Polyethylenes,
Metasul
®
Metal-on-Metal
Tribological Solution,
Cerasul
®
Ceramic-on-Ceramic
Tribological Solutions and the
Trilogy
AB
®
Acetabular System. Alternative bearings are designed to
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
minimize wear over time, with the goal of increasing the
longevity of the implant.
| Extremity Implants |
Our extremity portfolio, primarily shoulder and elbow products,
are designed to treat arthritic conditions, soft tissue injuries
and fractures, as well as to enhance the outcome of primary or
revision surgery.
Our key products include:
Bigliani/Flatow
®
Complete Shoulder Solution Family. The
Bigliani/Flatow
product line combined with the
Trabecular Metal
Humeral Stem gives us a significant
presence in the global shoulder implant market.
Trabecular Metal
Reverse Shoulder System. The
Trabecular Metal
Reverse Shoulder System incorporates
advanced materials and design to offer improved biological
ingrowth potential through the utilization of
Trabecular
Metal
technology, while addressing significant loss of
rotator cuff function. The reverse shoulder system is designed
to restore function to patients who, because of debilitating
rotator cuff tears, are not candidates for traditional shoulder
surgery and have exhausted other means of repair.
Anatomical
Shoulder
tm
System. The
Anatomical Shoulder
System can be
adjusted to each patient’s individual anatomy. This
portfolio of products was further expanded to include the
Anatomical Shoulder
Inverse/Reverse System, designed to
address significant loss of rotator cuff function, and the
Anatomical Shoulder
Fracture System. Both the primary and
fracture shoulder implants can be converted to a reverse
shoulder without removal of the initial implant.
Coonrad/Morrey Total Elbow. The Coonrad/Morrey Total
Elbow product line is a family of elbow replacement implant
products to address patients with conditions of severe arthritis
or trauma. It remains the largest elbow franchise in the world.
| Dental Products |
Our dental products division manufactures and distributes
(1) dental reconstructive implants – for
individuals who are totally without teeth or are missing one or
more teeth; (2) dental restorative products –
aimed at providing a more natural restoration to mimic the
original teeth; and (3) dental regenerative products
— for soft tissue and bone rehabilitation.
| Dental Reconstructive Implants |
Our dental reconstructive implant products and surgical and
restorative techniques include:
Tapered
Screw-Vent
®
Implant System. Our highest selling dental
product line provides the clinician a tapered geometry which
mimics the natural shape of a tooth root. The
Tapered
Screw-Vent
System, with its two-stage design, was developed
to minimize valuable chair time for restorations. Featuring a
patented internal hex connection, multiple lead threads for
reduced insertion time and selective surface coatings, the
Tapered Screw-Vent
Product is a technologically advanced
dental implant offering features designed to allow the clinician
to meet the needs of patients even in the most demanding
circumstances. The
Zimmer
One-Piece Implant System,
designed to complement the success of the
Tapered Screw-Vent
System, enhances this product line by offering clinicians a
fast, convenient restorative option.
AdVent
®
Implant System. Utilizing many features of the
Tapered Screw-Vent
System, the
AdVent
Product is a
transgingival, one stage design that utilizes the same surgical
system as the
Tapered Screw-Vent
System, allowing the
clinician to use both design concepts without incurring the
added cost of a second surgical system.
Tapered
SwissPlus
®
Implant System. Designed to meet the needs of
clinicians who prefer a transgingival, one stage, dental
implant, the
Tapered SwissPlus
System incorporates
multiple lead threads for faster insertion time, and a tapered
body to allow it to be placed in tight interdental spaces. The
Tapered SwissPlus
System also incorporates an internal
connection.
| Dental Restorative Products |
We commercialize products for the aesthetic market aimed at
providing a more natural restoration. We offer a full line of
prosthetic devices for each of the above dental implant systems
as well as a custom solution, as follows:
Zimmer
Hex-Lock
®
Contour Abutment and Restorative Products. Designed
to be used with our
Tapered Screw-Vent
and One-Piece
Implant Systems, our contour lines are an off-the-shelf solution
for immediately addressing the diversity of patients’
needs. Featuring prepared margins, titanium and ceramic options,
and snap-on impression caps, our abutments are designed to
simplify the restoration process, save time for clinicians and
technicians, and offer versatility.
| Dental Regenerative Products |
We market the following product lines for use in regenerative
techniques in oral surgery:
Puros
®
Allograft Products. The
Puros
Material is
an allograft grafting material which utilizes the
Tutoplast
®
1
Tissue Processing Technique that provides exceptional bone and
soft tissue grafting material for use in oral surgery. Zimmer
Dental offers five distinct
Puros
Allograft products to
use together or separately for various bone and soft tissue
grafting needs:
Puros
Cancellous Particulate,
Puros
Cortical Particulate,
Puros
Block Allografts,
Puros
Pericardium Membranes, and
Puros
Dermis
Membranes. We market the
Puros
Allograft Products through
an agreement with RTI Biologics, Inc.
1
Registered
Trademark of RTI Biologics, Inc.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
During 2008, within our Dental division, we released our new
Zimmer
Instrument Kit System, which is designed to better
enable clinicians to use the
Tapered Screw-Vent
and
Zimmer
One-Piece implants. We extended our regenerative
product portfolio by releasing the
CopiOs
®
Pericardium Membrane in the United States. Sourced from bovine
pericardial tissue,
CopiOs
Pericardium Membrane provides
the characteristics of natural tissue.
Spine
Implants
Our spine products division designs, manufactures and
distributes medical devices and surgical instruments that
provide comprehensive spine care solutions for patients with
back pain, neck pain, degenerative disc conditions and injuries
due to trauma. Zimmer Spine offers orthopaedic surgeons and
neurosurgeons a full range of devices for posterior and anterior
applications of the cervical, thoracic and lumbar spine.
In October 2008, we acquired Abbott Spine. This investment adds
a number of innovative products and builds critical mass in our
Spine products segment. In addition to bringing existing
products and a promising pipeline, the Abbott Spine acquisition
added to our research and development capabilities in the spinal
category and strengthened our sales coverage.
Our spine product offerings include:
Dynesys
®
Dynamic Stabilization System. The
Dynesys
System is used in the treatment of lower back and leg pain
in skeletally mature patients. Developed to bring the lumbar
vertebrae into a more natural anatomical position while
stabilizing the affected segments, the
Dynesys
System
uses flexible materials threaded through pedicle screws rather
than rigid rods. The
Dynesys
Dynamic Stabilization Spinal
System is indicated for use as an adjunct to fusion in the U.S.
PathFinder
®
System. The
Pathfinder
System is a minimally
invasive posterior stabilization system used in lumbar surgery.
Its design accommodates single or multilevel constructs and
offers advanced reduction, compression and distraction
capabilities.
Universal
Clamp
®
Device. The
Universal Clamp
Device is
designed to correct scoliotic deformity and provides
intra-operative flexibility with immediate post-operative
stability.
Sequoia
®
Pedicle Screw System. The
Sequoia
Pedicle
Screw Platform was designed to treat a variety of conditions of
the thoracolumbar spine. The system offers reproducible fixation
required for spinal arthrodesis while minimizing screw bulk and
footprint. This allows greater decortication and fusion bed
preparation, space for distraction/compression and in situ
bending. In addition to a reduced footprint, the
Sequoia
platform offers a variety of advanced and proprietary
features that improve strength, reduce cross-threading and
minimize head splay.
TiTLE
®
2 Polyaxial Spinal System. The
TiTLE
System is
designed for both minimally invasive and open procedures in the
thoracic and lumbar spine. Its anti-cross threading cap screw
and built-in friction head aid in the placement through small
surgical openings. The
NorthStar
®
Cannulated Screw Delivery System allows for percutaneous
placement of the screws.
Ant-Cer
®
II
Plate. The
Ant-Cer
II Plate is a dynamic
cervical plate providing the capacity for one way translational
settling to maintain natural graft loading.
Atavi
®
Atraumatic Spine Surgery System. The
Atavi
family of
minimally invasive access products includes the
NexPosure
®
System for cervical applications and the
FlexPosure
®
Products for lumbar applications.
Trinic
a
®
Select Anterior Cervical Plate System. The
Trinica
Select Anterior Cervical Plate System and All-Through-One
instrumentation is designed to simplify the surgical procedure
while requiring less retraction and reducing the risk of
soft-tissue damage. The
Trinica
Select Self-Drilling
Screws are designed to provide the surgeon with the option to
reduce the number of instruments required to implant the
Trinica
Select Plate.
Trabecular Metal
Technology.
Trabecular
Metal
Technology has a wide range of orthopaedic
applications. In the United States,
Trabecular Metal
material shapes are utilized for vertebral body replacement
procedures as well as bone void fillers.
Puros
®
Allograft Products. We continue to sell
traditional and specialty
Puros
Allograft Bone Products
through our exclusive U.S. and Canadian distribution
agreements with RTI Biologics, Inc.
CopiOs
Bone Void
Filler
2
.
CopiOs
Bone Void Filler is a collagen-based synthetic bone graft
material provided in the form of sponges or pastes of various
sizes for surgical implantation. It is intended for filling bone
voids resulting from trauma or created by a surgeon.
Trauma
Trauma products include devices used to stabilize damaged or
broken bones and their surrounding tissues to support the
body’s natural healing processes. Fractures are most often
stabilized using internal fixation devices such as plates,
screws, nails, wires and pins, but may also be stabilized using
external fixation devices which are applied externally to the
limb. We are focused on addressing unmet clinical needs,
aligning our trauma products with MIS Procedures and integrating
orthobiologics and other next-generation technologies into our
portfolio of trauma solutions.
Zimmer Trauma offers a comprehensive line of products, including:
NCB
®
Plating System. The titanium
NCB
Locking
Plates provide surgeons with the ability to place screws with
2
Manufactured
by Kensey Nash Corporation
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
polyaxial freedom and utilize both conventional and locking
technology in the treatment of complex fractures of the distal
femur, proximal humerus and proximal tibia.
Zimmer
Periarticular Locking Plates. The
Zimmer
Periarticular Locking Plate System combines
advanced design techniques with locking screw technology to
create constructs for use in comminuted fractures or where
deficient bone stock or poor bone quality is encountered. By
combining locking screw holes with compression slots, the plates
can be used as both locking devices and fracture compression
devices.
Zimmer
Universal Locking System. The
Zimmer
Universal Locking System is a comprehensive system of mini
and small fragment stainless steel plates, screws and
instruments for fracture fixation. The Universal Locking System
plates resemble standard plates, but have figure-8 shaped holes
that will accommodate standard or locking screws on either side
of the hole. As a result, the plate can be used, depending upon
the fracture situation, as a compression plate, a locked
internal fixator or as an internal fixation system combining
both techniques.
Zimmer
Intertrochanteric/Subtrochanteric
(
I.T.S.T.
tm
)
Nailing System. The
I.T.S.T.
system offers a proven
method to treat hip fractures that are common in elderly
patients. The system allows for treatment of a variety of hip
fractures with a simple, well accepted surgical technique.
Instrumentation designed specifically for the system allows
surgeons to use a minimally invasive approach.
Orthopaedic
Surgical Products
We develop, manufacture and market surgical products that
support our reconstructive, trauma, spine and dental product
systems in the operating room environment, with a focus on Bone
Cements, Surgical Wound Site Management and Blood Management.
Orthopaedic Surgical Products include:
PALACOS
®
3
Bone Cement. We have exclusive United States
distribution rights for the
PALACOS
line of bone cement
products manufactured by Heraeus Kulzer GmbH. Included in these
brands are
PALACOS
R and
PALACOS
R+G Bone Cements,
as well as
PALACOS
LV and
PALACOS
LV+G Bone
Cements. The
PALACOS
R+G and
PALACOS
LV+G products
are bone cements with the antibiotic gentamiacin pre-mixed in
the formulation, and are used by orthopaedic surgeons to reduce
the risk of postoperative infection. The products handling
characteristics make them well-suited for minimally invasive
procedures.
Hi-Fatigue
tm
4
Bone Cement. We have exclusive European and Asian
distribution rights for the
Hi-Fatigue
line of bone
cement products manufactured by aap Biomaterials GmbH. Included
in these brands are
Hi-Fatigue
and
Hi-Fatigue
G
Bone Cements. The
Hi-Fatigue
G bone cement utilizes the
antibiotic gentamiacin pre-mixed in the formulation, and is used
by orthopaedic surgeons to reduce the risk of postoperative
infection.
A.T.S.
®
Automatic Tourniquet Systems. The
A.T.S.
Tourniquet Systems Product Line is a
family of tourniquet machines and cuffs designed to safely
create a bloodless surgical field. The machines include the
A.T.S.
3000 Tourniquet, which utilizes proprietary
technology to determine a patient’s proper “Limb
Occlusion Pressure” (LOP) based on the patient’s
specific physiology. A decrease in LOP may reduce tissue or
nerve damage. The range of cuffs which complement the machines
provides the flexibility to occlude blood flow safely with
convenience and accuracy for limbs of virtually every size and
shape.
Pulsavac
®
Plus,
Pulsavac
Plus AC and
Pulsavac
Plus LP Wound
Debridement Systems. These
Pulsavac
Systems
are used for cleaning and debridement of contaminants and
foreign matter from wounds using simultaneous irrigation and
suction. All three
Pulsavac
Systems are completely
disposable to reduce the risk of cross contamination. While
Pulsavac
Plus and
Pulsavac
Plus LP Wound
Debridement Systems are both battery-powered, the
Pulsavac
Plus AC Wound Debridement System is a disposable system that
is powered by a reusable AC power source to address battery
disposal concerns.
HEALTHCARE
CONSULTING
Our healthcare consulting services subsidiary, Accelero Health
Partners, LLC (Accelero), is based in Canonsburg, Pennsylvania.
Accelero consultants work to design a customized program for
each client that promotes the active participation and
collaboration of the physicians and the hospital-based
departments with the goal of consistently producing a superior
outcome in the form of a growing, efficient, and effective care
delivery network. Currently, revenue related to Accelero
represents less than 1 percent of our total net sales.
ORTHOBIOLOGICS
Our research and development efforts include an Orthobiologics
group based in Austin, Texas, with its own full-time staff and
dedicated projects centralizing on the development of biologic
technologies for musculoskeletal applications, including the
repair and replacement of damaged tendon, ligament, meniscus,
articular cartilage, bone and spinal nucleus tissues. This group
works on biological solutions to repair and regenerate damaged
or degenerated musculoskeletal tissues using biomaterials/cell
therapies which offer the possibility of treating damaged joints
by biological repair rather than replacing them. A sampling of
some of our key projects in the Orthobiologics area is set forth
below.
We are collaborating with ISTO Technologies, Inc. (ISTO) to
develop chondral (Neocartilage) and osteochondral grafts
3
Registered
Trademark of Heraeus Kulzer GmbH
4
Trademark
of aap Biomaterials GmbH & Co. KG
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
for cartilage repair. ISTO creates cell-based therapies for
cartilage regeneration using cells from juvenile donor
cartilage. Neocartilage is a living tissue-engineered cartilage
graft under clinical investigation for the restoration of
cartilage defects, reestablishment of joint function and relief
of pain in the knee. The Phase I/II clinical trial (IND) for
Neocartilage has completed patient enrollment with all patients
having reached the
12-month
follow-up
milestone. We plan to distribute this product as
DeNovo
®
ET Engineered Tissue Graft. In addition, we launched our first
cartilage repair product (
DeNovo
NT Natural Tissue Graft)
in 2007 and expanded use of the product in 2008. This product
provides particulated juvenile cartilage tissue for repair of
articular cartilage defects and has been implanted in nearly
200 patients during this limited release phase.
Many musculoskeletal surgical procedures use bone grafts to help
regenerate lost or damaged bone. In 2008, our Spine, Dental and
Trauma divisions introduced a technologically advanced all-human
demineralized bone matrix,
Puros
DBM Putty and Putty with
bone chips. This bone-derived allograft material is used to fill
bone voids or defects. It is placed into the bone void where it
is then completely replaced by natural bone during the healing
process.
RESEARCH AND
DEVELOPMENT
We have extensive research and development activities to develop
new surgical techniques, materials, orthobiologics and product
designs. The research and development functions work closely
with our strategic brand marketing function. The rapid
commercialization of innovative new materials, orthobiologics
products, implant and instrument designs, and surgical
techniques remains one of our core strategies and continues to
be an important driver of sales growth.
We are broadening our product offerings in each of the product
categories and exploring new technologies with possible
applications in multiple areas. For the years ended
December 31, 2008, 2007 and 2006, we spent
$194.0 million, $209.6 million, and
$188.3 million, respectively, on research and development.
The decreased spending on research and development in 2008
reflects delays connected with our operational compliance with
the DPA and CIA and implementation of our enhanced compliance
and ethics initiatives. We intend to increase spending on
product development in 2009. Our primary research and
development facility is located in Warsaw, Indiana. We have
other research and development personnel based in, among other
places, Winterthur, Switzerland; Austin, Texas; Minneapolis,
Minnesota; Carlsbad, California; Dover, Ohio; and Parsippany,
New Jersey. As of December 31, 2008, we employed more than
800 research and development employees worldwide.
We expect to continue to identify innovative technologies and
consider acquiring complementary products or businesses, or
establishing technology licensing arrangements or strategic
alliances.
GOVERNMENT
REGULATION AND COMPLIANCE
We are subject to government regulation in the countries in
which we conduct business. In the U.S., numerous laws and
regulations govern all the processes by which medical devices
are brought to market. These include, among others, the Federal
Food, Drug and Cosmetic Act and regulations issued or
promulgated thereunder. The U.S. Food and Drug
Administration (FDA) has enacted regulations that control all
aspects of the development, manufacture, advertising, promotion
and postmarket surveillance of medical products, including
medical devices. In addition, the FDA controls the access of
products to market through processes designed to ensure that
only products that are safe and effective are made available to
the public.
Most of our new products fall into FDA classifications that
require the submission of a Premarket Notification (510(k)) to
the FDA. This process requires us to demonstrate that the device
to be marketed is at least as safe and effective as, that is,
substantially equivalent to, a legally marketed device. We must
submit information that supports our substantial equivalency
claims. Before we can market the new device, we must receive an
order from the FDA finding substantial equivalence and clearing
the new device for commercial distribution in the United States.
Other devices we develop and market are in a category (class)
for which the FDA has implemented stringent clinical
investigation and Premarket Approval (PMA) requirements. The PMA
process requires us to provide clinical and laboratory data that
establishes that the new medical device is safe and effective.
The FDA will approve the new device for commercial distribution
if it determines that the data and information in the PMA
constitute valid scientific evidence and that there is
reasonable assurance that the device is safe and effective for
its intended use(s). All of our devices marketed in the
United States have been cleared or approved by the FDA,
with the exception of certain
pre-amendment
devices which were in commercial distribution prior to
May 28, 1976. The FDA has grandfathered these devices, so
new FDA submissions are not required. Some low risk medical
devices (including most instruments) also do not require FDA
review and approval or clearance prior to commercial
distribution. The FDA has the authority to: halt the
distribution of certain medical devices; detain or seize
adulterated or misbranded medical devices; or order the repair,
replacement of or refund the costs of such devices. There are
also certain requirements of state, local and foreign
governments that we must comply with in the manufacture and
marketing of our products.
In many of the foreign countries in which we market our
products, we are subject to local regulations affecting, among
other things, design and product standards, packaging
requirements and labeling requirements. Many of the regulations
applicable to our devices and products in these countries are
similar to those of the FDA. The member countries of the
European Union have adopted the European Medical Device
Directive, which creates a single set of medical device
regulations for products marketed in all member countries.
Compliance with the Medical Device
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Directive and certification to a quality system enable the
manufacturer to place a CE mark on its products. To obtain
authorization to affix the CE mark to a product, a recognized
European Notified Body must assess a manufacturer’s quality
systems and the product’s conformity to the requirements of
the Medical Device Directive. We are subject to inspection by
the Notified Bodies for compliance with these requirements.
Further, we are subject to various federal and state laws
concerning healthcare fraud and abuse, including false claims
laws and anti-kickback laws. These laws are administered by,
among others, the U.S. Department of Justice, the Office of
Inspector General of the Department of Health and Human Services
and state attorneys general. Many of these agencies have
increased their enforcement activities with respect to medical
device manufacturers in recent years. Violations of these laws
are punishable by criminal
and/or
civil
sanctions, including, in some instances, fines, imprisonment
and, within the United States, exclusion from participation in
government healthcare programs, including Medicare, Medicaid and
Veterans Administration (VA) health programs. As part of meeting
our obligations under the 2007 DPA, we developed and have
substantially implemented enhanced compliance initiatives and
are applying these enhancements in most respects to all of our
businesses on a global basis.
Our facilities and operations are also subject to complex
federal, state, local and foreign environmental and occupational
safety laws and regulations, including those relating to
discharges of substances in the air, water and land, the
handling, storage and disposal of wastes and the
clean-up
of
properties by pollutants. We do not expect that the ongoing
costs of compliance with these environmental requirements will
have a material impact on our consolidated earnings, capital
expenditures or competitive position.
COMPETITION
The orthopaedics industry is highly competitive. In the global
markets for reconstructive implants, trauma and related surgical
products, our major competitors include: DePuy Orthopaedics,
Inc. (a subsidiary of Johnson & Johnson), Stryker
Corporation, Biomet, Inc., Synthes, Inc., Smith &
Nephew plc, Wright Medical Group, Inc. and Tornier Inc.
In the Americas geographic segment, we and DePuy Orthopaedics,
Inc., Stryker Corporation, Biomet, Inc., Smith &
Nephew, Inc. (a subsidiary of Smith & Nephew plc),
Wright Medical Group, Inc. and Synthes, Inc. account for a large
majority of the total reconstructive and trauma implant sales.
In the Asia Pacific market for reconstructive implant and trauma
products, we compete primarily with DePuy Orthopaedics, Inc.,
Stryker Corporation, Synthes, Inc. and Smith & Nephew
plc, as well as regional companies, including Japan Medical
Materials Corporation and Japan Medical Dynamic Marketing, Inc.
Factors, such as the dealer system, complex regulatory
environments and the accompanying inability to compete on price,
make it difficult for smaller companies, particularly those that
are non-regional, to compete effectively with the market leaders
in the Asia Pacific region.
The European reconstructive implant and trauma product markets
are more fragmented than the Americas or the Asia Pacific
segments. The variety of philosophies held by European surgeons
regarding hip reconstruction, for example, has fostered the
existence of many regional European companies, including Mathys
AG and Waldemar LINK GmbH & Co. KG, which, in addition
to the global competitors, compete with us. Today most hip
implants sold in Europe are products developed specifically for
the European market, although global products are gaining
acceptance. We will continue to develop and produce specially
tailored products to meet specific European needs.
In the spinal implant category, we compete globally primarily
with Medtronic Sofamor Danek, Inc. (a subsidiary of Medtronic,
Inc.), DePuy Spine (a subsidiary of Johnson &
Johnson), Synthes, Inc., Stryker Corporation and EBI, L.P., now
operating as Biomet Trauma and Biomet Spine (a subsidiary of
Biomet, Inc.).
In the dental reconstructive implant category, we compete
primarily with Nobel Biocare Holding AG, Straumann Holding AG
and Implant Innovations, Inc. (a subsidiary of Biomet, Inc.).
Competition within the industry is primarily based on
technology, innovation, quality, reputation and customer
service. A key factor in our continuing success in the future
will be our ability to develop new products and improve existing
products and technologies.
MANUFACTURING AND
RAW MATERIALS
We manufacture substantially all of our products at eight sites
including Warsaw, Indiana; Winterthur, Switzerland; Ponce,
Puerto Rico; Dover, Ohio; Statesville, North Carolina; Carlsbad,
California; Parsippany, New Jersey; and Etupes, France. In
February 2008, we announced plans to open a new manufacturing
facility in Shannon, Ireland and are scheduled to open the
facility in the second half of 2009.
We believe that our manufacturing facilities set industry
standards in terms of automation and productivity and have the
flexibility to accommodate future growth. The manufacturing
operations at these facilities are designed to incorporate the
cellular concept for production and to implement tenets of a
manufacturing philosophy focused on continuous operational
improvement and optimization. In addition, at certain of our
manufacturing facilities, many of the employees are
cross-trained to perform a broad array of operations.
We generally target operating our manufacturing facilities at
levels up to 90 percent of total capacity. We continually
evaluate the potential to in-source products currently purchased
from outside vendors to
on-site
production.
We have improved our manufacturing processes to protect our
profitability and offset the impact of inflationary costs. We
have, for example, employed computer-assisted robots and
multi-axis grinders to precision polish medical devices;
automated certain manufacturing and inspection processes,
including on-machine inspection and process controls; purchased
state-of-the-art equipment; in-sourced
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
core products, such as castings and forgings; and negotiated
reductions in third party supplier costs.
We use a diverse and broad range of raw materials in the
manufacturing of our products. We purchase all of our raw
materials and select components used in manufacturing our
products from external suppliers. In addition, we purchase some
supplies from single sources for reasons of quality assurance,
sole source availability, cost effectiveness or constraints
resulting from regulatory requirements. We work closely with our
suppliers to assure continuity of supply while maintaining high
quality and reliability. To date, we have not experienced any
significant difficulty in locating and obtaining the materials
necessary to fulfill our production schedules.
INTELLECTUAL
PROPERTY
Patents and other proprietary rights are important to the
continued success of our business. We also rely upon trade
secrets, know-how, continuing technological innovation and
licensing opportunities to develop and maintain our competitive
position. We protect our proprietary rights through a variety of
methods, including confidentiality agreements and proprietary
information agreements with vendors, employees, consultants and
others who may have access to proprietary information. We own or
control through licensing arrangements more than 4,000 issued
patents and patent applications throughout the world that relate
to aspects of the technology incorporated in many of our
products.
EMPLOYEES
We employ more than 8,500 employees worldwide, including
more than 800 employees dedicated to research and
development. Over 5,200 employees are located within the
United States and approximately 3,300 employees are located
outside of the United States, primarily throughout Europe and in
Japan. We have over 3,600 employees dedicated to
manufacturing our products worldwide. The Warsaw, Indiana
production facility employs more than 1,600 employees.
Fewer than 200 North American employees are members of a trade
union covered by a collective bargaining agreement.
In May 2007, we renewed a collective bargaining agreement with
the United Steel, Paper and Forestry, Rubber Manufacturing,
Energy, Allied Industrial and Service Workers International
Union for and on behalf of Local
2737-15
covering employees at the Dover, Ohio facility, which continues
in effect until May 15, 2012.
