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.
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, 2018.
In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The December 31, 2018 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.
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
Accounting Pronouncements Recently Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02 – Leases (Topic 842).
This ASU requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet. This ASU was effective for us as of January 1, 2019. This ASU required a modified retrospective transition method that could either be applied at the earliest comparative period in the financial statements or the period of adoption. We elected to use the period of adoption (January 1, 2019) transition method and therefore did not recast prior periods.
This ASU allowed for certain practical expedients to make the adoption of the ASU less burdensome. We elected the practical expedients upon transition which permitted us to not reassess lease identification, classification, and initial direct costs under the new standard for leases that commenced prior to the effective date. We also elected not to recognize a right-of-use asset nor a lease liability for leases with an initial term of twelve months or less. Finally, we elected not to separate non-lease components from the leased components in the valuation of our right-of-use asset and lease liability for all asset classes.
On January 1, 2019, we recognized a right-of-use asset of $274.7 million in other assets and lease liabilities of $62.2 million and $221.2 million in other current liabilities and other long-term liabilities, respectively. No cumulative adjustment to retained earnings was required upon adoption. We do not have any significant finance leases. See Note 7 for additional information.
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
Net sales by geography are as follows (in millions):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Americas
|
|
$
|
1,214.3
|
|
|
$
|
1,216.3
|
|
|
$
|
2,408.4
|
|
|
$
|
2,424.4
|
|
EMEA
|
|
|
438.0
|
|
|
|
457.7
|
|
|
|
901.9
|
|
|
|
954.2
|
|
Asia Pacific
|
|
|
336.3
|
|
|
|
333.6
|
|
|
|
653.8
|
|
|
|
646.6
|
|
Total
|
|
$
|
1,988.6
|
|
|
$
|
2,007.6
|
|
|
$
|
3,964.1
|
|
|
$
|
4,025.2
|
|
Net sales by product category are as follows (in millions):
8
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Knees
|
|
$
|
703.5
|
|
|
$
|
703.0
|
|
|
$
|
1,397.6
|
|
|
$
|
1,416.3
|
|
Hips
|
|
|
479.4
|
|
|
|
486.9
|
|
|
|
963.6
|
|
|
|
978.9
|
|
S.E.T.
|
|
|
444.4
|
|
|
|
433.8
|
|
|
|
884.3
|
|
|
|
876.1
|
|
Spine & CMF
|
|
|
185.9
|
|
|
|
198.2
|
|
|
|
368.7
|
|
|
|
381.3
|
|
Dental
|
|
|
106.5
|
|
|
|
106.9
|
|
|
|
211.0
|
|
|
|
214.5
|
|
Other
|
|
|
68.9
|
|
|
|
78.8
|
|
|
|
138.9
|
|
|
|
158.1
|
|
Total
|
|
$
|
1,988.6
|
|
|
$
|
2,007.6
|
|
|
$
|
3,964.1
|
|
|
$
|
4,025.2
|
|
“S.E.T.” refers to our Surgical, Sports Medicine, Extremities and Trauma product category. “CMF” refers to our craniomaxillofacial and thoracic products.
4.
Inventories
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Finished goods
|
|
$
|
1,837.1
|
|
|
$
|
1,797.7
|
|
Work in progress
|
|
|
252.9
|
|
|
|
230.4
|
|
Raw materials
|
|
|
254.5
|
|
|
|
228.4
|
|
Inventories
|
|
$
|
2,344.5
|
|
|
$
|
2,256.5
|
|
5. Property, Plant and Equipment
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Land
|
|
$
|
27.9
|
|
|
$
|
28.0
|
|
Buildings and equipment
|
|
|
1,954.3
|
|
|
|
1,885.6
|
|
Capitalized software costs
|
|
|
457.6
|
|
|
|
425.8
|
|
Instruments
|
|
|
3,137.0
|
|
|
|
2,950.5
|
|
Construction in progress
|
|
|
140.9
|
|
|
|
147.2
|
|
|
|
|
5,717.7
|
|
|
|
5,437.1
|
|
Accumulated depreciation
|
|
|
(3,681.9
|
)
|
|
|
(3,421.7
|
)
|
Property, plant and equipment, net
|
|
$
|
2,035.8
|
|
|
$
|
2,015.4
|
|
We had $38.1 million and $49.3 million of property, plant and equipment included in accounts payable as of June 30, 2019 and December 31, 2018, respectively.
6. Intangible Assets
In the second quarter of 2019, we entered into an agreement and paid $192.5 million to buy out certain licensing arrangements from an unrelated third party. This new agreement and the related payment replace the variable royalty payments that otherwise would have been due under the terms of previous licensing arrangements through 2029. Under the new agreement, we maintain the rights to the counterparty’s intellectual property provided under the previous licensing arrangements. The $192.5 million payment was recognized as an intangible asset and will be amortized through 2029, which represents the useful life of the intellectual property.
In the second quarter of 2019, we recognized $70.1 million of in-process research and development (“IPR&D”) intangible asset impairment due to the termination of certain IPR&D projects. The termination of these projects is the result of the progress we are making to prioritize our internal research and development portfolio and focus our engineering resources on the opportunities that most closely link to our mission. Since these projects were not a priority, their terminations are not expected to have a significant impact to our future cash flows.
9
7. Leases
We own most of our manufacturing facilities, but lease various office space, vehicles and other less significant assets throughout the world. Our contracts contain a lease if they convey a right to control the use of an identified asset, either explicitly or implicitly, in exchange for consideration. Our lease contracts are a necessary part of our business, but we do not believe they are significant to our overall operations. We do not have any significant finance leases. Additionally, we do not have significant leases: where we are considered a lessor; where we sublease our assets; with an initial term of twelve months or less; with related parties; with residual value guarantees; that impose restrictions or covenants on us; or that have not yet commenced, but create significant rights and obligations against us.
Our real estate leases generally have terms of between 5 to 10 years and contain lease extension options that can vary from month-to-month extensions to up to 5 year extensions. We include extension options in our lease term if we are reasonably certain to exercise that option.
In determining whether an extension is reasonably certain, we consider the uniqueness of the property for our needs, the availability of similar properties, whether the extension period payments remain the same or may change due to market rates or fixed price increases in the contract, and other economic factors. Our vehicle leases generally have terms of between 3 to 5 years and contain lease extension options on a month-to-month basis. Our vehicle leases are generally not reasonably certain to be extended.
