The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2017.
In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The December 31, 2017 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). Results for interim periods should not be considered indicative of results for the full year.
We have reclassified expenses that were previously recognized in a financial statement line item labeled “Acquisition, quality remediation and other” (and prior to that, labeled “Special items”) to the financial statement line items of “Research and development,” “Selling, general and administrative,” “Intangible asset impairment,” “Acquisition, integration and related,” and “Quality remediation”. Prior periods have been reclassified to conform to the current year presentation. Please refer to Note 2 for additional details on the reclassified items. We made this change to provide additional transparency and better reflect the nature of these expenses.
The words “we,” “us,” “our” and similar words and “Zimmer Biomet” refer to Zimmer Biomet Holdings, Inc. and its subsidiaries. “Zimmer Biomet Holdings” refers to the parent company only.
2. Significant Accounting Policies
We use the financial statement line item “Acquisition, integration and related” to recognize expenses resulting from the consummation of business mergers and acquisitions and the related integration of those businesses. In 2015, we completed our merger with LVB Acquisition, Inc. (“LVB”), the parent company of Biomet, Inc. (“Biomet”) (which merger is sometimes referred to herein as the “Biomet merger”). In 2016, we acquired LDR Holding Corporation and other individually immaterial companies. Acquisition, integration and related expenses are primarily composed of:
|
•
|
Consulting and professional fees related to third-party integration consulting performed in a variety of areas, such as tax, compliance, logistics and human resources, and legal fees related to the consummation of mergers and acquisitions.
|
|
•
|
Employee termination benefits in various areas of our business.
|
|
•
|
Dedicated project personnel expenses which include the salary, benefits, travel expenses and other costs directly associated with employees who are 100 percent dedicated to our integration of acquired businesses and employees who have been notified of termination.
|
|
•
|
Contract termination expenses related to terminated contracts, primarily with sales agents and distribution agreements.
|
|
•
|
Other various expenses to relocate facilities, integrate information technology, losses incurred on assets resulting from the applicable acquisition, and other various expenses.
|
We use the financial statement line item “Quality remediation” to recognize expenses related to addressing inspectional observations on Form 483 issued by the FDA following its inspections of our Warsaw North Campus facility, among other matters. The majority of these expenses are related to consultants who are helping us to update previous documents and redesign certain processes.
Accounting Pronouncements Recently Adopted
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2017-12 – Targeted Improvements to Accounting for Hedging Activities. This ASU amends the hedge accounting guidance to simplify the application of hedge accounting, makes more financial and nonfinancial hedging strategies eligible for hedge accounting treatment, changes how companies assess effectiveness and updates presentation and disclosure requirements. We early adopted this ASU in the first quarter of 2018. Based upon our hedging portfolio that existed prior to adoption, the adoption of this ASU did not have any impact on our financial position, results of operations or cash flows. However, after adoption we entered into cross-currency interest rate swaps that we designated as net investment hedges. Under this ASU, we have made a policy election for changes in the fair value of the cross-currency component of the cross-currency interest rate swaps to be recorded in accumulated other comprehensive income. Therefore, a
ll changes in the fair value of the cross-currency interest rate swaps are recorded as a component of accumulated other comprehensive loss in the condensed consolidated balance sheet. The portion of this change related to the excluded component will
7
be amortized into earnings over the life of the derivative while the remainder will be recorded in accumulated other comprehensive loss until the hedged net investment is sold or substantially liquidated.
Under previous guidance, the fair valu
e change related to the cross-currency component was recognized in earnings. See Note 10 for additional information.
In February 2018, the FASB issued ASU 2018-02 – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Under GAAP, when there is a change in tax rates, it requires remeasurement of deferred tax assets and liabilities to be recognized as part of income, even if the deferred tax asset or liability had been recorded and recognized in Accumulated Other Comprehensive Income (Loss) (“AOCI”). As a result, a portion of the amount recognized in AOCI at the previous tax rate would remain stranded in AOCI permanently. ASU 2018-02 allows the stranded tax effects in AOCI related only to the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) to be reclassified from AOCI to retained earnings. The only stranded tax effects in AOCI we had related to the 2017 Tax Act were due to changes in the U.S. federal corporate income tax rate. We early adopted this ASU in the first quarter of 2018 and elected to use the beginning of period transition method, which means we recognized the reclassification as of January 1, 2018. As a result, we reclassified $42.9 million from AOCI to retained earnings.
In March 2017,
the FASB issued ASU 2017-07
–
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires us to report the service cost component of pensions in the same location as other compensation costs arising from services rendered by the pertinent employees during the period. We are required to report the other components of net benefit costs in other income (expense) in the statements of earnings. This ASU was effective for us as of January 1, 2018. This ASU must be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the statements of earnings and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost in assets. This ASU provides a practical expedient that allows companies to use the amounts disclosed in prior financial statements as the basis for the retrospective application. We elected to use this practical expedient. The impacts of this ASU on our condensed consolidated financial statements for the three and six month periods ended June 30, 2017 are included in the tables below. See Note 12 for further information on the components of our net benefit cost.
In May 2014, the FASB issued ASU 2014-09 – Revenue from Contracts with Customers (Topic 606). This ASU provides a five-step model for revenue recognition that all industries will apply to recognize revenue when a customer obtains control of a good or service. This ASU was effective for us as of January 1, 2018. Entities were permitted to apply the standard and related amendments either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the
ASU recognized at the date of initial application. We adopted this new standard using the retrospective method, which resulted in us restating prior reporting periods presented. This ASU did not result in a change to the timing of our revenue recognition. However, we were required to reclassify certain immaterial costs from selling, general and administrative (“SG&A”) expense to net sales, which resulted in a reduction of net sales, but had no impact on operating profit or retained earnings. This ASU also required us to reclassify our estimated refund liability for products expected to be returned from a reduction of accounts receivable to other current liabilities and the related right to receive products from the return from inventories to prepaid expenses and other current assets. The impacts of this ASU on our condensed consolidated financial statements for the three and six month periods ended June 30, 2017 and as of December 31, 2017 are included in the tables below.
|
|
|
|
|
New
|
|
|
New
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
Revenue
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
Standard
|
|
|
Standard
|
|
|
|
|
|
|
As
|
|
(in millions)
|
Reported
|
|
|
Adjustment
|
|
|
Adjustment
|
|
|
Reclassifications
|
|
|
Restated
|
|
Statement of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
$
|
1,954.4
|
|
|
$
|
(4.9
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,949.5
|
|
Research and development
|
|
90.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.5
|
|
|
|
92.6
|
|
Selling, general and administrative
|
|
748.0
|
|
|
|
(4.9
|
)
|
|
|
2.2
|
|
|
|
6.9
|
|
|
|
752.2
|
|
Intangible asset impairment
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26.8
|
|
|
|
26.8
|
|
Acquisition, integration and related
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72.5
|
|
|
|
72.5
|
|
Quality remediation
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49.9
|
|
|
|
49.9
|
|
Special items
|
|
158.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(158.6
|
)
|
|
|
-
|
|
Operating expenses
|
|
1,672.1
|
|
|
|
(4.9
|
)
|
|
|
2.2
|
|
|
|
-
|
|
|
|
1,669.4
|
|
Operating Profit
|
|
282.3
|
|
|
|
-
|
|
|
|
(2.2
|
)
|
|
|
-
|
|
|
|
280.1
|
|
Other expense, net
|
|
(3.9
|
)
|
|
|
-
|
|
|
|
2.2
|
|
|
|
-
|
|
|
|
(1.7
|
)
|
8
|
|
|
|
|
New
|
|
|
New
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
Revenue
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
Standard
|
|
|
Standard
|
|
|
|
|
|
|
As
|
|
(in millions)
|
Reported
|
|
|
Adjustment
|
|
|
Adjustment
|
|
|
Reclassifications
|
|
|
Restated
|
|
Statement of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
$
|
3,931.7
|
|
|
$
|
(9.8
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,921.9
|
|
Research and development
|
|
181.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.5
|
|
|
|
183.7
|
|
Selling, general and administrative
|
|
1,508.8
|
|
|
|
(9.8
|
)
|
|
|
4.5
|
|
|
|
24.4
|
|
|
|
1,527.9
|
|
Intangible asset impairment
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26.8
|
|
|
|
26.8
|
|
Acquisition, integration and related
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
130.7
|
|
|
|
130.7
|
|
Quality remediation
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84.3
|
|
|
|
84.3
|
|
Special items
|
|
268.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(268.7
|
)
|
|
|
-
|
|
Operating expenses
|
|
3,299.0
|
|
|
|
(9.8
|
)
|
|
|
4.5
|
|
|
|
-
|
|
|
|
3,293.7
|
|
Operating Profit
|
|
632.7
|
|
|
|
-
|
|
|
|
(4.5
|
)
|
|
|
-
|
|
|
|
628.2
|
|
Other expense, net
|
|
(6.7
|
)
|
|
|
-
|
|
|
|
4.5
|
|
|
|
-
|
|
|
|
(2.2
|
)
|
|
|
|
|
|
New
|
|
|
|
|
|
|
As
|
|
|
Revenue
|
|
|
|
|
|
|
Previously
|
|
|
Standard
|
|
|
As
|
|
(in millions)
|
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, less allowance for doubtful accounts
|
$
|
1,494.6
|
|
|
$
|
49.5
|
|
|
$
|
1,544.1
|
|
Inventories
|
|
2,081.8
|
|
|
|
(13.5
|
)
|
|
|
2,068.3
|
|
Prepaid expenses and other current assets
|
|
414.5
|
|
|
|
13.5
|
|
|
|
428.0
|
|
Other current liabilities
|
|
1,299.8
|
|
|
|
49.5
|
|
|
|
1,349.3
|
|
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02 – Leases.
This ASU requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet. This ASU will be effective for us beginning January 1, 2019. Early adoption is permitted. Based on current guidance, this ASU must be adopted using a modified retrospective transition approach at the beginning of the earliest comparative period in the consolidated financial statements. We own most of our manufacturing facilities, but lease various office space, vehicles and other less significant assets throughout the world. We have formed our project team and have collected all of our lease agreements from across the organization. We are in the process of abstracting the key terms from these lease agreements to determine the appropriate accounting treatment. We will continue evaluating our leases and the related impact this ASU will have on our consolidated financial statements throughout 2018.
There are no other recently issued accounting pronouncements that we have not yet adopted that are expected to have a material effect on our financial position, results of operations or cash flows.
3. Revenue Recognition
We recognize revenue when our performance obligations under the terms of a contract with our customer are satisfied. This happens when we transfer control of our products to the customer, which generally occurs upon implantation or when title passes upon shipment. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring our product. Taxes collected from customers and remitted to governmental authorities are excluded from revenues.
We 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
9
accounts represented approximately 80 percent of our net sales in 2017. 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 the ability to control the inventory. 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 institutio
ns within a specified group. At negotiated thresholds within a contract buying period, price discounts may increase. Payment terms vary by customer, but are typically less than 90 days.
