10-K 1 zbh-10k_20171231.htm 10-K zbh-10k_20171231.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For year ended December 31, 2017

Commission file number 001-16407

ZIMMER BIOMET HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

13‑4151777

(State of Incorporation)

 

(IRS Employer
Identification No.)

 

 

 

345 East Main Street

Warsaw, Indiana

 

46580

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code:  (574) 267-6131

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.01 par value

 

New York Stock Exchange

1.414% Notes due 2022

 

New York Stock Exchange

2.425% Notes due 2026

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.   (Check One):

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by checkmark whether the registrant is a shell company (as defined Exchange Act Rule 12b-2).    Yes      No  

The aggregate market value of shares held by non-affiliates was $25,893,487,085 (based on the closing price of these shares on the New York Stock Exchange on June 30, 2017 and assuming solely for the purpose of this calculation that all directors and executive officers of the registrant are “affiliates”).  As of February 15, 2018, 203,146,925 shares of the registrant’s $.01 par value common stock were outstanding.  

Documents Incorporated by Reference

 

Document

 

Form 10-K

Portions of the Proxy Statement with respect to the 2018 Annual Meeting of Stockholders

 

Part III

 


ZIMMER BIOMET HOLDINGS, INC.

2017 FORM 10-K ANNUAL REPORT

Cautionary Note About Forward-Looking Statements

This Annual Report on Form 10-K includes “forward-looking” statements within the meaning of federal securities laws, including, among others, statements about our expectations, plans, strategies or prospects.  We generally use the words “may,” “will,” “expect,” “believe,” “anticipate,” “plan,” “estimate,” “project,” “assume,” “guide,” “target,” “forecast,” “see,” “seek,” “can,” “should,” “could,” “would,” “intend” “predict,” “potential,”  “strategy,” “is confident that,” “future,” “opportunity,” “work toward,” and similar expressions to identify forward-looking statements.  All statements other than statements of historical or current fact are, or may be deemed to be, forward-looking statements.  Such statements are based upon the current beliefs, expectations and assumptions of management and are subject to significant risks, uncertainties and changes in circumstances that could cause actual results to differ materially from the forward-looking statements.  A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (refer to Part I, Item 1A of this report).  Readers of this report are cautioned not to rely on these forward-looking statements, since there can be no assurance that these forward-looking statements will prove to be accurate.  We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10‑Q and Current Reports on Form 8-K.

 

 


TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

PART I

 

4

 

 

 

 

Item 1.

Business

 

4

 

 

 

 

Item 1A.

Risk Factors

 

13

 

 

 

 

Item 1B.

Unresolved Staff Comments

 

24

 

 

 

 

Item 2.

Properties

 

25

 

 

 

 

Item 3.

Legal Proceedings

 

25

 

 

 

 

Item 4.

Mine Safety Disclosures

 

25

 

 

 

 

PART II

 

26

 

 

 

 

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities

 

26

 

 

 

 

Item 6.

Selected Financial Data

 

27

 

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

28

 

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

41

 

 

 

 

Item 8.

Financial Statements and Supplementary Data

 

45

 

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

94

 

 

 

 

Item 9A.

Controls and Procedures

 

94

 

 

 

 

Item 9B.

Other Information

 

96

 

 

 

 

PART III

 

97

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

97

 

 

 

 

Item 11.

Executive Compensation

 

97

 

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

 

97

 

 

 

 

Item 13.

Certain Relationships and Related Transactions and Director Independence

 

97

 

 

 

 

Item 14.

Principal Accounting Fees and Services

 

97

 

 

 

 

PART IV

 

98

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

 

98

 

 

 

 

Item 16.

10-K Summary

 

102

 

 

 

 


PART I

Item 1.

Business

Overview

Zimmer Biomet is a global leader in musculoskeletal healthcare.  We design, manufacture and market orthopaedic reconstructive products; sports medicine, biologics, extremities and trauma products; office based technologies; spine, craniomaxillofacial and thoracic products; dental implants; and related surgical products.  We collaborate with healthcare professionals around the globe to advance the pace of innovation.  Our products and solutions help treat patients suffering from disorders of, or injuries to, bones, joints or supporting soft tissues.  Together with healthcare professionals, we help millions of people live better lives.  In this report, “Zimmer Biomet,” “we,” “us,” “our,” “the Company” and similar words refer collectively to Zimmer Biomet Holdings, Inc. and its subsidiaries.  “Zimmer Biomet Holdings” refers to the parent company only.  