EXECUTIVE
OFFICERS
The following table sets forth certain information with respect
to our executive officers as of January 31, 2009.
| Name | Age | Position | ||
|
David C. Dvorak
|
45 | President and Chief Executive Officer | ||
|
Cheryl R. Blanchard, Ph.D.
|
44 | Senior Vice President, Research and Development and Chief Scientific Officer | ||
|
James T. Crines
|
49 | Executive Vice President, Finance and Chief Financial Officer | ||
|
Derek M. Davis
|
39 | Vice President, Finance and Corporate Controller and Chief Accounting Officer | ||
|
Jeffery A. McCaulley
|
43 | President, Zimmer Reconstructive | ||
|
Bruno A. Melzi
|
61 | Chairman, Europe, Middle East and Africa | ||
|
Stephen H.L. Ooi
|
55 | President, Asia Pacific | ||
|
Chad F. Phipps
|
37 | Senior Vice President, General Counsel and Secretary | ||
|
Mark C. Throdahl
|
57 | Group President, Global Businesses | ||
|
|
||||
Mr. Dvorak
was appointed President, Chief Executive Officer and
a member of the Board of Directors of Zimmer Holdings on
May 1, 2007. From December 2005 to April 2007,
Mr. Dvorak served as Group President, Global Businesses and
Chief Legal Officer. From October 2003 to December 2005,
Mr. Dvorak served as Executive Vice President, Corporate
Services, Chief Counsel and Secretary, as well as Chief
Compliance Officer. Mr. Dvorak was appointed Corporate
Secretary in February 2003. He joined Zimmer Holdings in
December 2001 as Senior Vice President, Corporate Affairs and
General Counsel.
Dr. Blanchard
was appointed Senior Vice President, Research and
Development and Chief Scientific Officer of Zimmer Holdings in
December 2005. She is responsible for Global Research and
Development,Quality and Regulatory, Medical Education, and
Medical Affairs. From October 2003 to December 2005,
Dr. Blanchard served as Vice President, Corporate Research
and Clinical Affairs and from August 2002 to October 2003, she
served as Vice President, Research and Biologics.
Mr. Crines
was appointed Executive Vice President, Finance and
Chief Financial Officer of Zimmer Holdings on May 1, 2007.
From December 2005 to April 2007, Mr. Crines served as
Senior Vice President, Finance, Operations and Corporate
Controller and Chief Accounting Officer. From October 2003 to
December 2005, Mr. Crines served as Senior Vice President,
Finance/Controller and Information Technology and from July 2001
to October 2003, he served as Vice President, Finance/Controller.
Mr. Davis
was appointed Vice President, Finance and Corporate
Controller and Chief Accounting Officer of Zimmer Holdings in
May 2007. He has responsibility for internal and external
reporting, planning and analysis, and corporate and business
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
unit accounting. From March 2006 to May 2007, Mr. Davis
served as Director, Financial Planning and Accounting. From
December 2003 to March 2006, Mr. Davis served as Director,
Finance, Operations and Logistics and from April 2003 to
December 2003, he served as Associate Director, Finance.
Mr. McCaulley
was appointed President, Zimmer Reconstructive in
December 2008. He has responsibility for our activities in the
reconstructive devices market, including Global Marketing and
Americas Sales. Prior to joining us, Mr. McCaulley served
as President and Chief Executive Officer of the Health Division
of Wolters Kluwer, a leading provider of scientific information
and workflow solutions for healthcare professionals, providers,
payors and the pharmaceutical industry, from November 2004 to
November 2008. Prior to joining Wolters Kluwer,
Mr. McCaulley served as Vice President and General Manager
of the Diabetes Division of Medtronic, Inc., a global leader in
medical technology, from 2002 to 2004.
Mr. Melzi
was appointed Chairman, Europe, Middle East and
Africa of Zimmer Holdings in October 2003. He is responsible for
the sales, marketing and distribution of products in the
European, Middle Eastern and African regions. From March 2000 to
October 2003, Mr. Melzi served as President, Europe/MEA.
Mr. Ooi
was appointed President, Asia Pacific of Zimmer
Holdings in December 2005. He is responsible for the sales,
marketing and distribution of products in the Asia Pacific
region, including responsibility for Japan. From September 2003
to December 2005, Mr. Ooi served as President, Australasia,
where he was responsible for operations in Asia Pacific,
excluding Japan. From September 2002 to September 2003,
Mr. Ooi served as President, Asia Pacific region.
Mr. Phipps
was appointed Senior Vice President, General Counsel
and Secretary of Zimmer Holdings in May 2007. He has global
responsibility for our legal affairs and he serves as Secretary
to the Board of Directors. Mr. Phipps also oversees our
Government Affairs, Corporate Communication and Public Relations
activities. From December 2005 to May 2007, Mr. Phipps
served as Associate General Counsel and Corporate Secretary and
from September 2003 to December 2005, he served as Associate
Counsel and Assistant Secretary.
Mr. Throdahl
was appointed Group President, Global Businesses of
Zimmer Holdings in May 2008. He is responsible for Zimmer Spine,
Zimmer Dental, Zimmer Trauma, Zimmer Orthopaedic Surgical
Products, Zimmer Computer Assisted Solutions and Accelero Health
Partners. Prior to joining us, Mr. Throdahl served as Chief
Executive Officer of Consort Medical plc (formerly Bespak plc),
a leader in medical devices for inhaled drug delivery and
anesthesia based in Milton Keynes, United Kingdom, from June
2001 to December 2007.
AVAILABLE
INFORMATION
Our Internet website address is www.zimmer.com. Our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act are available or
may be accessed free of charge through the Investor Relations
section of our Internet website as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC. Our Internet website and the information
contained therein or connected thereto are not intended to be
incorporated by reference into this Annual Report on
Form 10-K.
The following corporate governance and related documents, among
others, are available through our website or may be obtained in
print form, without charge, by request to our Investor Relations
Department: Corporate Governance Guidelines, Code of Business
Conduct, Code of Ethics for Chief Executive Officer and Senior
Financial Officers, Audit Committee Charter, Compensation and
Management Development Committee Charter, Corporate Governance
Committee Charter and Science and Technology Committee Charter.
We will post on our Internet website any substantive amendment
to, or waiver from, our Code of Ethics for Chief Executive
Officer and Senior Financial Officers or a provision of our Code
of Business Conduct that applies to any of our directors or
executive officers.
| ITEM 1A. | Risk Factors |
Risk factors which could cause actual results to differ from
our expectations and which could negatively impact our financial
condition and results of operations are discussed below and
elsewhere in this report. The risks and uncertainties described
below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that are currently
not believed to be significant to our business may also affect
our actual results and could harm our business, financial
condition and results of operations. If any of the risks or
uncertainties described below or any additional risks and
uncertainties actually occur, our business, results of
operations and financial condition could be materially and
adversely affected.
RISKS RELATED TO
OUR BUSINESS
If we fail to comply with the terms of the Deferred
Prosecution Agreement and Corporate Integrity Agreement we
entered into in September 2007, we may be subject to criminal
prosecution
and/or
exclusion from federal healthcare programs.
As previously reported, in September 2007 we settled an
investigation conducted by the United States Attorney’s
Office for the District of New Jersey (the
“U.S. Attorney”) into financial relationships
between major orthopaedic manufacturers and consulting
orthopaedic surgeons. As part of that settlement, we entered
into a Deferred Prosecution Agreement (the “DPA”) with
the U.S. Attorney and a Corporate Integrity Agreement (the
“CIA”) with the Office of Inspector General of the
Department of Health and Human Services (the
“OIG-HHS”). Copies of the DPA and CIA are filed as
exhibits to this report and a copy of the DPA is available on
our website at www.zimmer.com.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
If we do not comply with the terms of these agreements, we could
be subject to prosecution for violations of the federal
Anti-Kickback Statute that the U.S. Attorney alleges we
committed between 2002 and 2006, as well as any new or
continuing violations. We could also be subject to exclusion by
OIG-HHS from participation in federal healthcare programs,
including Medicaid and Medicare.
We could be subject to further governmental investigations or
actions by other third parties based on allegations of
wrongdoing similar to those made by the U.S. Attorney.
Our settlement with the U.S. government does not preclude
other governmental agencies or state authorities from conducting
investigations or instituting proceedings based on allegations
of wrongdoing similar to those made by the U.S. Attorney.
As previously disclosed, we are cooperating with the
U.S. Securities and Exchange Commission and the
U.S. Department of Justice with regard to an informal
investigation into 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 are also cooperating with investigative demands made by two
state attorneys general. While we believe that the pending state
investigations are not likely to have a material adverse effect
on our business or financial condition, similar investigations
by other states or governmental agencies are possible. In
addition, the settlement with the government could increase our
exposure to lawsuits by potential whistleblowers under the
federal false claims acts, based on new theories or allegations
arising from the allegations made by the U.S. Attorney. We
intend to review and take appropriate actions with respect to
any such investigations or proceedings; however, we cannot
assure that the costs of defending or resolving those
investigations or proceedings would not have a material adverse
effect on our financial condition, results of operations and
cash flows.
If we are not able to fulfill or otherwise resolve our
existing royalty and other payment obligations to healthcare
professional consultants and institutions, our ability to
maintain our existing intellectual property rights and obtain
future rights may be impaired.
We have reviewed our existing royalty agreements with healthcare
professional consultants and institutions in light of the
requirements of the DPA. Following our review, we resumed paying
royalties with respect to some of the agreements. With respect
to others, we made lump-sum payments to resolve our accrued and
future royalty obligations and secure rights to the intellectual
property. With respect to the remaining agreements, if we do not
fulfill our obligations or reach some other resolution
acceptable to the affected healthcare professional consultants
and institutions, our ability to use the intellectual property
covered by those agreements may be adversely affected. In
addition, our ability to enter into new agreements with
healthcare professional consultants or institutions for the
future acquisition of intellectual property rights may be
adversely affected.
Our 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 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 last half
of 2008. Although we resumed U.S. marketing and
distribution in August 2008, we expect the effects of this
action will continue to have a negative impact through 2009.
Following our action, product liability lawsuits and other
claims were asserted against us and we expect additional similar
claims will be asserted. In addition, we expect that our entry
into the growing U.S. hip resurfacing market has been
delayed as the
Durom
Cup had been integral to our plans
for entry into that market.
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.
Since entering into the DPA and CIA, we have devoted substantial
resources to meet our obligations under those agreements and
implemented enhancements to our global compliance program
applicable in most respects to all of our businesses on a global
basis. These efforts have not only involved significant expense,
but also required 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. 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.
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.
We believe that the disruptive effects of the product
suspensions and recalls in 2008 and the implementation of our
enhanced global compliance initiatives contributed to customer
losses during the last half of 2008. 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.
If we fail to retain the independent agents and distributors
upon whom we rely heavily to market our products, customers may
not buy our products and our revenue and profitability may
decline.
Our marketing success in the United States and abroad depends
significantly upon our agents’ and distributors’ sales
and service expertise in the marketplace. Many of these agents
have developed professional relationships with existing and
potential customers because of the agents’ detailed
knowledge of products and instruments. A loss of a significant
number of these agents could have a material adverse effect on
our business and results of operations.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
If we do not introduce new products in a timely manner, our
products may become obsolete over time, customers may not buy
our products and our revenue and profitability may decline.
Demand for our products may change, in certain cases, in ways we
may not anticipate because of:
| • | evolving customer needs; |
| • | changing demographics; |
| • | slowing industry growth rates; |
| • | declines in the reconstructive implant market; |
| • | the introduction of new products and technologies; |
| • | evolving surgical philosophies; and |
| • | evolving industry standards. |
Without the timely introduction of new products and
enhancements, our products may become obsolete over time. If
that happens, our revenue and operating results would suffer.
The success of our new product offerings will depend on several
factors, including our ability to:
| • | properly identify and anticipate customer needs; |
| • | commercialize new products in a timely manner; |
| • | manufacture and deliver instruments and products in sufficient volumes on time; |
| • | differentiate our offerings from competitors’ offerings; |
| • | achieve positive clinical outcomes for new products; |
| • | satisfy the increased demands by healthcare payors, providers and patients for shorter hospital stays, faster post-operative recovery and lower-cost procedures; |
| • | innovate and develop new materials, product designs and surgical techniques; and |
| • | provide adequate medical education relating to new products. |
In addition, new materials, product designs and surgical
techniques that we develop may not be accepted quickly, in some
or all markets, because of, among other factors:
| • | entrenched patterns of clinical practice; |
| • | the need for regulatory clearance; and |
| • | uncertainty with respect to third-party reimbursement. |
Moreover, innovations generally require a substantial investment
in research and development before we can determine their
commercial viability and we may not have the financial resources
necessary to fund the production. In addition, even if we are
able to successfully develop enhancements or new generations of
our products, these enhancements or new generations of products
may not produce revenue in excess of the costs of development
and they may be quickly rendered obsolete by changing customer
preferences or the introduction by our competitors of products
embodying new technologies or features.
We conduct a significant amount of our sales activity outside
of the United States, which subjects us to additional business
risks and may cause our profitability to decline due to
increased costs.
We sell our products in more than 100 countries and derive more
than 40% of our net sales from outside the United States.
We intend to continue to pursue growth opportunities in sales
internationally, which could expose us to additional risks
associated with international sales and operations. Our
international operations are, and will continue to be, subject
to a number of risks and potential costs, including:
| • | changes in foreign medical reimbursement policies and programs; |
| • | unexpected changes in foreign regulatory requirements; |
| • | differing local product preferences and product requirements; |
| • | fluctuations in foreign currency exchange rates; |
| • | diminished protection of intellectual property in some countries outside of the United States; |
| • | trade protection measures and import or export requirements that may prevent us from shipping products to a particular market and may increase our operating costs; |
| • | foreign exchange controls that might prevent us from repatriating cash earned in countries outside the United States; |
| • | complex data privacy requirements and labor relations laws; |
| • | extraterritorial effects of U.S. laws such as the Foreign Corrupt Practices Act; |
| • | difficulty in staffing and managing foreign operations; |
| • | labor force instability; |
| • | potentially negative consequences from changes in tax laws; and |
| • | political and economic instability. |
Violations of foreign laws or regulations could result in fines,
criminal sanctions against us, our officers or our employees,
prohibitions on the conduct of our business and damage to our
reputation.
We are subject to risks arising from currency exchange rate
fluctuations, which can increase our costs, cause our
profitability to decline and expose us to counterparty risks.
A substantial portion of our foreign revenues are generated in
Europe and Japan. The United States dollar value of our
foreign-generated revenues varies with currency exchange rate
fluctuations. Significant increases in the value of the United
States dollar relative to the Euro or the Japanese Yen, as well
as other currencies, could have a material adverse effect on our
results of operations. Although we address currency risk
management through regular operating and financing activities,
and, on a limited basis, through the use of derivative financial
instruments, those actions may not prove to be fully effective.
The current global economic crisis has generally increased the
risk of entering into derivative financial instruments, even if
major international financial institutions act as counterparties.
We may fail to adequately protect our proprietary technology
and other intellectual property, which would allow competitors
or others to take advantage of our research and development
efforts.
Our long-term success largely depends on our ability to market
technologically competitive products. If we fail to obtain or
maintain adequate intellectual property protection, we may not
be able to prevent third parties from using our proprietary
technologies. Also, our currently pending or future patent
applications may not result in issued patents, and issued
patents are subject to claims concerning priority, scope and
other issues.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
The United States Patent and Trademark Office and the courts
have not consistently treated the breadth of claims allowed or
interpreted in orthopaedic reconstructive implant and
biotechnology patents. Future changes in, or unexpected
interpretations of, the patent laws may adversely affect our
ability to enforce our patent position.
In addition, intellectual property rights may be unavailable or
of limited effect in some foreign countries. If we do not obtain
sufficient international protection for our intellectual
property, our competitiveness in international markets could be
impaired, which could limit our growth and revenue.
We also attempt to protect our trade secrets, proprietary
know-how and continuing technological innovation with security
measures, including the use of confidentiality agreements with
our employees, consultants, and collaborators. These measures
may prove to be ineffective and any remedies available to us may
be insufficient to compensate our damages.
We may be subject to intellectual property litigation and
infringement claims, which could cause us to incur significant
expenses or prevent us from selling our products.
A successful claim of patent or other intellectual property
infringement against us could adversely affect our growth and
profitability, in some cases materially. From time to time, we
receive notices from third parties of potential infringement and
receive claims of potential infringement. We may be unaware of
intellectual property rights of others that may cover some of
our technology. If someone claims that our products infringed
their intellectual property rights, any resulting litigation
could be costly and time consuming and would divert the
attention of management and key personnel from other business
issues. If we were to lose such litigation involving material
intellectual property rights, we may be unable to manufacture,
sell or use some of our products.
We may make additional acquisitions or enter into strategic
alliances that could increase our costs or liabilities or be
disruptive.
We intend to continue to look for additional strategic
acquisitions of other businesses that are complementary to our
businesses and other companies with whom we could form strategic
alliances or enter into other arrangements to develop or exploit
intellectual property rights. These activities involve risks,
including the following:
| • | we may need to divert more management resources to integration than we planned, which may adversely affect our ability to pursue other more profitable activities; |
| • | the difficulties of integrating acquired businesses may be increased if we need to integrate geographically separated organizations, personnel with disparate business backgrounds and companies with different corporate cultures; |
| • | we may not recognize expected cost savings from acquisitions or the anticipated benefits of strategic alliances; |
| • | our acquisition candidates or strategic partners may have unexpected liabilities or prove unable to meet their obligations to us or the joint venture; and |
| • | the priorities of our strategic partners may prove incompatible with ours. |
We depend on a limited number of suppliers for some key raw
materials and outsourced activities.
We use a number of suppliers for raw materials that we need to
manufacture our products and to outsource some key manufacturing
activities. These suppliers must provide the materials and
perform the activities to our standards for us to meet our
quality and regulatory requirements. Some key raw materials and
outsourced activities can only be obtained from a single source
or a limited number of sources. A prolonged disruption or other
inability to obtain these materials or outsource key
manufacturing activities could materially and adversely affect
our ability to satisfy demand for our products.
We are subject to putative stockholder class action lawsuits
that could be costly to defend and distracting to management.
We and a number of our related parties are defending putative
stockholder class action lawsuits alleging violations of the
securities laws, breaches of fiduciary duties or violations of
the federal Employee Retirement Income Security Act of 1974
arising out of trading or ownership of our common stock. We
believe these lawsuits are without merit, and we intend to
defend them vigorously. We may incur significant expenses
associated with the defense of these lawsuits, however, and the
necessary participation of our executive officers could detract
from their ability to devote their full time and attention to
our business operations.
RISKS RELATED TO
OUR INDUSTRY
The ongoing informal investigation by the
U.S. Securities and Exchange Commission 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 could have a material adverse effect
on our business, financial condition and cash flows.
We are cooperating fully with the U.S. Securities and
Exchange Commission and the U.S. Department of Justice with
regard to an ongoing informal investigation of 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. Although we have adopted policies
and procedures designed to prevent improper payments and we
train our employees, distributors and others concerning these
issues, we cannot assure that violations of these requirements
will not occur. If we are found to have violated the Foreign
Corrupt Practices Act, we may face sanctions including fines,
criminal penalties, disgorgement of profits and suspension or
debarment of our ability to contract with governmental agencies
or receive export licenses.
We are subject to healthcare fraud and abuse regulations on
an ongoing basis that could require us to change our business
practices and restrict our operations in the future.
Our industry is subject to various federal and state laws
pertaining to healthcare fraud and abuse, including false claims
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
laws, the federal Anti-Kickback Statute, similar state laws and
physician self-referral laws. Violations of these laws are
punishable by criminal
and/or
civil
sanctions, including, in some instances, fines, imprisonment
and, within the United States, exclusion from participation in
government healthcare programs, including Medicare, Medicaid and
Veterans Administration (VA) health programs. The interpretation
and enforcement of these laws and regulations are uncertain and
subject to rapid change.
If third-party payors decline to reimburse our customers for
our products or reduce reimbursement levels, the demand for our
products may decline and our ability to sell our products
profitably may be harmed.
We sell our products and services to hospitals, doctors,
dentists and other healthcare providers, all of which receive
reimbursement for the healthcare services provided to their
patients from third-party payors, such as domestic and
international government programs, private insurance plans and
managed care programs. These third-party payors may deny
reimbursement if they determine that a device used in a
procedure was not in accordance with cost-effective treatment
methods, as determined by the third-party payor, or was used for
an unapproved indication. Third-party payors may also decline to
reimburse for experimental procedures and devices. If our
products are not considered cost-effective by third-party
payors, our customers may not be reimbursed for our products.
In addition, third-party payors are increasingly attempting to
contain healthcare costs by limiting both coverage and the level
of reimbursement for medical products and services. If
third-party payors reduce reimbursement levels to hospitals and
other healthcare providers for our products, demand for our
products may decline or we may experience pressure to reduce the
prices of our products, which could have a material adverse
effect on our sales and results of operations.
We have also experienced downward pressure on product pricing
and other effects of healthcare reform in our international
markets. If key participants in government healthcare systems
reduce the reimbursement levels for our products, our sales and
results of operations may be adversely affected.
The ongoing cost-containment efforts of healthcare purchasing
organizations may have a material adverse effect on our results
of operations.
Many customers for our products have formed group purchasing
organizations in an effort to contain costs. Group purchasing
organizations negotiate pricing arrangements with medical supply
manufacturers and distributors, and these negotiated prices are
made available to a group purchasing organization’s
affiliated hospitals and other members. If we are not one of the
providers selected by a group purchasing organization,
affiliated hospitals and other members may be less likely to
purchase our products, and, if the group purchasing organization
has negotiated a strict compliance contract for another
manufacturer’s products, we may be precluded from making
sales to members of the group purchasing organization for the
duration of the contractual arrangement. Our failure to respond
to the cost-containment efforts of group purchasing
organizations may cause us to lose market share to our
competitors and could have a material adverse effect on our
sales and results of operations.
Continuing weakness in the global economy is likely to
adversely affect our business until an economic recovery is
underway.
A significant portion of our products are used in procedures
covered by private insurance, many of which, including
procedures using our dental products, may be considered elective
procedures. We expect the current global economic crisis is
likely to reduce the availability or affordability of private
insurance or may impact patient decisions to have an elective
procedure performed. If current economic conditions continue or
worsen, we expect that increasing levels of unemployment and
pressures to contain healthcare costs could adversely affect the
global growth rate of hip and knee procedure volume, which could
have a material adverse effect on our sales and results of
operations.
Our success depends on our ability to effectively develop and
market our products against those of our competitors.
We operate in a highly competitive environment. Our present or
future products could be rendered obsolete or uneconomical by
technological advances by one or more of our present or future
competitors or by other therapies, including orthobiological
therapies. To remain competitive, we must continue to develop
and acquire new products and technologies. Competition is
primarily on the basis of:
| • | technology; |
| • | innovation; |
| • | quality; |
| • | reputation; and |
| • | customer service. |
In markets outside of the United States, other factors influence
competition as well, including:
| • | local distribution systems; |
| • | complex regulatory environments; and |
| • | differing medical philosophies and product preferences. |
Our competitors may:
| • | have greater financial, marketing and other resources than us; |
| • | respond more quickly to new or emerging technologies; |
| • | undertake more extensive marketing campaigns; |
| • | adopt more aggressive pricing policies; or |
| • | be more successful in attracting potential customers, employees and strategic partners. |
Any of these factors, alone or in combination, could cause us to
have difficulty maintaining or increasing sales of our products.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
We and our customers are subject to various governmental
regulations relating to the manufacturing, labeling and
marketing of our products and we may incur significant expenses
to comply with these regulations and develop products compatible
with these regulations.
The medical devices we design, develop, manufacture and market
are subject to rigorous regulation by the FDA and numerous other
federal, state and foreign governmental authorities. The process
of obtaining regulatory approvals to market a medical device can
be costly and time consuming and approvals might not be granted
for future products on a timely basis, if at all. Delays in
receipt of, or failure to obtain, approvals for future products
could result in delayed realization of product revenues or in
substantial additional costs.
In addition, if we fail to comply with applicable material
regulatory requirements, including, for example, the Quality
System Regulation, recordkeeping regulations, labeling
requirements and adverse event reporting regulations, we may be
subject to a range of sanctions including:
| • | warning letters; |
| • | fines or civil penalties; |
| • | injunctions; |
| • | repairs, replacements or refunds; |
| • | recalls or seizures of products; |
| • | total or partial suspension of production; |
| • | the FDA’s refusal to grant future premarket clearances or approvals; |
| • | withdrawals or suspensions of current product applications; and |
| • | criminal prosecution. |
Our products and operations are also often subject to the rules
of industrial standards bodies, such as the International
Standards Organization. If we fail to adequately address any of
these regulations, our business will be harmed.
We may incur product liability losses, and insurance coverage
may be inadequate or unavailable to cover these losses.
In the ordinary course of business, we are the subject of
product liability lawsuits alleging that component failures,
manufacturing flaws, design defects or inadequate disclosure of
product-related risks or product-related information resulted in
an unsafe condition or injury to patients. Product liability
lawsuits and claims, safety alerts or product recalls,
regardless of their ultimate outcome, could have a material
adverse effect on our business and reputation and on our ability
to attract and retain customers.