Sales to stocking distributors, healthcare dealers, dental practices and dental laboratories accounted for approximately 20 percent of our net sales in 2017. With these types of sales, revenue is recognized when control of our product passes to the customer, either upon shipment of the product or in some cases upon implantation of the product. It is our accounting policy to account for shipping and handling activities as a fulfillment cost rather than as an additional promised service. We have contracts with these customers or orders may be placed from available price lists. Payment terms vary by customer, but are typically less than 90 days.
We offer standard warranties to our customers that our products are not defective. These standard warranties are not considered separate performance obligations. In limited circumstances, we offer extended warranties that are separate performance obligations. We have very few contracts that have multiple performance obligations. Since we do not have significant multiple element arrangements and essentially all of our sales are recognized upon implantation of a product or when title passes, very little judgment is required to allocate the transaction price of a contract or determine when control has passed to a customer. Our costs to obtain contracts consist primarily of sales commissions to employees or third party agents that are earned when control of our product passes to the customer. Therefore, sales commissions are expensed as part of selling, general and administrative expenses at the same time revenue is recognized. Accordingly, we do not have significant contract assets, liabilities or future performance obligations.
We offer variable consideration through volume-based discounts, rebates, prompt pay discounts, right of return and other various incentives. If sales incentives may be earned by a customer for purchasing a specified amount of our product, we estimate whether such incentives will be achieved and recognize these incentives as a reduction in revenue in the same period the underlying revenue transaction is recognized. We primarily use the expected value method to estimate incentives. Under the expected value method, we consider the historical experience of similar programs as well as review sales trends on a customer-by-customer basis to estimate what levels of incentives will be earned. Occasionally, products are returned and, accordingly, we maintain an estimated refund liability based upon the expected value method that is recorded as a reduction in revenue.
We analyze sales by three geographies, the Americas, EMEA and Asia Pacific, and by the following product categories: Knees, Hips, S.E.T., Dental, Spine & CMF and Other. As discussed in Note 14, we have seven operating segments that are based upon geography and product categories. The geographic segments include sales of all product categories exclusive of the specific product category operating segments. The geographic operating segments are the Americas, EMEA and Asia Pacific. These three operating segments are our reporting segments. The product category operating segments are Spine, less Asia Pacific; Office Based Technologies; CMF and Dental. The product operating segments do not constitute a reporting segment because they are, individually and on a combined basis, insignificant to our consolidated results.
Our sales analysis differs from our reporting operating segments because the underlying market trends in any particular geography tend to be similar across product categories, we primarily sell the same products in all geographies and the product category operating segments are not individually significant to our consolidated results.
Net sales by geography are as follows (in millions):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Americas
|
|
$
|
1,216.3
|
|
|
$
|
1,203.9
|
|
|
$
|
2,424.4
|
|
|
$
|
2,433.8
|
|
EMEA
|
|
|
457.7
|
|
|
|
438.2
|
|
|
|
954.2
|
|
|
|
891.4
|
|
Asia Pacific
|
|
|
333.6
|
|
|
|
307.4
|
|
|
|
646.6
|
|
|
|
596.7
|
|
Total
|
|
$
|
2,007.6
|
|
|
$
|
1,949.5
|
|
|
$
|
4,025.2
|
|
|
$
|
3,921.9
|
|
Net sales by product category are as follows (in millions):
10
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Knees
|
|
$
|
703.0
|
|
|
$
|
680.0
|
|
|
$
|
1,416.3
|
|
|
$
|
1,380.8
|
|
Hips
|
|
|
486.9
|
|
|
|
468.0
|
|
|
|
978.9
|
|
|
|
941.8
|
|
S.E.T.
|
|
|
433.8
|
|
|
|
421.1
|
|
|
|
876.1
|
|
|
|
844.6
|
|
Dental
|
|
|
106.9
|
|
|
|
110.4
|
|
|
|
214.5
|
|
|
|
218.2
|
|
Spine & CMF
|
|
|
198.2
|
|
|
|
193.3
|
|
|
|
381.3
|
|
|
|
379.6
|
|
Other
|
|
|
78.8
|
|
|
|
76.7
|
|
|
|
158.1
|
|
|
|
156.9
|
|
Total
|
|
$
|
2,007.6
|
|
|
$
|
1,949.5
|
|
|
$
|
4,025.2
|
|
|
$
|
3,921.9
|
|
“S.E.T.” refers to our Surgical, Sports Medicine, Foot and Ankle, Extremities and Trauma product category. CMF refers to our craniomaxillofacial and thoracic products.
4.
Inventories
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Finished goods
|
|
$
|
1,724.6
|
|
|
$
|
1,618.7
|
|
Work in progress
|
|
|
235.6
|
|
|
|
200.0
|
|
Raw materials
|
|
|
198.3
|
|
|
|
249.6
|
|
Inventories
|
|
$
|
2,158.5
|
|
|
$
|
2,068.3
|
|
5. Property, Plant and Equipment
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Land
|
|
$
|
28.8
|
|
|
$
|
29.0
|
|
Buildings and equipment
|
|
|
1,904.2
|
|
|
|
1,838.5
|
|
Capitalized software costs
|
|
|
430.9
|
|
|
|
421.6
|
|
Instruments
|
|
|
2,828.3
|
|
|
|
2,683.9
|
|
Construction in progress
|
|
|
94.2
|
|
|
|
110.7
|
|
|
|
|
5,286.4
|
|
|
|
5,083.7
|
|
Accumulated depreciation
|
|
|
(3,299.5
|
)
|
|
|
(3,045.1
|
)
|
Property, plant and equipment, net
|
|
$
|
1,986.9
|
|
|
$
|
2,038.6
|
|
6. Transfers of Financial Assets
In the fourth quarter of 2016, we executed receivables purchase arrangements with unrelated third parties to liquidate portions of our trade accounts receivable balance. The receivables relate to products sold to customers and are short-term in nature. The factorings were treated as sales of our accounts receivable. Proceeds from the transfers reflect either the face value of the accounts receivable or the face value less factoring fees.
In the U.S. and Japan, our programs are executed on a revolving basis with a maximum funding limit as of June 30, 2018 of $400 million. We act as the collection agent on behalf of the third party, but have no significant retained interests or servicing liabilities related to the accounts receivable sold. In order to mitigate credit risk, we purchased credit insurance for the factored accounts receivable. As a result, our risk of loss is limited to the factored accounts receivable not covered by the insurance. Additionally, we have provided guarantees for the factored accounts receivable. The maximum exposures to loss associated with these arrangements were $30.5 million and $22.9 million as of June 30, 2018 and December 31, 2017, respectively.
In Europe, we sell to a third party and have no continuing involvement or significant risk with the factored accounts receivable.
11
Funds received from the transfers are recorded as an increase to cash and a reduction to accounts receivable outstanding in the condensed consolidated balance sheets. W
e report the cash flows attributable to the sale of receivables to third parties in cash flows from operating activities in our condensed consolidated statements of cash flows.
Net expenses resulting from the sales of receivables are recognized in selling
, general and administrative expense. Net expenses include any resulting gains or losses from the sales of receivables, credit insurance and factoring fees.
In the six month periods ended June 30, 2018 and 2017, we sold receivables having an aggregate face value of $1,260.7 million and $582.7 million to third parties in exchange for cash proceeds of $1,260.1 million and $582.3 million, respectively. Expenses recognized on these sales during the six month periods ended June 30, 2018 and 2017 were not significant. In the six month periods ended June 30, 2018 and 2017, under the U.S. and Japan programs, we collected $1,007.8 million and $314.0 million, respectively, from our customers and remitted that amount to the third party, and we effectively repurchased $121.0 million and $31.0 million, respectively, of previously sold accounts receivable from the third party, due to the programs’ revolving nature.
As of June 30, 2018 and December 31, 2017, we had collected $40.6 million and $103.5 million, respectively, of funds that were unremitted to the third party, which are reflected in our condensed consolidated balance sheets under other current liabilities. The initial collection of cash from customers and its remittance to the third party is reflected in net cash provided by/(used in) financing activities in our condensed consolidated statements of cash flows. We estimate the incremental operating cash inflows related to all of our receivables purchase programs were approximately $30 million in the six month period ended June 30, 2018.
At June 30, 2018 and December 31, 2017, the outstanding principal amount of receivables that has been derecognized under the U.S. and Japan revolving arrangements amounted to $338.9 million and $261.2 million, respectively.
7. Debt
Our debt consisted of the following (in millions):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
2.000% Senior Notes due 2018
|
|
$
|
-
|
|
|
$
|
1,150.0
|
|
U.S. Term Loan B
|
|
|
75.0
|
|
|
|
75.0
|
|
Multicurrency Revolving Facility
|
|
|
25.0
|
|
|
|
-
|
|
Total current portion of long-term debt
|
|
$
|
100.0
|
|
|
$
|
1,225.0
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
4.625% Senior Notes due 2019
|
|
$
|
500.0
|
|
|
$
|
500.0
|
|
2.700% Senior Notes due 2020
|
|
|
1,500.0
|
|
|
|
1,500.0
|
|
Floating Rate Notes due 2021
|
|
|
450.0
|
|
|
-
|
|
3.375% Senior Notes due 2021
|
|
|
300.0
|
|
|
|
300.0
|
|
3.150% Senior Notes due 2022
|
|
|
750.0
|
|
|
|
750.0
|
|
3.700% Senior Notes due 2023
|
|
|
300.0
|
|
|
-
|
|
3.550% Senior Notes due 2025
|
|
|
2,000.0
|
|
|
|
2,000.0
|
|
4.250% Senior Notes due 2035
|
|
|
253.4
|
|
|
|
253.4
|
|
5.750% Senior Notes due 2039
|
|
|
317.8
|
|
|
|
317.8
|
|
4.450% Senior Notes due 2045
|
|
|
395.4
|
|
|
|
395.4
|
|
1.414% Euro Notes due 2022
|
|
|
583.8
|
|
|
|
600.4
|
|
2.425% Euro Notes due 2026
|
|
|
583.8
|
|
|
|
600.4
|
|
U.S. Term Loan A
|
|
|
610.0
|
|
|
|
835.0
|
|
U.S. Term Loan B
|
|
|
600.0
|
|
|
|
600.0
|
|
Japan Term Loan A
|
|
|
105.9
|
|
|
|
103.2
|
|
Japan Term Loan B
|
|
|
192.8
|
|
|
|
187.9
|
|
Other long-term debt
|
|
|
3.9
|
|
|
|
4.1
|
|
Debt discount and issuance costs
|
|
|
(52.4
|
)
|
|
|
(53.2
|
)
|
Adjustment related to interest rate swaps
|
|
|
18.9
|
|
|
|
23.1
|
|
Total long-term debt
|
|
$
|
9,413.3
|
|
|
$
|
8,917.5
|
|
At June 30, 2018, our total debt balance consisted of
$7.9 billion aggregate principal amount of our senior notes, which included $1.2 billion of Euro-denominated senior notes (“Euro Notes”), $610.0 million outstanding under a U.S. term loan (“U.S. Term Loan
12
A”) that will mature on June 24, 2020, $675.0
million o
utstanding under a U.S. term loan (“U.S. Term Loan B”) that will mature on September 30, 2019, an
11.7 billion Japanese Yen term loan agreement (“Japan Term Loan A”) and a 21.3 billion Japanese Yen term loan agreement (“Japan Term Loan B”) that will each m
ature on September 27, 2022, $25.0 million outstanding under the Multicurrency Revolving Facility (defined below) and other debt and fair value adjustments totaling
$22.8 million, partially offset by debt discount and issuance costs of $52.4 million.