Zimmer Biomet Holdings was incorporated in Delaware in 2001.  Our history dates to 1927, when Zimmer Manufacturing Company, a predecessor, was founded in Warsaw, Indiana.  On August 6, 2001, we were spun off from our former parent and became an independent public company.

On June 24, 2015 (the “Closing Date”), we acquired LVB Acquisition, Inc. (“LVB”), the parent company of Biomet, Inc. (“Biomet”), and LVB and Biomet became our wholly-owned subsidiaries (sometimes hereinafter referred to as the “Biomet merger” or the “merger”).  In connection with the merger, we changed our name from Zimmer Holdings, Inc. to Zimmer Biomet Holdings, Inc.  “Zimmer” used alone refers to the business or information of us and our subsidiaries on a stand-alone basis without inclusion of the business or information of LVB or any of its subsidiaries.

Customers, Sales and Marketing

Our primary customers include orthopaedic surgeons, neurosurgeons, oral surgeons, and other specialists, dentists, hospitals, stocking distributors, healthcare dealers and, in their capacity as agents, healthcare purchasing organizations or buying groups.  These customers range from large multinational enterprises to independent clinicians and dentists.  

We have operations throughout the world.  We manage our operations through three major geographic operating segments and four product category operating segments.  Our three major 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.  Our four product category operating segments, which are individually not as significant as our geographic operating segments, are as follows: 1) Spine, less Asia Pacific (“Spine”); 2) Office Based Technologies; 3) Craniomaxillofacial and Thoracic (“CMF”); and 4) Dental.

We market and sell products through three principal channels:  1) direct to healthcare institutions, such as hospitals, referred to as direct channel accounts; 2) through stocking distributors and healthcare dealers; and 3) directly to dental practices and dental laboratories.  With direct channel accounts, inventory is generally consigned to sales agents or customers.  With sales to stocking distributors, healthcare dealers, dental practices and dental laboratories, title to product passes upon shipment or upon implantation of the product.  Direct channel accounts represented approximately 75 percent of our net sales in 2017.  No individual direct channel account, stocking distributor, healthcare dealer, dental practice or dental laboratory accounted for more than 1 percent of our net sales for 2017.

We stock inventory in our warehouse facilities and retain title to consigned inventory in an effort to have sufficient quantities available when products are needed for surgical procedures.  Safety stock levels are determined based on a number of factors, including demand, manufacturing lead times and quantities required to maintain service levels.  We also carry trade accounts receivable balances based on credit terms that are generally consistent with local market practices.

We utilize a network of sales associates, sales managers and support personnel, some of whom are employed or contracted by independent distributors and sales agencies.  We invest a significant amount of time and expense in training sales associates in how to use specific products and how to best inform surgeons of product features and uses.  Sales force representatives must have strong technical selling skills and medical education to provide technical support for surgeons.

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In response to the different healthcare systems throughout the world, our sales and marketing strategies and organizational structures differ by region.  We utilize a global approach to sales force training, marketing and medical education to provide consistent, high quality service.  Additionally, we keep current with key surgical developments and other issues related to orthopaedic surgeons, neurosurgeons, other specialists, dentists and oral surgeons and the medical procedures they perform.

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.  We are organized through a combination of geographic and product category operating segments for various reasons, including the distribution channels through which products are sold.  Our product category operating segments generally have distribution channels focused specifically on those product categories, whereas our geographic operating segments have distribution channels that sell multiple product categories.  The following is a summary of our seven operating segments.  See Note 17 to the consolidated financial statements for more information regarding our segments.

Americas.  The Americas geographic operating segment is our largest operating segment.  The U.S. accounts for 94 percent of net sales in this region.  The U.S. sales force consists of a combination of employees and independent sales agents, most of whom sell products exclusively for Zimmer Biomet.  The sales force in the U.S. receives a commission on product sales and is responsible for many operating decisions and costs.  