Although we maintain third-party product liability insurance
coverage, it is possible that claims against us may exceed the
coverage limits of our insurance policies or cause us to record
a self-insured loss. Even if any product liability loss is
covered by an insurance policy, these policies typically have
substantial retentions or deductibles that we are responsible
for. Product liability claims in excess of applicable insurance
could have a material adverse effect on our business, financial
condition and results of operations.
| ITEM 1B. | Unresolved Staff Comments |
Not Applicable.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| ITEM 2. | Properties |
We have the following properties:
| Location | Use | Owned/Leased | Square Feet | |||||
|
Warsaw, Indiana
|
Research & Development, Manufacturing, Warehousing, Marketing & Administration | Owned | 1,400,000 | |||||
|
Warsaw, Indiana
|
Corporate Headquarters & The Zimmer Institute | Owned | 117,000 | |||||
|
Warsaw, Indiana
|
Offices, Manufacturing & Warehousing | Leased | 90,000 | |||||
|
Carlsbad, California
|
Offices, Research & Development & Manufacturing | Leased | 118,000 | |||||
|
Minneapolis, Minnesota
|
Offices & Research & Development | Owned | 51,000 | |||||
|
Cedar Knolls, New Jersey
|
Manufacturing & Warehousing | Leased | 23,000 | |||||
|
Parsippany, New Jersey
|
Research & Development, Manufacturing & Warehousing | Leased | 115,000 | |||||
|
Statesville, North Carolina
|
Manufacturing & Warehousing | Owned | 156,000 | |||||
|
Dover, Ohio
|
Offices, Research & Development & Manufacturing | Owned | 140,000 | |||||
|
Dover, Ohio
|
Warehousing | Leased | 61,000 | |||||
|
Memphis, Tennessee
|
Offices & Warehousing | Leased | 30,000 | |||||
|
Austin, Texas
|
Offices, Research & Development & Distribution | Leased | 97,000 | |||||
|
Sydney, Australia
|
Offices & Warehousing | Leased | 36,000 | |||||
|
Vienna, Austria
|
Offices & Warehousing | Leased | 15,000 | |||||
|
Wemmel, Belgium
|
Offices & Warehousing | Leased | 15,000 | |||||
|
Mississauga, Canada
|
Offices & Warehousing | Leased | 52,000 | |||||
|
Shanghai, China
|
Offices & Warehousing | Leased | 18,000 | |||||
|
Etupes, France
|
Offices, Manufacturing & Warehousing | Owned | 90,000 | |||||
|
Freiburg, Germany
|
Offices & Warehousing | Leased | 51,000 | |||||
|
Kiel, Germany
|
Offices & Warehousing | Leased | 21,000 | |||||
|
Shannon, Ireland
|
Offices, Manufacturing & Warehousing | Owned | 125,000 | |||||
|
Milan, Italy
|
Offices & Warehousing | Leased | 47,000 | |||||
|
Gotemba, Japan
|
Offices, Service Center & Warehousing | Owned | 87,000 | |||||
|
Tokyo, Japan
|
Offices & Warehousing | Leased | 24,000 | |||||
|
Seoul, Korea
|
Offices & Warehousing | Leased | 22,000 | |||||
|
Utrecht, Netherlands
|
Offices & Warehousing | Leased | 16,000 | |||||
|
Ponce, Puerto Rico
|
Offices, Manufacturing & Warehousing | Owned | 213,000 | |||||
|
Singapore
|
Offices & Warehousing | Leased | 10,000 | |||||
|
Barcelona, Spain
|
Offices & Warehousing | Leased | 16,000 | |||||
|
Baar, Switzerland
|
Warehousing | Leased | 40,000 | |||||
|
Winterthur, Switzerland
|
Offices, Research & Development & Manufacturing | Leased | 358,000 | |||||
|
Münsingen, Switzerland
|
Offices & Warehousing | Owned | 76,000 | |||||
|
Swindon, United Kingdom
|
Offices & Warehousing | Leased | 70,000 | |||||
We began construction of our new 125,000 square feet
Shannon, Ireland facility in 2008 and expect to begin
manufacturing operations at this facility in the second half of
2009. In an effort to expand our global distribution network, we
have begun construction on a 130,000 square feet warehouse
facility in Eschbach, Germany. We expect to begin utilizing this
facility in the second half of 2009. We believe the current
facilities, including manufacturing, warehousing, research and
development and office space, together with the planned
expansion provide sufficient capacity to meet ongoing demands.
Once a facility reaches 85 percent utilization, we examine
alternatives for either expanding that facility or acquiring new
facilities to meet our ongoing demands.
In addition to the above, we maintain more than 100 other
offices and warehouse facilities in more than 25 countries
around the world, including the United States, Japan, Australia,
France, Russia, India, Germany, Italy, Switzerland and China. We
believe that all of the facilities and equipment are in good
condition, well maintained and able to operate at present levels.
| ITEM 3. | Legal Proceedings |
Information pertaining to legal proceedings can be found in
Note 16 to the Consolidated Financial Statements, which are
included in this report under Item 8.
| ITEM 4. | Submission of Matters to a Vote of Security Holders |
Not Applicable.
19
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| ITEM 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is traded on the New York Stock Exchange and
the SWX Swiss Exchange under the symbol “ZMH.” The
high and low sales prices for our common stock on the New York
Stock Exchange for the calendar quarters of fiscal years 2008
and 2007 are set forth as follows:
| Quarterly High-Low Share Prices | High | Low | ||||||
|
Year Ended December 31, 2008:
|
||||||||
|
First Quarter
|
$ | 79.78 | $ | 63.80 | ||||
|
Second Quarter
|
$ | 80.92 | $ | 66.12 | ||||
|
Third Quarter
|
$ | 74.55 | $ | 60.41 | ||||
|
Fourth Quarter
|
$ | 66.42 | $ | 34.10 | ||||
|
Year Ended December 31, 2007:
|
||||||||
|
First Quarter
|
$ | 88.18 | $ | 76.90 | ||||
|
Second Quarter
|
$ | 94.38 | $ | 83.67 | ||||
|
Third Quarter
|
$ | 91.00 | $ | 75.14 | ||||
|
Fourth Quarter
|
$ | 85.91 | $ | 63.00 | ||||
We have not declared or paid dividends on our common stock since
becoming a public company on August 6, 2001. Currently, we
do not anticipate paying any cash dividends on the common stock
in the foreseeable future. Our credit facility also restricts
the payment of dividends under certain circumstances.
The number of beneficial owners of our common stock on
February 13, 2009 was approximately 470,800. On
February 13, 2009, the closing price of the common stock,
as reported on the New York Stock Exchange, was $41.06 per share.
The information required by this Item concerning equity
compensation plans is incorporated by reference to Item 12
of this report.
The following table summarizes repurchases of common stock
settled during the three months ended December 31, 2008:
|
Total Number of
Shares
|
Approximate Dollar
Value of
|
|||||||||||||||
|
Purchased as Part
of
|
Shares that May Yet
Be
|
|||||||||||||||
|
Total Number of
|
Average Price
|
Publicly Announced
Plans
|
Purchased Under
Plans
|
|||||||||||||
| Shares Purchased | Paid per Share | or Programs (1) | or Programs | |||||||||||||
|
October 2008
|
1,189,100 | $ | 40.47 | 30,066,500 | $ | 1,134,346,296 | ||||||||||
|
November 2008
|
– | – | – | – | ||||||||||||
|
December 2008
|
– | – | – | – | ||||||||||||
|
Total
|
1,189,100 | $ | 40.47 | 30,066,500 | $ | 1,134,346,296 | ||||||||||
| (1) | 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. |
20
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| ITEM 6. | Selected Financial Data |
The financial information for each of the past five years ended
December 31 is set forth below (in millions, except per share
amounts):
| Summary of Operations | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||
|
Net sales
|
$ | 4,121.1 | $ | 3,897.5 | $ | 3,495.4 | $ | 3,286.1 | $ | 2,980.9 | ||||||||||
|
Net earnings
|
848.6 | 773.2 | 834.5 | 732.5 | 541.8 | |||||||||||||||
|
Earnings per common share
|
||||||||||||||||||||
|
Basic
|
$ | 3.73 | $ | 3.28 | $ | 3.43 | $ | 2.96 | $ | 2.22 | ||||||||||
|
Diluted
|
3.72 | 3.26 | 3.40 | 2.93 | 2.19 | |||||||||||||||
|
Average common shares outstanding
|
||||||||||||||||||||
|
Basic
|
227.3 | 235.5 | 243.0 | 247.1 | 244.4 | |||||||||||||||
|
Diluted
|
228.3 | 237.5 | 245.4 | 249.8 | 247.8 | |||||||||||||||
|
Balance Sheet Data
|
||||||||||||||||||||
|
Total assets
|
$ | 7,239.0 | $ | 6,633.7 | $ | 5,974.4 | $ | 5,721.9 | $ | 5,695.5 | ||||||||||
|
Short-term debt
|
– | – | – | – | 27.5 | |||||||||||||||
|
Long-term debt
|
460.1 | 104.3 | 99.6 | 81.6 | 624.0 | |||||||||||||||
|
Other long-term obligations
|
353.9 | 328.4 | 323.4 | 348.3 | 420.9 | |||||||||||||||
|
Stockholders’ equity
|
5,650.3 | 5,449.6 | 4,920.5 | 4,682.8 | 3,942.5 | |||||||||||||||
21
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and the
corresponding notes included elsewhere in this
Form 10-K.
OVERVIEW
We are a global leader in the design, development, manufacture
and marketing of orthopaedic and dental reconstructive implants,
spinal implants, trauma products and related surgical products
(sometimes referred to in this report as “OSP”). We
also provide other healthcare related services. Orthopaedic
reconstructive 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 who have lost teeth due to trauma or
disease. Spinal implants are utilized by orthopaedic surgeons
and neurosurgeons in the treatment of degenerative diseases,
deformities and trauma in all regions of the spine. Trauma
products are devices used primarily to reattach or stabilize
damaged bone and tissue to support the body’s natural
healing process. OSP include supplies and instruments designed
to aid in 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 this discussion and analysis
are calculated from the underlying whole-dollar amounts and
therefore may not recalculate from the rounded numbers used for
disclosure purposes. Certain amounts in the 2007 and 2006
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 years ended December 31, 2007 and 2006 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 year ended December 31, 2008.
Demand (Volume
and Mix) Trends
Increased volume and changes in the mix of product sales
contributed 3 percentage points of 2008 sales growth, which
is 6 percentage points below the rate of growth from 2007
compared to 2006. We estimate that the orthopaedic procedure
volume market growth rate on a global basis will be in the mid
single digits in the coming years driven by an aging global
population, obesity and more active lifestyles, among other
factors. In addition, the continued shift in demand to premium
products, such as
Longevity
,
Durasul
and
Prolong
Highly Crosslinked Polyethylenes,
Trabecular
Metal
Technology products, high-flex knees, knee revision
products and porous hip stems, continue to positively affect
sales growth. Our 2008 increase of 3 percentage points
decreased from 2007 and was lower than market growth due to the
factors discussed below.
Pricing Trends
Selling prices were flat during 2008, which is similar to 2007
when compared to 2006. Asia Pacific selling prices decreased
3 percentage points for the year ended December 31,
2008, compared to a 1 percent decrease in 2007 when
compared to 2006. Japan and Australia reported 4 percent
and 3 percent decreases, respectively, in average selling
prices as a result of scheduled reductions in reimbursement
prices. Japan and Australia combined represent approximately
10 percent of our sales. Selling prices in the Americas
were flat during 2008, compared to a 1 percent increase in
2007. In Europe, selling prices for 2008 were flat, compared to
a 1 percent decrease in 2007. With the effect of
governmental healthcare cost containment efforts and pressure
from group purchasing organizations, we expect global selling
prices to remain flat in 2009.
Foreign Currency
Exchange Rates
For 2008, foreign currency exchange rates had a positive
3 percent effect on global sales growth. If foreign
currency exchange rates remain consistent with the year end
rates, we estimate that a stronger dollar versus foreign
currency exchange rates will have a negative effect in 2009 of
approximately 4 percent on sales. We address currency risk
through regular operating and financing activities, and, under
appropriate circumstances and subject to proper authorization,
through the use of forward contracts and 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 and options, which
are recorded in cost of products sold, the effect on net
earnings in the near term is expected to be minimal.
Abbott Spine
Acquisition
In October 2008, we acquired Abbott Spine, previously a
subsidiary of Abbott Laboratories, for approximately
$360 million. The purchase price was funded by a
combination of cash on hand and borrowings under existing credit
facilities. This investment adds a number of innovative products
and helps build toward critical mass in the Spine product
category. The acquisition also enhances our research and
development capabilities in the Spine product category and
strengthens our sales coverage. We recorded $48.7 million
of acquisition and integration costs in 2008 as a result of this
transaction, including $38.5 million of in-process research
and development expense. For more information regarding the
acquisition of Abbott Spine, see Note 4 to the consolidated
financial statements included elsewhere in this
Form 10-K.
22
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Compliance-Related
Matters
In September 2007, we and other major U.S. orthopaedic
manufacturers reached a settlement with the U.S. government
to resolve claims related to an investigation into financial
relationships between the industry and consulting orthopaedic
surgeons. We paid the government $169.5 million and entered
into a Deferred Prosecution Agreement (DPA) under which we will
remain subject to oversight by a federally-appointed monitor
through March 27, 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 16
to the consolidated financial statements included elsewhere in
this
Form 10-K.
We did not record any tax benefit related to the
$169.5 million payment in 2007. During 2008, we reached an
agreement with the U.S. Internal Revenue Service confirming
the deductibility of a portion of the payment and recorded a
current tax benefit of $31.7 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 12 to the consolidated financial
statements included elsewhere in this
Form 10-K.
We have developed and substantially implemented enhanced global
compliance initiatives which address 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 those principles
are being applied in most respects to all product segments and
reach all worldwide operations. Costs related to the DPA, CIA
and the enhanced compliance initiatives in 2008 were
approximately $60 million, including the fees incurred for
the federally-appointed monitor.
Durom Acetabular
Component
In July 2008, we temporarily suspended 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 an enhanced surgical training program
in the U.S. We resumed marketing and distribution of the
Durom
Cup in the U.S. in August 2008.
During 2008, we received claims from a number of
Durom
Cup patients seeking reimbursement for costs and payments
for alleged pain and suffering and we expect to receive
additional similar claims. We recorded a provision for certain
claims of $69.0 million in 2008, which represents
management’s 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 product liability accruals.
We believe we lost 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 U.S. hip
resurfacing market has been hindered or delayed as the
Durom
Cup had previously been integral to our plans for entry into
that market.
Orthopaedic
Surgical Products (OSP) Actions
In the first half of 2008, we initiated voluntary product
recalls of certain OSP patient care products manufactured at our
Dover, Ohio facility that we determined did not meet internal
quality standards and we temporarily suspended production and
sales of certain OSP products manufactured at the Dover
facility. We estimate that these actions adversely impacted 2008
OSP revenues by approximately $70 million and 2008 diluted
earnings per share by $0.18 including related inventory charges,
idle plant costs and other non-recurring charges. We expect to
have a significant portion of these products back in production
in the first quarter of 2009, with most other products coming
back into production in the second quarter of 2009.
Impact of
Disruptive Events on Market Share
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 initiatives, we
have suffered customer losses during 2008. We estimate that
these customer losses reduced our knee and hip market share by
1.5 to 2.0 percent as measured from fourth quarter results.
We expect our sales growth to be at a rate slower than the
market in the near term due to these disruptive factors.
2009 Outlook
We expect conditions in the broader economy will result in a
temporary slowdown in elective hospital procedures. Although
many of our products are used in elective procedures, we believe
our core knee and hip franchises remain more insulated than most
from swings in the broader economy because the need for these
procedures does not diminish, even if the timing is affected.
We expect to experience further customer losses in 2009
affecting our knee and hip market share as a result of the
ongoing effects of the disruptive factors discussed above. Our
assumption is that share loss should stabilize by year-end 2009,
as we anniversary out of the majority of the 2008 customer and
product-related losses, and as we launch new products in
sufficient quantities to recover some of the product-related
losses.
Among our other product categories, we expect extremities and
trauma sales growth to be in line with market growth rates. We
expect dental revenues to reflect the weak economic environment
and to underperform relative to market growth rates given
company-specific operational challenges. Finally, we expect
spine revenues to increase as a result of the Abbott Spine
acquisition and reflect sales dis-synergies associated with the
ongoing integration of the two businesses.
23
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
In 2009, our operating expenses will be impacted by a number of
factors, which in the aggregate are expected to result in a
modest net decrease in total expense compared to 2008. We expect
to realize significant savings from third-party fees related to
compliance with the DPA and the implementation of our enhanced
compliance initiatives, Durom-related certain claims and
acquisition, integration and other expenses. For 2009, however,
we intend to partially offset those savings with increased
spending in areas that suffered disruption in 2008, including
product development and medical education. We also continue to
step-up
our
level of spending on quality systems to achieve our continuous
improvement objectives in the areas of design and process
control as well as ongoing product surveillance.
RESULTS OF
OPERATIONS
Year Ended
December 31, 2008 Compared to Year Ended December 31,
2007
| Net Sales by Operating Segment |
The following table presents net sales by operating segment and
the components of the percentage changes (dollars in millions):
| Year Ended December 31, |
Volume/
|
Foreign
|
||||||||||||||||||||||
| 2008 | 2007 | % Inc | Mix | Price | Exchange | |||||||||||||||||||
|
Americas
|
$ | 2,353.9 | $ | 2,277.0 | 3 | % | 3 | % | – | % | – | % | ||||||||||||
|
Europe
|
1,179.1 | 1,081.0 | 9 | 4 | – | 5 | ||||||||||||||||||
|
Asia Pacific
|
588.1 | 539.5 | 9 | 5 | (3 | ) | 7 | |||||||||||||||||
|
Total
|
$ | 4,121.1 | $ | 3,897.5 | 6 | 3 | – | 3 | ||||||||||||||||
“Foreign Exchange” as used in the tables in this
report represents the effect of changes in foreign exchange
rates on sales growth.
| Net Sales by Product Category |
The following table presents net sales by product category and
the components of the percentage changes (dollars in millions):
| Year Ended December 31, |
Volume/
|
Foreign
|
||||||||||||||||||||||
| 2008 | 2007 | % Inc (Dec) | Mix | Price | Exchange | |||||||||||||||||||
|
Reconstructive
|
||||||||||||||||||||||||
|
Knees
|
$ | 1,763.0 | $ | 1,634.6 | 8 | % | 7 | % | (1 | )% | 2 | % | ||||||||||||
|
Hips
|
1,279.5 | 1,221.4 | 5 | 2 | (1 | ) | 4 | |||||||||||||||||
|
Extremities
|
121.0 | 104.0 | 16 | 14 | 1 | 1 | ||||||||||||||||||
|
Dental
|
227.5 | 221.0 | 3 | – | 1 | 2 | ||||||||||||||||||
|
Total
|
3,391.0 | 3,181.0 | 7 | 5 | (1 | ) | 3 | |||||||||||||||||
|
Trauma
|
221.4 | 205.8 | 8 | 4 | 1 | 3 | ||||||||||||||||||
|
Spine
|
230.6 | 197.0 | 17 | 14 | 2 | 1 | ||||||||||||||||||
|
OSP and other
|
278.1 | 313.7 | (11 | ) | (14 | ) | – | 3 | ||||||||||||||||
|
Total
|
$ | 4,121.1 | $ | 3,897.5 | 6 | 3 | – | 3 | ||||||||||||||||
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
Gender Solutions Natural-Knee
Flex System 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 was
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. 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.
As a result of the disruptive factors discussed above, we
suffered customer losses during 2008. We estimate that these
customer losses reduced our knee and hip market share by 1.5 to
2.0 percent as measured from fourth quarter results. We
expect to experience further customer losses in 2009 as a result
of the ongoing effects of these disruptive factors.
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
24
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
System and the
Trinica
Select Anterior Cervical Plate
System led spine sales, which also reflect an increase as a
result of the Abbott Spine acquisition. 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.
The following table presents estimated* 2008 global market size
and market share information (dollars in billions):
|
Global
|
Zimmer
|
Zimmer
|
||||||||||||||
|
Market
|
Global Market
|
Market
|
Market
|
|||||||||||||
| Size | % Growth** | Share | Position | |||||||||||||
|
Reconstructive
|
||||||||||||||||
|
Knees
|
$ | 6.4 | 8 | % | 27 | % | 1 | |||||||||
|
Hips
|
5.7 | 6 | 22 | 1 | ||||||||||||
|
Extremities
|
0.8 | 13 | 14 | 3 | ||||||||||||
|
Dental
|
3.2 | 7 | 7 | 4 | ||||||||||||
|
Total
|
$ | 16.1 | 7 | 21 | 1 | |||||||||||
|
Trauma
|
$ | 4.1 | 10 | 5 | 5 | |||||||||||
|
Spine***
|
$ | 6.8 | 10 | 3 | 5 | |||||||||||
| * | Estimates based on competitor annual filings, Wall Street equity research and Company estimates |
| ** | Excludes the effect of changes in foreign exchange rates on sales growth |
| *** | Spine includes related orthobiologics |
| Americas Net Sales |
The following table presents Americas net sales (dollars in
millions):
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | % Inc (Dec) | ||||||||||
|
Reconstructive
|
||||||||||||
|
Knees
|
$ | 1,089.8 | $ | 1,029.8 | 6 | % | ||||||
|
Hips
|
576.1 | 568.3 | 1 | |||||||||
|
Extremities
|
88.1 | 73.9 | 19 | |||||||||
|
Dental
|
114.9 | 118.9 | (3 | ) | ||||||||
|
Total
|
1,868.9 | 1,790.9 | 4 | |||||||||
|
Trauma
|
125.8 | 122.9 | 2 | |||||||||
|
Spine
|
181.3 | 160.3 | 13 | |||||||||
|
OSP and other
|
177.9 | 202.9 | (12 | ) | ||||||||
|
Total
|
$ | 2,353.9 | $ | 2,277.0 | 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
Gender
Solutions Natural-Knee
Flex System 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 was
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.
As a result of the disruptive factors discussed above, we
suffered customer losses during 2008. These customer losses
negatively impacted sales growth, primarily in the knee and hip
product segments. We expect to experience further customer
losses in 2009 as a result of the ongoing effects of these
disruptive factors.
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 initiatives 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, which also reflect an
increase as a result of the Abbott Spine acquisition. 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.
| Europe Net Sales |
The following table presents Europe net sales (dollars
in millions):
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | % Inc (Dec) | ||||||||||
|
Reconstructive
|
||||||||||||
|
Knees
|
$ | 452.6 | $ | 407.8 | 11 | % | ||||||
|
Hips
|
493.9 | 459.9 | 7 | |||||||||
|
Extremities
|
25.8 | 23.2 | 11 | |||||||||
|
Dental
|
82.2 | 71.3 | 15 | |||||||||
|
Total
|
1,054.5 | 962.2 | 10 | |||||||||
|
Trauma
|
47.4 | 41.1 | 16 | |||||||||
|
Spine
|
40.1 | 31.2 | 29 | |||||||||
|
OSP and other
|
37.1 | 46.5 | (20 | ) | ||||||||
|
Total
|
$ | 1,179.1 | $ | 1,081.0 | 9 | |||||||
Changes in foreign exchange rates positively affected both knee
and hip sales by 5 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, led knee sales 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.
As a result of the disruptive factors discussed above, we
suffered customer losses during 2008. These customer losses
negatively impacted sales growth, primarily in the knee and hip
product segments. We expect to experience further customer
losses in 2009 as a result of the ongoing effects of these
disruptive factors.
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
25
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
trauma sales, which were offset by weaker sales of our
intramedullary fixation systems. The
Dynesys
Dynamic
Stabilization System and the
Optima
tm5
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.
| Asia Pacific Net Sales |
The following table presents Asia Pacific net sales (dollars in
millions):
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | % Inc (Dec) | ||||||||||
|
Reconstructive
|
||||||||||||
|
Knees
|
$ | 220.6 | $ | 197.0 | 12 | % | ||||||
|
Hips
|
209.5 | 193.2 | 8 | |||||||||
|
Extremities
|
7.1 | 6.9 | 3 | |||||||||
|
Dental
|
30.4 | 30.8 | (1 | ) | ||||||||
|
Total
|
467.6 | 427.9 | 9 | |||||||||
|
Trauma
|
48.2 | 41.8 | 15 | |||||||||
|
Spine
|
9.2 | 5.5 | 65 | |||||||||
|
OSP and other
|
63.1 | 64.3 | (2 | ) | ||||||||
|
Total
|
$ | 588.1 | $ | 539.5 | 9 | |||||||
Changes in foreign exchange rates positively affected knee sales
by 6 percent and hip sales by 8 percent. Reported
decreases in average selling prices negatively affected both
knee 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 also made strong
contributions to 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.
As a result of the disruptive factors discussed above, we
suffered customer losses during 2008. These customer losses
negatively impacted sales growth, primarily in the knee and hip
product segments. We expect to experience further customer
losses in 2009 as a result of the ongoing effects of these
disruptive factors.
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 75.8 percent
in 2008, compared to 77.5 percent in 2007. The following
table reconciles the gross margin for 2007 to 2008:
|
Year ended December 31, 2007 gross margin
|
77.5 | % | ||
|
Foreign exchange impact, net
|
(0.8 | ) | ||
|
Excess and obsolete inventory
|
(0.6 | ) | ||
|
Inventory
step-up
|
(0.2 | ) | ||
|
Other
|
(0.1 | ) | ||
|
Year ended December 31, 2008 gross margin
|
75.8 | % | ||
Gross margin decreased in 2008 primarily due to the unfavorable
effect of year-over-year changes in foreign currency hedge gains
and losses as well as an increase in excess inventory and
obsolescence charges due to write-offs related to the OSP
patient care product recalls and increased inventory levels as a
result of lower than forecasted sales. Inventory
step-up
related to the completion of the Abbott Spine acquisition during
2008 also had an unfavorable impact on gross margin.
| Operating Expenses |
Research and Development, or R&D, as a percentage of net
sales was 4.7 percent for 2008, compared to
5.4 percent in 2007. R&D decreased to
$194.0 million for 2008 from $209.6 million in 2007,
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. We do not expect delays with our development
programs in 2009 and therefore our R&D expense as a
percentage of revenue is expected to return to historical levels
of 5 to 6 percent.
Selling, general and administrative, or SG&A, as a
percentage of net sales was 41.3 percent for 2008, compared
to 38.2 percent in 2007. SG&A expense increased to
$1,702.3 million for 2008, from $1,489.7 million in
2007. Increased SG&A costs include monitor fees as well as
consulting and legal fees associated with the global
implementation of our enhanced compliance initiatives. 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 and improving quality systems at our Dover facility.
Additionally, selling costs increased 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.
Settlement expense of $169.5 million for 2007 relates to
the settlement of the federal investigation into financial
relationships between major orthopaedic manufacturers and
consulting orthopaedic surgeons.
5
Trademark
of U & i Corporation
26
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Certain claims expense of $69.0 million is a provision for
estimated claims from
Durom
Cup patients undergoing
revision surgeries within specified periods. Acquisition,
integration and other expenses increased to $68.5 million
for 2008, compared to $25.2 million in 2007. The
acquisition, integration and other expenses recorded during 2008
include $38.5 million for in-process research and
development related to the Abbott Spine acquisition, costs
related to the integration of Abbott Spine, facility
consolidation costs, legal fees, and retention and termination
payments, partially offset by favorable adjustments to certain
liabilities of acquired companies. The acquisition, integration
and other expenses recorded during 2007 reflect in-process
research and development write-offs related to acquisitions,
costs related to the integration of acquired
U.S. distributors, estimated settlements for certain
pre-acquisition product liability claims, integration consulting
fees and costs for integrating information technology systems.
| Operating Profit, Income Taxes and Net Earnings |
Operating profit for 2008 decreased 3 percent to
$1,090.0 million, from $1,127.6 million in 2007.
Operating profit for 2007 includes the effect of the
non-recurring settlement expense of $169.5 million.