On March 19, 2018, we completed the offering of $450.0 million aggregate principal amount of our floating rate senior notes due March 19, 2021 and $300.0 million aggregate principal amount of our 3.700% senior notes due March 19, 2023. Interest on the floating rate senior notes is equal to three-month LIBOR plus 0.750% and is payable quarterly, commencing on June 19, 2018, until maturity. Interest is payable on the 3.700% senior notes semi-annually, commencing on September 19, 2018, until maturity. We received net proceeds of $749.5 million from this offering. On April 2, 2018, these proceeds, together with borrowings under the Multicurrency Revolving Facility (as defined below) and cash on hand, were used to repay the 2.000% Senior Notes due 2018.
On September 22, 2017, we entered into a term loan agreement for the Japan Term Loan B, and an amended and restated term loan agreement, which amended and restated the Japan Term Loan A loan agreement dated as of May 24, 2012, as amended as of October 31, 2014. As described above, the term loans under both of these agreements will mature on September 27, 2022. Each of these term loans bears interest at a fixed rate of 0.635% per annum.
We have a revolving credit and term loan agreement (the “2016 Credit Agreement”) and a first amendment to our credit agreement executed in 2014 (the “2014 Credit Agreement”). The 2016 Credit Agreement contains the U.S. Term Loan B and a five-year unsecured multicurrency revolving facility of $1.5 billion (the “Multicurrency Revolving Facility”). The Multicurrency Revolving Facility replaced the previous multicurrency revolving facility under the 2014 Credit Agreement and will mature on September 30, 2021, with two available one-year extensions at our discretion. The 2014 Credit Agreement also provided for the U.S. Term Loan A, which remains in effect.
Borrowings under the 2014 and 2016 Credit Agreements generally bear interest at floating rates. We pay a facility fee on the aggregate amount of the Multicurrency Revolving Facility. If our credit rating falls below investment grade, additional restrictions would result, including restrictions on investments and payment of dividends. We were in compliance with all financial covenants under the 2014 and 2016 Credit Agreements as of June 30, 2018. As of June 30, 2018, we had $25.0 million of borrowings outstanding under the Multicurrency Revolving Facility.
Under the terms of U.S. Term Loan A, we have the ability to prepay principal without penalty. We have paid $2.39 billion in principal under U.S. Term Loan A, resulting in $610.0 million in outstanding borrowings as of June 30, 2018. Of the outstanding balance, $197.5 million is due March 31, 2020 and $412.5 million is due June 30, 2020.
Under the terms of U.S. Term Loan B, future principal payments are due as follows: $75.0 million on September 30, 2018, with the remaining balance due on the maturity date of September 30, 2019. We have paid $75.0 million in principal under U.S. Term Loan B, resulting in $675.0 million outstanding on the U.S. Term Loan B as of June 30, 2018.
The estimated fair value of our senior notes as of June 30, 2018, based on quoted prices for the specific securities from transactions in over-the-counter markets (Level 2), was $7,864.8 million. The estimated fair value of Japan Term Loan A and Japan Term Loan B, in the aggregate, as of June 30, 2018, based upon publicly available market yield curves and the terms of the debt (Level 2), was $297.4 million. The carrying values of U.S. Term Loan A, U.S. Term Loan B and the Multicurrency Revolving Facility approximate their fair values as they bear interest at short-term variable market rates.
8. Accumulated Other Comprehensive Income
AOCI refers to certain gains and losses that under GAAP are included in comprehensive income but are excluded from net earnings as these amounts are initially recorded as an adjustment to stockholders’ equity. Amounts in AOCI may be reclassified to net earnings upon the occurrence of certain events.
Our AOCI is comprised of foreign currency translation adjustments, unrealized gains and losses on cash flow hedges and amortization of prior service costs and unrecognized gains and losses in actuarial assumptions on our defined benefit plans. Foreign currency translation adjustments are reclassified to net earnings upon sale or upon a complete or substantially complete liquidation of an investment in a foreign entity. Unrealized gains and losses on cash flow hedges are reclassified to net earnings when the hedged item affects net earnings. Amounts related to defined benefit plans that are in AOCI are reclassified over the service periods of employees in the plan.
13
The following table shows the changes in the components of AOCI, net of tax (in millions):
|
|
Foreign
|
|
|
Cash
|
|
|
Defined
|
|
|
|
|
|
|
|
Currency
|
|
|
Flow
|
|
|
Benefit
|
|
|
Total
|
|
|
|
Translation
|
|
|
Hedges
|
|
|
Plan Items
|
|
|
AOCI
|
|
Balance at December 31, 2017
|
|
$
|
121.5
|
|
|
$
|
(66.5
|
)
|
|
$
|
(138.2
|
)
|
|
$
|
(83.2
|
)
|
AOCI before reclassifications
|
|
|
(83.0
|
)
|
|
|
25.2
|
|
|
|
(3.8
|
)
|
|
|
(61.6
|
)
|
Reclassifications to retained earnings (Note 2)
|
|
|
(17.4
|
)
|
|
|
(4.4
|
)
|
|
|
(21.1
|
)
|
|
|
(42.9
|
)
|
Reclassifications to statement of earnings
|
|
|
-
|
|
|
|
18.9
|
|
|
|
5.8
|
|
|
|
24.7
|
|
Balance at June 30, 2018
|
|
$
|
21.1
|
|
|
$
|
(26.8
|
)
|
|
$
|
(157.3
|
)
|
|
$
|
(163.0
|
)
|
The following table shows the reclassification adjustments from AOCI (in millions):
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
Reclassified from AOCI
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Location on
|
Component of AOCI
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Statements of Earnings
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
(10.5
|
)
|
|
$
|
5.9
|
|
|
$
|
(21.6
|
)
|
|
$
|
17.0
|
|
|
Cost of products sold
|
Forward starting interest rate swaps
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
Interest expense
|
|
|
|
(10.7
|
)
|
|
|
5.7
|
|
|
|
(21.9
|
)
|
|
|
16.7
|
|
|
Total before tax
|
|
|
|
(1.5
|
)
|
|
|
1.2
|
|
|
|
(3.0
|
)
|
|
|
3.2
|
|
|
Provision for income taxes
|
|
|
$
|
(9.2
|
)
|
|
$
|
4.5
|
|
|
$
|
(18.9
|
)
|
|
$
|
13.5
|
|
|
Net of tax
|
Defined benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
2.5
|
|
|
$
|
2.5
|
|
|
$
|
5.0
|
|
|
$
|
5.1
|
|
|
Other expense, net
|
Unrecognized actuarial (loss)
|
|
|
(6.7
|
)
|
|
|
(5.2
|
)
|
|
|
(12.8
|
)
|
|
|
(10.8
|
)
|
|
Other expense, net
|
|
|
|
(4.2
|
)
|
|
|
(2.7
|
)
|
|
|
(7.8
|
)
|
|
|
(5.7
|
)
|
|
Total before tax
|
|
|
|
(1.2
|
)
|
|
|
(1.1
|
)
|
|
|
(2.0
|
)
|
|
|
(2.3
|
)
|
|
Benefit for income taxes
|
|
|
$
|
(3.0
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
(5.8
|
)
|
|
$
|
(3.4
|
)
|
|
Net of tax
|
Total reclassifications
|
|
$
|
(12.2
|
)
|
|
$
|
2.9
|
|
|
$
|
(24.7
|
)
|
|
$
|
10.1
|
|
|
Net of tax
|
The following table shows the tax effects on each component of AOCI recognized in our condensed consolidated statements of comprehensive income (in millions):
|
|
Three Months Ended June 30, 2018
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
Before Tax
|
|
|
Tax
|
|
|
Net of Tax
|
|
|
Before Tax
|
|
|
Tax
|
|
|
Net of Tax
|
|
Foreign currency cumulative translation adjustments
|
|
$
|
(192.0
|
)
|
|
$
|
(14.2
|
)
|
|
$
|
(177.8
|
)
|
|
$
|
(90.6
|
)
|
|
$
|
(7.6
|
)
|
|
$
|
(83.0
|
)
|
Unrealized cash flow hedge (losses)
|
|
|
62.7
|
|
|
|
11.1
|
|
|
|
51.6
|
|
|
|
29.6
|
|
|
|
4.4
|
|
|
|
25.2
|
|
Reclassification adjustments on cash flow hedges
|
|
|
10.7
|
|
|
|
1.5
|
|
|
|
9.2
|
|
|
|
21.9
|
|
|
|
3.0
|
|
|
|
18.9
|
|
Adjustments to prior service cost and unrecognized
actuarial assumptions
|
|
|
4.1
|
|
|
|
(1.2
|
)
|
|
|
5.3
|
|
|
|
-
|
|
|
|
(2.0
|
)
|
|
|
2.0
|
|
Total Other Comprehensive Loss
|
|
$
|
(114.5
|
)
|
|
$
|
(2.8
|
)
|
|
$
|
(111.7
|
)
|
|
$
|
(39.1
|
)
|
|
$
|
(2.2
|
)
|
|
$
|
(36.9
|
)
|
|
|
Three Months Ended June 30, 2017
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
Before Tax
|
|
|
Tax
|
|
|
Net of Tax
|
|
|
Before Tax
|
|
|
Tax
|
|
|
Net of Tax
|
|
Foreign currency cumulative translation adjustments
|
|
$
|
215.3
|
|
|
$
|
26.1
|
|
|
$
|
189.2
|
|
|
$
|
269.7
|
|
|
$
|
31.5
|
|
|
$
|
238.2
|
|
Unrealized cash flow hedge (losses)
|
|
|
(26.5
|
)
|
|
|
(1.7
|
)
|
|
|
(24.8
|
)
|
|
|
(63.1
|
)
|
|
|
(12.0
|
)
|
|
|
(51.1
|
)
|
Reclassification adjustments on cash flow hedges
|
|
|
(5.7
|
)
|
|
|
(1.2
|
)
|
|
|
(4.5
|
)
|
|
|
(16.7
|
)
|
|
|
(3.2
|
)
|
|
|
(13.5
|
)
|
Adjustments to prior service cost and unrecognized
actuarial assumptions
|
|
|
0.2
|
|
|
|
0.7
|
|
|
|
(0.5
|
)
|
|
|
(3.5
|
)
|
|
|
0.5
|
|
|
|
(4.0
|
)
|
Total Other Comprehensive Income
|
|
$
|
183.3
|
|
|
$
|
23.9
|
|
|
$
|
159.4
|
|
|
$
|
186.4
|
|
|
$
|
16.8
|
|
|
$
|
169.6
|
|
14
9. Fair Value Measurement of
Assets and Liabilities
The following financial assets and liabilities are recorded at fair value on a recurring basis (in millions):
|
|
As of June 30, 2018
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using:
|
|
Description
|
|
Recorded
Balance
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, current and long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
9.9
|
|
|
$
|
-
|
|
|
$
|
9.9
|
|
|
$
|
-
|
|
Interest rate swaps
|
|
|
37.2
|
|
|
|
-
|
|
|
|
37.2
|
|
|
|
-
|
|
Total Assets
|
|
$
|
47.1
|
|
|
$
|
-
|
|
|
$
|
47.1
|
|
|
$
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, current and long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
10.9
|
|
|
$
|
-
|
|
|
$
|
10.9
|
|
|
$
|
-
|
|
Interest rate swaps
|
|
|
1.2
|
|
|
|
-
|
|
|
|
1.2
|
|
|
|
-
|
|
Contingent payments related to acquisitions
|
|
|
23.5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23.5
|
|
Total Liabilities
|
|
$
|
35.6
|
|
|
$
|
-
|
|
|
$
|
12.1
|
|
|
$
|
23.5
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using:
|
|
Description
|
|
Recorded
Balance
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, current and long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
1.6
|
|
|
$
|
-
|
|
|
$
|
1.6
|
|
|
$
|
-
|
|
Interest rate swaps
|
|
|
4.5
|
|
|
|
-
|
|
|
|
4.5
|
|
|
|
-
|
|
Total Assets
|
|
$
|
6.1
|
|
|
$
|
-
|
|
|
$
|
6.1
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, current and long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
50.9
|
|
|
$
|
-
|
|
|
$
|
50.9
|
|
|
$
|
-
|
|
Contingent payments related to acquisitions
|
|
|
41.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41.0
|
|
Total Liabilities
|
|
$
|
91.9
|
|
|
$
|
-
|
|
|
$
|
50.9
|
|
|
$
|
41.0
|
|
We value our foreign currency forward contracts using a market approach based on foreign currency exchange rates obtained from active markets, and we perform ongoing assessments of counterparty credit risk.