In this region, we contract with group purchasing organizations and managed care accounts and have promoted unit growth by offering volume discounts to customer healthcare institutions within a specified group.  Generally, we are designated as one of several preferred purchasing sources for specified products, although members are not obligated to purchase our products.  Contracts with group purchasing organizations generally have a term of three years, with extensions as warranted.  

In the Americas, we monitor and rank independent sales agents and our direct sales force across a range of performance metrics, including the achievement of sales targets and maintenance of efficient levels of working capital.  

EMEA.  The EMEA geographic operating segment is our second largest operating segment.  France, Germany, Italy, Spain and the United Kingdom collectively account for 56 percent of net sales in the region.  This segment also includes other key markets, including Switzerland, Benelux, Nordic, Central and Eastern Europe, the Middle East and Africa.  Our sales force in this segment is comprised of direct sales associates, commissioned agents, independent distributors and sales support personnel.  We emphasize the advantages of our clinically proven, established designs and innovative solutions and new and enhanced materials and surfaces.  In most European countries, healthcare is sponsored by the government and therefore government budgets impact healthcare spending, which can affect our sales in this segment.  

Asia Pacific.  The Asia Pacific geographic operating segment includes key markets such as Japan, China, Australia, New Zealand, Korea, Taiwan, India, Thailand, Singapore, Hong Kong and Malaysia.  Japan is the largest market within this segment, accounting for 45 percent of the region’s sales.  In Japan and most countries in the Asia Pacific region, we maintain a network of dealers, who act as order agents on behalf of hospitals in the region, and sales associates, who build and maintain relationships with orthopaedic surgeons and neurosurgeons in their markets.  The knowledge and skills of these sales associates play a critical role in providing service, product information and support to surgeons.  We have a research and development center in Beijing, China, which focuses on products and technologies designed to meet the unique needs of Asian patients and their healthcare providers.

Spine.  The Spine product category operating segment includes all spine product results except those in Asia Pacific.  The U.S. accounts for the majority of sales in this operating segment.  The market dynamics of the Spine business are similar to those described in the geographic operating segments.  However, the Spine business maintains a separate sales force of employees and independent sales agents.  

Office Based Technologies.  Our Office Based Technologies product category operating segment only sells to U.S. customers.  In this product category, we market our products to doctors who prescribe them for use by patients.  The products are mostly provided directly by Zimmer Biomet to patients and are paid for through patients’ insurance or by patients themselves.  Products are also sold through wholesale channels on a limited basis.

CMF.  Our CMF product category operating segment competes across the world through a combination of direct and independent sales agents.  The U.S. accounts for the majority of sales in this operating segment.  The U.S. sales

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force consists of a combination of employees and independent sales agents.  Internationally, our primary customers are independent stocking distributors who market our products to their customers.  

Dental. Our Dental product category operating segment competes across the world.  Our sales force is primarily composed of employees who market our products to customers.  We sell directly to dental practices or dental laboratories, or to independent stocking distributors depending on the market.  

Seasonality

Our business is seasonal in nature to some extent, as many of our products are used in elective procedures, which typically decline during the summer months and can increase at the end of the year once annual deductibles have been met on health insurance plans.

Distribution

We distribute our products both through large, centralized warehouses and through smaller, market specific facilities, depending on the needs of the market.  We maintain large, centralized warehouses in the U.S. and Europe to be able to efficiently distribute our products to customers in those regions.  In addition to these centralized warehouses, we maintain smaller distribution facilities in the U.S. and in each of the countries where we have a direct sales presence.  In many locations, our inventory is consigned to the healthcare institution.

We generally ship our orders via expedited courier.  Since most of our sales occur at the time of an elective procedure, we generally do not have firm orders.

Products

Our products include orthopaedic reconstructive products; sports medicine, biologics, extremities and trauma products; office based technologies; spine and CMF products; dental implants; and related surgical products.  