Excluding the impact of the settlement expense in 2007,
operating profit for 2008 would still have been unfavorable
compared to 2007 as a result of lower gross margins, significant
but temporary increases in SG&A costs attributable to the
implementation of our enhanced compliance initiatives and
certain claims expense of $69.0 million.
Interest and other income for 2008 increased to
$31.8 million, from $4.0 million in 2007. Interest and
other income for 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.
The effective tax rate on earnings before income taxes and
minority interest decreased to 24.3 percent for 2008, down
from 31.6 percent in 2007. 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. During 2008, we recorded a current tax benefit of
$31.7 million related to the settlement expense, resulting
in a decrease of approximately 3 percent to the current
period effective tax rate. The effective tax rate for 2008 was
further reduced as a result of increased profits in lower tax
jurisdictions. These decreases in the effective tax rate were
partially offset by Abbott Spine acquisition-related in-process
research and development charges recorded during 2008 for which
no tax benefit was recorded.
Net earnings increased 10 percent to $848.6 million
for 2008, compared to $773.2 million in 2007, as the
decrease in operating profit was more than offset by favorable
items in interest and other income and a lower effective tax
rate. Basic and diluted earnings per share increased
14 percent to $3.73 and $3.72, respectively, from $3.28 and
$3.26 in 2007. The higher growth rate in earnings per share as
compared to net earnings is attributed to the effect of 2008 and
2007 share repurchases.
Year Ended
December 31, 2007 Compared to Year Ended December 31,
2006
| Net Sales by Operating Segment |
The following table presents net sales by operating segment and
the components of the percentage changes (dollars in millions):
| Year Ended December 31, |
Volume/
|
Foreign
|
||||||||||||||||||||||
| 2007 | 2006 | % Inc | Mix | Price | Exchange | |||||||||||||||||||
|
Americas
|
$ | 2,277.0 | $ | 2,076.5 | 10 | % | 8 | % | 1 | % | 1 | % | ||||||||||||
|
Europe
|
1,081.0 | 931.1 | 16 | 8 | (1 | ) | 9 | |||||||||||||||||
|
Asia Pacific
|
539.5 | 487.8 | 11 | 9 | (1 | ) | 3 | |||||||||||||||||
|
Total
|
$ | 3,897.5 | $ | 3,495.4 | 12 | 9 | – | 3 | ||||||||||||||||
27
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| Net Sales by Product Category |
The following table presents net sales by product category and
the components of the percentage changes (dollars in millions):
| Year Ended December 31, |
Volume/
|
Foreign
|
||||||||||||||||||||||
| 2007 | 2006 | % Inc | Mix | Price | Exchange | |||||||||||||||||||
|
Reconstructive
|
||||||||||||||||||||||||
|
Knees
|
$ | 1,634.6 | $ | 1,460.5 | 12 | % | 9 | % | – | % | 3 | % | ||||||||||||
|
Hips
|
1,221.4 | 1,126.9 | 8 | 6 | (1 | ) | 3 | |||||||||||||||||
|
Extremities
|
104.0 | 77.6 | 34 | 30 | 1 | 3 | ||||||||||||||||||
|
Dental
|
221.0 | 179.0 | 23 | 16 | 4 | 3 | ||||||||||||||||||
|
Total
|
3,181.0 | 2,844.0 | 12 | 9 | – | 3 | ||||||||||||||||||
|
Trauma
|
205.8 | 194.7 | 6 | 2 | 1 | 3 | ||||||||||||||||||
|
Spine
|
197.0 | 177.4 | 11 | 9 | 1 | 1 | ||||||||||||||||||
|
OSP and other
|
313.7 | 279.3 | 12 | 9 | 1 | 2 | ||||||||||||||||||
|
Total
|
$ | 3,897.5 | $ | 3,495.4 | 12 | 9 | – | 3 | ||||||||||||||||
The
NexGen
Complete Knee Solution product line, including
the
Gender Solutions
Knee Femoral Implants, the
NexGen
LPS-Flex Knee, the
NexGen
CR-Flex Knee, the
NexGen
Rotating Hinge Knee and the
NexGen
LCCK Revision Knee
led knee sales. In addition, the
Zimmer
Unicompartmental
High-Flex Knee and the
Inne
x Total Knee System exhibited
strong growth.
Growth in 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 was partially offset by weaker
sales of cemented and revision stems.
Trabecular Metal
Acetabular Cups,
Trabecular Metal
Primary Hip
Prosthesis
, Durom
Acetabular Cups with
Metasul
LDH
®
Large
Diameter Heads, and
Longevity
and
Durasul
Highly
Crosslinked Polyethylene Liners also had strong growth.
The
Bigliani/Flatow
Complete Shoulder Solution and the
Coonrad/Morrey Total Elbow 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
Zimmer
Plates and Screws led trauma sales. The
Dynesys
Dynamic Stabilization System, the
TiTLE
2 lumbar
pedicle screw system, the
Trinica
Select Anterior
Cervical Plate System and
Trabecular Metal
Implants led
spine sales. Extremity surgical products and
PALACOS
Bone
Cement led OSP sales.
| Americas Net Sales |
The following table presents Americas net sales (dollars in
millions):
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | % Inc | ||||||||||
|
Reconstructive
|
||||||||||||
|
Knees
|
$ | 1,029.8 | $ | 940.8 | 10 | % | ||||||
|
Hips
|
568.3 | 533.8 | 6 | |||||||||
|
Extremities
|
73.9 | 54.2 | 36 | |||||||||
|
Dental
|
118.9 | 105.4 | 13 | |||||||||
|
Total
|
1,790.9 | 1,634.2 | 10 | |||||||||
|
Trauma
|
122.9 | 117.1 | 5 | |||||||||
|
Spine
|
160.3 | 146.9 | 9 | |||||||||
|
OSP and other
|
202.9 | 178.3 | 14 | |||||||||
|
Total
|
$ | 2,277.0 | $ | 2,076.5 | 10 | |||||||
The
NexGen
Complete Knee Solution product line, including
the
Gender Solutions
Knee Femoral Implants,
NexGen
LPS-Flex Knee,
NexGen Trabecular Metal
Tibial
Components, 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
Trabecular Metal
Primary Hip
Prosthesis, led hip stem sales, but was partially offset by
weaker sales of cemented stems.
Trabecular Metal
Acetabular Cups and
Durom
Acetabular Cups with
Metasul LDH
Large Diameter Heads also exhibited strong
growth.
The
Bigliani/Flatow
Shoulder Solution and the
Trabecular Metal
Humeral Stem led extremities sales. The
Tapered Screw-Vent
Implant System led dental sales.
Zimmer
Periarticular Plates and
Zimmer
Plates and
Screws led trauma sales, but were offset by declining sales of
intramedullary nails and compression hip screws. The
Dynesys
Dynamic Stabilization System, the
Trinica
Select
Anterior Cervical Plate System and Spinal
Trabecular Metal
Implants led spine sales.
PALACOS
Bone Cement led OSP
sales.
28
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| Europe Net Sales |
The following table presents Europe net sales (dollars in
millions):
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | % Inc | ||||||||||
|
Reconstructive
|
||||||||||||
|
Knees
|
$ | 407.8 | $ | 352.2 | 16 | % | ||||||
|
Hips
|
459.9 | 408.3 | 13 | |||||||||
|
Extremities
|
23.2 | 17.9 | 30 | |||||||||
|
Dental
|
71.3 | 47.2 | 51 | |||||||||
|
Total
|
962.2 | 825.6 | 17 | |||||||||
|
Trauma
|
41.1 | 38.2 | 8 | |||||||||
|
Spine
|
31.2 | 24.8 | 26 | |||||||||
|
OSP and other
|
46.5 | 42.5 | 9 | |||||||||
|
Total
|
$ | 1,081.0 | $ | 931.1 | 16 | |||||||
Changes in foreign exchange rates positively affected knee sales
by 9 percent and hip sales by 8 percent. Excluding
these foreign exchange rate effects, the following product
categories experienced positive sales growth in our Europe
region: the
NexGen
Complete Knee Solution product line,
including the
NexGen
LPS-Flex Knee,
NexGen Trabecular
Metal
Tibial Components, the
NexGen
CR-Flex Knee, and
the
Innex
Total Knee System. Growth in porous stems,
including the
CLS Spotorno
Stem, led hip stem sales.
Longevity
and
Durasul
Highly Crosslinked
Polyethylene Liners, the
Durom
Hip Resurfacing System,
Trabecular Metal
Acetabular Cups and the
Allofit
Hip Acetabular System also contributed to hip sales.
The
Anatomical Shoulder
System, the
Anatomical
Shoulder
Inverse/Reverse System and the Coonrad/Morrey Total
Elbow led extremities sales. The addition of a direct sales
force in Italy as a result of a distributor acquisition
contributed to growth in dental sales and the
Tapered
Screw-Vent
Implant System led dental sales. The
Cable-Ready
Cable Grip System,
Zimmer
Periarticular Plates 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
Trabecular Metal
Implants led
spine sales. Wound management products led OSP sales.
| Asia Pacific Net Sales |
The following table presents Asia Pacific net sales (dollars in
millions):
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | % Inc (Dec) | ||||||||||
|
Reconstructive
|
||||||||||||
|
Knees
|
$ | 197.0 | $ | 167.5 | 18 | % | ||||||
|
Hips
|
193.2 | 184.8 | 5 | |||||||||
|
Extremities
|
6.9 | 5.5 | 27 | |||||||||
|
Dental
|
30.8 | 26.4 | 17 | |||||||||
|
Total
|
427.9 | 384.2 | 11 | |||||||||
|
Trauma
|
41.8 | 39.4 | 6 | |||||||||
|
Spine
|
5.5 | 5.7 | (4 | ) | ||||||||
|
OSP and other
|
64.3 | 58.5 | 10 | |||||||||
|
Total
|
$ | 539.5 | $ | 487.8 | 11 | |||||||
Changes in foreign exchange rates positively affected knee sales
by 5 percent and positively affected hip sales by
2 percent. Reported decreases in average selling prices
negatively affected hip sales by 3 percent. The
NexGen
Complete Knee Solution product line, including
NexGen
Trabecular Metal
Tibial Components, the
NexGen
CR-Flex Knee and the
NexGen
LPS-Flex Knee led knee
sales. Launch of the
Gender Solutions
Knee Femoral
Implant in Australia also contributed to strong knee sales for
the year. 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
Highly Crosslinked Polyethylene Liners and
Trabecular
Metal
Acetabular Cups also exhibited growth.
Extremities sales increased due to stronger sales of our
shoulder and elbow products. The
Tapered Screw-Vent
Implant System led dental sales. Trauma sales were led by
strong growth in
Zimmer
Periarticular Plates and
Zimmer
Plates and Screws, but were partially offset by a
reported 5 percent decrease in average selling prices
during 2007. A registration issue with the
ST360
°
®
Spinal Fixation System in Japan resulted in a decrease in sales
of this device, contributing to the negative growth in Spine
sales for 2007. Powered surgical instruments and Bone Cement and
accessories led OSP sales.
| Gross Profit |
Gross profit as a percentage of net sales was 77.5 percent
in 2007, compared to 77.7 percent in 2006. The following
table reconciles the gross margin for 2006 to 2007:
|
Year ended December 31, 2006 gross margin
|
77.7 | % | ||
|
Foreign exchange impact, net
|
(0.3 | ) | ||
|
Other
|
0.1 | |||
|
Year ended December 31, 2007 gross margin
|
77.5 | % | ||
The unfavorable effect of year over year changes in foreign
currency hedge gains and losses were partially offset by lower
unit manufacturing costs due to productivity gains as well as
favorable geographic sales mix. These gains were further offset
by increased inventory charges due to the impact of our newer
products on aging product lines.
| Operating Expenses |
R&D as a percentage of net sales was 5.4 percent for
2007, which is unchanged from 2006. R&D increased to
$209.6 million for 2007 from $188.3 million in 2006,
reflecting increased spending on new product development across
all of our product segments. In 2007, we continued to make
investments in our research and development facilities in
Warsaw, Indiana. We continued working with our third party
partners on genetically engineered tissues for regenerative
therapies, including soft tissue biological repair and
replacement.
SG&A, as a percentage of net sales was 38.2 percent
for 2007, compared to 38.8 percent in 2006. The improvement
in SG&A as a percent of net sales from the prior year is
due to sales growth and well controlled spending.
29
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Settlement expense of $169.5 million for 2007 relates to
the settlement of the federal investigation into financial
relationships between major orthopaedic manufacturers and
consulting orthopaedic surgeons. Acquisition, integration and
other items for 2007 were $25.2 million compared to
$6.1 million in 2006. The acquisition, integration and
other expenses recorded during 2007 reflect in-process research
and development write-offs related to acquisitions, costs
related to the integration of acquired U.S. distributors,
estimated settlements for certain pre-acquisition product
liability claims, integration consulting fees and costs for
integrating information technology systems. The acquisition,
integration and other expenses recorded during 2006 included
$27.7 million of income related to three unrelated
matters — the sale of the former Centerpulse Austin
land and facilities for a gain of $5.1 million and the
favorable settlement of two pre-acquisition contingent
liabilities.
| Operating Profit, Income Taxes and Net Earnings |
Operating profit for 2007 decreased 3 percent to
$1,127.6 million, from $1,165.2 million in 2006. The
decrease is due principally to the $169.5 million
settlement expense. Without the settlement expense, operating
profit would have been favorable to 2006 due to increased sales
and controlled operating expenses.
The effective tax rate on earnings before income taxes and
minority interest increased to 31.6 percent for 2007, up
from 28.6 percent in 2006. The increase in the effective
tax rate is primarily due to the effect of the
$169.5 million settlement expense in 2007 for which no tax
benefit was recognized. Without the effect of the settlement
expense, the effective tax rate for 2007 would have been
favorable to 2006 due to increased profitability in lower tax
jurisdictions.
Net earnings decreased 7 percent to $773.2 million for
2007, compared to $834.5 million in 2006. The decrease was
due to the $169.5 million settlement expense and the higher
effective tax rate that resulted from the settlement expense.
Basic and diluted earnings per share decreased 4 percent to
$3.28 and $3.26, respectively, from $3.43 and $3.40 in 2006 due
to fewer outstanding shares as a result of our stock repurchase
program.
LIQUIDITY AND
CAPITAL RESOURCES
Cash flows provided by operating activities were
$1,038.1 million in 2008 compared to $1,084.4 million
in 2007. The principal source of cash was net earnings of
$848.6 million. Non-cash charges included in net earnings
accounted for another $353.7 million of operating cash.
Income tax-related balances decreased by $77.3 million in
2008, primarily reflecting the impact of accelerated tax
payments resulting from changes in Federal and State tax rules.
All other items of operating cash flows accounted for a use of
$86.9 million of cash pertaining to pension funding and to
investments in working capital in support of sales services.
Operating cash flows continued to be positively affected by
delayed payments related to various contractual arrangements
with healthcare professionals or institutions. For 2008, we
estimate this delay had a positive effect on operating cash
flows of approximately $26 million.
At December 31, 2008, we had 59 days of sales
outstanding in trade accounts receivable, an increase of
7 days when compared to December 31, 2007, reflecting
a change in geographic mix of outstanding accounts receivable
balances and a general weakening in the broader economy. At
December 31, 2008, we had 344 days of inventory on
hand, above December 31, 2007 by 86 days, reflecting a
planned increase in field-based inventory deployments in the
U.S., a build-out of our inventory pipeline for certain new
products we are preparing to launch in 2009, lower than expected
sales in the fourth quarter of 2008 and the year-over-year
change in foreign currency hedge gains/losses impacting cost of
goods sold.
Cash flows used in investing activities were $924.2 million
in 2008, compared to $491.5 million in 2007. The most
significant contributors to the increase in cash flows used in
investing activities were the acquisition of Abbott Spine and
the acquisition of intellectual property rights. Cash payments
related to the acquisition of Abbott Spine were
$363.0 million compared to total acquisition-related
payments of $160.3 million in 2007, which related primarily
to the acquisitions of Endius and ORTHOsoft. Acquired
intellectual property rights of $109.4 million relate to
lump-sum payments made to certain healthcare professionals and
institutions in place of future royalty payments that otherwise
would have been due under the terms of an existing contractual
arrangement. These lump-sum payments were based upon a third
party fair market valuation of the current net present value of
the contractual arrangement. In 2009, we anticipate making
additional lump-sum payments to acquire intellectual property
rights. Additions to instruments during 2008 were
$237.9 million compared to $138.5 million in 2007.
Additions to instruments increased in 2008 compared to 2007 due
to an increase in instrument deployments to permit our sales and
distribution networks to respond more rapidly to changes in
surgical demand patterns and capitalize on new business
opportunities. In 2009, we expect to spend approximately
$160 — $170 million on instruments to support new
products and sales. Additions to other property, plant and
equipment during 2008 were $250.0 million compared to
$192.7 million in 2007. This increase reflects spending on
planned infrastructure improvements such as opening a new
manufacturing facility in Ireland, improving our quality system
infrastructure and investing in a central distribution center
for our Europe segment. During 2009, we expect to purchase
approximately $230 — $240 million in other
property, plant and equipment, reflecting the cash necessary to
complete capital expansions initiated in 2008 as well as new
product-related investments and normal replacement of older
machinery and equipment. Also included in investing activities
for 2008 is $54.9 million in proceeds from the sale of
certain equity securities.
Cash flows used in financing activities were $343.5 million
for 2008, compared to $399.5 million in 2007. We
repurchased $737.0 million of our common stock in 2008 as
compared with $576.3 million in 2007 under our stock
30
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
repurchase programs. We utilized cash generated from operating
activities, $57.0 million in cash proceeds received from
employee stock compensation plans and borrowings under credit
facilities to fund the repurchases. During 2008, we borrowed
$330.0 million from our existing credit facilities to fund
stock repurchases and partially fund the acquisition of Abbott
Spine.
We may use excess cash or further borrow from our credit
facilities to repurchase additional common stock under the
$1.25 billion program which expires December 31, 2009.
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 $460.1 million outstanding under the Senior Credit
Facility at December 31, 2008, and an availability of
$889.9 million. The Senior Credit Facility contains
provisions by which we can increase the line to
$1,750 million and 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 December 31, 2008.
Commitments under the Senior Credit Facility are subject to
certain fees, including a facility and a utilization fee. The
Senior Credit Facility is rated A- by Standard &
Poor’s Ratings Services and is not rated by Moody’s
Investors’ Service, Inc. Notwithstanding recent
interruptions in global credit markets, as of the date of this
report, we believe our access to our Senior Credit Facility has
not been impaired.
In October 2008, we funded a portion of the acquisition of
Abbott Spine with approximately $110 million of 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.
We also have available uncommitted credit facilities totaling
$71.4 million.
Management believes that cash flows from operations, together
with available borrowings under the Senior Credit Facility, are
sufficient to meet our expected 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.
CONTRACTUAL
OBLIGATIONS
We have entered into contracts with various third parties in the
normal course of business which will require future payments.
The following table illustrates our contractual obligations (in
millions):
|
2010
|
2012
|
2014
|
||||||||||||||||||
|
and
|
and
|
and
|
||||||||||||||||||
| Contractual Obligations | Total | 2009 | 2011 | 2013 | Thereafter | |||||||||||||||
|
Long-term debt
|
$ | 460.1 | $ | – | $ | – | $ | 460.1 | $ | – | ||||||||||
|
Operating leases
|
149.3 | 38.2 | 51.0 | 30.2 | 29.9 | |||||||||||||||
|
Purchase obligations
|
56.8 | 47.7 | 7.6 | 1.5 | – | |||||||||||||||
|
Long-term income taxes payable
|
116.9 | – | 69.6 | 24.9 | 22.4 | |||||||||||||||
|
Other long-term liabilities
|
237.0 | – | 30.7 | 15.1 | 191.2 | |||||||||||||||
|
Total contractual obligations
|
$ | 1,020.1 | $ | 85.9 | $ | 158.9 | $ | 531.8 | $ | 243.5 | ||||||||||
CRITICAL
ACCOUNTING ESTIMATES
Our financial results are affected by the selection and
application of accounting policies and methods. Significant
accounting policies which require management’s judgment are
discussed below.
Excess Inventory and Instruments
– We must
determine as of each balance sheet date how much, if any, of our
inventory may ultimately prove to be unsaleable or unsaleable at
our carrying cost. Similarly, we must also determine if
instruments on hand will be put to productive use or remain
undeployed as a result of excess supply. Reserves are
established to effectively adjust inventory and instruments to
net realizable value. To determine the appropriate level of
reserves, we evaluate current stock levels in relation to
historical and expected patterns of demand for all of our
products and instrument systems and components. The basis for
the determination is generally the same for all inventory and
instrument items and categories except for
work-in-progress
inventory, which is recorded at cost. Obsolete or discontinued
items are generally destroyed and completely written off.
Management evaluates the need for changes to valuation reserves
based on market conditions, competitive offerings and other
factors on a regular basis.
Income Taxes
– We estimate income tax expense
and income tax liabilities and assets by taxable jurisdiction.
Realization of deferred tax assets in each taxable jurisdiction
is dependent on our ability to generate future taxable income
sufficient to realize the benefits. We evaluate deferred tax
assets on an ongoing basis and provide valuation allowances if
it is determined to be “more likely than not” that the
deferred tax benefit will not be realized. Federal income taxes
are provided on the portion of the income of foreign
subsidiaries that is expected to be remitted to the U.S. We
operate within numerous taxing jurisdictions. We are subject to
regulatory
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
review or audit in virtually all of those jurisdictions and
those reviews and audits may require extended periods of time to
resolve. We make use of all available information and make
reasoned judgments regarding matters requiring interpretation in
establishing tax expense, liabilities and reserves. We believe
adequate provisions exist for income taxes for all periods and
jurisdictions subject to review or audit.
Commitments and Contingencies
– Accruals for
product liability and other claims are established with the
assistance of internal and external legal counsel based on
current information and historical settlement information for
claims, related 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 2008,
in addition to our general product liability estimates, we
recorded a provision for certain claims of $69.0 million
representing management’s 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
product liability accruals. The amounts established for our
general product liability estimates, excluding certain claims
for the
Durom
Cup, equate to less than 5 percent of
total liabilities and represent management’s best estimate
of the ultimate costs that we will incur under the various
contingencies.
Goodwill and Intangible Assets
– We evaluate
the carrying value of goodwill and indefinite life intangible
assets annually, or whenever events or circumstances indicate
the carrying value may not be recoverable. We evaluate the
carrying value of finite life intangible assets whenever events
or circumstances indicate the carrying value may not be
recoverable. Significant assumptions are required to estimate
the fair value of goodwill and intangible assets, most notably
estimated future cash flows generated by these assets. As such,
these fair valuation measurements use significant unobservable
inputs as defined under Statement of Financial Accounting
Standards No. 157, Fair Value Measurements. Changes to
these assumptions could require us to record impairment charges
on these assets.
Share-based Payment
– We account for
share-based payment expense in accordance with the fair value
recognition provisions of SFAS 123(R). Under the fair value
recognition provisions of SFAS 123(R), share-based payment
expense is measured at the grant date based on the fair value of
the award and is recognized over the requisite service period.
Determining the fair value of share-based awards at the grant
date requires judgment, including estimating the expected life
of stock options and the expected volatility of our stock.
Additionally, we must estimate the amount of share-based awards
that are expected to be forfeited. We estimate expected
volatility based upon the implied volatility of our actively
traded options. The expected life of stock options and estimated
forfeitures are based upon our employees’ historical
exercise and forfeiture behaviors. The assumptions used in
determining the grant date fair value and the expected
forfeitures represent management’s best estimates.
RECENT ACCOUNTING
PRONOUNCEMENTS
Information about recent accounting pronouncements is included
in Note 2 to the Consolidated Financial Statements, which
are included in this report under Item 8.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk |
MARKET
RISK
We are exposed to certain market risks as part of our ongoing
business operations, including risks from changes in foreign
currency exchange rates, interest rates and commodity prices
that could affect our financial condition, results of operations
and cash flows. We manage our exposure to these and other market
risks through regular operating and financing activities, and
through the use of derivative financial instruments. We use
derivative financial instruments solely as risk management tools
and not for speculative investment purposes.
FOREIGN CURRENCY
EXCHANGE RISK
We operate on a global basis and are exposed to the risk that
our financial condition, results of operations and cash flows
could be adversely affected by changes in foreign currency
exchange rates. We are primarily exposed to foreign currency
exchange rate risk with respect to transactions and net assets
denominated in Euros, Swiss Francs, Japanese Yen, British
Pounds, Canadian Dollars, Australian Dollars and Korean Won. We
manage the foreign currency exposure centrally, on a combined
basis, which allows us to net exposures and to take advantage of
any natural offsets. To reduce the uncertainty of foreign
exchange rate movements on transactions denominated in foreign
currencies, we enter into derivative financial instruments in
the form of foreign exchange forward contracts and options with
major financial institutions. These forward contracts and
options are designed to hedge anticipated foreign currency
transactions, primarily intercompany sale and purchase
transactions, for periods consistent with commitments. Realized
and unrealized gains and losses on these contracts and options
that qualify as cash flow hedges are temporarily recorded in
other comprehensive income, then recognized in cost of products
sold when the hedged item affects net earnings.
For contracts outstanding at December 31, 2008, we had
obligations to purchase U.S. Dollars and sell Euros,
Japanese Yen, British Pounds, Canadian Dollars, Australian
Dollars and Korean Won or purchase Swiss Francs and sell
U.S. Dollars at set maturity dates ranging from January
2009 through June 2011. The notional amounts of outstanding
forward contracts entered into with third parties to purchase
U.S. Dollars at December 31, 2008 and 2007 were
$1,343.0 million and $1,244.6 million, respectively.
The notional amounts of outstanding forward contracts entered
into with third parties to purchase Swiss Francs at
December 31, 2008 and 2007 were $207.5 million and
$138.4 million, respectively. The weighted average contract
rates outstanding are Euro:USD 1.41, USD:Swiss Franc 1.10,
USD:Japanese Yen 101, British Pound:USD 1.86, USD:Canadian
Dollar 1.09, Australian Dollar:USD 0.82 and USD:Korean Won 1,000.