We value our interest rate swaps using a market approach based on publicly available market yield curves and the terms of our swaps, and we perform ongoing assessments of counterparty credit risk.
Contingent payments related to acquisitions consist of commercial milestone, cost savings and sales-based payments, and are valued using discounted cash flow techniques. The fair value of commercial milestone payments reflects management’s expectations of probability of payment, and increases as the probability of payment increases or expectation of timing of payments is accelerated. The fair value of cost savings and sales-based payments is based upon probability-weighted future cost savings and revenue estimates, and increases as cost savings and revenue estimates increase, probability weighting of higher cost savings and revenue scenarios increase or expectation of timing of payment is accelerated.
The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the tables above that used significant unobservable inputs (Level 3) (in millions):
15
|
|
Level 3 - Liabilities
|
|
Contingent payments related to acquisitions
|
|
|
|
|
Beginning balance December 31, 2017
|
|
$
|
41.0
|
|
Change in estimate
|
|
|
0.3
|
|
Settlements
|
|
|
(17.8
|
)
|
Ending balance June 30, 2018
|
|
$
|
23.5
|
|
Changes in estimates are recognized in Acquisition, integration and related on our condensed consolidated statement of earnings.
10. Derivative Instruments and Hedging Activities
We are exposed to certain market risks relating to our ongoing business operations, including foreign currency exchange rate risk, commodity price risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risks that we manage through the use of derivative instruments are interest rate risk and foreign currency exchange rate risk.
Interest Rate Risk
Derivatives Designated as Fair Value Hedges
In prior years, we entered into various fixed-to-variable interest rate swap agreements that were accounted for as fair value hedges of a portion of our 4.625% Senior Notes due 2019 and all of our 3.375% Senior Notes due 2021. In August 2016, we received cash for these interest rate swap assets by terminating the hedging instruments with the counterparties. The remaining unamortized balance as of June 30, 2018 related to these discontinued hedges was $18.9 million, which will be recognized using the effective interest rate method over the remaining maturity period of the hedged notes. As of June 30, 2018 and December 31, 2017, the following amounts were recorded on our condensed consolidated balance sheets related to cumulative basis adjustments for fair value hedges (in millions):
|
|
Carrying Amount of the Hedged Liabilites
|
|
|
|
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liabilities
|
|
Balance Sheet Line Item
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Long-term debt
|
|
$
|
568.6
|
|
|
$
|
572.8
|
|
|
|
$
|
18.9
|
|
|
$
|
23.1
|
|
Derivatives Designated as Cash Flow Hedges
In 2014, we entered into forward starting interest rate swaps that were designated as cash flow hedges of our thirty-year tranche of senior notes (the 4.450% Senior Notes due 2045) we expected to issue in 2015. The forward starting interest rate swaps mitigated the risk of changes in interest rates prior to the completion of the offering of senior notes in connection with the Biomet merger. The interest rate swaps were settled, and the remaining loss to be recognized at June 30, 2018 was $27.4 million, which will be recognized using the effective interest rate method over the remaining maturity period of the hedged notes.
In September 2016, we entered into various variable-to-fixed interest rate swap agreements with a notional amount of $375.0 million that were accounted for as cash flow hedges of U.S. Term Loan B. The interest rate swaps minimize the exposure to changes in the LIBOR interest rates while the variable-rate debt is outstanding. The weighted average fixed interest rate for all of the swaps executed is approximately 0.82 percent through September 30, 2019.
Foreign Currency Exchange Rate Risk
We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. We also designated our Euro Notes as net investment hedges of investments in foreign subsidiaries. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros,
16
Swiss Francs, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, R
ussian Rubles, Indian Rupees, Turkish Lira, Polish Zloty, Danish Krone, and Norwegian Krone. We do not use derivative financial instruments for trading or speculative purposes.
Derivatives Designated as Net Investment Hedges
We are exposed to the impact of foreign exchange rate fluctuations in the investments in our wholly-owned foreign subsidiaries that are denominated in currencies other than the U.S. Dollar. In order to mitigate the volatility in foreign exchange rates, we issued Euro Notes in December 2016 and designated 100 percent of the Euro Notes to hedge our net investment in certain wholly-owned foreign subsidiaries that have a functional currency of the Euro. All changes in the fair value of a hedging instrument designated as a net investment hedge are recorded as a component of AOCI in the condensed consolidated balance sheets.
In the first quarter of 2018, we initiated receive-fixed-rate, pay-fixed-rate cross-currency interest rate swaps with a notional amount of €500.0 million. In the second quarter of 2018, we initiated additional receive-fixed-rate, pay-fixed-rate cross-currency interest rate swaps with a notional amount of €500.0 million. These transactions further hedged our net investment in certain wholly-owned foreign subsidiaries that have a functional currency of Euro. All changes in the fair value of a derivative instrument designated as a net investment hedge are recorded as a component of AOCI in the condensed consolidated balance sheets. The portion of this change related to the excluded component will be amortized into earnings over the life of the derivative while the remainder will be recorded in AOCI until the hedged net investment is sold or substantially liquidated. The gains related to the excluded component were not significant for the period.
In the three and six month periods ended June 30, 2018, we recognized foreign exchange gains of $91.1 million and $64.7 million, respectively, in AOCI in foreign currency translation adjustments on our net investment hedges. In the three and six month periods ended June 30, 2017, we recognized foreign exchange losses of $71.0 million and $85.8 million, respectively, in AOCI in foreign currency translation adjustments on our net investment hedges. We did not reclassify any amount from AOCI to earnings in the three and six month periods ended June 30, 2018 and 2017.
Derivatives Designated as Cash Flow Hedges
Our revenues are generated in various currencies throughout the world. However, a significant amount of our inventory is produced in U.S. Dollars. Therefore, movements in foreign currency exchange rates may have different proportional effects on our revenues compared to our cost of products sold. To minimize the effects of foreign currency exchange rate movements on cash flows, we hedge intercompany sales of inventory expected to occur within the next 30 months with foreign currency exchange forward contracts. We designate these derivative instruments as cash flow hedges.
We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and confirming that forecasted transactions have not changed significantly. We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default. Under ASU 2017-12 for derivatives which qualify as hedges of future cash flows, the gains and losses are temporarily recorded in AOCI and then recognized in cost of products sold when the hedged item affects net earnings. On our condensed consolidated statements of cash flows, the settlements of these cash flow hedges are recognized in operating cash flows.
For foreign currency exchange forward contracts and options outstanding at June 30, 2018, we had obligations to purchase U.S. Dollars and sell Euros, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, Indian Rupees, Turkish Lira, Polish Zloty, Danish Krone, and Norwegian Krone and obligations to purchase Swiss Francs and sell U.S. Dollars. These derivatives mature at dates ranging from July 2018 through December 2020. As of June 30, 2018, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase U.S. Dollars were $1,608.9 million. As of June 30, 2018, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase Swiss Francs were $264.2 million.
Derivatives Not Designated as Hedging Instruments
We enter into foreign currency forward exchange contracts with terms of one month to manage currency exposures for monetary assets and liabilities denominated in a currency other than an entity’s functional currency. As a result, any foreign currency re-measurement gains/losses recognized in earnings are generally offset with gains/losses on the foreign currency forward exchange contracts in the same reporting period. The net amount of these offsetting gains/losses is recorded in Other expense. These contracts are settled on the last day of each reporting period. Therefore, there is no outstanding balance related to these contracts recorded on the balance sheet as of the end of the reporting period. The notional amounts of these contracts are typically in a range of $1.5 billion to $2.0 billion per quarter.
17
Income Statement Presentation
Derivatives Designated as Cash Flow Hedges
Derivative instruments designated as cash flow hedges had the following effects, before taxes, on AOCI and Net earnings on our condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income and condensed consolidated balance sheets (in millions):
|
|
Amount of Gain (Loss)
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
|
Recognized in AOCI
|
|
|
|
|
Reclassified from AOCI
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Location on
|
|
June 30,
|
|
|
June 30,
|
|
Derivative Instrument
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Statements of Earnings
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Foreign exchange
forward contracts
|
|
$
|
63.7
|
|
|
$
|
(25.9
|
)
|
|
$
|
29.5
|
|
|
$
|
(63.1
|
)
|
|
Cost of products sold
|
|
$
|
(10.5
|
)
|
|
$
|
5.9
|
|
|
$
|
(21.6
|
)
|
|
$
|
17.0
|
|
Interest rate swaps
|
|
|
(1.0
|
)
|
|
|
(0.6
|
)
|
|
|
0.1
|
|
|
|
-
|
|
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forward starting
interest rate swaps
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Interest expense
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
$
|
62.7
|
|
|
$
|
(26.5
|
)
|
|
$
|
29.6
|
|
|
$
|
(63.1
|
)
|
|
|
|
$
|
(10.7
|
)
|
|
$
|
5.7
|
|
|
$
|
(21.9
|
)
|
|
$
|
16.7
|
|
The net amounts recognized in earnings during the three and six month periods ended June 30, 2018 and 2017 due to ineffectiveness and amounts excluded from the assessment of hedge effectiveness were not significant.