Knees

Total knee replacement surgeries typically include a femoral component, a patella (knee cap), a tibial tray and an articular surface (placed on the tibial tray).  Knee replacement surgeries include first-time, or primary, joint replacement procedures and revision procedures for the replacement, repair or enhancement of an implant or component from a previous procedure.  There are also procedures for partial reconstruction of the knee, which treat limited knee degeneration and involve the replacement of only one side, or compartment, of the knee with a unicompartmental knee prosthesis.  Our knee portfolio also includes early intervention and joint preservation products, which seek to preserve the joint by repairing or regenerating damaged tissues and by treating osteoarthritis.  

Our significant knee brands include the following:  

 

Persona® The Personalized Knee System

 

NexGen® Complete Knee Solution  

 

Vanguard® Knee System

 

Oxford® Partial Knee

Hips

Total hip replacement surgeries replace both the head of the femur and the socket portion of the pelvis (acetabulum) of the natural hip.  Hip procedures include first-time, or primary, joint replacement as well as revision procedures.  Hip implant procedures involve the use of bone cement to attach or affix the prosthetic components to the surrounding bone, or are press-fit into bone, which means that they have a surface that bone affixes to through either ongrowth or ingrowth technologies.

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Our significant hip brands include the following:  

 

Zimmer® M/L Taper Hip Prosthesis

 

Taperloc® Hip System

 

Arcos® Modular Hip System

 

Continuum® Acetabular System

 

G7® Acetabular System

S.E.T.

Our S.E.T. product category includes surgical, sports medicine, biologics, foot and ankle, extremities and trauma products.  Our surgical products are used to support various surgical procedures.  Our sports medicine products are primarily for the repair of soft tissue injuries, most commonly used in the knee and shoulder.  Our biologics products are used as early intervention for joint preservation or to support surgical procedures.  Our foot and ankle and extremities products are designed to treat arthritic conditions and fractures in the foot, ankle, shoulder, elbow and wrist.  Our trauma products are used to stabilize damaged or broken bones and their surrounding tissues to support the body’s natural healing process.

Our significant S.E.T. brands include the following:  

 

Transposal® and Transposal Ultra® Fluid Waste Management Systems

 

A.T.S.® Tourniquet Systems

 

JuggerKnot® Soft Anchor System

 

Gel-One®1 Cross-linked Hyaluronate

 

Zimmer® Trabecular MetalTM Reverse Shoulder System 

 

Comprehensive® Shoulder

 

Zimmer® Natural Nail® System

 

A.L.P.S.® Plating System

SPINE and CMF

Our spine products division designs, manufactures and distributes medical devices and surgical instruments to deliver comprehensive solutions for individuals with back or neck pain caused by degenerative conditions, deformities or traumatic injury of the spine.  Our CMF division includes face and skull reconstruction products as well as products that fixate and stabilize the bones of the chest in order to facilitate healing or reconstruction after open heart surgery, trauma or for deformities of the chest.

Our significant spine and CMF brands include the following:  

 

Polaris™ Spinal System

 

Timberline® Lateral Fusion System

 

Mobi-C® Cervical Disc

 

SternaLock® Blu Closure System

 

SternaLock® Rigid Sternal Fixation

DENTAL

Our dental products division manufactures and/or distributes: 1) dental reconstructive implants – for individuals who are totally without teeth or are missing one or more teeth; 2) dental prosthetic products – aimed at providing a more

 

1 

Registered trademark of Seikagaku Corporation

7


natural restoration to resemble the original teeth; and 3) dental regenerative products – for soft tissue and bone rehabilitation.

Our significant dental brands include the following:  

 

Tapered Screw-Vent® Implant System

 

3i T3® Implant

OTHER

Our other product category primarily includes our bone cement and office based technology products.  Our significant brands include the following:  

 

PALACOS®2 Bone Cement

 

SpinalPak® Spinal Fusion Stimulator

Research and Development

We have extensive research and development activities to develop new surgical techniques, materials, biologics and product designs.  The research and development teams work closely with our strategic brand marketing function.  The rapid commercialization of innovative new materials, biologics products, implant and instrument designs and surgical techniques remains one of our core strategies and continues to be an important driver of sales growth.