We maintain written policies and procedures governing our risk
management activities. Our policy requires that critical terms
of hedging instruments are the same as hedged forecasted
transactions. On this basis, with respect to cash flow hedges,
changes in cash flows attributable to hedged transactions are
generally expected to be completely offset by changes in the
fair value of hedge instruments. As part of our risk management
program, we also perform sensitivity analyses to assess
potential changes in revenue, operating results, cash flows and
financial position relating to hypothetical movements in
currency exchange rates. A sensitivity analysis of changes in
the fair value of foreign exchange forward contracts outstanding
at December 31, 2008 indicated that, if the
U.S. Dollar uniformly changed in value by 10 percent
relative to the Euro, Swiss Franc, Japanese Yen, British Pound,
Canadian Dollar, Australian Dollar and Korean Won, with no
change in the interest differentials, the fair value of those
contracts would increase or decrease earnings before income
taxes in periods through 2011, depending on the direction of the
change, by an average approximate amount of $72.3 million,
$21.1 million, $32.4 million, $10.4 million,
$7.1 million, $7.2 million and $1.9 million for
the Euro, Swiss Franc, Japanese Yen, British Pound, Canadian
Dollar, Australian Dollar and Korean Won contracts,
respectively. Any change in the fair value of foreign exchange
forward contracts as a result of a fluctuation in a currency
exchange rate is expected to be largely offset by a change in
the value of the hedged transaction. Consequently, foreign
exchange contracts would not subject us to material risk due to
exchange rate movements because gains and losses on these
contracts offset gains and losses on the assets, liabilities,
and transactions being hedged.
We had net investment exposures to net foreign currency
denominated assets and liabilities of approximately
$2,003 million at December 31, 2008, primarily in
Swiss Francs, Japanese Yen and Euros. Approximately
$1,234 million of the net asset exposure at
December 31, 2008 relates to goodwill recorded in the
Europe and Asia Pacific geographic segments.
We enter into foreign currency forward exchange contracts with
terms of one month to manage currency exposures for assets and
liabilities denominated in a currency other than an
entity’s functional currency. As a result, foreign currency
remeasurement gains/losses recognized in earnings under
SFAS No. 52, “Foreign Currency Translation,”
are generally offset with gains/losses on the foreign currency
forward exchange contracts in the same reporting period.
COMMODITY PRICE
RISK
We purchase raw material commodities such as cobalt chrome,
titanium, tantalum, polymer and sterile packaging. We enter into
supply contracts generally with terms of 12 to 24 months,
where available, on these commodities to alleviate the effect of
market fluctuation in prices. As part of our risk management
program, we perform sensitivity analyses related to potential
commodity price changes. A 10 percent price change across
all these commodities would not have a material effect on our
consolidated financial position, results of operations or cash
flows.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
INTEREST RATE
RISK
In the normal course of business, we are exposed to market risk
from changes in interest rates that could affect our results of
operations and financial condition. We manage our exposure to
interest rate risks through our regular operations and financing
activities.
Presently, we invest our cash and equivalents primarily in
U.S. government treasury funds and bank deposits. The
primary investment objective is to ensure capital preservation
of our invested principal funds by limiting default and market
risk. Currently, we do not use derivative financial instruments
in our investment portfolio.
Our principal exposure to interest rate risk arises from the
variable rates associated with our credit facilities. We are
subject to interest rate risk through movements in interest
rates on the committed Senior Credit Facility and our
uncommitted credit facilities. Presently, all of our debt
outstanding bears interest at short-term rates. We currently do
not hedge our interest rate exposure, but we may do so in the
future. Based upon our overall interest rate exposure as of
December 31, 2008, a change of 10 percent in interest
rates, assuming the amount outstanding remains constant, would
not have a material effect on interest expense. Further, this
analysis does not consider the effect of the change in the level
of overall economic activity that could exist in such an
environment.
CREDIT
RISK
Financial instruments, which potentially subject us to
concentrations of credit risk, are primarily cash, cash
equivalents, counterparty transactions, and accounts receivable.
We place our investments in highly rated financial institutions
and money market instruments, and limit the amount of credit
exposure to any one entity. We believe we do not have any
significant credit risk on our cash and equivalents and
investments.
We are exposed to credit loss if the financial institutions with
which we conduct business fail to perform. However, this loss is
limited to the amounts, if any, by which the obligations of the
counterparty to the financial instrument contract exceed our
obligation. We also minimize exposure to credit risk by dealing
with a diversified group of major financial institutions. We
manage credit risk by monitoring the financial condition of our
counterparties using standard credit guidelines. We do not
anticipate any nonperformance by any of the counterparties.
Concentration of credit risk with respect to trade accounts
receivable is limited due to the large number of customers and
their dispersion across a number of geographic areas and by
frequent monitoring of the creditworthiness of the customers to
whom credit is granted in the normal course of business.
However, essentially all of our trade receivables are
concentrated in the public and private hospital and healthcare
industry in the U.S. and internationally or with
distributors or dealers who operate in international markets
and, accordingly, are exposed to their respective business,
economic and country specific variables. Repayment is dependent
upon the financial stability of these industry sectors and the
respective countries’ national economic and healthcare
systems. Exposure to credit risk is controlled through credit
approvals, credit limits and monitoring procedures, and we
believe that reserves for losses are adequate. There is no
significant net exposure due to any individual customer or other
major concentration of credit risk.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Management’s Report on
Internal Control Over Financial Reporting
The management of Zimmer Holdings, Inc. is responsible for
establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting
is defined in
Rules 13a-15(f)
or
15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers and effected by the company’s Board of Directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting
principles and includes those policies and procedures that:
| • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; | |
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and | |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, the company’s internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
The company’s management assessed the effectiveness of the
company’s internal control over financial reporting as of
December 31, 2008. In making this assessment, the
company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in
Internal Control-Integrated Framework
.
Based on that assessment, management has concluded that, as of
December 31, 2008, the company’s internal control over
financial reporting is effective based on those criteria.
The company’s independent registered public accounting firm
has audited the effectiveness of the company’s internal
control over financial reporting as of December 31, 2008,
as stated in its report which appears in Item 8 of this
Annual Report on
Form 10-K.
35
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| ITEM 8. | Financial Statements and Supplementary Data |
| Index to Consolidated Financial Statements | Page |
| Financial Statements: | ||||
| 37 | ||||
| 38 | ||||
| 39 | ||||
| 40 | ||||
| 41 | ||||
| 42 | ||||
| 43 | ||||
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
To the Stockholders and Board
of Directors of Zimmer Holdings, Inc.:
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Zimmer
Holdings, Inc., and its subsidiaries at December 31, 2008
and 2007, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is
responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Report of
Management on Internal Control over Financial Reporting. Our
responsibility is to express opinions on these financial
statements and on the Company’s internal control over
financial reporting based on our integrated audits. We conducted
our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in Note 12 to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertain tax positions in 2007. As discussed in Note 2
to the consolidated financial statements, the Company changed
the manner in which it accounts for defined benefit pension and
other postretirement plans effective December 31, 2006.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 23, 2009
37
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| (in millions, except per share amounts) | ||||||||||||
| For the Years Ended December 31, | 2008 | 2007 | 2006 | |||||||||
|
Net Sales
|
$ | 4,121.1 | $ | 3,897.5 | $ | 3,495.4 | ||||||
|
Cost of products sold
|
997.3 | 875.9 | 780.1 | |||||||||
|
Gross Profit
|
3,123.8 | 3,021.6 | 2,715.3 | |||||||||
|
Research and development
|
194.0 | 209.6 | 188.3 | |||||||||
|
Selling, general and administrative
|
1,702.3 | 1,489.7 | 1,355.7 | |||||||||
|
Settlement (Note 16)
|
– | 169.5 | – | |||||||||
|
Certain claims (Note 16)
|
69.0 | – | – | |||||||||
|
Acquisition, integration and other
|
68.5 | 25.2 | 6.1 | |||||||||
|
Operating expenses
|
2,033.8 | 1,894.0 | 1,550.1 | |||||||||
|
Operating Profit
|
1,090.0 | 1,127.6 | 1,165.2 | |||||||||
|
Interest and other, net
|
31.8 | 4.0 | 3.8 | |||||||||
|
Earnings before income taxes and minority interest
|
1,121.8 | 1,131.6 | 1,169.0 | |||||||||
|
Provision for income taxes
|
272.3 | 357.9 | 334.0 | |||||||||
|
Minority interest
|
(0.9 | ) | (0.5 | ) | (0.5 | ) | ||||||
|
Net Earnings
|
$ | 848.6 | $ | 773.2 | $ | 834.5 | ||||||
|
Earnings Per Common Share – Basic
|
$ | 3.73 | $ | 3.28 | $ | 3.43 | ||||||
|
Earnings Per Common Share – Diluted
|
$ | 3.72 | $ | 3.26 | $ | 3.40 | ||||||
|
Weighted Average Common Shares Outstanding
|
||||||||||||
|
Basic
|
227.3 | 235.5 | 243.0 | |||||||||
|
Diluted
|
228.3 | 237.5 | 245.4 | |||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
The accompanying notes are an integral part of these
consolidated financial statements.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| (in millions) | ||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Other
|
Total
|
|||||||||||||||||||||||||||||||
| Common Shares |
Paid-in
|
Retained
|
Comprehensive
|
Treasury Shares |
Stockholders’
|
|||||||||||||||||||||||||||
| Number | Amount | Capital | Earnings | Income | Number | Amount | Equity | |||||||||||||||||||||||||
|
Balance January 1, 2006
|
247.8 | $ | 2.5 | $ | 2,601.1 | $ | 1,934.0 | $ | 149.3 | (0.1 | ) | $ | (4.1 | ) | $ | 4,682.8 | ||||||||||||||||
|
Net earnings
|
– | – | – | 834.5 | – | – | – | 834.5 | ||||||||||||||||||||||||
|
Other comprehensive income
|
– | – | – | – | 95.3 | – | – | 95.3 | ||||||||||||||||||||||||
|
Impact of adoption of SFAS 158
|
– | – | – | – | (35.4 | ) | – | – | (35.4 | ) | ||||||||||||||||||||||
|
Stock compensation plans, including tax benefits
|
1.1 | – | 142.1 | – | – | – | – | 142.1 | ||||||||||||||||||||||||
|
Share repurchases
|
– | – | – | – | – | (12.0 | ) | (798.8 | ) | (798.8 | ) | |||||||||||||||||||||
|
Balance December 31, 2006
|
248.9 | 2.5 | 2,743.2 | 2,768.5 | 209.2 | (12.1 | ) | (802.9 | ) | 4,920.5 | ||||||||||||||||||||||
|
Net earnings
|
– | – | – | 773.2 | – | – | – | 773.2 | ||||||||||||||||||||||||
|
Other comprehensive income
|
– | – | – | – | 81.1 | – | – | 81.1 | ||||||||||||||||||||||||
|
Impact of adoption of FIN 48
|
– | – | – | (4.8 | ) | – | – | – | (4.8 | ) | ||||||||||||||||||||||
|
Stock compensation plans, including tax benefits
|
3.3 | – | 255.9 | – | – | – | – | 255.9 | ||||||||||||||||||||||||
|
Share repurchases
|
– | – | – | – | – | (7.2 | ) | (576.3 | ) | (576.3 | ) | |||||||||||||||||||||
|
Balance December 31, 2007
|
252.2 | 2.5 | 2,999.1 | 3,536.9 | 290.3 | (19.3 | ) | (1,379.2 | ) | 5,449.6 | ||||||||||||||||||||||
|
Net earnings
|
– | – | – | 848.6 | – | – | – | 848.6 | ||||||||||||||||||||||||
|
Other comprehensive loss
|
– | – | – | – | (50.3 | ) | – | – | (50.3 | ) | ||||||||||||||||||||||
|
Stock compensation plans, including tax benefits
|
1.5 | – | 139.4 | – | – | – | – | 139.4 | ||||||||||||||||||||||||
|
Share repurchases
|
– | – | – | – | – | (10.8 | ) | (737.0 | ) | (737.0 | ) | |||||||||||||||||||||
|
Balance December 31, 2008
|
253.7 | $ | 2.5 | $ | 3,138.5 | $ | 4,385.5 | $ | 240.0 | (30.1 | ) | $ | (2,116.2 | ) | $ | 5,650.3 | ||||||||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
40
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| (in millions) | ||||||||||||
| For the Years Ended December 31, | 2008 | 2007 | 2006 | |||||||||
|
Cash flows provided by (used in) operating activities:
|
||||||||||||
|
Net earnings
|
$ | 848.6 | $ | 773.2 | $ | 834.5 | ||||||
|
Adjustments to reconcile net earnings to net cash provided
|
||||||||||||
|
by operating activities:
|
||||||||||||
|
Depreciation and amortization
|
275.1 | 230.0 | 197.4 | |||||||||
|
Gain on sale of investments
|
(38.8 | ) | – | – | ||||||||
|
In-process research and development
|
38.5 | 6.5 | 2.9 | |||||||||
|
Share-based compensation
|
69.9 | 70.1 | 76.0 | |||||||||
|
Inventory
step-up
|
7.0 | 0.5 | – | |||||||||
|
Deferred income tax provision
|
2.0 | 63.9 | 43.8 | |||||||||
|
Income tax benefit from stock option exercises
|
12.5 | 40.8 | 11.6 | |||||||||
|
Excess income tax benefit from stock option exercises
|
(6.5 | ) | (27.0 | ) | (8.0 | ) | ||||||
|
Changes in operating assets and liabilities, net of
|
||||||||||||
|
acquired assets and liabilities
|
||||||||||||
|
Income taxes payable
|
(77.3 | ) | 6.1 | 24.9 | ||||||||
|
Receivables
|
(44.4 | ) | (12.5 | ) | (76.9 | ) | ||||||
|
Inventories
|
(148.1 | ) | (58.0 | ) | (39.2 | ) | ||||||
|
Accounts payable and accrued liabilities
|
119.3 | 61.9 | (29.9 | ) | ||||||||
|
Other assets and liabilities
|
(19.7 | ) | (71.1 | ) | 3.6 | |||||||
|
Net cash provided by operating activities
|
1,038.1 | 1,084.4 | 1,040.7 | |||||||||
|
Cash flows provided by (used in) investing activities:
|
||||||||||||
|
Additions to instruments
|
(237.9 | ) | (138.5 | ) | (126.2 | ) | ||||||
|
Additions to other property, plant and equipment
|
(250.0 | ) | (192.7 | ) | (142.1 | ) | ||||||
|
Acquisition of intellectual property rights
|
(109.4 | ) | – | – | ||||||||
|
Proceeds from sale of investments
|
54.9 | – | – | |||||||||
|
Proceeds from sale of property, plant and equipment
|
– | – | 16.2 | |||||||||
|
Abbott Spine acquisition, net of acquired cash
|
(363.0 | ) | – | – | ||||||||
|
Other acquisitions, net of acquired cash
|
(18.8 | ) | (160.3 | ) | (34.9 | ) | ||||||
|
Net cash used in investing activities
|
(924.2 | ) | (491.5 | ) | (287.0 | ) | ||||||
|
Cash flows provided by (used in) financing activities:
|
||||||||||||
|
Net borrowings under credit facilities
|
330.0 | – | 18.8 | |||||||||
|
Proceeds from employee stock compensation plans
|
57.0 | 149.8 | 41.3 | |||||||||
|
Excess income tax benefit from stock option exercises
|
6.5 | 27.0 | 8.0 | |||||||||
|
Repurchase of common stock
|
(737.0 | ) | (576.3 | ) | (798.8 | ) | ||||||
|
Net cash used in financing activities
|
(343.5 | ) | (399.5 | ) | (730.7 | ) | ||||||
|
Effect of exchange rates on cash and equivalents
|
(21.7 | ) | 4.8 | 9.5 | ||||||||
|
Increase (decrease) in cash and equivalents
|
(251.3 | ) | 198.2 | 32.5 | ||||||||
|
Cash and equivalents, beginning of year
|
463.9 | 265.7 | 233.2 | |||||||||
|
Cash and equivalents, end of year
|
$ | 212.6 | $ | 463.9 | $ | 265.7 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
41
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| (in millions) | ||||||||||||
| For the Years Ended December 31, | 2008 | 2007 | 2006 | |||||||||
|
Net Earnings
|
$ | 848.6 | $ | 773.2 | $834.5 | |||||||
|
Other Comprehensive Income (Loss):
|
||||||||||||
|
Foreign currency cumulative translation adjustments
|
(49.4 | ) | 101.1 | 143.8 | ||||||||
|
Unrealized foreign currency hedge gains/(losses), net of tax
effects of
$0.7 in 2008, $11.5 in 2007 and $7.6 in 2006 |
35.0 | (49.8 | ) | (56.7 | ) | |||||||
|
Reclassification adjustments on foreign currency hedges, net of
tax effects of
$(10.9) in 2008, $(1.3) in 2007 and $(1.8) in 2006 |
43.4 | 27.0 | 8.7 | |||||||||
|
Unrealized gains/(losses) on securities, net of tax effects of
$(15.2) in 2008,
$0.9 in 2007 and $0.9 in 2006 |
24.4 | (1.4 | ) | (1.4 | ) | |||||||
|
Reclassification adjustments on securities, net of tax effects
of $15.0 in 2008
|
(23.8 | ) | – | – | ||||||||
|
Prior service cost and unrecognized gain/(loss) in actuarial
assumptions,
net of tax effects of $14.1 in 2008 and $(0.4) in 2007 |
(79.9 | ) | 4.2 | – | ||||||||
|
Minimum pension liability adjustment, net of tax effects of
$(0.6) in 2006
|
– | – | 0.9 | |||||||||
|
Other comprehensive income (loss)
|
(50.3 | ) | 81.1 | 95.3 | ||||||||
|
Comprehensive Income
|
$ | 798.3 | $ | 854.3 | $929.8 | |||||||
The accompanying notes are an integral part of these
consolidated financial statements.
42
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| 1. | BUSINESS |
We design, develop, manufacture and market orthopaedic and
dental reconstructive implants, spinal implants, trauma
products, and related surgical products. We also provide other
healthcare related services. Orthopaedic reconstructive implants
restore 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 who have
lost teeth due to trauma or disease. Spinal implants are
utilized by orthopaedic surgeons and neurosurgeons in the
treatment of degenerative diseases, deformities and trauma in
all regions of the spine. Trauma products are devices used
primarily to reattach or stabilize damaged bone and tissue to
support the body’s natural healing process. Our related
surgical products include surgical supplies and instruments
designed to aid in orthopaedic surgical procedures and
post-operation rehabilitation. We have operations in more than
25 countries and market our products in more than 100 countries.
We operate in a single industry but have three reportable
geographic segments, the Americas, Europe and Asia Pacific.
The words “we”, “us”, “our” and
similar words refer to Zimmer Holdings, Inc. and its
subsidiaries. Zimmer Holdings refers to the parent company only.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
– The consolidated
financial statements include the accounts of Zimmer Holdings and
its subsidiaries in which it holds a controlling equity
position. Investments in companies in which we exercise
significant influence over the operating and financial affairs,
but do not control, are accounted for under the equity method.
Under the equity method, we record the investment at cost and
adjust the carrying amount of the investment by our
proportionate share of the investee’s net earnings or
losses. All significant intercompany accounts and transactions
are eliminated. Certain amounts in the 2007 and 2006
consolidated financial statements have been reclassified to
conform to the 2008 presentation.
Use of Estimates
– The consolidated financial
statements are prepared in conformity with accounting principles
generally accepted in the United States and include amounts that
are based on management’s best estimates and judgments.
Actual results could differ from those estimates.
Foreign Currency Translation
– The financial
statements of our foreign subsidiaries are translated into
U.S. dollars using period-end exchange rates for assets and
liabilities and average exchange rates for operating results.
Unrealized translation gains and losses are included in
accumulated other comprehensive income in stockholders’
equity. When a transaction is denominated in a currency other
than the subsidiary’s functional currency, we recognize a
transaction gain or loss when the transaction is settled.
Foreign currency transaction gains and losses included in net
earnings for the years ended December 31, 2008, 2007 and
2006 were not significant.
Revenue Recognition
– We sell product through
three principal channels: 1) direct to healthcare
institutions, referred to as direct channel accounts;
2) through stocking distributors and healthcare dealers;
and 3) directly to dental practices and dental
laboratories. The direct channel accounts 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 years ended December 31, 2008, 2007 and 2006.
The reserves for doubtful accounts were $20.0 million and
$21.7 million as of December 31, 2008 and 2007,
respectively.
Shipping and Handling
– Amounts billed to
customers for shipping and handling of products are reflected in
net sales and are not significant. Expenses incurred related to
shipping and handling of products are reflected in selling,
general and administrative and were $117.3 million,
$104.1 million and $95.5 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
Acquisition, Integration and Other
– We
recognize incremental expenses resulting directly from our
business combinations and significant nonrecurring and unusual
items as “Acquisition, integration and other”
expenses. Acquisition, integration and other expenses for the
years ended
43
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
December 31, 2008, 2007 and 2006, included (in millions):
| 2008 | 2007 | 2006 | ||||||||||
|
Gain on disposition, adjustment or impairment of acquired assets
and obligations
|
$ | (9.0 | ) | $ | (1.2 | ) | $ | (19.2 | ) | |||
|
Consulting and professional fees
|
10.1 | 1.0 | 8.8 | |||||||||
|
Employee severance and retention
|
1.9 | 1.6 | 3.3 | |||||||||
|
Information technology integration
|
0.9 | 2.6 | 3.0 | |||||||||
|
In-process research & development
|
38.5 | 6.5 | 2.9 | |||||||||
|
Integration personnel
|
– | – | 2.5 | |||||||||
|
Facility and employee relocation
|
7.5 | – | 1.0 | |||||||||
|
Distributor acquisitions
|
7.3 | 4.1 | – | |||||||||
|
Sales agent and lease contract terminations
|
8.1 | 5.4 | 0.2 | |||||||||
|
Other
|
3.2 | 5.2 | 3.6 | |||||||||
|
Acquisition, Integration and Other
|
$ | 68.5 | $ | 25.2 | $ | 6.1 | ||||||
Included in the gain on disposition, adjustment or impairment of
acquired assets and obligations for 2008 is a favorable
adjustment to certain liabilities of acquired companies due to
changes in circumstances surrounding those liabilities
subsequent to the related measurement period. Included in the
gain on disposition, adjustment or impairment of acquired assets
and obligations for 2006 is the sale of the former Centerpulse
Austin land and facilities for a gain of $5.1 million and
the favorable settlement of two pre-acquisition contingent
liabilities. These gains were offset by a $13.4 million
impairment charge for certain Centerpulse tradename and
trademark intangibles based principally in our Europe operating
segment. In-process research and development charges for 2008
are related to the acquisition of Abbott Spine. In-process
research and development charges for 2007 are related to the
acquisitions of Endius and ORTHOsoft. Consulting and
professional fees relate to third-party integration consulting
performed in a variety of areas such as tax, compliance,
logistics and human resources and legal fees related to matters
involving acquired businesses.
Cash and Equivalents
– We consider all highly
liquid investments with an original maturity of three months or
less to be cash equivalents. The carrying amounts reported in
the balance sheet for cash and equivalents are valued at cost,
which approximates their fair value. Restricted cash is
primarily composed of cash held in escrow related to certain
insurance coverage.
Inventories
– Inventories, net of allowances
for obsolete and slow-moving goods, are stated at the lower of
cost or market, with cost determined on a
first-in
first-out basis.
Property, Plant and Equipment
– Property, plant
and equipment is carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based on
estimated useful lives of ten to forty years for buildings and
improvements, three to eight years for machinery and equipment.
Maintenance and repairs are expensed as incurred. In accordance
with Statement of Financial Accounting Standards
(“SFAS”) No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” we review
property, plant and equipment for impairment whenever events or
changes in circumstances indicate that the carrying value of an
asset may not be recoverable. An impairment loss would be
recognized when estimated future undiscounted cash flows
relating to the asset are less than its carrying amount. An
impairment loss is measured as the amount by which the carrying
amount of an asset exceeds its fair value.
Software Costs
– We capitalize certain computer
software and software development costs incurred in connection
with developing or obtaining computer software for internal use
when both the preliminary project stage is completed and it is
probable that the software will be used as intended. Capitalized
software costs generally include external direct costs of
materials and services utilized in developing or obtaining
computer software and compensation and related benefits for
employees who are directly associated with the software project.
Capitalized software costs are included in property, plant and
equipment on our balance sheet and amortized on a straight-line
basis when the software is ready for its intended use over the
estimated useful lives of the software, which approximate three
to seven years.
Instruments
– Instruments are hand-held devices
used by orthopaedic surgeons during total joint replacement and
other surgical procedures. Instruments are recognized as
long-lived assets and are included in property, plant and
equipment. Undeployed instruments are carried at cost, net of
allowances for excess and obsolete instruments. Instruments in
the field are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based on
average estimated useful lives, determined principally in
reference to associated product life cycles, primarily five
years. We review instruments for impairment in accordance with
SFAS No. 144. Depreciation of instruments is
recognized as selling, general and administrative expense.
Goodwill
– We account for goodwill in
accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets.” Goodwill is not amortized but is
subject to annual impairment tests. Goodwill has been assigned
to reporting units. We perform annual impairment tests by
comparing each reporting unit’s fair value to its carrying
amount to determine if there is potential impairment. The fair
value of the reporting unit and the implied fair value of
goodwill are determined based upon a discounted cash flow
analysis. Significant assumptions are incorporated into to these
discounted cash flow analyses such as estimated growth rates and
risk-adjusted discount rates. We perform this test in the fourth
quarter of the year. If the fair value of the reporting unit is
less than its carrying value, an impairment loss is recorded to
the extent that the implied fair value of the reporting unit
goodwill is less than the carrying value of the reporting unit
goodwill.
Intangible Assets
– We account for intangible
assets in accordance with SFAS No. 142. Intangible
assets are initially measured at their fair value. We have
determined the fair value of our intangible assets either by the
fair value of the
44
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
consideration exchanged for the intangible asset, or the
estimated after-tax discounted cash flows expected to be
generated from the intangible asset. Intangible assets with an
indefinite life, including certain trademarks and trade names,
are not amortized. Indefinite life intangible assets are
assessed annually to determine whether events and circumstances
continue to support an indefinite life. Intangible assets with a
finite life, including core and developed technology, certain
trademarks and trade names, customer-related intangibles,
intellectual property rights and patents and licenses are
amortized on a straight-line basis over their estimated useful
life, ranging from less than one year to 40 years. Intangible
assets with a finite life are tested for impairment whenever
events or circumstances indicate that the carrying amount may
not be recoverable. Intangible assets with an indefinite life
are tested for impairment annually, or whenever events or
circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognized if the carrying
amount exceeds the estimated fair value of the asset. The amount
of the impairment loss to be recorded would be determined based
upon the excess of the asset’s carrying value over its fair
value. The fair values of indefinite lived intangible assets are
determined based upon a discounted cash flow analysis using the
relief from royalty method. The relief from royalty method
estimates the cost savings associated with owning, rather than
licensing, assets. Significant assumptions are incorporated into
to these discounted cash flow analyses such as estimated growth
rates, royalty rates and risk-adjusted discount rates.