The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on our condensed consolidated balance sheet at June 30, 2018, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized loss of $32.9 million, or $26.8 million after taxes, which is deferred in AOCI. A loss of $10.7 million, or $9.3 million after taxes, is expected to be reclassified to earnings in cost of products sold and a loss of $0.6 million, or $0.4 million after taxes, is expected to be reclassified to earnings in interest expense over the next twelve months.
The following table presents the effect of fair value and cash flow hedge accounting on our condensed consolidated statements of earnings (in millions):
|
|
Location and Amount of Gain/(Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships for the Period Ended:
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
|
Cost of
|
|
|
|
|
|
|
Cost of
|
|
|
|
|
|
|
Cost of
|
|
|
|
|
|
|
Cost of
|
|
|
|
|
|
|
|
Goods
|
|
|
Interest
|
|
|
Goods
|
|
|
Interest
|
|
|
Goods
|
|
|
Interest
|
|
|
Goods
|
|
|
Interest
|
|
|
|
Sold
|
|
|
Expense
|
|
|
Sold
|
|
|
Expense
|
|
|
Sold
|
|
|
Expense
|
|
|
Sold
|
|
|
Expense
|
|
Total amounts of income and expense line items presented in the statements of earnings in which the effects of fair value or cash flow hedges are
recorded
|
|
$
|
583.7
|
|
|
$
|
(75.9
|
)
|
|
$
|
527.7
|
|
|
$
|
(82.3
|
)
|
|
$
|
1,159.5
|
|
|
$
|
(154.8
|
)
|
|
$
|
1,040.6
|
|
|
$
|
(165.2
|
)
|
The effects of fair value and cash flow hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging
relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued interest rate swaps
|
|
|
-
|
|
|
|
2.1
|
|
|
|
-
|
|
|
|
2.1
|
|
|
|
-
|
|
|
|
4.2
|
|
|
|
-
|
|
|
|
4.1
|
|
Gain (loss) on cash flow hedging
relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward starting interest rate swaps
|
|
|
-
|
|
|
|
(0.2
|
)
|
|
|
-
|
|
|
|
(0.2
|
)
|
|
|
-
|
|
|
|
(0.3
|
)
|
|
|
-
|
|
|
|
(0.3
|
)
|
Foreign exchange forward contracts
|
|
|
(10.5
|
)
|
|
|
-
|
|
|
|
5.9
|
|
|
|
-
|
|
|
|
(21.6
|
)
|
|
|
-
|
|
|
|
17.0
|
|
|
|
-
|
|
18
Derivative
s Not Designated as Hedging Instruments
The following gains and (losses) from these derivative instruments were recognized on our condensed consolidated statements of earnings (in millions):
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
Location on
|
|
June 30,
|
|
|
June 30,
|
|
Derivative Instrument
|
|
Statements of Earnings
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Foreign exchange forward contracts
|
|
Other expense, net
|
|
$
|
27.6
|
|
|
$
|
(10.8
|
)
|
|
$
|
17.9
|
|
|
$
|
(38.6
|
)
|
These gains and losses do not reflect offsetting losses of $32.9 million and $29.0 million in the three and six month periods ended June 30, 2018, respectively, and offsetting gains of $6.3 million and $31.9 million in the three and six month periods ended June 30, 2017, respectively, recognized in Other expense, net as a result of foreign currency re-measurement of monetary assets and liabilities denominated in a currency other than an entity’s functional currency.
Balance Sheet Presentation
As of June 30, 2018 and December 31, 2017, all derivative instruments designated as fair value hedges and cash flow hedges were recorded at fair value on our condensed consolidated balance sheets. On our condensed consolidated balance sheets, we recognize individual forward contracts and options with the same counterparty on a net asset/liability basis if we have a master netting agreement with the counterparty. Under these master netting agreements, we are able to settle derivative instrument assets and liabilities with the same counterparty in a single transaction, instead of settling each derivative instrument separately. We have master netting agreements with all of our counterparties. The fair value of derivative instruments on a gross basis is as follows (in millions):
|
|
As of June 30, 2018
|
|
|
As of December 31, 2017
|
|
|
|
Balance
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
$
|
15.0
|
|
|
Other current assets
|
|
$
|
14.5
|
|
Foreign exchange forward contracts
|
|
Other assets
|
|
|
7.9
|
|
|
Other assets
|
|
|
4.8
|
|
Interest rate swaps
|
|
Other assets
|
|
|
4.6
|
|
|
Other assets
|
|
|
4.5
|
|
Cross-currency interest rate swaps
|
|
Other assets
|
|
|
32.6
|
|
|
Other assets
|
|
|
-
|
|
Total asset derivatives
|
|
|
|
$
|
60.1
|
|
|
|
|
$
|
23.8
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current liabilities
|
|
$
|
18.2
|
|
|
Other current liabilities
|
|
$
|
45.8
|
|
Foreign exchange forward contracts
|
|
Other long-term liabilities
|
|
|
5.7
|
|
|
Other long-term liabilities
|
|
|
22.8
|
|
Cross-currency interest rate swaps
|
|
Other long-term liabilities
|
|
|
1.2
|
|
|
Other long-term liabilities
|
|
|
-
|
|
Total liability derivatives
|
|
|
|
$
|
25.1
|
|
|
|
|
$
|
68.6
|
|
The table below presents the effects of our master netting agreements on our condensed consolidated balance sheets (in millions):
|
|
|
|
As of June 30, 2018
|
|
|
As of December 31, 2017
|
|
Description
|
|
Location
|
|
Gross
Amount
|
|
|
Offset
|
|
|
Net Amount in
Balance Sheet
|
|
|
Gross
Amount
|
|
|
Offset
|
|
|
Net Amount in
Balance Sheet
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
Other current assets
|
|
$
|
15.0
|
|
|
$
|
8.7
|
|
|
$
|
6.3
|
|
|
$
|
14.5
|
|
|
$
|
13.4
|
|
|
$
|
1.1
|
|
Cash flow hedges
|
|
Other assets
|
|
|
7.9
|
|
|
|
4.3
|
|
|
|
3.6
|
|
|
|
4.8
|
|
|
|
4.3
|
|
|
|
0.5
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
Other current liabilities
|
|
|
18.2
|
|
|
|
8.7
|
|
|
|
9.5
|
|
|
|
45.8
|
|
|
|
13.4
|
|
|
|
32.4
|
|
Cash flow hedges
|
|
Other long-term liabilities
|
|
|
5.7
|
|
|
|
4.3
|
|
|
|
1.4
|
|
|
|
22.8
|
|
|
|
4.3
|
|
|
|
18.5
|
|
19
The following net investment hedge gains (losses) were recognized
on our condensed consolidated statements of comprehensive income (in millions):
|
|
Amount of Gain (Loss)
|
|
|
|
Recognized in AOCI
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
Derivative Instrument
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Euro Notes
|
|
$
|
62.3
|
|
|
$
|
(71.0
|
)
|
|
$
|
33.3
|
|
|
$
|
(85.8
|
)
|
Cross-currency interest rate swaps
|
|
|
28.8
|
|
|
|
-
|
|
|
|
31.4
|
|
|
|
-
|
|
|
|
$
|
91.1
|
|
|
$
|
(71.0
|
)
|
|
$
|
64.7
|
|
|
$
|
(85.8
|
)
|
11. Income Taxes
We operate on a global basis and are subject to numerous and complex tax laws and regulations. Additionally, tax laws continue to undergo rapid changes in both application and interpretation by various countries, including state aid interpretations and initiatives led by the Organization for Economic Cooperation and Development. Our income tax filings are subject to examinations by taxing authorities throughout the world. Income tax audits may require an extended period of time to reach resolution and may result in significant income tax adjustments when interpretation of tax laws or allocation of company profits is disputed. Although ultimate timing is uncertain, the net amount of tax liability for unrecognized tax benefits may change within the next twelve months due to changes in audit status, expiration of statutes of limitations, settlements of tax assessments and other events. Management’s best estimate of such change is within the range of a $115 million decrease to a $25 million increase.
Our U.S. Federal income tax returns have been audited through 2009 and are currently under audit for years 2010-2015. The IRS has proposed adjustments for years 2005-2012, reallocating profits between certain of our U.S. and foreign subsidiaries. We have disputed these adjustments and intend to continue to vigorously defend our positions. For years 2005-2007, we have filed a petition with the U.S. Tax Court. For years 2008-2009, we are pursuing resolution through the IRS Administrative Appeals Process.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "2017 Tax Act"). The 2017 Tax Act made changes to the U.S. tax code, which included (1) reducing the U.S. corporate income tax rate from 35 percent to 21 percent, (2) implementing a base erosion and anti-abuse tax, (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (4) adding a new provision designed to tax global intangible low-taxed income ("GILTI") of foreign subsidiaries which allows for the possibility of utilizing foreign tax credits to offset the tax liability (subject to some limitations), (5) implementing a lower effective U.S. income tax rate on certain revenues from sources outside the U.S., and (6) implementing a one-time transition tax on certain undistributed earnings of foreign subsidiaries. In the year ended December 31, 2017, we recorded a provisional discrete net tax benefit associated with the 2017 Tax Act and related matters. In the three and six month periods ended June 30, 2018, we did not make any material changes to the amount recorded in the year ended December 31, 2017. As of June 30, 2018, the amounts recorded for the 2017 Tax Act remain provisional for the transition tax, the remeasurement of deferred taxes, and our reassessment of permanently reinvested earnings, uncertain tax positions and other related matters. These estimates may be impacted by further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations, state tax conformity to federal tax changes and the impact of the GILTI provisions. We have not yet determined our policy election with respect to whether to record deferred taxes for basis differences expected to reverse as a result of the GILTI provisions in future periods or use the period cost method. We have, however, included an estimate of the current GILTI impact in our tax provision for 2018.
In the three and six month periods ended June 30, 2018, our effective tax rate (“ETR”) was 15.1 percent and 18.2 percent, respectively. In the three month period ended June 30, 2018, we recognized a tax benefit related to adjustments from internal restructuring transactions. Other than this tax benefit, our ETR approximates the U.S. federal income tax rate for both the three and six month periods ended June 30, 2018. In the prior year periods, we had certain discrete adjustments that significantly impacted our ETR. In the six month period ended June 30, 2017, we recognized a tax benefit of $69.7 million resulting from a tax restructuring that lowered the tax rate on certain deferred tax liabilities recorded on intangible assets recognized in the Biomet merger acquisition-related accounting. In the three and six month periods ended June 30, 2017, we recognized tax benefits of $67.0 million and $88.8 million, respectively, related to resolution of certain tax matters. In addition, our prior year ETR was affected by the significant expenses associated with the Biomet merger and other acquisitions which have generally been recognized in higher income tax jurisdictions. Accordingly, this has reduced our ETR as our earnings have been lower in these higher income tax jurisdictions.