We are broadening our offerings in each of our product categories and exploring new technologies with possible applications in multiple areas.  Our primary research and development facility is located in Warsaw, Indiana.  We have other research and development personnel based in, among other places, Canada, China, France, Switzerland and other U.S. locations.  As of December 31, 2017, we employed approximately 1,900 research and development employees worldwide.

We expect to continue to identify innovative technologies, which may include acquiring complementary products or businesses, establishing technology licensing arrangements or strategic alliances.  

Government Regulation and Compliance

We are subject to government regulation in the countries in which we conduct business.  In the U.S., numerous laws and regulations govern all the processes by which our products are brought to market.  These include, among others, the Federal Food, Drug and Cosmetic Act and regulations issued or promulgated thereunder.  The U.S. Food and Drug Administration (“FDA”) has enacted regulations that control all aspects of the development, manufacture, advertising, promotion and postmarket surveillance of medical products, including medical devices.  In addition, the FDA controls the access of products to market through processes designed to ensure that only products that are safe and effective are made available to the public.

Most of our new products fall into an FDA medical device classification that requires the submission of a Premarket Notification (510(k)) to the FDA.  This process requires us to demonstrate that the device to be marketed is at least as safe and effective as, that is, substantially equivalent to, a legally marketed device.  We must submit information that supports our substantial equivalency claims.  Before we can market the new device, we must receive an order from the FDA finding substantial equivalence and clearing the new device for commercial distribution in the U.S.  

Other devices we develop and market are in a category (class) for which the FDA has implemented stringent clinical investigation and Premarket Approval (“PMA”) requirements.  The PMA process requires us to provide clinical and laboratory data that establishes that the new medical device is safe and effective.  The FDA will approve the new device for commercial distribution if it determines that the data and information in the PMA application constitute valid scientific evidence and that there is reasonable assurance that the device is safe and effective for its intended use(s).  

 

2 

Registered trademark of Heraeus Medical GmbH

8


All of our devices marketed in the U.S. have been cleared or approved by the FDA, with the exception of some devices which are exempt or were in commercial distribution prior to May 28, 1976.  The FDA has grandfathered these devices, so new FDA submissions are not required.  

Both before and after a product is commercially released, we have ongoing responsibilities under FDA regulations.  The FDA reviews design and manufacturing practices, labeling and record keeping, and manufacturers’ required reports of adverse experiences and other information to identify potential problems with marketed medical devices.  We are also subject to periodic inspection by the FDA for compliance with its Quality System Regulation (21 CFR Part 820) (“QSR”), among other FDA requirements, such as restrictions on advertising and promotion.  Our manufacturing operations, and those of our third-party manufacturers, are required to comply with the QSR, which addresses a company’s responsibility for product design, testing and manufacturing quality assurance and the maintenance of records and documentation.  The QSR requires that each manufacturer establish a quality system by which the manufacturer monitors the manufacturing process and maintains records that show compliance with FDA regulations and the manufacturer’s written specifications and procedures relating to the devices.  QSR compliance is necessary to receive and maintain FDA clearance or approval to market new and existing products.  The FDA conducts announced and unannounced periodic and on-going inspections of medical device manufacturers to determine compliance with the QSR.  If in connection with these inspections the FDA believes the manufacturer has failed to comply with applicable regulations and/or procedures, it may issue inspectional observations on Form 483 that would necessitate prompt corrective action.  If FDA inspectional observations are not addressed and/or corrective action is not taken in a timely manner and to the FDA’s satisfaction, the FDA may issue a warning letter (which would similarly necessitate prompt corrective action) and/or proceed directly to other forms of enforcement action, including the imposition of operating restrictions, including a ceasing of operations, on 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 to 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.  For information regarding certain warning letters and FDA Form 483 inspectional observations that we are addressing, see Note 19 to the consolidated financial statements.

The FDA, in cooperation with U.S. Customs and Border Protection (“CBP”), administers controls over the import of medical devices into the U.S.  The CBP imposes its own regulatory requirements on the import of our products, including inspection and possible sanctions for noncompliance.  We are also subject to foreign trade controls administered by certain U.S. government agencies, including the Bureau of Industry and Security within the Commerce Department and the Office of Foreign Assets Control within the Treasury Department (“OFAC”).