The useful lives of intangible assets range from less than
one year to 40 years. In determining the useful lives
of intangible assets, we consider the expected use of the assets
and the effects of obsolescence, demand, competition,
anticipated technological advances, changes in surgical
techniques, market influences and other economic factors. For
technology-based intangible assets, we consider the expected
life cycles of products, absent unforeseen technological
advances, which incorporate the corresponding technology.
Trademarks and trade names that do not have a wasting
characteristic (i.e., there are no legal, regulatory,
contractual, competitive, economic or other factors which limit
the useful life) are assigned an indefinite life. Trademarks and
trade names that are related to products expected to be phased
out are assigned lives consistent with the period in which the
products bearing each brand are expected to be sold. For
customer relationship intangible assets, we assign useful lives
based upon historical levels of customer attrition. Intellectual
property rights are assigned useful lives that approximate the
contractual life of any related patent or the period for which
we maintain exclusivity over the intellectual property.
Research and Development
– We expense all
research and development costs as incurred. Research and
development costs include salaries, prototypes, depreciation of
equipment used in research and development, consultant fees and
service fees paid to collaborative partners.
Income Taxes
– We account for income taxes in
accordance with SFAS No. 109, “Accounting for
Income Taxes” and related interpretations, including
FIN 48. Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax
rates in effect for the years in which the differences are
expected to reverse. Federal income taxes are provided on the
portion of the income of foreign subsidiaries that is expected
to be remitted to the U.S.
Derivative Financial Instruments
– We account
for all derivative financial instruments in accordance with
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended by
SFAS No. 138, “Accounting for Certain Derivative
Instruments and Certain Hedging Activities (an amendment of FASB
Statement No. 133)” and SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments and
Hedging Activities.” SFAS No. 133 requires that
all derivative instruments be reported as assets or liabilities
on the balance sheet and measured at fair value. We maintain
written policies and procedures that permit, under appropriate
circumstances and subject to proper authorization, the use of
derivative financial instruments solely for hedging purposes.
The use of derivative financial instruments for trading or
speculative purposes is prohibited by our policy. We are exposed
to market risk due to changes in currency exchange rates. As a
result, we utilize foreign exchange forward contracts and
options to offset the effect of exchange rate fluctuations on
anticipated foreign currency transactions, generally
intercompany sales and purchases expected to occur within the
next twelve to thirty months. Derivative instruments that
qualify as cash flow hedges are designated as such from
inception. We maintain formal documentation regarding our
objectives, the nature of the risk being hedged, identification
of the instrument, the hedged transaction, the hedging
relationship and how effectiveness of the hedging instrument
will be assessed. Our policy requires that critical terms of a
hedging instrument are effectively the same as a hedged
forecasted transaction. On this basis, with respect to a cash
flow hedge, changes in cash flows attributable to the hedged
transaction are generally expected to be completely offset by
the cash flows attributable to hedge instruments. We, therefore,
perform quarterly assessments of hedge effectiveness by
verifying and documenting those critical terms of the hedge
instrument and that forecasted transactions have not changed. We
also assess on a quarterly basis whether there have been adverse
developments regarding the risk of a counterparty default. For
derivatives which qualify as hedges of future cash flows, the
effective portion of changes in fair value is temporarily
recorded in other comprehensive income and then recognized in
cost of products sold when the hedged item affects net earnings.
The ineffective portion of a derivative’s change in fair
value, if any, is reported in cost of products sold immediately.
The net amount recognized in earnings during
45
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
the years ended December 31, 2008, 2007 and 2006, due to
ineffectiveness and amounts excluded from the assessment of
hedge effectiveness, was not significant.
For contracts outstanding at December 31, 2008, we have an
obligation to purchase U.S. Dollars and sell Euros,
Japanese Yen, British Pounds, Canadian Dollars, Australian
Dollars and Korean Won and purchase Swiss Francs and sell
U.S. Dollars at set maturity dates ranging from January
2009 through June 2011. The notional amounts of outstanding
forward contracts entered into with third parties to purchase
U.S. Dollars at December 31, 2008 were
$1,343.0 million. The notional amounts of outstanding
forward contracts entered into with third parties to purchase
Swiss Francs at December 31, 2008 were $207.5 million.
The fair value of outstanding derivative instruments recorded on
the balance sheet at December 31, 2008, together with
settled derivatives where the hedged item has not yet affected
earnings, was a net unrealized gain of $32.7 million, or
$33.0 million net of taxes, which is deferred in other
comprehensive income, of which $16.4 million, or
$17.9 million, net of taxes, is expected to be reclassified
to earnings over the next twelve months.
We also enter into foreign currency forward exchange contracts
with terms of one month to manage currency exposures for assets
and liabilities denominated in a currency other than an
entity’s functional currency. As a result, any foreign
currency remeasurement gains/losses recognized in earnings under
SFAS No. 52, “Foreign Currency Translation,”
are generally offset with gains/losses on the foreign currency
forward exchange contracts in the same reporting period.
Other Comprehensive Income
– Other
comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are
included in comprehensive income but are excluded from net
earnings as these amounts are recorded directly as an adjustment
to stockholders’ equity. Other comprehensive income is
comprised of foreign currency translation adjustments,
unrealized foreign currency hedge gains and losses, unrealized
gains and losses on available-for-sale securities and
amortization of prior service costs and unrecognized gains and
losses in actuarial assumptions. In 2006 we adopted
SFAS 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an
amendment of FASB Statements No. 87, 88, 106 and
132(R).” This statement required recognition of the funded
status of our benefit plans in the statement of financial
position and recognition of certain deferred gains or losses in
other comprehensive income. We recorded an unrealized loss of
$35.4 million in other comprehensive income during 2006
related to the adoption of SFAS 158.
The components of accumulated other comprehensive income are as
follows (in millions):
|
Balance at
|
Other
|
Balance at
|
||||||||||
|
December 31,
|
Comprehensive
|
December 31,
|
||||||||||
| 2007 | Income (Loss) | 2008 | ||||||||||
|
Foreign currency translation
|
$ | 368.8 | $ | (49.4 | ) | $ | 319.4 | |||||
|
Foreign currency hedges
|
(45.4 | ) | 78.4 | 33.0 | ||||||||
|
Unrealized gain/(loss) on securities
|
(1.9 | ) | 0.6 | (1.3 | ) | |||||||
|
Unrecognized prior service cost and unrecognized gain/(loss) in
actuarial assumptions
|
(31.2 | ) | (79.9 | ) | (111.1 | ) | ||||||
|
Accumulated other comprehensive income
|
$ | 290.3 | $ | (50.3 | ) | $ | 240.0 | |||||
During 2008, we reclassified an investment previously accounted
for under the equity method to an available-for-sale investment
as we no longer exercised significant influence over the
third-party investee. The investment was marked-to-market in
accordance with SFAS 115, “Accounting for Certain
Investments in Debt and Equity Securities,” resulting in a
net unrealized gain of $23.8 million recorded in other
comprehensive income for 2008. This unrealized gain was
reclassified to the income statement when we sold this
investment in 2008 for total proceeds of $54.9 million and
a gross realized gain of $38.8 million included in interest
and other income. The basis of these securities was determined
based on the consideration paid at the time of acquisition.
Treasury Stock
– We account for repurchases of
common stock under the cost method and present treasury stock as
a reduction of shareholders equity. We may reissue common stock
held in treasury only for limited purposes.
Accounting Pronouncements
– In September 2006,
the FASB issued SFAS No. 157, “Fair Value
Measurements,” which defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. This Statement does not require any new fair value
measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source
of the information. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. In February 2008, the FASB issued FASB Staff Position
(FSP)
No. SFAS 157-2,
which delays the effective date of certain provisions of
SFAS No. 157 relating to non-financial assets and
liabilities measured at fair value on a non-recurring basis
until fiscal years beginning after November 15, 2008. The
full adoption of SFAS No. 157 is not expected to have
a material impact on our consolidated financial statements or
results of operations.
46
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
In December 2007, the FASB issued SFAS No. 141(R),
“Business Combinations,” which is a revision of
SFAS No. 141 “Business Combinations.”
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 our financial statements for business combinations that
preceded the effective date. For deferred tax assets and income
tax reserves recorded as part of business combinations, these
assets will be accounted for under SFAS 109 and FIN 48
after the effective date regardless of the acquisition date.
Therefore, if a remeasurement of those assets and liabilities is
warranted after the effective date of this statement, it 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
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.
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 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.
| 3. | SHARE-BASED COMPENSATION |
Our share-based payments primarily consist of stock options,
restricted stock, restricted stock units (RSUs), performance
shares and an employee stock purchase plan. For the year ended
December 31, 2008, share-based payment expense was
$69.9 million or $49.5 million net of the related tax
benefits. For the year ended December 31, 2007, share-based
payment expense was $70.1 million or $48.1 million net
of the related tax benefits. For the year ended
December 31, 2006, share-based payment expense was
$76.0 million or $54.5 million net of the related tax
benefits.
Stock
Options
We had three equity compensation plans in effect at
December 31, 2008: the 2006 Stock Incentive Plan (the
“2006 Plan”), the TeamShare Stock Option Plan and the
Stock Plan for Non-Employee Directors. The 2006 Plan replaced
the 2001 Stock Incentive Plan (the “2001 Plan”), which
by its terms expired in August 2006. Following stockholder
approval of the 2006 Plan in May 2006, no further awards were
granted under the 2001 Plan. However, vested and unvested stock
options previously granted under the 2001 Plan remained
outstanding as of December 31, 2008. We have reserved the
maximum number of shares of common stock available for award
under the terms of each of these plans and have registered
52.9 million shares of common stock. The 2006 Plan provides
for the grant of nonqualified stock options and incentive stock
options, long-term performance awards in the form of performance
shares or units, restricted stock, restricted stock units and
stock appreciation rights. The Compensation and Management
Development Committee of the Board of Directors determines the
grant date for annual grants under our equity compensation
plans. The date for annual grants under the 2006 Plan to our
executive officers is expected to occur in February of each year
following the earnings announcements for the previous quarter
and full year. The TeamShare Stock Option Plan provides for the
grant of non-qualified stock options and, in certain
jurisdictions, stock appreciation rights, while the Stock Plan
for Non-Employee Directors provides for awards of stock options,
restricted stock and restricted stock units to non-employee
directors. It has been our practice to issue shares of common
stock upon exercise of stock options from previously unissued
shares. The total number of awards which may be granted in a
given year
and/or
over
the life of the plan under each of our equity compensation plans
is limited. At December 31, 2008, an aggregate of
11.2 million shares were available for future grants and
awards under these plans.
Stock options granted to date under our plans generally vest
over four years and generally have a maximum contractual life of
10 years. We recognize expense related to stock options on
a straight-line basis over the vesting period for the entire
award, less awards expected to be forfeited using estimated
forfeiture rates. Stock options are granted with an exercise
price equal to the market price of our common stock on the date
of grant, except in limited circumstances where local law may
dictate otherwise. In the past, certain options have had price
thresholds, which affect exercisability. All such price
thresholds have been satisfied. The total number of awards which
may be granted in a given year
and/or
over
the life of the plan under each of our stock option plans is
limited to control dilution.
47
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
A summary of stock option activity for the year ended
December 31, 2008 is as follows (options in thousands):
|
Weighted Average
|
||||||||
| Stock Options | Exercise Price | |||||||
|
Outstanding at December 31, 2007
|
14,107 | $ | 67.94 | |||||
|
Options granted
|
3,975 | 76.45 | ||||||
|
Options exercised
|
(1,190 | ) | 43.68 | |||||
|
Options cancelled
|
(698 | ) | 77.87 | |||||
|
Options expired
|
(294 | ) | 76.85 | |||||
|
Outstanding at December 31, 2008
|
15,900 | $ | 71.25 | |||||
The following table summarizes information about stock options
outstanding at December 31, 2008 (options in thousands):
| Outstanding | ||||||||||||||||||||
|
Weighted
|
Exercisable | |||||||||||||||||||
|
Average
|
Weighted
|
Weighted
|
||||||||||||||||||
|
Remaining
|
Average
|
Average
|
||||||||||||||||||
| Range of Exercise Prices | Options | Contractual Life | Exercise Price | Options | Exercise Price | |||||||||||||||
|
$22.00 – $27.50
|
187 | 1.85 | $ | 24.76 | 187 | $ | 24.76 | |||||||||||||
|
$27.51 – $37.50
|
915 | 2.46 | 30.64 | 915 | 30.64 | |||||||||||||||
|
$39.50 – $51.00
|
734 | 4.19 | 44.02 | 734 | 44.02 | |||||||||||||||
|
$55.00 – $70.50
|
2,970 | 6.01 | 68.64 | 2,403 | 69.30 | |||||||||||||||
|
$71.00 – $91.00
|
11,094 | 7.79 | 77.88 | 3,900 | 77.93 | |||||||||||||||
| 15,900 | 6.91 | $ | 71.25 | 8,139 | $ | 65.79 | ||||||||||||||
We use a Black-Scholes option-pricing model to determine the
fair value of our stock options. Expected volatility was derived
from the implied volatility of our traded options that were
actively traded around the grant date of the stock options with
exercise prices similar to the stock options and maturities of
over one year. The expected term of the stock options has been
derived from historical employee exercise behavior. The
risk-free interest rate is determined using the implied yield
currently available for zero-coupon U.S. government issues
with a remaining term equal to the expected life of the options.
A dividend yield of zero percent has been used as we have not
paid a dividend since becoming a public company in 2001.
The weighted average fair value of the options granted in the
years ended December 31, 2008, 2007 and 2006 were
determined using the following assumptions:
| 2008 | 2007 | 2006 | ||||||||||
|
Dividend Yield
|
– | % | – | % | – | % | ||||||
|
Volatility
|
27.4 | % | 23.8 | % | 25.7 | % | ||||||
|
Risk-free interest rate
|
2.9 | % | 4.4 | % | 4.5 | % | ||||||
|
Expected life (years)
|
5.4 | 5.1 | 5.1 | |||||||||
The weighted average fair value for options granted during 2008,
2007 and 2006 was $23.32, $22.60 and $22.32, respectively. The
total intrinsic value of stock options exercised during the
years ended December 31, 2008, 2007 and 2006 was
$31.9 million, $124.5 million and $40.5 million,
respectively. For the years ended December 31, 2008, 2007
and 2006, share-based payment expense related to stock options
was $65.4 million, $73.4 million and
$66.3 million, respectively, or $46.3 million,
$50.4 million and $47.7 million net of the related tax
benefits, respectively.
Summarized information about outstanding stock options as of
December 31, 2008 that are already vested and that we
expect to vest, as well as stock options that are currently
exercisable, is as follows:
|
Outstanding Stock
|
||||||||
|
Options Already
|
Options
|
|||||||
|
Vested and
Expected
|
that are
|
|||||||
| to Vest* | Exercisable | |||||||
|
Number of outstanding options (in thousands)
|
15,096 | 8,139 | ||||||
|
Weighted average remaining contractual life
|
6.9 years | 5.6 years | ||||||
|
Weighted average exercise price per share
|
$70.94 | $65.79 | ||||||
|
Intrinsic value (in millions)
|
$12.2 | $12.2 | ||||||
| * | Includes effects of estimated forfeitures |
As of December 31, 2008, there was $117.5 million of
unrecognized share-based payment expense related to nonvested
stock options granted under our plans. That expense is expected
to be recognized over a weighted average period of
2.7 years.
Performance
Shares and RSUs
We granted performance shares and performance-based RSUs in 2006
and 2007, respectively, the vesting of which depended on the
achievement of objective performance targets over periods ended
December 31, 2008. The
48
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
performance targets related to these awards were not met and the
related performance shares and RSUs were forfeited. We also
granted RSUs in December 2007. These RSUs are not tied to our
performance and vest ratably on the first and second
anniversaries of the date of grant, provided that the recipient
is still our employee. Each of these awards are converted into
one share of our common stock upon vesting.
A summary of nonvested performance share and RSU activity for
the year ended December 31, 2008 is as follows (Performance
Shares and RSUs in thousands):
|
Weighted Average
|
||||||||
|
Performance
|
Grant Date
|
|||||||
| Shares and RSUs | Fair Value | |||||||
|
Outstanding at January 1, 2008
|
1,147 | $ | 69.35 | |||||
|
Granted
|
40 | 53.29 | ||||||
|
Vested
|
(123 | ) | 68.29 | |||||
|
Forfeited
|
(895 | ) | 69.64 | |||||
|
Outstanding at December 31, 2008
|
169 | $ | 64.93 | |||||
The fair value of the awards was determined based upon the fair
market value of our common stock on the date of grant.
SFAS 123(R) requires us to estimate the number of
performance shares and RSUs that will vest, and recognize
share-based payment expense on a straight line basis over the
requisite service period. As of December 31, 2008, we
estimate that all 169,000 outstanding RSUs will vest. If our
estimate were to change in the future, the cumulative effect of
the change in estimate will be recorded in that period. Based
upon the number of RSUs that we expect to vest, the unrecognized
share-based payment expense as of December 31, 2008 was
$10.0 million, and is expected to be recognized over a
period of 1.4 years. For the years ended December 31,
2008, 2007 and 2006, pre-tax expense (income) related to these
awards was $4.5 million, $(3.3) million and
$9.7 million, respectively, or $3.2 million,
$(2.3) million and $6.8 million net of the related tax
benefits, respectively.
| 4. | ACQUISITIONS |
We made acquisitions during the years 2008, 2007 and 2006, the
more significant of which are described below. These
acquisitions were accounted for under the purchase method of
accounting pursuant to SFAS No. 141. Accordingly, the
results of operations of the acquired companies have been
included in our consolidated results of operations subsequent to
the transaction dates, and the respective assets and liabilities
of the acquired companies have been recorded at their estimated
fair values in our consolidated statement of financial position
as of the transaction dates, with any excess purchase price
being allocated to goodwill. Pro forma financial information and
other information required by SFAS No. 141 have not
been included as the acquisitions did not have a material impact
upon our financial position or results of operations.
Abbott
Spine
In October 2008, we acquired Abbott Spine, a former subsidiary
of Abbott Laboratories, for an aggregate value of approximately
$363.0 million, including a $358.0 million cash
purchase price after certain working capital adjustments and
$5.0 million of direct acquisition costs. The acquisition
was funded by approximately $253 million of cash on-hand
and $110 million from new borrowings under our Senior
Credit Facility. This investment adds a number of innovative
products and builds critical mass in the Spine product category.
The acquisition also enhances our research and development
capabilities in the Spine product category and strengthens our
sales coverage.
We completed the preliminary purchase price allocation in
accordance with U.S. generally accepted accounting
principles. The process included interviews with both Abbott
Spine and our management, review of the economic and competitive
environment and examination of assets including historical
performance and future prospects. The preliminary purchase price
allocation was based on information currently available to us,
and expectations and assumptions deemed reasonable by us. No
assurance can be given, however, that the underlying assumptions
used to estimate expected technology-based product revenues,
development costs or profitability, or the events associated
with such technology will occur as projected. The final purchase
price allocation may vary from the preliminary purchase price
allocation. The final valuation and associated purchase price
allocation is expected to be completed during the first half of
2009. To the extent that the estimates need to be adjusted, we
will do so.
The following table summarizes the preliminary estimate of fair
values of the assets acquired and liabilities assumed at the
date of the Abbott Spine acquisition (in millions):
49
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
Goodwill of $129.3 million, $65.7 million and
$2.4 million was assigned to the Americas, Europe and Asia
Pacific reporting segments, respectively. None of the goodwill
is deductible for tax purposes.
In-process research and development charges relate to acquired
technologies for which no alternative future use has been
identified at the acquisition date. The values assigned to
in-process research and development (IPR&D), are based on
valuations that estimate the future cash flows of the related
technologies and discounting the net cash flows back to their
present values utilizing an appropriate risk-adjusted rate of
return (discount rate). These valuations also include
consideration of the risk of the project not achieving
commercial feasibility and include a factor that takes into
account the uncertainty surrounding the successful development
of the IPR&D.
At the time of acquisition, we expect all acquired IPR&D
will reach technological feasibility, but there can be no
assurance that the commercial viability of these products will
actually be achieved. The nature of the efforts to develop the
acquired technologies into commercially viable products consists
principally of planning, designing, and conducting clinical
trials necessary to obtain regulatory approvals. The risks
associated with achieving commercialization include, but are not
limited to, delay or failure to obtain regulatory approvals to
conduct clinical trials, delay or failure to obtain required
market clearances, and patent issuance, validity and litigation,
if any.
The $38.5 million of IPR&D primarily relates to
projects in the following spine product categories:
1) Thoracolumbar, 2) Minimally Invasive Surgery, and
3) Cervical. The related products have projected launch
dates beginning in 2009 through 2014, with estimated total costs
to complete of approximately $8.5 million.
ORTHOsoft
Inc.
In November 2007, we acquired ORTHOsoft Inc. (ORTHOsoft), a
leader in computer navigation for orthopaedic surgery, in a cash
transaction for an aggregate value of approximately
$50 million. We recorded $31.3 million in goodwill in
connection with the acquisition. The acquisition of ORTHOsoft
bolsters our SmartTools strategic initiative to bring innovative
tools to the marketplace that will help create better and more
reproducible outcomes for surgeons and patients.
Endius
Incorporated
In April 2007, we acquired Endius Incorporated (Endius), a
privately held spinal products company based in Massachusetts,
for an aggregate value of approximately $80 million in
cash, before adjustments for debt repayment and other items. We
recorded $38.5 million in goodwill in connection with the
acquisition. Endius develops and manufactures minimally invasive
spine surgery products, implants and techniques to treat spine
disease. The acquisition of Endius has expanded our spine
product portfolio to include innovative minimally invasive
instruments and implants.
| 5. | FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES |
On January 1, 2008, we adopted the provisions of
SFAS No. 157 “Fair Value Measurements” as it
relates to financial assets and liabilities recorded at fair
value on a recurring basis. FSP
No. SFAS 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.
The following financial assets and liabilities are recorded at
fair value on a recurring basis as of December 31, 2008 (in
millions):
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.
| 6. | INVENTORIES |
Inventories at December 31, 2008 and 2007 consist of the
following (in millions):
| 2008 | 2007 | |||||||
|
Finished goods
|
$ | 731.2 | $ | 564.2 | ||||
|
Work in progress
|
52.6 | 50.3 | ||||||
|
Raw materials
|
144.5 | 113.3 | ||||||
|
Inventories, net
|
$ | 928.3 | $ | 727.8 | ||||
Reserves for excess and obsolete inventory were
$199.6 million and $143.7 million at December 31,
2008 and 2007, respectively. Included in finished goods
inventory at
50
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
December 31, 2008 is approximately $14.0 million of
inventory
step-up
resulting primarily from the Abbott Spine acquisition. Inventory
step-up
values are based upon estimated sales prices less distribution
costs and a profit allowance.
| 7. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment at December 31, 2008 and 2007
was as follows (in millions):
| 2008 | 2007 | |||||||
|
Land
|
$ | 21.7 | $ | 19.4 | ||||
|
Building and equipment
|
992.7 | 855.3 | ||||||
|
Capitalized software costs
|
136.7 | 98.7 | ||||||
|
Instruments
|
1,161.7 | 903.8 | ||||||
|
Construction in progress
|
149.0 | 98.7 | ||||||
| 2,461.8 | 1,975.9 | |||||||
|
Accumulated depreciation
|
(1,197.7 | ) | (1,004.0 | ) | ||||
|
Property, plant and equipment, net
|
$ | 1,264.1 | $ | 971.9 | ||||
Depreciation expense was $215.8 million,
$182.6 million and $155.0 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
| 8. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The following table summarizes the changes in the carrying
amount of goodwill for the years ended December 31, 2008
and 2007 (in millions):
| Americas | Europe | Asia Pacific | Total | |||||||||||||
|
Balance at January 1, 2007
|
$ | 1,414.1 | $ | 993.9 | $ | 107.6 | $ | 2,515.6 | ||||||||
|
Change in fair value estimates of Centerpulse related to:
|
||||||||||||||||
|
Integration liability
|
(0.1 | ) | (1.0 | ) | (0.1 | ) | (1.2 | ) | ||||||||
|
Income taxes
|
16.3 | – | – | 16.3 | ||||||||||||
|
Impact of FIN 48 adoption
|
(61.4 | ) | – | – | (61.4 | ) | ||||||||||
|
Change in fair value estimates of Musculoskeletal Management
Systems related to:
|
||||||||||||||||
|
Earn-out payment liability
|
0.3 | – | – | 0.3 | ||||||||||||
|
Integration liability
|
0.6 | – | – | 0.6 | ||||||||||||
|
Purchase of Endius
|
42.3 | – | – | 42.3 | ||||||||||||
|
Purchase of ORTHOsoft Inc.
|
31.4 | – | – | 31.4 | ||||||||||||
|
Other
|
– | 9.9 | – | 9.9 | ||||||||||||
|
Currency translation
|
– | 63.5 | 4.1 | 67.6 | ||||||||||||
|
Balance at December 31, 2007
|
1,443.5 | 1,066.3 | 111.6 | 2,621.4 | ||||||||||||
|
Change in fair value estimates of Centerpulse related to:
|
||||||||||||||||
|
Integration liability
|
– | (0.1 | ) | – | (0.1 | ) | ||||||||||
|
Income taxes
|
(22.7 | ) | (0.9 | ) | – | (23.6 | ) | |||||||||
|
Change in fair value estimates of Endius related to:
|
||||||||||||||||
|
Integration liability
|
0.2 | – | – | 0.2 | ||||||||||||
|
Income taxes
|
(4.0 | ) | – | – | (4.0 | ) | ||||||||||
|
Change in fair value estimates of ORTHOsoft related to:
|
||||||||||||||||
|
Developed technology
|
0.8 | – | – | 0.8 | ||||||||||||
|
Income taxes
|
(1.0 | ) | – | – | (1.0 | ) | ||||||||||
|
Other
|
0.1 | – | – | 0.1 | ||||||||||||
|
Purchase of Abbott Spine
|
129.3 | 65.7 | 2.4 | 197.4 | ||||||||||||
|
Other
|
– | (0.5 | ) | – | (0.5 | ) | ||||||||||
|
Currency translation
|
(5.9 | ) | (20.4 | ) | 10.4 | (15.9 | ) | |||||||||
|
Balance at December 31, 2008
|
$ | 1,540.3 | $ | 1,110.1 | $ | 124.4 | $ | 2,774.8 | ||||||||
Goodwill increased by $197.4 million during 2008 related to
the acquisition of Abbott Spine. During the year ended
December 31, 2007, goodwill was reduced by
$61.4 million related to the adoption of FIN 48 and
increased by $83.6 million related to the acquisitions of
Endius, ORTHOsoft and a foreign-based distributor.