20
12. 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 compensation. In addition to the U.S. and Puerto Rico defined benefit pension plans, we sponsor various foreign pension arrangements, including retirement and termination benefit plans required by local law or coordinated with government sponsored plans.
The components of net periodic pension expense for our U.S. and foreign defined benefit pension plans are as follows (in millions):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
7.0
|
|
|
$
|
6.4
|
|
|
$
|
14.5
|
|
|
$
|
13.9
|
|
Interest cost
|
|
|
5.6
|
|
|
|
4.6
|
|
|
|
11.1
|
|
|
|
9.3
|
|
Expected return on plan assets
|
|
|
(11.7
|
)
|
|
|
(10.1
|
)
|
|
|
(23.5
|
)
|
|
|
(20.2
|
)
|
Curtailment loss
|
|
|
-
|
|
|
|
0.2
|
|
|
|
-
|
|
|
|
0.2
|
|
Amortization of prior service cost
|
|
|
(2.5
|
)
|
|
|
(2.5
|
)
|
|
|
(5.0
|
)
|
|
|
(5.1
|
)
|
Amortization of unrecognized actuarial loss
|
|
|
6.7
|
|
|
|
5.2
|
|
|
|
12.8
|
|
|
|
10.8
|
|
Net periodic pension expense
|
|
$
|
5.1
|
|
|
$
|
3.8
|
|
|
$
|
9.9
|
|
|
$
|
8.9
|
|
Service cost is recognized in the operating expense line item in which the related employee is classified. All other components of net periodic pension expense are recognized in Other expense, net.
We expect that we will have minimal legally required funding obligations in 2018 for our U.S. and Puerto Rico defined benefit pension plans, and therefore we have not made, nor do we voluntarily expect to make, any material contributions to these plans during 2018. We contributed $9.8 million to our foreign-based defined benefit pension plans in the six month period ended June 30, 2018, and we expect to contribute $9.7 million to these foreign-based plans during the remainder of 2018.
13. Earnings Per Share
The following is a reconciliation of weighted average shares for the basic and diluted shares computations (in millions):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted average shares outstanding for basic
net earnings per share
|
|
|
203.3
|
|
|
|
201.8
|
|
|
|
203.2
|
|
|
|
201.4
|
|
Effect of dilutive stock options and other equity awards
|
|
|
1.3
|
|
|
|
1.9
|
|
|
|
1.4
|
|
|
|
2.0
|
|
Weighted average shares outstanding for diluted
net earnings per share
|
|
|
204.6
|
|
|
|
203.7
|
|
|
|
204.6
|
|
|
|
203.4
|
|
During the three and six month periods ended June 30, 2018, an average of 3.4 million options and 2.3 million options, respectively, to purchase shares of common stock were not included in the computation of diluted earnings per share because the exercise prices of these options were greater than the average market price of our common stock. In the three and six month periods ended June 30, 2017, an average of 1.0 million and 0.7 million options, respectively, were not included for the same reason.
14. Segment Information
We design, manufacture and market orthopaedic reconstructive products; sports medicine, biologics, extremities and trauma products; spine, craniomaxillofacial and thoracic products (“CMF”); office based technologies; dental implants; and related surgical products. We allocate resources to achieve our operating profit goals through seven operating segments. Our operating segments are comprised of both geographic and product category business units. The geographic operating segments are the Americas, which is comprised principally of the U.S. and includes other North, Central and South American markets; EMEA, which is comprised principally of Europe and includes the Middle East and African markets; and Asia Pacific, which is comprised primarily of Japan, China and Australia and includes other Asian and Pacific markets. The product category operating segments are Spine, less Asia Pacific; Office Based Technologies; CMF and Dental. The geographic operating segments include results from all of our product categories except those in the product category operating segments. The Office Based Technologies, CMF and Dental product
21
category operating segments reflect those respective product category results from all regions, whereas the Spine, l
ess Asia Pacific product category operating segment includes all spine product results excluding those from Asia Pacific.
As it relates to the geographic operating segments, we evaluate performance based upon segment operating profit exclusive of operating expenses pertaining to inventory step-up and certain other inventory and manufacturing related charges, intangible asset amortization, intangible asset impairment, acquisition, integration and related, quality remediation, litigation, other charges and global operations and corporate functions. Global operations and corporate functions include research, development engineering, medical education, brand management, corporate legal, finance and human resource functions, manufacturing operations and logistics and share-based payment expense. As it relates to each product category operating segment, research, development engineering, medical education, brand management and other various costs that are specific to the product category operating segment’s operations are reflected in its operating profit results. Due to these additional costs included in the product category operating segments, profitability metrics among the geographic operating segments and product category operating segments are not comparable. Intercompany transactions have been eliminated from segment operating profit.
We do not review asset information by operating segment. Instead, we review cash flow and other financial ratios by operating segment.
These seven operating segments are the basis for our reportable segment information provided below. The four product category operating segments are individually insignificant to our consolidated results and therefore do not constitute a reporting segment either individually or combined. For presentation purposes, these product category operating segments have been aggregated. Prior period reportable segment financial information has been restated to reflect the impact of the adoption of ASU 2017-07 and ASU 2014-09, as described in Note 2.
Net sales and operating profit by segment are as follows (in millions):
|
|
Net Sales
|
|
|
Operating Profit
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Americas
|
|
$
|
979.3
|
|
|
$
|
969.2
|
|
|
$
|
516.3
|
|
|
$
|
523.6
|
|
EMEA
|
|
|
400.0
|
|
|
|
380.4
|
|
|
|
118.6
|
|
|
|
118.9
|
|
Asia Pacific
|
|
|
319.2
|
|
|
|
292.2
|
|
|
|
112.3
|
|
|
|
111.8
|
|
Product Category Operating Segments
|
|
|
309.1
|
|
|
|
307.7
|
|
|
|
39.8
|
|
|
|
69.6
|
|
Global Operations and Corporate Functions
|
|
|
-
|
|
|
|
-
|
|
|
|
(225.5
|
)
|
|
|
(212.6
|
)
|
Total
|
|
$
|
2,007.6
|
|
|
$
|
1,949.5
|
|
|
|
|
|
|
|
|
|
Inventory step-up and other inventory and manufacturing
related charges
|
|
|
|
|
|
|
|
|
|
|
(12.5
|
)
|
|
|
(22.5
|
)
|
Intangible asset amortization
|
|
|
|
|
|
|
|
|
|
|
(149.5
|
)
|
|
|
(147.7
|
)
|
Intangible asset impairment
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(26.8
|
)
|
Acquisition, integration and related
|
|
|
|
|
|
|
|
|
|
|
(50.5
|
)
|
|
|
(72.5
|
)
|
Quality remediation
|
|
|
|
|
|
|
|
|
|
|
(45.4
|
)
|
|
|
(52.3
|
)
|
Litigation
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
|
|
-
|
|
Other charges
|
|
|
|
|
|
|
|
|
|
|
(11.8
|
)
|
|
|
(9.4
|
)
|
Operating profit
|
|
|
|
|
|
|
|
|
|
$
|
296.0
|
|
|
$
|
280.1
|
|
22
|
|
Net Sales
|
|
|
Operating Profit
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Americas
|
|
$
|
1,970.4
|
|
|
$
|
1,969.8
|
|
|
$
|
1,035.2
|
|
|
$
|
1,064.8
|
|
EMEA
|
|
|
832.6
|
|
|
|
773.1
|
|
|
|
259.0
|
|
|
|
248.6
|
|
Asia Pacific
|
|
|
618.1
|
|
|
|
568.8
|
|
|
|
216.7
|
|
|
|
211.8
|
|
Product Category Operating Segments
|
|
|
604.1
|
|
|
|
610.2
|
|
|
|
93.3
|
|
|
|
142.4
|
|
Global Operations and Corporate Functions
|
|
|
-
|
|
|
|
-
|
|
|
|
(470.9
|
)
|
|
|
(422.9
|
)
|
Total
|
|
$
|
4,025.2
|
|
|
$
|
3,921.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory step-up and other inventory and manufacturing
related charges
|
|
|
|
|
|
|
|
|
|
|
(19.7
|
)
|
|
|
(41.2
|
)
|
Intangible asset amortization
|
|
|
|
|
|
|
|
|
|
|
(300.3
|
)
|
|
|
(299.7
|
)
|
Intangible asset impairment
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(26.8
|
)
|
Acquisition, integration and related
|
|
|
|
|
|
|
|
|
|
|
(96.5
|
)
|
|
|
(130.7
|
)
|
Quality remediation
|
|
|
|
|
|
|
|
|
|
|
(91.6
|
)
|
|
|
(91.2
|
)
|
Litigation
|
|
|
|
|
|
|
|
|
|
|
(1.5
|
)
|
|
|
(7.0
|
)
|
Other charges
|
|
|
|
|
|
|
|
|
|
|
(22.7
|
)
|
|
|
(19.9
|
)
|
Operating profit
|
|
|
|
|
|
|
|
|
|
$
|
601.0
|
|
|
$
|
628.2
|
|
15. Commitments and Contingencies
On a quarterly and annual basis, we review relevant information with respect to loss contingencies and update our accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews. We establish liabilities for loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made.
Litigation
Durom
®
Cup-related claims
: On July 22, 2008, we temporarily suspended marketing and distribution of the Durom Cup in the U.S. Subsequently, a number of product liability lawsuits were filed against us in various U.S. and foreign jurisdictions. The plaintiffs seek damages for personal injury, and they generally allege that the Durom Cup contains defects that result in complications and premature revision of the device. We have settled the majority of these claims and others are still pending. The majority of the pending U.S. lawsuits are currently in a federal Multidistrict Litigation (“MDL”) in the District of New Jersey (
In Re: Zimmer Durom Hip Cup Products Liability Litigation
). As of June 30, 2018, litigation activity in the MDL
is stayed to allow participation in the U.S. Durom Cup Settlement Program, an extrajudicial program created to resolve actions and claims of eligible U.S. plaintiffs and claimants. Other lawsuits are pending in various domestic and foreign jurisdictions, and additional claims may be asserted in the future. The majority of claims outside the U.S. are pending in Canada, Germany, Netherlands, Italy and the UK. A Canadian class settlement was approved in late 2016, and the period for class members to submit a claim for compensation under the settlement closed in September 2017. The majority of claims in the UK are consolidated in a Group Litigation Order.
In the second quarter of 2018, we lowered our estimate of the number of Durom Cup-related claims we expect to settle. Therefore, we recognized a $20.0 million gain in selling, general and administrative expense in the three and six month periods ended June 30, 2018.
In the three and six month periods ended June 30, 2017, we did not record any expense for Durom Cup-related claims.