Under GAAP, we are required to discount our lease liabilities to present value using the rate implicit in the lease, or our incremental borrowing rate for a similar term as the lease term if the implicit rate is not readily available. We generally do not have adequate information to know the implicit rate in a lease and therefore use our incremental borrowing rate. Under GAAP, the incremental borrowing rate must be on a collateralized basis, but our debt arrangements are unsecured. We have determined our incremental borrowing rate by using our credit rating to estimate our unsecured borrowing rate and applying reasonable assumptions to reduce the unsecured rate for a risk adjustment effect from collateral.
Information on our leases is as follows ($ in millions):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2019
|
|
|
June 30, 2019
|
|
Lease cost
|
|
$
|
18.4
|
|
|
$
|
37.0
|
|
Cash paid for leases recognized in operating cash flows
|
|
$
|
18.4
|
|
|
$
|
37.2
|
|
Right-of-use assets obtained in exchange for new lease liabilities
|
|
$
|
10.6
|
|
|
$
|
16.4
|
|
|
|
As of
|
|
|
|
June 30, 2019
|
|
Right-of-use assets recognized in Other assets
|
|
$
|
257.6
|
|
Lease liabilities recognized in Other current liabilities
|
|
$
|
62.5
|
|
Lease liabilities recognized in Other long-term liabilities
|
|
$
|
205.4
|
|
Weighted-average remaining lease term
|
|
6.2 years
|
|
Weighted-average discount rate
|
|
|
2.7
|
%
|
Our variable lease costs are not significant.
Our future minimum lease payments as of June 30, 2019 were (in millions):
For the Years Ending December 31,
|
|
|
|
|
2019 (July 1, 2019 to December 31, 2019)
|
|
$
|
35.4
|
|
2020
|
|
|
61.8
|
|
2021
|
|
|
48.3
|
|
2022
|
|
|
34.1
|
|
2023
|
|
|
28.7
|
|
Thereafter
|
|
|
84.8
|
|
Total
|
|
|
293.1
|
|
Less imputed interest
|
|
|
25.2
|
|
Total
|
|
$
|
267.9
|
|
10
Under GAAP, since we adopted the new standard using the period of adoption transition method (see Note 2 for additional information regarding the new standard), we are not required to present 2018 comparative disclosures. However, we are required to present the required annual disclosures under the previous GAAP lease accounting standard.
Accordingly, the following were the future minimum rental commitments under non-cancelable operating leases as of December 31, 2018 (in millions):
For the Years Ending December 31,
|
|
|
|
|
2019
|
|
$
|
67.1
|
|
2020
|
|
|
56.9
|
|
2021
|
|
|
44.1
|
|
2022
|
|
|
32.2
|
|
2023
|
|
|
27.7
|
|
Thereafter
|
|
|
81.6
|
|
8. Transfers of Financial Assets
We have 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 are 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, 2019 of $400.0 million combined. 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 $33.5 million and $33.0 million as of June 30, 2019 and December 31, 2018, respectively.
In Europe, we sell to a third party and have no continuing involvement or significant risk with the factored accounts receivable.
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. We 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, 2019 and 2018, we sold receivables having an aggregate face value of $1,595.9 million and $1,260.7 million to third parties in exchange for cash proceeds of $1,594.9 million and $1,260.1 million, respectively. Expenses recognized on these sales during the six month periods ended June 30, 2019 and 2018 were not significant. In the six month periods ended June 30, 2019 and 2018, under the U.S. and Japan programs, we collected $1,438.3 million and $1,007.8 million, respectively, from our customers and remitted that amount to the third party, and we effectively repurchased $73.9 million and $121.0 million, respectively, of previously sold accounts receivable from the third party, due to the programs’ revolving nature.
As of June 30, 2019 and December 31, 2018, we had collected $41.2 million and $66.8 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.
At June 30, 2019 and December 31, 2018, the outstanding principal amount of receivables that has been derecognized under the U.S. and Japan revolving arrangements amounted to $378.1 million and $365.9 million, respectively.
11
9. Debt
Our debt consisted of the following (in millions):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
4.625% Senior Notes due 2019
|
|
$
|
500.0
|
|
|
$
|
500.0
|
|
2.700% Senior Notes due 2020
|
|
|
1,500.0
|
|
|
|
-
|
|
U.S. Term Loan B
|
|
|
-
|
|
|
|
25.0
|
|
Total current portion of long-term debt
|
|
$
|
2,000.0
|
|
|
$
|
525.0
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
2.700% Senior Notes due 2020
|
|
$
|
-
|
|
|
$
|
1,500.0
|
|
Floating Rate Notes due 2021
|
|
|
450.0
|
|
|
|
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
|
|
|
|
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
|
|
|
569.4
|
|
|
|
571.6
|
|
2.425% Euro Notes due 2026
|
|
|
569.4
|
|
|
|
571.6
|
|
U.S. Term Loan B
|
|
|
-
|
|
|
|
200.0
|
|
U.S. Term Loan C
|
|
|
535.0
|
|
|
|
535.0
|
|
Japan Term Loan A
|
|
|
108.7
|
|
|
|
105.3
|
|
Japan Term Loan B
|
|
|
197.9
|
|
|
|
191.7
|
|
Debt discount and issuance costs
|
|
|
(38.1
|
)
|
|
|
(42.7
|
)
|
Adjustment related to interest rate swaps
|
|
|
10.4
|
|
|
|
14.6
|
|
Total long-term debt
|
|
$
|
6,719.3
|
|
|
$
|
8,413.7
|
|
At June 30, 2019, our total current and non-current debt of $8.7 billion consisted of
$7.9 billion aggregate principal amount of our senior notes, which included $1.1 billion of Euro-denominated senior notes (“Euro Notes”), $535.0 million outstanding under a U.S. term loan (“U.S. Term Loan C”) that will mature on December 14, 2020, 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 mature on September 27, 2022, and fair value adjustments totaling
$10.4 million, partially offset by debt discount and issuance costs of $38.1 million.