There are also requirements of state, local and foreign governments that we must comply with in the manufacture and marketing of our products.

In many of the foreign countries in which we market our products, we are subject to local regulations affecting, among other things, design and product standards, packaging requirements and labeling requirements.  Many of the regulations applicable to our products in these countries are similar to those of the FDA.  The member countries of the European Union (the “EU”) have adopted the European Medical Device Directive, which creates a single set of medical device regulations for products marketed in all member countries.  Compliance with the Medical Device Directive and certification to a quality system (e.g., ISO 13485 certification) enable the manufacturer to place a CE mark on its products.  To obtain authorization to affix the CE mark to a product, a recognized European Notified Body must assess a manufacturer’s quality system and the product’s conformity to the requirements of the Medical Device Directive.  We are subject to inspection by the Notified Bodies for compliance with these requirements.  In May 2017, a new EU Medical Device Regulation was published that will impose significant additional premarket and postmarket requirements.  The regulation has a three-year implementation period, and after that time all products marketed in the EU will require certification according to these new requirements.  In addition, many countries, including Canada and Japan, have very specific additional regulatory requirements for quality assurance and manufacturing with which we must comply.

Further, we are subject to other federal, state and foreign laws concerning healthcare fraud and abuse, including false claims and anti-kickback laws, as well as the U.S. Physician Payments Sunshine Act and similar state and foreign healthcare professional payment transparency laws.  These laws are administered by, among others, the DOJ, the Office of Inspector General of the Department of Health and Human Services (“OIG-HHS”), state attorneys general and various foreign government agencies.  Many of these agencies have increased their enforcement activities with respect to medical device manufacturers in recent years.  Violations of these laws are

9


punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the U.S., exclusion from participation in government healthcare programs, including Medicare, Medicaid and Veterans Administration health programs.  

Our operations in foreign countries are subject to the extraterritorial application of the U.S. Foreign Corrupt Practices Act (“FCPA”).  Our global operations are also subject to foreign anti-corruption laws, such as the United Kingdom (“UK”) Bribery Act, among others.  As part of our global compliance program, we seek to address anti-corruption risks proactively.  On January 12, 2017, we resolved previously-disclosed FCPA matters involving Biomet and certain of its subsidiaries.  As part of that settlement, we entered into a Deferred Prosecution Agreement (“DPA”) with the DOJ.  For information regarding the DPA, see Note 19 to the consolidated financial statements.  

Our facilities and operations are also subject to complex federal, state, local and foreign environmental and occupational safety laws and regulations, including those relating to discharges of substances in the air, water and land, the handling, storage and disposal of wastes and the clean-up of properties contaminated by pollutants.  We do not expect that the ongoing costs of compliance with these environmental requirements will have a material impact on our consolidated earnings, capital expenditures or competitive position.

In addition, we are subject to federal, state and international data privacy and security laws and regulations that govern the collection, use, disclosure and protection of health-related and other personal information.  Certain of our affiliates are subject to privacy and security regulations promulgated under the Health Insurance Portability and Accountability Act of 1996 and the Health Information Technology for Economic and Clinical Health Act (collectively, “HIPAA”).  The FDA also has issued guidance to which we may be subject concerning data security for medical devices.

International data protection laws, including the EU Data Protection Directive and member state implementing legislation, may also apply to some of our operations.  The EU Data Protection Directive imposes strict obligations and restrictions on the ability to collect, analyze and transfer EU personal data.  Moreover, the General Data Protection Regulation, an EU-wide regulation that will be fully enforceable by May 25, 2018, will introduce new data protection requirements in the EU and substantial fines for violations of the data protection rules.

Failure to comply with U.S. and international data protection laws and regulations could result in government enforcement actions (which could include civil and/or criminal penalties), private litigation and/or adverse publicity and could negatively affect our operating results and business.