51
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
The components of identifiable intangible assets are as follows
(in millions):
|
Core
|
Developed
|
Intellectual
|
Trademarks and
|
Customer
|
||||||||||||||||||||||||
| Technology | Technology | Property Rights | Trade Names | Relationships | Other | Total | ||||||||||||||||||||||
|
As of December 31, 2008:
|
||||||||||||||||||||||||||||
|
Intangible assets subject to amortization:
|
||||||||||||||||||||||||||||
|
Gross carrying amount
|
$ | 144.1 | $ | 498.8 | $ | 109.4 | $ | 35.6 | $ | 52.9 | $ | 83.6 | $ | 924.4 | ||||||||||||||
|
Accumulated amortization
|
(36.0 | ) | (147.5 | ) | (6.7 | ) | (16.6 | ) | (8.7 | ) | (33.8 | ) | (249.3 | ) | ||||||||||||||
|
Intangible assets not subject to amortization:
|
||||||||||||||||||||||||||||
|
Gross carrying amount
|
– | – | – | 197.0 | – | – | 197.0 | |||||||||||||||||||||
|
Total identifiable intangible assets
|
$ | 108.1 | $ | 351.3 | $ | 102.7 | $ | 216.0 | $ | 44.2 | $ | 49.8 | $ | 872.1 | ||||||||||||||
|
As of December 31, 2007:
|
||||||||||||||||||||||||||||
|
Intangible assets subject to amortization:
|
||||||||||||||||||||||||||||
|
Gross carrying amount
|
$ | 144.8 | $ | 433.3 | $ | – | $ | 35.6 | $ | 44.5 | $ | 75.7 | $ | 733.9 | ||||||||||||||
|
Accumulated amortization
|
(27.9 | ) | (116.4 | ) | – | (13.1 | ) | (6.2 | ) | (26.4 | ) | (190.0 | ) | |||||||||||||||
|
Intangible assets not subject to amortization:
|
||||||||||||||||||||||||||||
|
Gross carrying amount
|
– | – | – | 199.9 | – | – | 199.9 | |||||||||||||||||||||
|
Total identifiable intangible assets
|
$ | 116.9 | $ | 316.9 | $ | – | $ | 222.4 | $ | 38.3 | $ | 49.3 | $ | 743.8 | ||||||||||||||
During 2008 we made lump-sum payments of $109.4 million to
certain healthcare professionals and institutions in place of
future royalty payments that otherwise would have been due under
the terms of existing contractual arrangements. Such payments
were based upon a third party fair market valuation of the
current net present value of the contractual arrangement. Under
the terms of these resolutions, we acquired the exclusive rights
to any intellectual property, patented and unpatented, provided
by the healthcare professional or institution during the course
of the original contractual arrangement. The weighted average
useful life for these assets is 5.6 years, which represents
the life of any related patent or the period for which we
maintain exclusivity to the intellectual property. Amortization
expense for these assets is reported as part of cost of goods
sold.
As a result of the acquisition of Abbott Spine, we acquired
developed technology-related intangible assets of approximately
$64.3 million and customer relationship related intangible
assets of approximately $8.6 million, based on the
preliminary purchase price allocation as of December 31,
2008. These assets each have a 10 year useful life.
Total amortization expense for finite-lived intangible assets
was $59.3 million, $47.4 million and
$42.4 million for the years ended December 31, 2008,
2007 and 2006, respectively. For 2008, $6.7 million of
amortization expense was recorded as part of cost of goods sold,
with the remaining $52.6 million recorded as part of
selling, general and administrative expenses. For 2007 and 2006,
all amortization expense was recorded as part of selling,
general and administrative expenses. Estimated annual
amortization expense for the years ending December 31, 2009
through 2013 is $82.2 million, $79.9 million,
$74.3 million, $72.2 million and $67.1 million,
respectively.
| 9. | OTHER CURRENT AND LONG-TERM LIABILITIES |
Other current and long-term liabilities at December 31,
2008 and 2007 consist of the following (in millions):
| 2008 | 2007 | |||||||
|
Other current liabilities:
|
||||||||
|
License and service agreements
|
$ | 169.6 | $ | 149.9 | ||||
|
Certain claims accrual (Note 16)
|
62.8 | – | ||||||
|
Fair value of derivatives
|
17.7 | 50.0 | ||||||
|
Salaries, wages and benefits
|
91.5 | 59.3 | ||||||
|
Accrued liabilities
|
236.5 | 230.2 | ||||||
|
Total other current liabilities
|
$ | 578.1 | $ | 489.4 | ||||
|
Other long-term liabilities:
|
||||||||
|
Long-term income tax payable
|
$ | 116.9 | $ | 137.0 | ||||
|
Accrued retirement and postretirement benefit plans
|
129.9 | 66.3 | ||||||
|
Other long-term liabilities
|
107.1 | 125.1 | ||||||
|
Total other long-term liabilities
|
$ | 353.9 | $ | 328.4 | ||||
| 10. | DEBT |
We have a five year $1,350 million senior credit agreement
(the “Senior Credit Facility”). The Senior Credit
Facility is a revolving, multi-currency, senior unsecured credit
facility maturing November 30, 2012. Available borrowings
under the Senior Credit Facility at December 31, 2008 were
$889.9 million. The Senior Credit Facility contains
provisions whereby borrowings may be increased to
$1,750 million and the maturity date may be extended for up
to two 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 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,
52
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
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 December 31, 2008. Commitments under the
Senior Credit Facility are subject to certain fees, including a
facility and a utilization fee.
Outstanding long-term debt as of December 31, 2008 was
$460.1 million and $104.3 million as of
December 31, 2007. We had no current debt as of
December 31, 2008 or 2007.
We also have available uncommitted credit facilities totaling
$71.4 million.
The weighted average interest rate for borrowings under the
Senior Credit Facility was 3.2 percent at December 31,
2008. Borrowings under the Senior Credit Facility were
U.S. Dollar and Japanese Yen-based borrowings at
December 31, 2008 and Japanese Yen-based borrowings at
December 31, 2007. We paid $14.0 million,
$8.5 million and $5.8 million in interest during 2008,
2007 and 2006, respectively.
Debt issuance costs of $22.8 million were incurred to
obtain the Senior Credit Facility arrangement. These costs were
capitalized and are amortized to interest expense over the lives
of the related facility. At December 31, 2008, unamortized
debt issuance costs were $3.5 million.
| 11. | RETIREMENT BENEFIT PLANS |
We have defined benefit pension plans covering certain
U.S. and Puerto Rico employees. The employees who are not
participating in the defined benefit plans receive additional
benefits under our defined contribution plans. Plan benefits are
primarily based on years of credited service and the
participant’s average eligible compensation. 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.
We use a December 31 measurement date for our benefit plans.
Defined Benefit
Plans
The components of net pension expense for the years ended
December 31, 2008, 2007 and 2006 for our defined benefit
retirement plans are as follows (in millions):
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
|
Service cost
|
$ | 11.7 | $ | 13.0 | $ | 13.1 | $ | 12.1 | $ | 10.8 | $ | 10.2 | ||||||||||||
|
Interest cost
|
9.7 | 8.8 | 7.4 | 7.3 | 5.7 | 4.8 | ||||||||||||||||||
|
Expected return on plan assets
|
(13.5 | ) | (10.9 | ) | (8.2 | ) | (9.3 | ) | (8.0 | ) | (6.6 | ) | ||||||||||||
|
Settlement
|
3.4 | – | – | 0.1 | – | – | ||||||||||||||||||
|
Amortization of prior service cost
|
0.1 | – | – | (0.1 | ) | – | 0.1 | |||||||||||||||||
|
Amortization of unrecognized actuarial loss
|
2.2 | 2.9 | 3.7 | 0.1 | 0.2 | 0.2 | ||||||||||||||||||
|
Net periodic benefit cost
|
$ | 13.6 | $ | 13.8 | $ | 16.0 | $ | 10.2 | $ | 8.7 | $ | 8.7 | ||||||||||||
The weighted average actuarial assumptions used to determine net
pension expense for our defined benefit retirement plans were as
follows:
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
|
Discount rate
|
6.16 | % | 6.14 | % | 5.84 | % | 3.60 | % | 3.64 | % | 3.20 | % | ||||||||||||
|
Rate of compensation increase
|
3.84 | % | 3.84 | % | 3.84 | % | 3.06 | % | 3.12 | % | 2.27 | % | ||||||||||||
|
Expected long-term return on plan assets
|
8.00 | % | 8.00 | % | 8.25 | % | 4.64 | % | 4.73 | % | 4.70 | % | ||||||||||||
The expected long-term rates of return on plan assets is based
on the period expected benefits will be paid and the historical
rates of return on the different asset classes held in the
plans. The expected long-term rate of return is the weighted
average of the target asset allocation of each individual asset
class. We believe that historical asset results approximate
expected market returns applicable to the funding of a long-term
benefit obligation.
Discount rates were determined for each of our defined benefit
retirement plans at their measurement date to reflect the yield
of a portfolio of high quality bonds matched against the timing
and amounts of projected future benefit payments.
53
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
Changes in projected benefit obligations and plan assets, for
the years ended December 31, 2008 and 2007 for our defined
benefit retirement plans, were (in millions):
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
|
Projected benefit obligation – beginning of year
|
$ | 166.0 | $ | 144.2 | $ | 181.6 | $ | 167.9 | ||||||||
|
Plan amendments
|
– | 0.9 | – | (1.2 | ) | |||||||||||
|
Service cost
|
11.7 | 13.0 | 12.1 | 10.8 | ||||||||||||
|
Interest cost
|
9.7 | 8.8 | 7.3 | 5.7 | ||||||||||||
|
Employee contributions
|
– | – | 14.5 | 12.2 | ||||||||||||
|
Benefits paid
|
(9.7 | ) | (2.8 | ) | (22.5 | ) | (16.4 | ) | ||||||||
|
Actuarial (gain) loss
|
11.8 | 1.9 | (8.5 | ) | (5.7 | ) | ||||||||||
|
Settlement
|
(1.1 | ) | – | – | – | |||||||||||
|
Translation loss
|
– | – | 7.6 | 8.3 | ||||||||||||
|
Projected benefit obligation – end of year
|
$ | 188.4 | $ | 166.0 | $ | 192.1 | $ | 181.6 | ||||||||
|
Plan assets at fair market value – beginning of year
|
$ | 147.2 | $ | 115.3 | $ | 180.4 | $ | 159.7 | ||||||||
|
Actual return on plan assets
|
(39.3 | ) | 6.7 | (31.4 | ) | 3.4 | ||||||||||
|
Company contributions
|
40.3 | 28.0 | 15.2 | 13.3 | ||||||||||||
|
Employee contributions
|
– | – | 14.5 | 12.2 | ||||||||||||
|
Benefits paid
|
(9.7 | ) | (2.8 | ) | (22.5 | ) | (16.4 | ) | ||||||||
|
Translation gain
|
– | – | 7.5 | 8.2 | ||||||||||||
|
Plan assets at fair market value – end of year
|
$ | 138.5 | $ | 147.2 | $ | 163.7 | $ | 180.4 | ||||||||
|
Funded status
|
$ | (49.9 | ) | $ | (18.8 | ) | $ | (28.4 | ) | $ | (1.2 | ) | ||||
|
Amounts recognized in consolidated balance sheet:
|
||||||||||||||||
|
Prepaid pension
|
$ | – | $ | – | $ | 2.5 | $ | 7.1 | ||||||||
|
Short-term accrued benefit liability
|
(0.5 | ) | (5.6 | ) | – | – | ||||||||||
|
Long-term accrued benefit liability
|
(49.4 | ) | (13.2 | ) | (30.9 | ) | (8.3 | ) | ||||||||
|
Net amount recognized
|
$ | (49.9 | ) | $ | (18.8 | ) | $ | (28.4 | ) | $ | (1.2 | ) | ||||
|
Amounts recognized in accumulated other comprehensive income:
|
||||||||||||||||
|
Unrecognized prior service cost
|
$ | 0.9 | $ | 1.0 | $ | (1.3 | ) | $ | (1.1 | ) | ||||||
|
Unrecognized actuarial loss
|
101.0 | 43.2 | 31.2 | 6.0 | ||||||||||||
|
Net amount recognized
|
$ | 101.9 | $ | 44.2 | $ | 29.9 | $ | 4.9 | ||||||||
We estimate the following amounts recorded as part of
accumulated other comprehensive income will be recognized as
part of our net pension expense during 2009:
|
U.S. and
|
||||||||
| Puerto Rico | Non-U.S. | |||||||
|
Unrecognized prior service cost
|
$ | 0.1 | $ | (0.1 | ) | |||
|
Unrecognized actuarial loss
|
4.6 | 1.3 | ||||||
| $ | 4.7 | $ | 1.2 | |||||
54
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
The weighted average actuarial assumptions used to determine the
projected benefit obligation for our defined benefit retirement
plans were as follows:
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
|
Discount rate
|
5.79 | % | 6.16 | % | 6.14 | % | 3.34 | % | 3.71 | % | 3.23 | % | ||||||||||||
|
Rate of compensation increase
|
3.84 | % | 3.84 | % | 3.84 | % | 3.03 | % | 3.15 | % | 2.28 | % | ||||||||||||
Plans with projected benefit obligations in excess of plan
assets as of December 31, 2008 and 2007 were as follows (in
millions):
| U.S. and Puerto Rico | Non-U.S. | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
|
Projected benefit obligation
|
$ | 188.4 | $ | 166.0 | $ | 178.3 | $ | 163.0 | ||||||||
|
Plan assets at fair market value
|
138.5 | 147.2 | 147.8 | 155.5 | ||||||||||||
Plans with accumulated benefit obligations in excess of plan
assets as of December 31, 2008 and 2007 were as follows (in
millions):
|
U.S. and
|
||||||||||||||||
| Puerto Rico | Non-U.S. | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
|
Accumulated benefit obligation
|
$ | 15.5 | $ | 20.5 | $ | 140.4 | $ | 5.5 | ||||||||
|
Plan assets at fair market value
|
7.4 | 8.8 | 120.1 | 4.5 | ||||||||||||
The accumulated benefit obligation for U.S. and Puerto Rico
defined benefit retirement pension plans was $140.6 million
and $116.8 million as of December 31, 2008 and 2007,
respectively. The accumulated benefit obligation for
non-U.S. defined
benefit retirement plans was $178.7 million and
$150.9 million as of December 31, 2008 and 2007,
respectively.
The benefits expected to be paid out in each of the next five
years and for the five years combined thereafter are as follows
(in millions):
|
U.S. and
|
||||||||
| For the Years Ending December 31, | Puerto Rico | Non-U.S. | ||||||
|
2009
|
$ | 3.4 | $ | 17.6 | ||||
|
2010
|
3.8 | 16.9 | ||||||
|
2011
|
5.1 | 15.8 | ||||||
|
2012
|
6.4 | 14.0 | ||||||
|
2013
|
7.3 | 14.4 | ||||||
|
2014-2018
|
57.6 | 72.5 | ||||||
Our weighted-average asset allocations at December 31, 2008
and 2007, by asset category are as follows:
|
U.S. and
|
||||||||||||||||
| Puerto Rico | Non-U.S. | |||||||||||||||
| Asset Category | 2008 | 2007 | 2008 | 2007 | ||||||||||||
|
Equity Securities
|
59 | % | 65 | % | 28 | % | 37 | % | ||||||||
|
Debt Securities
|
31 | 35 | 43 | 38 | ||||||||||||
|
Real Estate
|
– | – | 18 | 15 | ||||||||||||
|
Cash Funds
|
10 | – | 3 | 4 | ||||||||||||
|
Other
|
– | – | 8 | 6 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
The U.S. and Puerto Rico defined benefit retirement
plans’ overall investment strategy is to maximize total
returns by emphasizing long-term growth of capital while
avoiding risk. We have established target ranges of assets held
by the plans of 50 to 75 percent for equity securities and
25 to 50 percent for debt securities. The plans strive to
have sufficiently diversified assets so that adverse or
unexpected results from one asset class will not have an unduly
detrimental impact on the entire portfolio. The investments in
the plans are rebalanced quarterly based upon the target asset
allocation of the plans.
The investment strategies of
non-U.S. based
plans vary according to the plan provisions and local laws. The
majority of the assets in
non-U.S. based
plans are located in Switzerland based plans. These assets are
held in trusts and are commingled with the assets of other Swiss
companies, with representatives of all the companies making the
investment decisions. The overall strategy is to maximize total
returns while avoiding risk. The trustees of the assets have
established target ranges of assets held by the plans of 30 to
50 percent in debt securities, 20 to 37 percent in
equity securities, 15 to 24 percent in real estate, 3 to
15 percent in cash funds and 0 to 12 percent in other
funds.
As of December 31, 2008 and 2007, our defined benefit
pension plans’ assets did not hold any direct investment in
Zimmer Holdings common stock.
We expect that we will have no minimum funding requirements by
law in 2009 for the qualified U.S. and Puerto Rico defined
benefit retirement plans, however, subsequent Congressional
action may impact the minimum funding requirement for 2009. We
expect to voluntarily contribute between $40 million to
$50 million to these plans during 2009. Contributions to
non-U.S. defined
benefit plans are estimated to be approximately $11 million
in 2009. We do not expect the plan assets in any of our plans to
be returned to us in the next year.
55
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
Defined
Contribution Plans
We also sponsor defined contribution plans for substantially all
of the U.S. and Puerto Rico employees and certain employees
in other countries. The benefits of these plans relate to local
customs and practices in the countries concerned. We expensed
$14.9 million, $12.8 million and $12.6 million
related to these plans for the years ended December 31,
2008, 2007 and 2006, respectively.
| 12. | INCOME TAXES |
The components of earnings before taxes consist of the following
(in millions):
Income taxes paid during 2008, 2007 and 2006 were
$332.9 million, $255.9 million and
$257.6 million, respectively.
A reconciliation of the U.S. statutory income tax rate to
our effective tax rate is as follows:
| For the Years Ended December 31, | 2008 | 2007 | 2006 | |||||||||
|
U.S. statutory income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State taxes, net of federal deduction
|
1.6 | 2.7 | 1.3 | |||||||||
|
Foreign income taxes at rates different from the U.S. statutory
rate, net of foreign tax credits
|
(7.3 | ) | (7.0 | ) | (4.3 | ) | ||||||
|
Tax benefit relating to operations in Puerto Rico
|
(2.5 | ) | (3.1 | ) | (2.0 | ) | ||||||
|
Tax benefit relating to U.S. manufacturer’s deduction and
export sales
|
(1.3 | ) | (1.2 | ) | (1.2 | ) | ||||||
|
R&D credit
|
(0.1 | ) | (0.4 | ) | (0.1 | ) | ||||||
|
Non-deductible expenses
|
0.1 | 0.2 | 0.1 | |||||||||
|
Department of Justice settlement
|
(2.8 | ) | 5.2 | – | ||||||||
|
In-process research and development charges
|
1.2 | 0.2 | – | |||||||||
|
Other
|
0.4 | – | (0.2 | ) | ||||||||
|
Effective income tax rate
|
24.3 | % | 31.6 | % | 28.6 | % | ||||||
Our operations in Puerto Rico, Switzerland and the State of
Indiana benefit from various tax incentive grants. Unless these
grants are extended, they will expire between fiscal years 2016
and 2019.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. We have established valuation
allowances for deferred tax assets when the amount of expected
future taxable income is not likely to support the use of the
deduction or credit.
The components of deferred taxes consisted of the following (in
millions):
| 2008 | 2007 | |||||||
|
Deferred tax assets:
|
||||||||
|
Inventory
|
$ | 165.9 | $ | 118.6 | ||||
|
Net operating loss carryover
|
64.8 | 101.4 | ||||||
|
Tax credit carryover
|
23.7 | 20.7 | ||||||
|
Capital loss carryover
|
– | 1.7 | ||||||
|
Accrued liabilities
|
105.4 | 97.3 | ||||||
|
Share-based compensation
|
49.4 | 35.7 | ||||||
|
Unremitted earnings of foreign subsidiaries
|
95.5 | 94.0 | ||||||
|
Other
|
38.4 | 24.4 | ||||||
|
Total deferred tax assets
|
543.1 | 493.8 | ||||||
|
Less: Valuation allowances
|
(37.1 | ) | (55.7 | ) | ||||
|
Total deferred tax assets after valuation
|
506.0 | 438.1 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Fixed assets
|
$ | (79.1 | ) | $ | (36.3 | ) | ||
|
Intangible assets
|
(188.1 | ) | (174.8 | ) | ||||
|
Accrued liabilities
|
(0.4 | ) | (1.4 | ) | ||||
|
Other
|
(4.4 | ) | (3.0 | ) | ||||
|
Total deferred tax liabilities
|
(272.0 | ) | (215.5 | ) | ||||
|
Total net deferred tax assets
|
$ | 234.0 | $ | 222.6 | ||||
The net operating loss carryovers are available to reduce future
federal, state and foreign taxable earnings. At
December 31, 2008, these net operating loss carryovers
generally expire within a period of 1 to 20 years.
Valuation allowances for net operating loss carryovers have been
established in the amount of $18.9 million and
$16.3 million at December 31, 2008 and 2007,
respectively. The tax credit carryovers are available to offset
future federal, state and foreign tax liabilities. At
December 31, 2008, these tax credit carryovers generally
expire within a period of 1 to 15 years. We have
established valuation allowances for certain tax credit
carryovers in the amount of $12.9 million and
$20.2 million at December 31, 2008 and 2007,
respectively. The remaining valuation allowances of
$5.3 million and $17.5 million at December 31,
2008 and 2007, respectively, relate primarily to potential
capital losses. We have established valuation allowances related
to certain business combination transactions through goodwill.
These allowances were approximately $19.3 million and
$33.9 million at December 31, 2008 and 2007,
respectively.
At December 31, 2008, we had an aggregate of approximately
$871 million of unremitted earnings of foreign subsidiaries
that have been, or are intended to be, indefinitely
56
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
reinvested for continued use in foreign operations. If the total
undistributed earnings of foreign subsidiaries were remitted, a
significant amount of the additional tax would be offset by the
allowable foreign tax credits. It is not practical for us to
determine the additional tax of remitting these earnings.
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, during 2008 we recorded a current tax
benefit of $31.7 million.
In June 2006, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement
No. 109, Accounting for Income Taxes (FIN 48).
FIN 48 addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, we may
recognize the tax benefit from an uncertain tax position only if
it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures.
We adopted FIN 48 on January 1, 2007. Prior to the
adoption of FIN 48 we had a long term tax liability for
expected settlement of various federal, state and foreign income
tax liabilities that was reflected net of the corollary tax
impact of these expected settlements of $102.1 million, as
well as a separate accrued interest liability of
$1.7 million. As a result of the adoption of FIN 48,
we are required to present the different components of such
liability on a gross basis versus the historical net
presentation. The adoption resulted in the financial statement
liability for unrecognized tax benefits decreasing by
$6.4 million as of January 1, 2007. The adoption
resulted in this decrease in the liability as well as a
reduction to retained earnings of $4.8 million, a reduction
in goodwill of $61.4 million, the establishment of a tax
receivable of $58.2 million, which was recorded in other
current and non-current assets on our consolidated balance
sheet, and an increase in an interest/penalty payable of
$7.9 million, all as of January 1, 2007. Therefore,
after the adoption of FIN 48, the amount of unrecognized
tax benefits is $95.7 million as of January 1, 2007.
As of December 31, 2008, the amount of unrecognized tax
benefits is $129.5 million. Of this amount,
$45.5 million would impact our effective tax rate if
recognized. $38.2 million of the $129.5 million
liability for unrecognized tax benefits relate to tax positions
of acquired entities taken prior to their acquisition by us.
Under FAS 141(R), if these liabilities are settled for
different amounts, they will affect the income tax expense in
the period of reversal or settlement.
The following is a tabular reconciliation of the total amounts
of unrecognized tax benefits (in millions):
| 2008 | 2007 | |||||||
|
Balance at January 1
|
$ | 135.2 | $ | 95.7 | ||||
|
Increases related to prior periods
|
12.1 | 27.4 | ||||||
|
Decreases related to prior periods
|
(32.0 | ) | (5.5 | ) | ||||
|
Increases related to current period
|
15.8 | 21.9 | ||||||
|
Decreases related to settlements with taxing authorities
|
(1.3 | ) | (1.3 | ) | ||||
|
Decreases related to lapse of statue of limitations
|
(0.3 | ) | (3.0 | ) | ||||
|
Balance at December 31
|
$ | 129.5 | $ | 135.2 | ||||
We recognize accrued interest and penalties related to
unrecognized tax benefits in income tax expense in the
Consolidated Statements of Earnings, which is consistent with
the recognition of these items in prior reporting periods. As of
December 31, 2007, we recorded a liability of
$19.6 million for accrued interest and penalties, of which
$14.7 million would impact our effective tax rate, if
recognized. The amount of this liability is $22.9 million
as of December 31, 2008. Of this amount, $17.1 million
would impact our effective tax rate, if recognized.
We expect that the amount of tax liability for unrecognized tax
benefits will change in the next twelve months; however, we do
not expect these changes will have a significant impact on our
results of operations or financial position.
The U.S. federal statute of limitations remains open for
the year 2003 and onward. 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. In addition, for the 1999 tax year of
Centerpulse, which we acquired in October 2003, one issue
remains in dispute.
State income tax returns are generally subject to examination
for a period of 3 to 5 years after filing of the respective
return. The state impact of any federal changes remains subject
to examination by various states for a period of up to one year
after formal notification to the states. We have various state
income tax returns in the process of examination, administrative
appeals or litigation. It is
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
reasonably possible that such matters will be resolved in the
next twelve months, but we do not anticipate that the resolution
of these matters would result in any material impact on our
results of operations or financial position.
Foreign jurisdictions have statutes of limitations generally
ranging from 3 to 5 years. Years still open to examination
by foreign tax authorities in major jurisdictions include
Australia (2003 onward), Canada (2002 onward), France (2006
onward), Germany (2005 onward), Italy (2005 onward), Japan (2002
onward), Puerto Rico (2005 onward), Singapore (2003 onward),
Switzerland (2006 onward) and the United Kingdom (2006 onward).