On December 14, 2018, we entered into a credit agreement (the “2018 Credit Agreement”) that provides for U.S. Term Loan C, which is a two-year unsecured multi-draw term loan facility in the principal amount of $900.0 million, with a maturity date of December 14, 2020, and borrowed $675.0 million under that facility. In January 2019, we borrowed an additional $200.0 million under U.S. Term Loan C and used those proceeds, along with cash on hand, to repay the remaining $225.0 million outstanding under a U.S. term loan issued under the 2016 Credit Agreement (as defined below) (“U.S. Term Loan B”). Under the applicable accounting rules, since $200.0 million of U.S. Term Loan B was refinanced on a long-term basis before the issuance of our consolidated financial statements for the year ended December 31, 2018, we classified the refinanced portion of U.S. Term Loan B as long-term as of December 31, 2018.
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.
In addition to the 2018 Credit Agreement, we have a revolving credit and term loan agreement (the “2016 Credit Agreement”), which contains a five-year unsecured multicurrency revolving facility of $1.5 billion (the “Multicurrency Revolving Facility”), and previously contained U.S. Term Loan B, which was paid in full during the six month period ended June 30, 2019. The Multicurrency Revolving Facility replaced the previous multicurrency revolving facility under our credit agreement executed in 2014 (as amended,
12
the “2014 Credit Agreement”) and will mature on
September 30, 2021
, with two available one-year extensions at our discretion. The 2014 Credit Agreement previously contained a term loan (“U.S. Term Loan A”), which was paid in full in December 2018.
Borrowings under the 2018 and 2016 Credit Agreements generally bear interest at floating rates. We pay a facility fee on the aggregate amount of the Multicurrency Revolving Facility. The 2018 and 2016 Credit Agreements contain customary affirmative and negative covenants and events of default for unsecured financing arrangements, including, among other things, limitations on consolidations, mergers and sales of assets. 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 covenants under the 2018 and 2016 Credit Agreements as of June 30, 2019. As of June 30, 2019, we had no borrowings outstanding under the Multicurrency Revolving Facility.
During the six month period ended June 30, 2019, we repaid $200.0 million on U.S. Term Loan C with cash generated from operations. Under the terms of U.S. Term Loan C, the remaining balance as of June 30, 2019 of $535.0 million is due on the maturity date of December 14, 2020.
The estimated fair value of our senior notes as of June 30, 2019, based on quoted prices for the specific securities from transactions in over-the-counter markets (Level 2), was $8,126.5 million. The estimated fair value of Japan Term Loan A and Japan Term Loan B, in the aggregate, as of June 30, 2019, based upon publicly available market yield curves and the terms of the debt (Level 2), was $303.1 million. The carrying value of U.S. Term Loan C approximates its fair value as it bears interest at short-term variable market rates.
10. Accumulated Other Comprehensive Income
Accumulated other comprehensive income (loss) (“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.
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, 2018
|
|
$
|
(31.3
|
)
|
|
$
|
20.9
|
|
|
$
|
(177.0
|
)
|
|
$
|
(187.4
|
)
|
AOCI before reclassifications
|
|
|
10.7
|
|
|
|
14.9
|
|
|
|
-
|
|
|
|
25.6
|
|
Reclassifications to statement of earnings
|
|
|
-
|
|
|
|
(14.4
|
)
|
|
|
4.4
|
|
|
|
(10.0
|
)
|
Balance at June 30, 2019
|
|
$
|
(20.6
|
)
|
|
$
|
21.4
|
|
|
$
|
(172.6
|
)
|
|
$
|
(171.8
|
)
|
13
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
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Statements of Earnings
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
7.4
|
|
|
$
|
(10.5
|
)
|
|
$
|
14.5
|
|
|
$
|
(21.6
|
)
|
|
Cost of products sold
|
Interest rate swaps
|
|
|
-
|
|
|
|
-
|
|
|
|
2.8
|
|
|
|
-
|
|
|
Interest expense, net
|
Forward starting interest rate swaps
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
Interest expense, net
|
|
|
|
7.2
|
|
|
|
(10.7
|
)
|
|
|
17.0
|
|
|
|
(21.9
|
)
|
|
Total before tax
|
|
|
|
1.0
|
|
|
|
(1.5
|
)
|
|
|
2.6
|
|
|
|
(3.0
|
)
|
|
Provision for income taxes
|
|
|
$
|
6.2
|
|
|
$
|
(9.2
|
)
|
|
$
|
14.4
|
|
|
$
|
(18.9
|
)
|
|
Net of tax
|
Defined benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
1.9
|
|
|
$
|
2.5
|
|
|
$
|
3.7
|
|
|
$
|
5.0
|
|
|
Other expense, net
|
Unrecognized actuarial loss
|
|
|
(5.5
|
)
|
|
|
(6.7
|
)
|
|
|
(10.8
|
)
|
|
|
(12.8
|
)
|
|
Other expense, net
|
|
|
|
(3.6
|
)
|
|
|
(4.2
|
)
|
|
|
(7.1
|
)
|
|
|
(7.8
|
)
|
|
Total before tax
|
|
|
|
(1.2
|
)
|
|
|
(1.2
|
)
|
|
|
(2.7
|
)
|
|
|
(2.0
|
)
|
|
Provision for income taxes
|
|
|
$
|
(2.4
|
)
|
|
$
|
(3.0
|
)
|
|
$
|
(4.4
|
)
|
|
$
|
(5.8
|
)
|
|
Net of tax
|
Total reclassifications
|
|
$
|
3.8
|
|
|
$
|
(12.2
|
)
|
|
$
|
10.0
|
|
|
$
|
(24.7
|
)
|
|
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, 2019