Since 2008, we have recognized net expense of $469.7 million for Durom Cup-related claims.
We maintain insurance for product liability claims, subject to self-insurance retention requirements. We have recovered insurance proceeds from certain of our insurance carriers for Durom Cup-related claims. While we may recover additional insurance proceeds in the future for Durom Cup-related claims, we do not have a receivable recorded on our condensed consolidated balance sheet as of June 30, 2018 for any possible future insurance recoveries for these claims.
Our estimate as of June 30, 2018 of the remaining liability for all Durom Cup-related claims is $119.4 million, of which $48.9 million is classified as short-term in “Other current liabilities” and $70.5 million is classified as long-term in “Other long-term
23
liabilities” on our condensed consolidated balance sheet. We expect to pay the majority of the Durom C
up-related claims within the next few years.
Our understanding of clinical outcomes with the Durom Cup and other large diameter hip cups continues to evolve. We rely on significant estimates in determining the provisions for Durom Cup-related claims, including our estimate of the number of claims that we will receive and the average amount we will pay per claim. The actual number of claims and the actual amount we pay per claim may differ from our estimates. Among other factors, since our understanding of the clinical outcomes is still evolving, we cannot reasonably estimate the possible loss or range of loss that may result from Durom Cup-related claims in excess of the losses we have accrued. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain.
Margo and Daniel Polett v. Zimmer, Inc. et al.
: On August 20, 2008, Margo and Daniel Polett filed an action against us and an unrelated third party, Public Communications, Inc. (“PCI”), in the Court of Common Pleas, Philadelphia, Pennsylvania seeking an unspecified amount of damages for injuries and loss of consortium allegedly suffered by Mrs. Polett and her spouse, respectively. The complaint alleged that defendants were negligent in connection with Mrs. Polett’s participation in a promotional video featuring one of our knee products. The case was tried in November 2010 and the jury returned a verdict in favor of plaintiffs. The jury awarded $27.6 million in compensatory damages and apportioned fault 30 percent to plaintiffs, 34 percent to us and 36 percent to PCI.
Under applicable law, we may be liable for any portion of the damages apportioned to PCI that it does not pay. On December 2, 2010, we and PCI filed a motion for post-trial relief seeking a judgment notwithstanding the verdict, a new trial or a remittitur. On June 10, 2011, the trial court entered an order denying our motion for post-trial relief and affirming the jury verdict in full and entered judgment for
$20.3 million
against us and PCI. On June 29, 2011, we filed a notice of appeal to the Superior Court of Pennsylvania and posted a bond for the verdict amount plus interest. Oral argument before the appellate court in Philadelphia, Pennsylvania was held on March 13, 2012. On March 1, 2013, the Superior Court of Pennsylvania vacated the
$27.6 million judgment and remanded the case for a new trial. On March 15, 2013, plaintiffs filed a motion for re-argument
en banc
, and on March 28, 2013, we filed our response in opposition. On May 9, 2013, the Superior Court of Pennsylvania granted plaintiffs’ motion for re-argument
en banc
. Oral argument (re-argument
en banc
) before the Superior Court of Pennsylvania was held on October 16, 2013. On December 20, 2013, the Court issued its opinion again vacating the trial court judgment and remanding the case for a new trial. On January 21, 2014, plaintiffs filed a petition for allowance of appeal in the Supreme Court of Pennsylvania, which was granted on May 21, 2014. Oral argument before the Supreme Court of Pennsylvania took place on October 8, 2014. On October 27, 2015, the Supreme Court of Pennsylvania reversed the order of the Superior Court of Pennsylvania and remanded the case to that court to consider the question of whether the trial court erred in refusing to remit the jury’s compensatory damages award. On June 6, 2016, an
en banc
panel of the Superior Court of Pennsylvania vacated the
$27.6 million
verdict and remanded the case back to the trial court for reconsideration of whether remittitur was appropriate. On December 2, 2016, the trial court remitted the verdict to
$21.5 million,
which, after being molded to reduce for plaintiffs’ comparative negligence, totals approximately $15.8 million between PCI and us. On December 5, 2016, we filed a notice of appeal to the Superior Court of Pennsylvania. Oral argument before the Superior Court of Pennsylvania took place on September 20, 2017, and on December 15, 2017, the Superior Court of Pennsylvania issued its decision affirming the $21.5 million remitted award. We subsequently filed a motion for re-argument
en banc
on December 29, 2017, which motion was denied without opinion on February 12, 2018. We filed a petition for allowance of appeal in the Supreme Court of Pennsylvania on March 14, 2018. That petition was pending as of June 30, 2018. While we are pursuing appeal, we recorded a charge in the three month period ended December 31, 2017 for the approximately $15.8 million remitted and molded verdict, plus post-judgment interest from the date of verdict in 2010.
NexGen
®
Knee System claims:
Following a wide-spread advertising campaign conducted by certain law firms beginning in 2010, a number of product liability lawsuits have been filed against us in various jurisdictions. The plaintiffs seek damages for personal injury, alleging that certain products within the NexGen Knee System, specifically the NexGen Flex Femoral Components and MIS Stemmed Tibial Component, suffer from defects that cause them to loosen prematurely. The majority of the cases are currently pending in an MDL in the Northern District of Illinois (
In Re: Zimmer NexGen Knee Implant Products Liability Litigation
). Other cases are pending in various state courts, and additional lawsuits may be filed. Thus far, all cases decided by the MDL court or a jury on the merits have involved NexGen Flex Femoral Components, which represent the majority of cases in the MDL. The initial bellwether trial took place in October 2015 and resulted in a defense verdict. The next scheduled bellwether trial, which was set to commence in November 2016, was dismissed following the court’s grant of summary judgment in our favor in October 2016. That decision was appealed by the plaintiff and subsequently affirmed by the Seventh Circuit Court of Appeals in March 2018. The second bellwether trial took place in January 2017 and resulted in a defense verdict. The parties attended a court-ordered mediation in January 2018, at which a settlement in principle was reached that would resolve all MDL cases and all state court cases that involved MDL products. MDL proceedings have been stayed pending administration of the aforementioned settlement. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain.
Biomet metal-on-metal hip implant claims
: Biomet is a defendant in a number of product liability lawsuits relating to metal-on-metal hip implants, most of which involve the M2a-Magnum
TM
hip system. The majority of the cases are currently consolidated in an MDL in the U.S. District Court for the Northern District of Indiana
(In Re: Biomet M2a Magnum Hip Implant Product Liability
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Litigation)
. Other cases are pending in various state and foreign courts, with the majority of domestic state court cases pending in Indiana and Florida.
On February 3, 2014, Biomet announced the settlement of the MDL. Lawsuits filed in the MDL by April 15, 2014 were eligible to participate in the settlement. Those claims that did not settle via the MDL settlement program have re-commenced litigation in the MDL under a new case management plan. The settlement does not affect certain other claims relating to Biomet’s metal-on-metal hip products that are pending in various state and foreign courts, or other claims that may be filed in the future. Our estimate as of June 30, 2018 of the remaining liability for all Biomet metal-on-metal hip implant claims
is $41.4 million.
Biomet has exhausted the self-insured retention in its insurance program and has been reimbursed for claims related to its metal-on-metal products up to its policy limits in the program. Zimmer Biomet is responsible for any amounts by which the ultimate losses exceed the amount of Biomet’s third-party insurance coverage. As of June 30, 2018, Biomet had received all of the insurance proceeds it expects to recover under the excess policies. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain.
Heraeus trade secret misappropriation lawsuits:
In December 2008, Heraeus Kulzer GmbH (together with its affiliates, “Heraeus”) initiated legal proceedings in Germany against Biomet, Inc., Biomet Europe BV, certain other entities and certain employees alleging that the defendants misappropriated Heraeus trade secrets when developing Biomet Europe’s Refobacin and Biomet Bone Cement line of cements (“European Cements”). The lawsuit sought to preclude the defendants from producing, marketing and offering for sale their current line of European Cements and to compensate Heraeus for any damages incurred.
On June 5, 2014, the German appeals court in Frankfurt (i) enjoined Biomet, Inc., Biomet Europe BV and Biomet Deutschland GmbH from manufacturing, selling or offering the European Cements to the extent they contain certain raw materials in particular specifications; (ii) held the defendants jointly and severally liable to Heraeus for any damages from the sale of European Cements since 2005; and (iii) ruled that no further review may be sought (the “Frankfurt Decision”). The Heraeus and Biomet parties both sought appeal against the Frankfurt Decision. In a decision dated June 16, 2016, the German Supreme Court dismissed the parties’ appeals without reaching the merits, rendering that decision final.
In December 2016, Heraeus filed papers to restart proceedings against Biomet Orthopaedics Switzerland GmbH, seeking to require that entity to relinquish its CE certificates for the European Cements. In January 2017, Heraeus notified Biomet it had filed a claim for damages in the amount of
€121.9 million
for sales in Germany. In September 2017, Heraeus filed an enforcement action in the Frankfurt court against Biomet Europe, requesting that a fine be imposed against Biomet Europe for failure to prevent Biomet Orthopaedics Switzerland from having bone cements for the Chinese market manufactured in Germany. As of June 30, 2018, these claims were still pending. Also in September 2017, Heraeus filed suit against Zimmer Biomet Deutschland in the court of first instance in Freiberg concerning the sale of the European Cements with certain changed raw materials. Heraeus seeks an injunction on the basis that the continued use of the product names for the European Cements is misleading for customers and thus an act of unfair competition. On June 29, 2018, the court in Freiberg, Germany dismissed Heraeus’ request for an injunction prohibiting the marketing of the European Cements under their current names. Heraeus may appeal this decision to the Court of Appeals in Karlsruhe, Germany.
On September 8, 2014, Heraeus filed a complaint against a Biomet supplier, Esschem, Inc. (“Esschem”), in the U.S. District Court for the Eastern District of Pennsylvania. The lawsuit contained allegations that focused on two copolymer compounds that Esschem sells to Biomet, which Biomet incorporates into certain bone cement products that compete with Heraeus’ bone cement products. The complaint alleged that Biomet helped Esschem to develop these copolymers, using Heraeus trade secrets that Biomet allegedly misappropriated. The complaint asserted a claim under the Pennsylvania Uniform Trade Secrets Act, as well as other various common law tort claims, all based upon the same trade secret misappropriation theory. Heraeus sought to enjoin Esschem from supplying the copolymers to any third party and actual damages. The complaint also sought punitive damages, costs and attorneys’ fees. Although Biomet was not a party to this lawsuit, Biomet agreed, at Esschem’s request and subject to certain limitations, to indemnify Esschem for any liability, damages and legal costs related to this matter. On November 3, 2014, the court entered an order denying Heraeus’ motion for a temporary restraining order. On June 30, 2016, the court entered an order denying Heraeus’ request to give preclusive effect to the factual findings in the
Frankfurt Decision. On June 6, 2017, the court entered an order denying Heraeus’ motion to add Biomet as a party to the lawsuit. On January 26, 2018, the court entered an order granting Esschem’s motion for summary judgment and dismissed all of Heraeus’ claims with prejudice. On February 21, 2018, Heraeus filed a notice of appeal to U.S. Court of Appeals for the Third Circuit.