Our tax returns are currently under examination in various
foreign jurisdictions. The most significant foreign tax
jurisdiction under examination is the United Kingdom. It is
reasonably possible that such audits will be resolved in the
next twelve months, but we do not anticipate that the resolution
of these audits would result in any material impact on our
results of operations or financial position.
| 13. | CAPITAL STOCK AND EARNINGS PER SHARE |
We are authorized to issue 250 million shares of preferred
stock, none of which were issued or outstanding as of
December 31, 2008.
The numerator for both basic and diluted earnings per share is
net earnings available to common stockholders. The denominator
for basic earnings per share is the weighted average number of
common shares outstanding during the period. The denominator for
diluted earnings per share is weighted average shares
outstanding adjusted for the effect of dilutive stock options
and other equity awards. The following is a reconciliation of
weighted average shares for the basic and diluted share
computations for the years ending December 31 (in millions):
| 2008 | 2007 | 2006 | ||||||||||
|
Weighted average shares outstanding for basic net earnings per
share
|
227.3 | 235.5 | 243.0 | |||||||||
|
Effect of dilutive stock options and other equity awards
|
1.0 | 2.0 | 2.4 | |||||||||
|
Weighted average shares outstanding for diluted net earnings per
share
|
228.3 | 237.5 | 245.4 | |||||||||
For the year ended December 31, 2008, an average of
11.2 million options 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. For the years
ended December 31, 2007 and 2006, an average of
3.1 million and 7.6 million options, respectively,
were not included.
During 2008, we repurchased approximately 10.8 million
shares of our common stock at an average price of $68.72 per
share for a total cash outlay of $737.0 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
$1.13 billion remains authorized under this plan.
| 14. | SEGMENT DATA |
We design, develop, manufacture and market orthopaedic and
dental reconstructive implants, spinal implants, trauma products
and related 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
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 expense, settlement, certain claims,
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. Management reviews accounts
receivable, inventory, property, plant and equipment, goodwill
and intangible assets by reportable segment exclusive of U.S and
Puerto Rico-based manufacturing operations and logistics and
corporate assets.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
Net sales, segment operating profit and year-end assets are as
follows (in millions):
| Net Sales | Operating Profit | Year-End Assets | ||||||||||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | 2008 | 2007 | |||||||||||||||||||||||||
|
Americas
|
$ | 2,353.9 | $ | 2,277.0 | $ | 2,076.5 | $ | 1,209.4 | $ | 1,184.2 | $ | 1,093.7 | $ | 2,845.6 | $ | 2,552.6 | ||||||||||||||||
|
Europe
|
1,179.1 | 1,081.0 | 931.1 | 470.2 | 429.6 | 385.9 | 2,200.0 | 1,999.2 | ||||||||||||||||||||||||
|
Asia Pacific
|
588.1 | 539.5 | 487.8 | 257.1 | 259.5 | 231.5 | 395.1 | 348.3 | ||||||||||||||||||||||||
|
Net sales
|
$ | 4,121.1 | $ | 3,897.5 | $ | 3,495.4 | ||||||||||||||||||||||||||
|
Share-based payment expense
|
(69.9 | ) | (70.1 | ) | (74.8 | ) | ||||||||||||||||||||||||||
|
Inventory
step-up
|
(7.0 | ) | (0.5 | ) | – | |||||||||||||||||||||||||||
|
Settlement
|
– | (169.5 | ) | – | ||||||||||||||||||||||||||||
|
Certain claims
|
(69.0 | ) | – | – | ||||||||||||||||||||||||||||
|
Acquisition, integration and other
|
(68.5 | ) | (25.2 | ) | (6.1 | ) | ||||||||||||||||||||||||||
|
Global operations and corporate functions
|
(632.3 | ) | (480.4 | ) | (465.0 | ) | 1,798.3 | 1,733.6 | ||||||||||||||||||||||||
|
Operating profit
|
$ | 1,090.0 | $ | 1,127.6 | $ | 1,165.2 | ||||||||||||||||||||||||||
|
Total assets
|
$ | 7,239.0 | $ | 6,633.7 | ||||||||||||||||||||||||||||
U.S. sales were $2,212.3 million,
$2,142.2 million and $1,962.5 million for the years
ended December 31, 2008, 2007 and 2006, respectively. Sales
to any individual country outside of the U.S. were not
significant. Sales are attributable to a country based upon the
customer’s country of domicile.
Beginning in 2008, our Hips product category sales 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 2007
and 2006 related to sales of bone cement and accessory products
have been reclassified to conform to 2008 presentation.
Net sales by product category are as follows (in millions):
| 2008 | 2007 | 2006 | ||||||||||
|
Reconstructive
|
||||||||||||
|
Knees
|
$ | 1,763.0 | $ | 1,634.6 | $ | 1,460.5 | ||||||
|
Hips
|
1,279.5 | 1,221.4 | 1,126.9 | |||||||||
|
Extremities
|
121.0 | 104.0 | 77.6 | |||||||||
|
Dental
|
227.5 | 221.0 | 179.0 | |||||||||
|
Total
|
3,391.0 | 3,181.0 | 2,844.0 | |||||||||
|
Trauma
|
221.4 | 205.8 | 194.7 | |||||||||
|
Spine
|
230.6 | 197.0 | 177.4 | |||||||||
|
OSP and other
|
278.1 | 313.7 | 279.3 | |||||||||
|
Total
|
$ | 4,121.1 | $ | 3,897.5 | $ | 3,495.4 | ||||||
Long-lived tangible assets as of December 31, 2008 and 2007
are as follows (in millions):
| 2008 | 2007 | |||||||
|
Americas
|
$ | 918.3 | $ | 707.3 | ||||
|
Europe
|
272.5 | 211.8 | ||||||
|
Asia Pacific
|
73.3 | 52.8 | ||||||
|
Total
|
$ | 1,264.1 | $ | 971.9 | ||||
The Americas long-lived tangible assets are located primarily in
the U.S. Approximately $232.7 million of Europe
long-lived tangible assets as of December 31, 2008 are
located in Switzerland.
Capital expenditures by operating segment for the years ended
December 31, 2008, 2007 and 2006 were as follows (in
millions):
| 2008 | 2007 | 2006 | ||||||||||
|
Americas
|
||||||||||||
|
Additions to other property, plant and equipment
|
$ | 1.5 | $ | 0.7 | $ | 0.7 | ||||||
|
Europe
|
||||||||||||
|
Additions to instruments
|
25.3 | 25.4 | 20.0 | |||||||||
|
Additions to other property, plant and equipment
|
59.6 | 24.6 | 25.9 | |||||||||
|
Asia Pacific
|
||||||||||||
|
Additions to instruments
|
2.2 | 1.2 | 1.7 | |||||||||
|
Additions to other property, plant and equipment
|
9.4 | 2.4 | 2.5 | |||||||||
|
Global operations and corporate functions
|
||||||||||||
|
Additions to instruments
|
210.4 | 111.9 | 104.5 | |||||||||
|
Additions to other property, plant and equipment
|
179.5 | 165.0 | 113.0 | |||||||||
For segment reporting purposes, deployed instruments are
included in the measurement of operating segment assets while
undeployed instruments at U.S. and Puerto Rico-based
manufacturing operations and logistics are included in global
operations and corporate functions. The majority of instruments
are purchased by U.S. and Puerto Rico-based manufacturing
operations and logistics and are deployed to the operating
segments as needed for the business.
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
Depreciation and amortization included in operating segment
profit for the years ended December 31, 2008, 2007 and 2006
was as follows (in millions):
| 2008 | 2007 | 2006 | ||||||||||
|
Americas
|
$ | 78.5 | $ | 66.9 | $ | 56.7 | ||||||
|
Europe
|
57.0 | 60.7 | 46.5 | |||||||||
|
Asia Pacific
|
25.6 | 22.7 | 18.7 | |||||||||
|
Global operations and corporate functions
|
114.0 | 79.7 | 75.5 | |||||||||
|
Total
|
$ | 275.1 | $ | 230.0 | $ | 197.4 | ||||||
| 15. | LEASES |
Future minimum rental commitments under non-cancelable operating
leases in effect as of December 31, 2008 were
$38.2 million for 2009, $30.1 million for 2010,
$20.9 million for 2011, $15.9 million for 2012,
$14.3 million for 2013 and $29.9 million thereafter.
Total rent expense for the years ended December 31, 2008,
2007 and 2006 aggregated $41.4 million, $37.1 million
and $31.1 million, respectively.
| 16. | COMMITMENTS AND CONTINGENCIES |
Intellectual
Property and Product Liability-Related Litigation
In July 2008, we temporarily suspended marketing and
distribution of the
Durom
®
Acetabular Component
(Durom
Cup
)
in the
U.S. 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 have settled.
There are a number of claims still pending and we expect
additional claims will be submitted. We recorded a provision of
$47.5 million in the third quarter of 2008, representing
management’s estimate of these
Durom
Cup-related
claims. We increased that provision by $21.5 million in the
fourth quarter of 2008. The provision is limited to revisions
within two years of an original surgery that occurred prior to
July 2008. These parameters are consistent with our data which
indicates that cup loosenings associated with surgical technique
are most likely to occur within that time period. Any claims
received outside of these defined parameters will be managed in
the normal course and reflected in our standard product
liability accruals.
On February 15, 2005, Howmedica Osteonics Corp. filed an
action against us and an unrelated party in the
United States District Court for the District of New Jersey
alleging infringement of U.S. Patent Nos. 6,174,934;
6,372,814; 6,664,308; and 6,818,020. On June 13, 2007, the
Court granted our motion for summary judgment on the invalidity
of the asserted claims of U.S. Patent Nos. 6,174,934;
6,372,814; and 6,664,308 by ruling that all of the asserted
claims are invalid for indefiniteness. On August 19, 2008,
the Court granted our motion for summary judgment of
non-infringement of certain claims of U.S. Patent
No. 6,818,020, reducing the number of claims at issue in
the suit to five. We continue to believe that our defenses
against infringement of the remaining claims are valid and
meritorious, and we intend to defend this 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 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 from
these cases in excess of those recorded, if any, will not have a
material adverse effect on our consolidated financial position,
results of operations or cash flows.
Government
Investigations
In March 2005, the U.S. Department of Justice through the
U.S. Attorney’s 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 U.S. through
the U.S. Department of Justice and 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
U.S. Attorney’s 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
U.S. government of $169.5 million.
Under the terms of the DPA, the U.S. Attorney filed a
criminal complaint in the U.S. 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
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
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 General’s 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 General’s office in
October 2008. We are cooperating fully with the investigators
with regard to these matters.
In September 2007, the Staff of the U.S. Securities and
Exchange Commission (“SEC”) informed us that it was
conducting an informal investigation regarding potential
violations of the Foreign Corrupt Practices Act 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
On April 24, 2008, a complaint was filed in the
U.S. District Court for the Southern District of New York,
Thorpe v. Zimmer, Inc., et al., naming us and two of our
subsidiaries as defendants. The complaint 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
U.S. District Court for the Southern District of Indiana,
Plumbers and Pipefitters Local Union 719 Pension Fund v.
Zimmer Holdings, Inc., et al., naming us and two of our
executive officers as defendants. The complaint relates to a
putative class action on behalf of persons who purchased our
common stock between January 29, 2008 and July 22,
2008. The complaint alleges that we and two of our executive
officers engaged in violations of federal securities laws by
allegedly failing to disclose developments relating to our OSP
manufacturing operations in Dover, Ohio and problems relating to
the
Durom
Cup. The plaintiff seeks unspecified damages
and interest, attorneys’ fees, costs and other relief. On
December 24, 2008, the lead plaintiff filed a consolidated
complaint that alleges the same claims and relates to the same
time period. The defendants filed a motion to dismiss the
consolidated complaint on February 23, 2009. The motion to
dismiss is pending with the court. We believe this lawsuit is
without merit, and we and the individual defendants intend to
defend it vigorously.
On August 15, 2008, a shareholder derivative action,
Hays v. Dvorak et al., was filed in the U.S. District
Court for the Southern District of Indiana. The plaintiff seeks
to maintain the action purportedly on our behalf against certain
of our current and former directors 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
federal securities class action referenced above brought by the
Plumbers and Pipefitters Local Union 719 Pension Fund. The
plaintiff does not seek damages from us, but instead requests
damages of an unspecified amount on our behalf. The plaintiff
also seeks equitable relief to remedy the individual
defendants’ alleged misconduct, attorneys’ fees, costs
and other relief. The court has entered a scheduling order that
permits the plaintiff to file an amended complaint on or before
March 11, 2009. Under that same court order, the defendants
are not required to respond to any complaint until May 11,
2009.
On November 20, 2008, a complaint was filed in the
U.S. District Court for the Northern District of Indiana,
Dewald v. Zimmer Holdings, Inc., et al., naming us and
certain of our current and former directors and employees as
defendants. The complaint relates to a putative class action on
behalf of all persons who were participants in or beneficiaries
of our U.S. or Puerto Rico Savings and Investment Programs
(“plans”) between October 5, 2007 and the date of
filing and whose accounts included investments in our common
stock. The complaint alleges, among other things, that the
defendants breached their fiduciary duties in violation of the
Employee Retirement Income Security Act of 1974, as amended, by
continuing to offer Zimmer stock as an investment option in the
plans when the stock purportedly was no longer a prudent
investment and that defendants failed to provide plan
participants with complete and accurate information sufficient
to advise them of the risks of investing their retirement
savings in Zimmer stock. The plaintiff seeks an unspecified
monetary payment to the plans, injunctive and equitable relief,
attorneys’ fees, costs and other relief. On
January 23, 2009, the plaintiff filed an amended complaint
that alleges the same claims and clarifies that the class period
is October 5, 2007 through September 2, 2008. The
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Notes to Consolidated
Financial Statements
(Continued)
defendants are not required to respond to the amended complaint
until March 23, 2009. We believe this lawsuit is without
merit, and we and the individual defendants intend to defend it
vigorously.
| 17. | QUARTERLY FINANCIAL INFORMATION (UNAUDITED) |
(in millions, except per share data)
| 2008 Quarter Ended | 2007 Quarter Ended | |||||||||||||||||||||||||||||||
| Mar | Jun | Sep | Dec | Mar | Jun | Sep | Dec | |||||||||||||||||||||||||
|
Net sales
|
$ | 1,059.2 | $ | 1,079.5 | $ | 952.2 | $ | 1,030.2 | $ | 950.2 | $ | 970.6 | $ | 903.2 | $ | 1,073.5 | ||||||||||||||||
|
Gross profit
|
804.5 | 817.2 | 715.0 | 787.1 | 743.8 | 754.2 | 704.0 | 819.6 | ||||||||||||||||||||||||
|
Net earnings
|
239.3 | 227.1 | 214.7 | 167.5 | 233.4 | 231.5 | 44.5 | 263.8 | ||||||||||||||||||||||||
|
Net earnings per common share
|
||||||||||||||||||||||||||||||||
|
Basic
|
1.03 | 0.99 | 0.96 | 0.75 | 0.99 | 0.98 | 0.19 | 1.13 | ||||||||||||||||||||||||
|
Diluted
|
1.02 | 0.99 | 0.95 | 0.75 | 0.98 | 0.97 | 0.19 | 1.12 | ||||||||||||||||||||||||
62
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| ITEM 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None
| ITEM 9A. | 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 December 31, 2008 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Management’s report on internal control over financial
reporting appears in this report at the conclusion of
Part II, Item 7A.
| ITEM 9B. | Other Information |
During the fourth quarter of 2008, the Audit Committee of the
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.
We submitted the Annual CEO Certification for 2008 required by
the New York Stock Exchange to the exchange on June 3, 2008.
63
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| ITEM 10. | Directors, Executive Officers and Corporate Governance |
The information required by this Item concerning our directors
and executive officers is incorporated herein by reference from
our definitive Proxy Statement for our 2009 Annual Meeting of
Stockholders which will be filed with the Commission pursuant to
Regulation 14A within 120 days after the end of our
most recent fiscal year and the information included under the
caption “Executive Officers” in Part I of this
report.
| ITEM 11. | Executive Compensation |
The information required by this Item concerning remuneration of
our officers and directors and information concerning material
transactions involving such officers and directors is
incorporated herein by reference from our definitive Proxy
Statement for our 2009 Annual Meeting of Stockholders which will
be filed with the Commission pursuant to Regulation 14A
within 120 days after the end of our most recent fiscal
year.
| ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item concerning the stock
ownership of management and five percent beneficial owners and
related stockholder matters, including equity compensation plan
information, is incorporated herein by reference from our
definitive Proxy Statement for our 2009 Annual Meeting of
Stockholders which will be filed with the Commission pursuant to
Regulation 14A within 120 days after the end of our
most recent fiscal year.
| ITEM 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item concerning certain
relationships and related transactions and director independence
is incorporated herein by reference from our definitive Proxy
Statement for our 2009 Annual Meeting of Stockholders which will
be filed with the Commission pursuant to Regulation 14A
within 120 days after the end of our most recent fiscal
year.
| ITEM 14. | Principal Accounting Fees and Services |
The information required by this Item concerning principal
accounting fees and services is incorporated herein by reference
from our definitive Proxy Statement for our 2009 Annual Meeting
of Stockholders which will be filed with the Commission pursuant
to Regulation 14A within 120 days after the end of our
most recent fiscal year.
64
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| ITEM 15. | Exhibits, Financial Statement Schedules |
(a) 1. Financial Statements
The following consolidated financial statements of Zimmer
Holdings, Inc. and its subsidiaries are set forth in
Part II, Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings for the Years Ended
December 31, 2008, 2007 and 2006
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Stockholders’ Equity for the
Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2008, 2007 and 2006
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II. Valuation and Qualifying Accounts
Other financial statement schedules are omitted because they are
not applicable or the required information is shown in the
financial statements or the notes thereto.
3. Exhibits
A list of exhibits required to be filed as part of this report
is set forth in the Index to Exhibits, which immediately
precedes such exhibits and is incorporated herein by reference.
65
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Zimmer Holdings, Inc.
| By: |
/s/
David
C. Dvorak
|
David C. Dvorak
President and Chief Executive Officer
Dated: February 27, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Title | Date | ||
|
/s/
David
C. Dvorak
|
President, Chief Executive Officer and Director
(Principal Executive Officer) |
February 27, 2009 | ||
|
/s/
James
T. Crines
|
Executive Vice President, Finance
and Chief Financial Officer (Principal Financial Officer) |
February 27, 2009 | ||
|
/s/
Derek
M. Davis
|
Vice President, Finance, and Corporate Controller and Chief
Accounting Officer
(Principal Accounting Officer) |
February 27, 2009 | ||
|
/s/
Betsy
J. Bernard
|
Director | February 27, 2009 | ||
|
|
Director | February 27, 2009 | ||
|
/s/
Larry
C. Glasscock
|
Director | February 27, 2009 | ||
|
/s/
Robert
A. Hagemann
|
Director | February 27, 2009 | ||
|
/s/
Arthur
J. Higgins
|
Director | February 27, 2009 | ||
|
/s/
John
L. McGoldrick
|
Director | February 27, 2009 | ||
|
/s/
Cecil
B. Pickett, Ph.D.
|
Director | February 27, 2009 | ||
|
/s/
Augustus
A. White, III, M.D., Ph.D.
|
Director | February 27, 2009 | ||
66
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Index to Exhibits
| Exhibit No | Description | |
|
2.1
|
Stock Purchase Agreement dated as of September 4, 2008 (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed September 4, 2008) | |
|
3.1
|
Restated Certificate of Incorporation of Zimmer Holdings, Inc. dated May 13, 2008 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 5, 2008) | |
|
3.2
|
Restated By-Laws of Zimmer Holdings, Inc. effective May 6, 2008 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed May 9, 2008) | |
|
4.1
|
Specimen Common Stock certificate (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-8 filed January 20, 2006) | |
|
10.1*
|
Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Appendix B to the Registrant’s definitive Proxy Statement on Schedule 14A filed March 24, 2003) | |
|
10.2*
|
First Amendment to the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 15, 2005) | |
|
10.3*
|
Zimmer Holdings, Inc. 2006 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | |
|
10.4*
|
Zimmer Holdings, Inc. Executive Performance Incentive Plan, as amended (incorporated by reference to Appendix B to the Registrant’s definitive Proxy Statement on Schedule 14A filed March 20, 2008) | |
|
10.5*
|
Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors, effective August 6, 2001 (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed August 6, 2001) | |
|
10.6*
|
First Amendment to the Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed December 15, 2005) | |
|
10.7*
|
Restated Zimmer Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors, effective January 1, 2005 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed December 15, 2005) | |
|
10.8*
|
First Amendment to the Restated Zimmer Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors | |
|
10.9*
|
Restated Zimmer, Inc. Long-Term Disability Income Plan for Highly Compensated Employees (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on form 10-K filed February 28, 2007) | |
|
10.10*
|
Change in Control Severance Agreement with David C. Dvorak | |
|
10.11*
|
Form of Change in Control Severance Agreement with Bruno A. Melzi (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed May 8, 2002) | |
|
10.12*
|
Form of Change in Control Severance Agreement with James T. Crines and Cheryl R. Blanchard | |
|
10.13*
|
Form of Change in Control Severance Agreement with Jeffery A. McCaulley, Mark C. Throdahl and Chad F. Phipps | |
|
10.14*
|
Change in Control Severance Agreement with Derek M. Davis | |
|
10.15*
|
Change in Control Severance Agreement with Stephen Hong Liang, Ooi (incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K filed March 12, 2003) | |
|
10.16*
|
Restated Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Savings and Investment Program | |
|
10.17*
|
Restated Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan | |
|
10.18*
|
Form of Non-Disclosure, Non-Competition and Non-Solicitation Employment Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 27, 2006) | |
|
10.19*
|
Non-Disclosure, Non-Competition and Non-Solicitation Employment Agreement with Stephen Hong Liang, Ooi (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed March 27, 2006) | |
|
10.20*
|
Confidentiality, Non-Competition and Non-Solicitation Agreement with Bruno A. Melzi (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed March 27, 2006) | |
|
10.21*
|
Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed January 11, 2006) | |
|
10.22*
|
Form of Restricted Stock Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed January 12, 2005) | |
|
10.23*
|
Form of Nonqualified Performance-Conditioned Stock Option Grant Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 21, 2005) | |
67
Table of Contents
| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
Index to Exhibits
(Continued)
| Exhibit No | Description | |
|
10.24*
|
Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed April 5, 2005) | |
|
10.25*
|
Form of Restricted Stock Unit Award Letter under the Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 21, 2006) | |
|
10.26*
|
Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | |
|
10.27*
|
Form of Nonqualified Stock Option Award Letter for Non-U.S. Employees under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | |
|
10.28*
|
Form of Restricted Stock Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (five-year vesting) (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | |
|
10.29*
|
Form of Restricted Stock Unit Award Letter for Non-U.S. Employees under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (five-year vesting) (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed December 13, 2006) | |
|
10.30*
|
Form of Restricted Stock Unit Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (two-year vesting) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 11, 2007) | |
|
10.31*
|
Form of Restricted Stock Unit Award Letter for Non-US Employees under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (two-year vesting) (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed December 11, 2007) | |
|
10.32*
|
Summary Compensation Sheet | |
|
10.33
|
$1,350,000,000 Amended and Restated Credit Agreement dated as of November 30, 2007 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 6, 2007) | |
|
10.34
|
Settlement Agreement dated September 27, 2007, among the United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General of the Department of Health and Human Services, and Zimmer Holdings, Inc. on behalf of its wholly owned subsidiary Zimmer, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed November 9, 2007) | |
|
10.35
|
Corporate Integrity Agreement dated September 27, 2007, among Zimmer Holdings, Inc., Zimmer, Inc. and the Office of Inspector General of the Department of Health and Human Services (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed November 9, 2007) | |
|
10.36
|
Deferred Prosecution Agreement dated September 27, 2007, between Zimmer, Inc. and the United States Attorney’s Office for the District of New Jersey (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed November 9, 2007) | |
|
10.37
|
Zimmer, Inc. Monitor Agreement and Agreement Regarding Fees and Reimbursements, dated October 25, 2007 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 31, 2007) | |
|
10.38
|
Form of Indemnification Agreement with Non-Employee Directors and Officers (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 31, 2008) | |
|
21
|
List of Subsidiaries of Zimmer Holdings, Inc. | |
|
23
|
Consent of PricewaterhouseCoopers LLP | |
|
31.1
|
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
31.2
|
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
32
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| * | indicates management contracts or compensatory plans or arrangements |
68
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| ZIMMER HOLDINGS, INC. | 2008 FORM 10-K ANNUAL REPORT |
| Valuation and Qualifying Accounts | Schedule II |
| (In millions) | ||||||||||||||||||||||||
|
Additions
|
||||||||||||||||||||||||
|
Balance at
|
Charged
|
Effects of
|
Acquired
|
Balance at
|
||||||||||||||||||||
|
Beginning
|
(Credited)
|
Deductions
|
Foreign
|
Abbott Spine
|
End of
|
|||||||||||||||||||
| Description | of Period | to Expense | to Reserve | Currency | Allowances | Period | ||||||||||||||||||
|
Doubtful Accounts:
|
||||||||||||||||||||||||
|
Year Ended December 31, 2006
|
$ | 23.3 | $ | (3.2 | ) | $ | (1.0 | ) | $ | 1.3 | $ | – | $ | 20.4 | ||||||||||
|
Year Ended December 31, 2007
|
20.4 | 1.4 | (1.2 | ) | 1.1 | – | 21.7 | |||||||||||||||||
|
Year Ended December 31, 2008
|
21.7 | (0.5 | ) | (1.9 | ) | (1.2 | ) | 1.9 | 20.0 | |||||||||||||||
|
Excess and Obsolete Inventory:
|
||||||||||||||||||||||||
|
Year Ended December 31, 2006
|
$ | 121.0 | $ | 32.6 | $ | (26.0 | ) | $ | 1.9 | $ | – | $ | 129.5 | |||||||||||
|
Year Ended December 31, 2007
|
129.5 | 38.6 | (26.9 | ) | 2.5 | – | 143.7 | |||||||||||||||||
|
Year Ended December 31, 2008
|
143.7 | 66.5 | (23.1 | ) | (2.6 | ) | 15.1 | 199.6 | ||||||||||||||||
|
Excess and Obsolete Instruments:
|
||||||||||||||||||||||||
|
Year Ended December 31, 2006
|
$ | 37.7 | $ | 8.3 | $ | (5.4 | ) | $ | 0.1 | $ | – | $ | 40.7 | |||||||||||
|
Year Ended December 31, 2007
|
40.7 | 3.1 | (12.5 | ) | 0.4 | – | 31.7 | |||||||||||||||||
|
Year Ended December 31, 2008
|
31.7 | 5.6 | (2.9 | ) | 0.3 | 2.4 | 37.1 | |||||||||||||||||
69