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
Before Tax
|
|
|
Tax
|
|
|
Net of Tax
|
|
|
Before Tax
|
|
|
Tax
|
|
|
Net of Tax
|
|
Foreign currency cumulative translation adjustments
|
|
$
|
8.1
|
|
|
$
|
(7.0
|
)
|
|
$
|
15.1
|
|
|
$
|
16.0
|
|
|
$
|
5.3
|
|
|
$
|
10.7
|
|
Unrealized cash flow hedge (losses) gains
|
|
|
(3.9
|
)
|
|
|
(4.3
|
)
|
|
|
0.4
|
|
|
|
12.8
|
|
|
|
(2.1
|
)
|
|
|
14.9
|
|
Reclassification adjustments on cash flow hedges
|
|
|
(7.2
|
)
|
|
|
(1.0
|
)
|
|
|
(6.2
|
)
|
|
|
(17.0
|
)
|
|
|
(2.6
|
)
|
|
|
(14.4
|
)
|
Adjustments to prior service cost and unrecognized actuarial assumptions
|
|
|
3.6
|
|
|
|
1.2
|
|
|
|
2.4
|
|
|
|
7.1
|
|
|
|
2.7
|
|
|
|
4.4
|
|
Total Other Comprehensive Income
|
|
$
|
0.6
|
|
|
$
|
(11.1
|
)
|
|
$
|
11.7
|
|
|
$
|
18.9
|
|
|
$
|
3.3
|
|
|
$
|
15.6
|
|
|
|
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 gains
|
|
|
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
|
)
|
14
11. 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, 2019
|
|
|
|
|
|
|
|
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
|
|
$
|
42.7
|
|
|
$
|
-
|
|
|
$
|
42.7
|
|
|
$
|
-
|
|
Interest rate swaps
|
|
|
31.8
|
|
|
|
-
|
|
|
|
31.8
|
|
|
|
-
|
|
Total Assets
|
|
$
|
74.5
|
|
|
$
|
-
|
|
|
$
|
74.5
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, current and long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
0.6
|
|
|
$
|
-
|
|
|
$
|
0.6
|
|
|
$
|
-
|
|
Total Liabilities
|
|
$
|
0.6
|
|
|
$
|
-
|
|
|
$
|
0.6
|
|
|
$
|
-
|
|
|
|
As of December 31, 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
|
|
$
|
45.7
|
|
|
$
|
-
|
|
|
$
|
45.7
|
|
|
$
|
-
|
|
Interest rate swaps
|
|
|
17.9
|
|
|
|
-
|
|
|
|
17.9
|
|
|
|
-
|
|
Total Assets
|
|
$
|
63.6
|
|
|
$
|
-
|
|
|
$
|
63.6
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, current and long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
0.5
|
|
|
$
|
-
|
|
|
$
|
0.5
|
|
|
$
|
-
|
|
Interest rate swaps
|
|
|
2.5
|
|
|
|
-
|
|
|
|
2.5
|
|
|
|
-
|
|
Total Liabilities
|
|
$
|
3.0
|
|
|
$
|
-
|
|
|
$
|
3.0
|
|
|
$
|
-
|
|
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, foreign currency exchange rates and the terms of our swaps, and we perform ongoing assessments of counterparty credit risk.
12. 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.
15
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, 2019 related to these discontinued hedges was $10.4 million, which will be recognized using the effective interest rate method over the remaining maturity period of the hedged notes. As of June 30, 2019 and December 31, 2018, 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 Liabilities
|
|
|
|
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liabilities
|
|
Balance Sheet Line Item
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Long-term debt
|
|
$
|
560.3
|
|
|
$
|
564.4
|
|
|
|
$
|
10.4
|
|
|
$
|
14.6
|
|
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 our merger with LVB Acquisition, Inc., the parent company of Biomet, Inc. (“Biomet”) (which merger is sometimes referred to herein as the “Biomet merger”). The interest rate swaps were settled, and the remaining loss to be recognized at June 30, 2019 was $26.8 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 minimized the exposure to changes in the LIBOR interest rates while the variable-rate debt was outstanding. In the first quarter of 2019, we terminated these interest rate swaps concurrently with the repayment of the remaining balance of U.S. Term Loan B, and we recognized proceeds and interest income of $2.8 million related to the termination.
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, Swiss Francs, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, 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.
At June 30, 2019, we had receive-fixed-rate, pay-fixed-rate cross-currency interest swaps with notional amounts outstanding of Euro 1,450 million, Japanese Yen 7 billion and Swiss Franc 50 million. These transactions further hedge our net investment in certain wholly-owned foreign subsidiaries that have a functional currency of Euro, Japanese Yen and Swiss Franc. 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.
16
We recognize the excluded component in interest expense, net on our condensed consolidated statements of earnings. The net cash received related to the receive-fixed-rate, pay-fixed-rate component of the cross-currency interest rate swaps is reflected in investing cash flows in our condensed consolidated statements of cash flows.
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. 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, 2019, 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, 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 2019 through November 2021. As of June 30, 2019, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase U.S. Dollars were $1,535.1 million. As of June 30, 2019, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase Swiss Francs were $270.7 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, net. 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.