On December 7, 2017, Heraeus filed a complaint against Zimmer Biomet Holdings, Inc. and Biomet, Inc. in the U.S. District Court for the Eastern District of Pennsylvania alleging a single claim of trade secret misappropriation under the Pennsylvania Uniform Trade Secrets Act based on the same factual allegations as the Esschem litigation. On March 5, 2018, Heraeus filed an amended complaint adding a second claim of trade secret misappropriation under Pennsylvania common law. Heraeus seeks to enjoin the Zimmer Biomet parties from future use of the allegedly misappropriated trade secrets and recovery of unspecified damages for alleged past use. On April 18, 2018, the Zimmer Biomet parties filed a motion to dismiss both claims.
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Heraeus continues to pursue other related legal proceedings in Europe seek
ing various forms of relief, including injunctive relief and damages, against Biomet-related entities relating to the European Cements.
We have accrued an estimated loss relating to the Frankfurt Decision, but have not recognized any losses for Heraeus-related lawsuits in other jurisdictions because we do not believe it is probable that we have incurred a liability, and we cannot reasonably estimate any loss that might eventually be incurred. Damages relating to the Frankfurt Decision are subject to separate proceedings and it is reasonably possible that our estimate of the loss we may incur may change in the future. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain.
Stryker patent infringement lawsuit
: On December 10, 2010, Stryker Corporation and related entities (“Stryker”) filed suit against us in the U.S. District Court for the Western District of Michigan, alleging that certain of our Pulsavac
®
Plus Wound Debridement Products infringe
three
U.S. patents assigned to Stryker. The case was tried beginning on January 15, 2013, and on February 5, 2013, the jury found that we infringed certain claims of the subject patents. The jury awarded
$70.0 million
in monetary damages for lost profits. The jury also found that we willfully infringed the subject patents. We filed multiple post-trial motions, including a motion seeking a new trial. On August 7, 2013, the trial court issued a ruling denying all of our motions and awarded treble damages and attorneys’ fees to Stryker. We filed a notice of appeal to the Court of Appeals for the Federal Circuit to seek reversal of both the jury’s verdict and the trial court’s rulings on our post-trial motions. Oral argument before the Court of Appeals for the Federal Circuit took place on September 8, 2014. On December 19, 2014, the Federal Circuit issued a decision affirming the $70.0 million lost profits award but reversed the willfulness finding, vacating the treble damages award and vacating and remanding the attorneys’ fees award. We accrued an estimated loss of
$70.0 million related to this matter in the three month period ended December 31, 2014. On January 20, 2015, Stryker filed a motion with the Federal Circuit for a rehearing
en banc
. On March 23, 2015, the Federal Circuit denied Stryker’s petition. Stryker subsequently filed a petition for certiorari to the U.S. Supreme Court. In July 2015, we paid the final award of $90.3 million,
which includes the original $70.0 million plus pre- and post-judgment interest and damages for sales that occurred post-trial but prior to our entry into a license agreement with Stryker. On October 19, 2015, the U.S. Supreme Court granted Stryker’s petition for certiorari. Oral argument took place on February 23, 2016. On June 13, 2016, the U.S. Supreme Court issued its decision, vacating the judgment of the Federal Circuit and remanding the case for further proceedings related to the willfulness issue. On September 12, 2016, the Federal Circuit issued an opinion affirming the jury’s willfulness finding and vacating and remanding the trial court’s award of treble damages, its finding that this was an exceptional case and its award of attorneys’ fees. The case was remanded back to the trial court. Oral argument on Stryker’s renewed consolidated motion for enhanced damages and attorneys’ fees took place on June 28, 2017. On July 12, 2017, the trial court issued an order reaffirming its award of treble damages, its finding that this was an exceptional case and its award of attorney’s fees. On July 24, 2017, we appealed the ruling to the Federal Circuit and obtained a supersedeas bond staying enforcement of the judgment pending appeal. Although we are defending this lawsuit vigorously, the ultimate resolution of this matter is uncertain. In the future, we could be required to record a charge of up to
$170.0 million that could have a material adverse effect on our results of operations and cash flows.
Putative Class Action:
On December 2, 2016, a complaint was filed in the U.S. District Court for the Northern District of Indiana (
Shah v. Zimmer Biomet Holdings, Inc. et al.)
, naming us, two of our officers and one of our now former officers as defendants. On June 28, 2017, the plaintiffs filed a corrected amended complaint, naming as defendants, in addition to those previously named, current and former members of our Board of Directors, one additional officer, and the underwriters in connection with secondary offerings of our common stock by certain selling stockholders in 2016. On October 6, 2017, the plaintiffs voluntarily dismissed the underwriters without prejudice. On October 8, 2017, the plaintiffs filed a second amended complaint, naming as defendants, in addition to those current and former officers and Board members previously named, certain former stockholders of ours who sold shares of our common stock in secondary public offerings in 2016. The second amended complaint relates to a putative class action on behalf of persons who purchased our common stock between June 7, 2016 and November 7, 2016. The second amended complaint generally alleges that the defendants violated federal securities laws by making materially false and/or misleading statements and/or omissions about our compliance with
FDA
regulations and our ability to continue to accelerate our organic revenue growth rate in the second half of 2016. The defendants filed their respective motions to dismiss on December 20, 2017, plaintiffs filed their omnibus response to the motions to dismiss on March 13, 2018 and the defendants filed their respective reply briefs on May 18, 2018. The plaintiffs seek unspecified damages and interest, attorneys’ fees, costs and other relief. We believe this lawsuit is without merit, and we and the individual defendants are defending it vigorously.
Regulatory Matters, Government Investigations and Other Matters
FDA warning letters
: In September 2012, Zimmer received a warning letter from the FDA citing concerns relating to certain processes pertaining to products manufactured at our Ponce, Puerto Rico manufacturing facility. In May 2016, Zimmer received a warning letter from the FDA
related to observed non-conformities with current good manufacturing practice requirements of the FDA’s Quality System Regulation (21 CFR Part 820) at our facility in Montreal, Quebec, Canada.
We have provided detailed responses to the FDA as to our corrective actions and will continue to work expeditiously to address the issues identified by the FDA during inspections in Ponce and Montreal. As of June 30, 2018, these warning letters remained pending. Until the violations cited in the pending warning letters are corrected, we may be subject to additional regulatory action by the FDA, as described more fully
26
below. Additionally, requests for Certificates to Foreign Governments related to products manufactured at certain of our facilities may not be gr
anted and premarket approval applications for Class III devices to which the Quality System Regulation deviations at these facilities are reasonably related will not be approved until the violations have been corrected. In addition to responding to the wa
rning letters described above, we are in the process of addressing various FDA Form 483 inspectional observations at certain of our manufacturing facilities, including at both the legacy Zimmer and the legacy Biomet manufacturing facilities in Warsaw, Indi
ana (the legacy Biomet facility is sometimes referred to in this report as the “Warsaw North Campus”). The ultimate outcome of these matters is presently uncertain. Among other available regulatory actions, the FDA may impose operating restrictions, incl
uding a ceasing of operations, at one or more facilities, enjoining and restraining certain violations of applicable law pertaining to medical devices and assessing civil or criminal penalties against our officers, employees or us. The FDA could also issu
e a corporate warning letter, a recidivist warning letter or a consent decree of permanent injunction. The FDA may also recommend prosecution by the U.S. Department of Justice (“DOJ”). Any adverse regulatory action, depending on its magnitude, may restri
ct us from effectively manufacturing, marketing and selling our products and could have a material adverse effect on our business, financial condition and results of operations.
Deferred Prosecution Agreement (“DPA”)
relating to U.S. Foreign Corrupt Practices Act (“FCPA”) matters:
On January 12, 2017, we resolved previously-disclosed FCPA matters involving Biomet and certain of its subsidiaries. As part of the settlement, Biomet resolved matters with the U.S. Securities and Exchange Commission (the “SEC”) through an administrative cease-and-desist order (the “Order”); (ii) we entered into a DPA with the DOJ; and (iii) JERDS Luxembourg Holding S.à r.l. (“JERDS”), the direct parent company of Biomet 3i Mexico SA de CV and an indirect, wholly-owned subsidiary of Biomet, entered into a plea agreement (the “Plea Agreement”) with the DOJ. The conduct underlying these resolutions occurred prior to our acquisition of Biomet.
Pursuant to the terms of the Order, Biomet resolved claims with the SEC related to violations of the books and records, internal controls and anti-bribery provisions of the FCPA by disgorging profits to the U.S. government in an aggregate amount of approximately $6.5 million, inclusive of pre-judgment interest, and paying a civil penalty in the amount of $6.5 million (collectively, the “Civil Settlement Payments”). We also agreed to pay a criminal penalty of approximately $17.5 million
(together with the Civil Settlement Payments, the “Settlement Payments”) to the U.S. government pursuant to the terms of the DPA. We made the Settlement Payments in January 2017 and, as previously disclosed, had accrued, as of June 24, 2015, the closing date of the Biomet merger, an amount sufficient to cover this matter.
Under the DPA, which has a term of three years,
the DOJ agreed to defer criminal prosecution of us in connection with the charged violation of the internal controls provision of the FCPA as long as we comply with the terms of the DPA. In addition, we are subject to oversight by an independent compliance monitor. The monitor, who was appointed effective as of July 2017, will focus on legacy Biomet operations as integrated into our operations. If we remain in compliance with the DPA during its term, the charges against us will be dismissed with prejudice. The term of the DPA may be extended for up to one additional year at the DOJ’s discretion. In addition, under its Plea Agreement with the DOJ, JERDS pleaded guilty on January 13, 2017 to aiding and abetting a violation of the books and records provision of the FCPA. In light of the DPA we entered into, JERDS paid only a nominal assessment and no criminal penalty.
If we do not comply with the terms of the DPA, we could be subject to prosecution for violating the internal controls provisions of the FCPA and the conduct of Biomet and its subsidiaries described in the DPA, which conduct pre-dated our acquisition of Biomet, as well as any new or continuing violations. We could also be subject to exclusion by
the Office of Inspector General of the Department of Health and Human Services (“OIG”) from
participation in federal healthcare programs, including Medicaid and Medicare. Any of these events could have a material adverse effect on our business, financial condition, results of operations and cash flows.
OIG subpoena
: In June 2017, we received a subpoena from the OIG. The subpoena requests that we produce a variety of records primarily related to our healthcare professional consulting arrangements (including in the areas of medical education, product development, and clinical research) for the period spanning January 1, 2010 to the present. The subpoena does not indicate the nature of the OIG’s investigation beyond reference to possible false or otherwise improper claims submitted for payment. We are in the process of responding to the subpoena. We cannot currently predict the outcome of this investigation
.
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