Competition

The orthopaedics and broader musculoskeletal care industry is highly competitive.  In the global markets for our knees, hips, and S.E.T. products, our major competitors include: the DePuy Synthes Companies of Johnson & Johnson; Stryker Corporation; and Smith & Nephew plc.  There are smaller competitors in these product categories as well who have success by focusing on smaller subsegments of the industry.  

In the spine and CMF categories, we compete globally primarily with the spinal and biologic business of Medtronic plc, the DePuy Synthes Companies, Stryker Corporation, NuVasive, Inc. and Globus Medical, Inc.

In the dental implant category, we compete primarily with Nobel Biocare Holding AG (part of the Danaher Corporation), Straumann Holding AG and Dentsply Sirona Inc.

Competition within the industry is primarily based on pricing, technology, innovation, quality, reputation and customer service.  A key factor in our continuing success in the future will be our ability to develop new products and improve existing products and technologies.  

Manufacturing and Raw Materials

We manufacture our products at various sites.  We also strategically outsource some manufacturing to qualified suppliers who are highly capable of producing components.  

The manufacturing operations at our facilities are designed to incorporate the cellular concept for production and to implement tenets of a manufacturing philosophy focused on continuous improvement efforts in product quality, lead time reduction and capacity optimization.  Our continuous improvement efforts are driven by Lean and Six Sigma methodologies.   In addition, at certain of our manufacturing facilities, many of the employees are cross-trained to perform a broad array of operations.

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We generally target operating our manufacturing facilities at optimal levels of total capacity.  We continually evaluate the potential to in‑source and outsource production as part of our manufacturing strategy to provide value to our stakeholders.

In most of our manufacturing network, we have improved our manufacturing processes to harmonize and optimize our quality systems and to protect our profitability and offset the impact of inflationary costs.  We have, for example, employed computer-assisted robots and multi-axis grinders to precision polish medical devices; automated certain manufacturing and inspection processes, including on-machine inspection and process controls; purchased state-of-the-art equipment; in-sourced core products and processes; and negotiated cost reductions from third-party suppliers.  Our Warsaw North Campus facility is in the process of implementing many of these manufacturing process improvements.  These process improvements are an integral part of our quality remediation plans.

We use a diverse and broad range of raw materials in the manufacturing of our products.  We purchase all of our raw materials and select components used in manufacturing our products from external suppliers.  In addition, we purchase some supplies from single sources for reasons of quality assurance, sole source availability, cost effectiveness or constraints resulting from regulatory requirements.  We work closely with our suppliers to assure continuity of supply while maintaining high quality and reliability.  To date, we have not experienced any significant difficulty in locating and obtaining the materials necessary to fulfill our production schedules.

Intellectual Property

Patents and other proprietary rights are important to the continued success of our business.  We also rely upon trade secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain our competitive position.  We protect our proprietary rights through a variety of methods, including confidentiality agreements and proprietary information agreements with vendors, employees, consultants and others who may have access to proprietary information.  We own or control through licensing arrangements over 8,000 issued patents and patent applications throughout the world that relate to aspects of the technology incorporated in many of our products.

Employees

As of December 31, 2017, we employed approximately 18,200 employees worldwide, including approximately 1,900 employees dedicated to research and development.  Approximately 8,500 employees are located within the U.S. and approximately 9,700 employees are located outside of the U.S., primarily throughout Europe and in Japan.  We have approximately 7,900 employees dedicated to manufacturing our products worldwide.  The Warsaw, Indiana production facilities employ approximately 2,700 employees in the aggregate. 

We have production employees represented by a labor union in each of Dover, Ohio and Bridgend, South Wales.  We have other employees in Europe who are represented by Works Councils.  We believe that our relationship with our employees is satisfactory.

EXECUTIVE OFFICERS

The following table sets forth certain information with respect to our executive officers as of February 19, 2018.

 

Name

 

Age

 

Position

Bryan C. Hanson

 

51

 

President and Chief Executive Officer

Aure Bruneau

 

43

 

Group President, Spine, CMF, Thoracic and Surgery Assisting Technology

Tony W. Collins

 

49

 

Vice President, Corporate Controller and Chief Accounting Officer

Robert D. Delp

 

48

 

President, Americas

Daniel P. Florin

 

53

 

Executive Vice President and Chief Financial Officer

Katarzyna Mazur-Hofsaess, M.D., Ph.D.