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
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Statements of Earnings
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Foreign exchange
forward contracts
|
|
$
|
(3.9
|
)
|
|
$
|
63.7
|
|
|
$
|
12.8
|
|
|
$
|
29.5
|
|
|
Cost of products sold
|
|
$
|
7.4
|
|
|
$
|
(10.5
|
)
|
|
$
|
14.5
|
|
|
$
|
(21.6
|
)
|
Interest rate swaps
|
|
|
-
|
|
|
|
(1.0
|
)
|
|
|
-
|
|
|
|
0.1
|
|
|
Interest expense, net
|
|
|
-
|
|
|
|
-
|
|
|
|
2.8
|
|
|
|
-
|
|
Forward starting
interest rate swaps
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Interest expense, net
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
$
|
(3.9
|
)
|
|
$
|
62.7
|
|
|
$
|
12.8
|
|
|
$
|
29.6
|
|
|
|
|
$
|
7.2
|
|
|
$
|
(10.7
|
)
|
|
$
|
17.0
|
|
|
$
|
(21.9
|
)
|
17
The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on our condensed consolidated balance sheet at June 30, 2019, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized gain of $19.2 million, or $21.4 million after taxes, which is deferred in AOCI. A gain of $35.0 million, or $30.2 million after taxes, is expected to be reclassified to earnings in cost of products sold and a loss of $0.6 million, or $0.5 million after taxes, is expected to be reclassified to earnings in interest expense, net 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, 2019
|
|
|
June 30, 2018
|
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
|
|
Cost of
|
|
|
Interest
|
|
|
Cost of
|
|
|
Interest
|
|
|
Cost of
|
|
|
|
|
|
|
Cost of
|
|
|
|
|
|
|
|
Goods
|
|
|
Expense,
|
|
|
Goods
|
|
|
Expense,
|
|
|
Goods
|
|
|
Interest
|
|
|
Goods
|
|
|
Interest
|
|
|
|
Sold
|
|
|
Net
|
|
|
Sold
|
|
|
Net
|
|
|
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
|
|
$
|
581.3
|
|
|
$
|
(59.7
|
)
|
|
$
|
583.7
|
|
|
$
|
(75.3
|
)
|
|
$
|
1,134.7
|
|
|
$
|
(117.7
|
)
|
|
$
|
1,159.5
|
|
|
$
|
(153.3
|
)
|
The effects of fair value and cash flow hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on fair value hedging
relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued interest rate swaps
|
|
|
-
|
|
|
|
2.1
|
|
|
|
-
|
|
|
|
2.1
|
|
|
|
-
|
|
|
|
4.2
|
|
|
|
-
|
|
|
|
4.2
|
|
Gain (loss) on cash flow hedging
relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
|
7.4
|
|
|
|
-
|
|
|
|
(10.5
|
)
|
|
|
-
|
|
|
|
14.5
|
|
|
|
-
|
|
|
|
(21.6
|
)
|
|
|
-
|
|
Interest rate swaps
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.8
|
|
|
|
-
|
|
|
|
-
|
|
Forward starting interest rate swaps
|
|
|
-
|
|
|
|
(0.2
|
)
|
|
|
-
|
|
|
|
(0.2
|
)
|
|
|
-
|
|
|
|
(0.3
|
)
|
|
|
-
|
|
|
|
(0.3
|
)
|
Gain on net investment hedging
relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency interest rate swaps
|
|
|
-
|
|
|
|
13.4
|
|
|
|
-
|
|
|
|
5.1
|
|
|
|
-
|
|
|
|
25.4
|
|
|
|
-
|
|
|
|
5.2
|
|
Derivatives 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
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Foreign exchange forward contracts
|
|
Other expense, net
|
|
$
|
(6.3
|
)
|
|
$
|
27.6
|
|
|
$
|
(8.9
|
)
|
|
$
|
17.9
|
|
These gains/losses do not reflect offsetting gains of $1.3 million and $1.9 million in the three and six month periods ended June 30, 2019, respectively, and offsetting losses of $32.9 million and $29.0 million in the three and six month periods ended June 30, 2018, 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.
18
Balance Sheet Presentation
As of June 30, 2019 and December 31, 2018, all derivative instruments designated as fair value hedges, cash flow hedges and net investment 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, 2019
|
|
|
As of December 31, 2018
|
|
|
|
Balance
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
$
|
42.0
|
|
|
Other current assets
|
|
$
|
37.9
|
|
Foreign exchange forward contracts
|
|
Other assets
|
|
|
12.5
|
|
|
Other assets
|
|
|
20.9
|
|
Interest rate swaps
|
|
Other assets
|
|
|
-
|
|
|
Other assets
|
|
|
2.8
|
|
Cross-currency interest rate swaps
|
|
Other assets
|
|
|
31.8
|
|
|
Other assets
|
|
|
15.1
|
|
Total asset derivatives
|
|
|
|
$
|
86.3
|
|
|
|
|
$
|
76.7
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current liabilities
|
|
$
|
8.5
|
|
|
Other current liabilities
|
|
$
|
9.9
|
|
Foreign exchange forward contracts
|
|
Other long-term liabilities
|
|
|
3.9
|
|
|
Other long-term liabilities
|
|
|
3.7
|
|
Cross-currency interest rate swaps
|
|
Other long-term liabilities
|
|
|
-
|
|
|
Other long-term liabilities
|
|
|
2.5
|
|
Total liability derivatives
|
|
|
|
$
|
12.4
|
|
|
|
|
$
|
16.1
|
|
The table below presents the effects of our master netting agreements on our condensed consolidated balance sheets (in millions):
|
|
|
|
As of June 30, 2019
|
|
|
As of December 31, 2018
|
|
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
|
|
$
|
42.0
|
|
|
$
|
8.3
|
|
|
$
|
33.7
|
|
|
$
|
37.9
|
|
|
$
|
9.6
|
|
|
$
|
28.3
|
|
Cash flow hedges
|
|
Other assets
|
|
|
12.5
|
|
|
|
3.5
|
|
|
|
9.0
|
|
|
|
20.9
|
|
|
|
3.5
|
|
|
|
17.4
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
Other current liabilities
|
|
|
8.5
|
|
|
|
8.3
|
|
|
|
0.2
|
|
|
|
9.9
|
|
|
|
9.6
|
|
|
|
0.3
|
|
Cash flow hedges
|
|
Other long-term liabilities
|
|
|
3.9
|
|
|
|
3.5
|
|
|
|
0.4
|
|
|
|
3.7
|
|
|
|
3.5
|
|
|
|
0.2
|
|
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
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Euro Notes
|
|
$
|
(16.0
|
)
|
|
$
|
62.3
|
|
|
$
|
4.4
|
|
|
$
|
33.3
|
|
Cross-currency interest rate swaps
|
|
|
(15.0
|
)
|
|
|
28.8
|
|
|
|
19.2
|
|
|
|
31.4
|
|
|
|
$
|
(31.0
|
)
|
|
$
|
91.1
|
|
|
$
|
23.6
|
|
|
$
|
64.7
|
|
19
13. 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 $175 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 and 2008-2009, we have filed petitions with the U.S. Tax Court. For years 2010-2012, we are pursuing resolution through the IRS Administrative Appeals Process.
In the three and six month periods ended June 30, 2019, our effective tax rate (“ETR”) was 6.0 percent and 12.5 percent, respectively, compared to 15.1 percent and 18.2 percent in the three and six month periods ended June 30, 2018, respectively. The decline in ETR in the three month period ended June 30, 2019, compared to the same prior year period was primarily due to the favorable resolution of certain tax audits. The decline in ETR in the six month period ended June 30, 2019, compared to the same prior year period was primarily due to the favorable resolution of certain tax audits as well as a release of uncertain tax positions due to emerging foreign tax guidance in the first quarter. Absent discrete tax events, we expect our future ETR will continue to be lower than the U.S. corporate income tax rate of 21.0 percent due to our mix of earnings between U.S. and foreign locations, which have lower corporate income tax rates. Our ETR in future periods could also potentially be impacted by: changes in our mix of pre-tax earnings; changes in tax rates, tax laws or their interpretation, including the European Union rules on state aid; the outcome of various federal, state and foreign audits; and the expiration of certain statutes of limitations. Currently, we cannot reasonably estimate the impact of these items on our financial results.
14. 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Service cost
|
|
$
|
6.4
|
|
|
$
|
7.0
|
|
|
$
|
13.1
|
|
|
$
|
14.5
|
|
Interest cost
|
|
|
6.2
|
|
|
|
5.6
|
|
|
|
12.4
|
|
|
|
11.1
|
|
Expected return on plan assets
|
|
|
(11.4
|
)
|
|
|
(11.7
|
)
|
|
|
(22.9
|
)
|
|
|
(23.5
|
)
|
Amortization of prior service cost
|
|
|
(1.9
|
)
|
|
|
(2.5
|
)
|
|
|
(3.7
|
)
|
|
|
(5.0
|
)
|
Amortization of unrecognized actuarial loss
|
|
|
5.5
|
|
|
|
6.7
|
|
|
|
10.8
|
|
|
|
12.8
|
|
Net periodic pension expense
|
|
$
|
4.8
|
|
|
$
|
5.1
|
|
|
$
|
9.7
|
|
|
$
|
9.9
|
|
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.
20
We expect that we will have minimal legally required funding obligations in 2019 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 2019. We contributed $11.3 million to our foreign-based defined benefit pension plans in the six month period ended June 30, 2019, and we expect to contribute $8.2 million to these foreign-based plans during the remainder of 2019.
15. 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Weighted average shares outstanding for basic net earnings per share
|
|
|
204.8
|
|
|
|
203.3
|
|
|
|
204.6
|
|
|
|
203.2
|
|
Effect of dilutive stock options and other equity awards
|
|
|
1.4
|
|
|
|
1.3
|
|
|
|
1.4
|
|
|
|
1.4
|
|
Weighted average shares outstanding for diluted net earnings per share
|
|
|
206.2
|
|
|
|
204.6
|
|
|
|
206.0
|
|
|
|
204.6
|
|
During the three and six month periods ended June 30, 2019, an average of 2.1 million options and 1.7 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, 2018, an average of 3.4 million options and 2.3 million options, respectively, were not included for the same reason.
16. Segment Information
We design, manufacture and market orthopedic reconstructive products; sports medicine, biologics, extremities and trauma products; spine, craniomaxillofacial and thoracic products (“CMF”); office based technologies; dental implants; and related surgical products. Our chief operating decision maker (“CODM”) allocates 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 principally of Japan, China and Australia and includes other Asian and Pacific markets. The product category operating segments are Spine, 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 category operating segments reflect those respective product category results from all regions, whereas the Spine product category operating segment includes all spine product results excluding those from Asia Pacific.
As it relates to the geographic operating segments, our CODM evaluates performance based upon segment operating profit exclusive of operating expenses pertaining to inventory and manufacturing-related charges, intangible asset amortization, intangible asset impairment, acquisition, integration and related, quality remediation, litigation, litigation settlement gain, certain European Union Medical Device Regulation expenses, 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.
Our CODM does not review asset information by operating segment. Instead, our CODM reviews 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 conform to the current presentation.
21
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Americas
|
|
$
|
989.1
|
|
|
$
|
979.3
|
|
|
$
|
538.8
|
|
|
$
|
530.1
|
|
EMEA
|
|
|
383.2
|
|
|
|
400.0
|
|
|
|
116.9
|
|
|
|
117.5
|
|
Asia Pacific
|
|
|
321.9
|
|
|
|
319.2
|
|
|
|
114.8
|
|
|
|
109.7
|
|
Product Category Operating Segments
|
|
|
294.4
|
|
|
|
309.1
|
|
|
|
49.7
|
|
|
|
39.4
|
|
Global Operations and Corporate Functions
|
|
|
-
|
|
|
|
-
|
|
|
|
(275.0
|
)
|
|
|
(235.2
|
)
|
Total
|
|
$
|
1,988.6
|
|
|
$
|
2,007.6
|
|
|
|
|
|
|
|
|
|
Inventory and manufacturing-related charges
|
|
|
|
|
|
|
|
|
|
|
(34.1
|
)
|
|
|
(12.5
|
)
|
Intangible asset amortization
|
|
|
|
|
|
|
|
|
|
|
(146.9
|
)
|
|
|
(149.5
|
)
|
Intangible asset impairment
|
|
|
|
|
|
|
|
|
|
|
(70.1
|
)
|
|
|
-
|
|
Acquisition, integration and related
|
|
|
|
|
|
|
|
|
|
|
(10.5
|
)
|
|
|
(50.5
|
)
|
Quality remediation
|
|
|
|
|
|
|
|
|
|
|
(23.4
|
)
|
|
|
(45.4
|
)
|
Litigation
|
|
|
|
|
|
|
|
|
|
|
(7.0
|
)
|
|
|
4.2
|
|
European Union Medical Device Regulation
|
|
|
|
|
|
|
|
|
|
|
(5.1
|
)
|
|
|
(0.5
|
)
|
Other charges
|
|
|
|
|
|
|
|
|
|
|
(43.4
|
)
|
|
|
(11.3
|
)
|
Operating profit
|
|
|
|
|
|
|
|
|
|
$
|
204.7
|
|
|
$
|
296.0
|
|
|
|
Net Sales
|
|
|
Operating Profit
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Americas
|
|
$
|
1,964.5
|
|
|
$
|
1,970.4
|
|
|
$
|
1,045.9
|
|
|
$
|
1,062.3
|
|
EMEA
|
|
|
789.1
|
|
|
|
832.6
|
|
|
|
243.3
|
|
|
|
256.7
|
|
Asia Pacific
|
|
|
625.6
|
|
|
|
618.1
|
|
|
|
218.8
|
|
|
|
211.8
|
|
Product Category Operating Segments
|
|
|
584.9
|
|
|
|
604.1
|
|
|
|
90.6
|
|
|
|
92.6
|
|
Global Operations and Corporate Functions
|
|
|
-
|
|
|
|
-
|
|
|
|
(528.4
|
)
|
|
|
(490.1
|
)
|
Total
|
|
$
|
3,964.1
|
|
|
$
|
4,025.2
|
|
|
|
|
|
|
|
|
|
Inventory and manufacturing-related charges
|
|
|
|
|
|
|
|
|
|
|
(36.1
|
)
|
|
|
(19.7
|
)
|
Intangible asset amortization
|
|
|
|
|
|
|
|
|
|
|
(290.3
|
)
|
|
|
(300.3
|
)
|
Intangible asset impairment
|
|
|
|
|
|
|
|
|
|
|
(70.1
|
)
|
|
|
-
|
|
Acquisition, integration and related
|
|
|
|
|
|
|
|
|
|
|
(21.2
|
)
|
|
|
(96.5
|
)
|
Quality remediation
|
|
|
|
|
|
|
|
|
|
|
(43.1
|
)
|
|
|
(91.6
|
)
|
Litigation
|
|
|
|
|
|
|
|
|
|
|
(5.2
|
)
|
|
|
(1.5
|
)
|
Litigation settlement gain
|
|
|
|
|
|
|
|
|
|
|
23.5
|
|
|
|
-
|
|
European Union Medical Device Regulation
|
|
|
|
|
|
|
|
|
|
|
(6.7
|
)
|
|
|
(0.8
|
)
|
Other charges
|
|
|
|
|
|
|
|
|
|
|
(66.1
|
)
|
|
|
(21.9
|
)
|
Operating profit
|
|
|
|
|
|
|
|
|
|
$
|
554.9
|
|
|
$
|
601.0
|
|
22
17. 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
). Litigation activity in the MDL
is stayed pending finalization of 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 Germany, Netherlands and Italy.
Since 2008, we have recognized net expense of $443.0 million for Durom Cup-related claims. In the three and six month periods ended June 30, 2019, we lowered our estimate of the number of Durom Cup-related claims we expect to settle and, as a result, we recognized gains of $7.0 million and $9.5 million, respectively, in selling, general and administrative expense. We recorded a $20.0 million gain in the three and six month periods ended June 30, 2018.
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, 2019 for any possible future insurance recoveries for these claims.
Our estimate as of June 30, 2019 of the remaining liability for all Durom Cup-related claims is $73.5 million, of which $19.5 million is classified as short-term in other current liabilities and $54.0 million is classified as long-term in other long-term liabilities on our condensed consolidated balance sheet. We expect to pay the majority of the Durom Cup-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.
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 U.S. Court of Appeals for the Seventh Circuit 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. On February 11, 2019, we informed the MDL court of our intention to consummate a confidential settlement that resolves nearly all of the remaining cases, which was completed in June 2019. The settlement did not have a material adverse effect on our results of operations or cash flows.
Zimmer M/L Taper, M/L Taper with Kinectiv Technology, and Versys Femoral Head-related claims
: We are a defendant in a number of product liability lawsuits relating to our M/L Taper and M/L Taper with Kinectiv Technology hip stems, and Versys Femoral Head implants. The plaintiffs seek damages for personal injury, alleging that defects in the products lead to corrosion at the
23
head/stem junction resulting in, among other things, pain, inflammation and revision surgery. The majority of the cases are consolidated in an MDL in the United States District Court for the Southern District of New York (
In Re: Zimmer M/L Taper Hip Prosthesis or M/L Taper Hip Prosthesis with Kinectiv Technology and Versys Femoral Head Products Liability Litigation
). Other related cases are pending in various state courts, with the majority of state court cases pending in Oregon, New Mexico, Indiana and Florida. Additional lawsuits are likely to be filed. 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 hip system. 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 Litigation)
and
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, or are in the process of being remanded to their originating jurisdictions. 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, 2019 of the remaining liability for all Biomet metal-on-metal hip implant claims
is $64.3 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, 2019, 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 then-current line of European Cements and to compensate Heraeus for any damages incurred.
Germany: 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, which it first increased to
€
125.9
million and with a filing in June 2019 further increased to €146.7 million plus statutory interest
. In September 2017, Heraeus filed an enforcement action in the Darmstadt court against Biomet Europe, requesting that a fine be imposed against Biomet Europe for failure to disclose the amount of the European Cements which Biomet Orthopaedics Switzerland had ordered to be manufactured in Germany (e.g., for the Chinese market). In June 2018, the Darmstadt court dismissed Heraeus’ request. Heraeus appealed the decision. 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 on the grounds that the same request had already been decided upon by the Frankfurt Decision which became final and binding. Heraeus has appealed this decision to the Court of Appeals in Karlsruhe, Germany. The appeals hearing is scheduled for December 2019.
United States: 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 sold to Biomet, which Biomet incorporated 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
24
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 the U.S. Court of Appeals for the Third Circuit, which heard oral argument on the appeal on October 23, 2018. On June 21, 2019, the Third Circuit partially reversed the decision of the U.S. District Court for the Eastern District of Pennsylvania granting Esschem summary judgment and remanded the case back to the lower court. On July 5, 2019, Esschem filed a petition in the Third Circuit for rehearing
en banc
and a motion in the alternative to certify a question of state law to the Supreme Court of Pennsylvania, which remained pending as of July 31, 2019.
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. On March 8, 2019, the court stayed the case pending the Third Circuit’s decision in the Esschem case described above.
Other European Countries: Heraeus continues to pursue other related legal proceedings in Europe seeking various forms of relief, including injunctive relief and damages, against Biomet-related entities relating to the European Cements. On October 2, 2018, the Belgian Court of Appeal of Mons issued a judgment in favor of Heraeus relating to its request for past damages caused by the alleged misappropriation of its trade secrets, and an injunction preventing future sales of certain European Cements in Belgium (the “Belgian Decision”). We have appealed this judgment to the Belgian Supreme Court. Heraeus subsequently filed a suit in Belgium concerning the continued sale of the European Cements with certain changed materials. Like its suit in Germany, 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 May 7, 2019, the Liège Commercial Court issued a judgment that Zimmer Biomet failed to inform its hospital and surgeon customers of the changes made to the composition of the cement with certain changed materials and ordered, as a sole remedy, that Zimmer Biomet send letters to those customers, which we have done. We filed an appeal to the judgment.
On February 13, 2019, a Norwegian court of first instance issued a judgment in favor of Heraeus on its claim for misappropriation of trade secrets. The court awarded damages of 19,500,000 NOK, or approximately $2.3 million, plus attorneys’ fees, and issued an injunction, which is not final and thus not currently being enforced, preventing Zimmer Biomet Norway from marketing in Norway bone cements identified with the current product names and bone cements making use of the trade secrets which were acknowledged in the Frankfurt Decision. We have appealed the Norwegian judgment to the court of second instance.
Heraeus is pursuing damages and injunctive relief in France in an effort to prevent us from manufacturing, marketing and selling the European Cements (the “France Litigation”). The European Cements are manufactured at our facility in Valence, France. On December 11, 2018, a hearing was held in the France Litigation before the commercial court in Romans-sur-Isère. On May 23, 2019, the commercial court ruled in our favor. On July 12, 2019, Hereaus filed an appeal to the court of second instance in Grenoble, France. Although we are vigorously defending the France Litigation, the ultimate outcome is uncertain. An adverse ruling in the France Litigation could have a material adverse effect on our business, financial condition and results of operations.
We have accrued an estimated loss relating to the collective European trade secret litigation, including estimated legal costs to defend. Damages relating to the Frankfurt Decision are subject to separate proceedings, and the Belgian court appointed an expert to determine the amount of damages related to the Belgian Decision. Thus, 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
25
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 lost profits 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 attorneys’ 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. Oral argument before the Federal Circuit took place on December 3, 2018 and the Federal Circuit affirmed the trial court’s ruling in full on December 10, 2018. We accrued an estimated loss of approximately $
168.0
million related to the award of treble damages and attorneys’ fees in the three-month period ended December 31, 2018. On January 23, 2019, we filed a petition with the Federal Circuit for a rehearing
en banc.
On March 19, 2019, the petition for rehearing
en banc
was denied. In late March 2019, we paid the outstanding judgment of approximately $
168.0
million.
On June 17, 2019, we filed
a petition for certiorari
seeking
U.S. Supreme Court review of the Federal Circuit’s decision
.
Putative Securities 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, one of our officers and two 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. We and our current and former officers and Board members named as defendants are sometimes hereinafter referred to as the “Zimmer Biomet Defendant group”. The former stockholders of ours who sold shares of our common stock in secondary public offerings in 2016 are sometimes hereinafter referred to as the “Private Equity Fund Defendant group”. 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 U.S. Food and Drug Administration (“
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. On September 27, 2018, the court denied the Zimmer Biomet Defendant group’s motion to dismiss in its entirety. The court granted the Private Equity Fund Defendant group’s motion to dismiss, without prejudice. On October 9, 2018, the Zimmer Biomet Defendant group filed a motion (i) to amend the court’s order on the motion to certify two issues for interlocutory appeal, and (ii) to stay proceedings pending appeal. On February 21, 2019, that motion was denied. On April 11, 2019, the plaintiffs moved for class certification. On June 20, 2019, the Zimmer Biomet Defendant group filed its response. 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.
Shareholder Derivative Actions
:
On June 14 and July 29, 2019, two separate shareholder derivative actions,
Green v. Begley et al.
and
Detectives Endowment Association Annuity Fund v. Begley et al.
, were filed in the court of Chancery in the State of Delaware. The plaintiff in each action seeks to maintain the action purportedly on our behalf against certain of our current and former directors and officers (the “individual defendants”) and
certain former stockholders of ours who sold shares of our common stock in various secondary public offerings in 2016 (the “private equity fund defendants”)
. The plaintiff in each action alleges, among other things, breaches of fiduciary duties against the individual defendants and insider trading against two individual defendants and the private equity fund defendants,
based on substantially the same factual allegations as the putative federal securities class action referenced above
(
Shah v. Zimmer Biomet Holdings, Inc. et al.)
. The plaintiffs do not seek damages from us, but instead request damages from the defendants of an unspecified amount on our behalf. The plaintiffs also seek attorneys’ fees, costs and other relief. As of July 31, 2019, the parties were negotiating stipulations governing service of process and the timing for motions by the various defendants, including potential motions to stay, motions raising demand futility issues and substantive motions to dismiss some or all of the asserted claims.
26
Regulatory Matters, Government Investigations and Other Matters
U.S. International Trade Commission Investigation
: On March 5, 2019, Heraeus filed a complaint with the U.S. International Trade Commission (“ITC”) against us and certain of our subsidiaries. The complaint
alleges that Biomet misappropriated Heraeus’ trade secrets in the formulation and manufacture of two bone cement products now sold by Zimmer Biomet, both of which are imported from our Valence, France facility. Heraeus requested that the ITC institute an investigation and, after the investigation, issue a limited exclusion order and cease and desist orders. On April 5, 2019, the ITC ordered an investigation be instituted into whether we have committed an “unfair act” in the importation, sale for importation, or sale after importation of certain bone cement products. The investigation is ongoing, and an evidentiary hearing in front of an administrative law judge at the ITC is scheduled for January 2020. We cannot currently predict the outcome of this investigation.
FDA warning letters
: In August 2018, we 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) (“QSR”) at our legacy Biomet manufacturing facility in Warsaw, Indiana (this facility is sometimes referred to in this report as the “Warsaw North Campus”).
In May 2016, we received a warning letter from the FDA
related to observed non-conformities with current good manufacturing practice requirements of the QSR at our facility in Montreal, Quebec, Canada. In
September 2012, we received a warning letter from the FDA citing concerns relating to certain processes pertaining to products manufactured at our Ponce, Puerto Rico manufacturing facility. 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 Warsaw, Montreal and Ponce. As of July 31, 2019, 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 below. Additionally, requests for Certificates to Foreign Governments related to products manufactured at certain of our facilities may not be granted and premarket approval applications for Class III devices to which the QSR deviations at these facilities are reasonably related will not be approved until the violations have been corrected. In addition to responding to the warning letters described above, we are in the process of addressing various FDA Form 483 inspectional observations at certain of our manufacturing facilities. The ultimate outcome of these matters is presently uncertain. Among other available regulatory actions, the FDA may impose operating restrictions, including 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 issue 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 restrict 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, (i) 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, who was appointed effective as of August 7, 2017. The monitorship may remain in place until August 7, 2020. 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 and monitorship 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
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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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