 

54

 

President, Europe, Middle East and Africa

David A. Nolan Jr.

 

52

 

Group President, Biologics, Extremities, Sports Medicine, Surgical, Trauma, Foot and Ankle, Office Based Technologies and Zimmer Biomet Signature Solutions

Chad F. Phipps

 

46

 

Senior Vice President, General Counsel and Secretary

Daniel E. Williamson

 

52

 

Group President, Joint Reconstruction

Sang Yi

 

55

 

President, Asia Pacific

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Mr. Hanson was appointed President and Chief Executive Officer and a member of the Board of Directors in December 2017.  Previously, Mr. Hanson served as Executive Vice President and President, Minimally Invasive Therapies Group of Medtronic plc from January 2015 until joining Zimmer Biomet.  Prior to that, he was Senior Vice President and Group President, Covidien of Covidien plc from October 2014 to January 2015; Senior Vice President and Group President, Medical Devices and United States of Covidien from October 2013 to September 2014; Senior Vice President and Group President of Covidien for the Surgical Solutions business from July 2011 to October 2013; and President of Covidien’s Energy-based Devices business from July 2006 to June 2011.  Mr. Hanson held several other positions of increasing responsibility in sales, marketing and general management with Covidien from October 1992 to July 2006.

Mr. Bruneau was appointed Group President with responsibility for the Company’s, Spine, Craniomaxillofacial, Thoracic and Surgery Assisting Technology businesses in December 2017.  Prior to that, Mr. Bruneau served as Vice President and General Manager with global responsibility for the Company’s Craniomaxillofacial and Thoracic businesses beginning in June 2015.  He also led the integration of the Robotics business until assuming his current role.  Previously, Mr. Bruneau served in Vice President roles of increasing responsibility in marketing, business development and general management at Biomet from September 2008 until June 2015.  Prior to joining Biomet, Mr. Bruneau held numerous positions with Sofamor Danek Group and Medtronic over a 12-year period.

Mr. Collins was appointed Vice President, Corporate Controller and Chief Accounting Officer effective June 2015.  Prior to that, Mr. Collins served as Vice President, Finance for the Global Reconstructive Division and Global Operations organization.  He joined the Company in 2010 as Vice President, Finance for the Global Reconstructive Division and U.S. Commercial organization.  Previously, Mr. Collins held the position of Vice President, Finance and served as the chief financial officer of the Commercial segment of Oshkosh Corporation from 2007 to 2010.  From 1997 to 2007, he was employed at Guidant Corporation and Boston Scientific Corporation, where he held a number of positions of increasing responsibility, including Finance Director and chief financial officer of the Guidant Japan organization, Global Director of Operations Finance and Director of Strategic Planning.

Mr. Delp was appointed President, Americas effective January 2017.  He is responsible for the Company’s sales and management of the direct and indirect sales channels in the Americas region, including the United States, Canada and Latin America.  He served as Vice President, U.S. Sales from June 2015 until assuming his current role.  Mr. Delp previously served in commercial Vice President roles with Biomet from October 2007 until June 2015.  Prior to those appointments, Mr. Delp held numerous positions within the musculoskeletal healthcare field, where he began his career in 1995.

Mr. Florin was appointed Executive Vice President and Chief Financial Officer in February 2018.  Prior to that appointment, he served as Senior Vice President and Chief Financial Officer from June 2015 to February 2018.  In addition, he served as Interim Chief Executive Officer from July 2017 to December 2017.  Prior to the Biomet merger, Mr. Florin served as Senior Vice President and Chief Financial Officer of Biomet from June 2007 to June 2015.  Before joining Biomet, he served as Vice President and Corporate Controller of Boston Scientific Corporation from 2001 through May 2007.  Prior to that, Mr. Florin served in financial leadership positions within Boston Scientific Corporation and its various business units.  Before joining Boston Scientific Corporation, Mr. Florin worked for C.R. Bard from October 1990 through June 1995.

Dr. Mazur-Hofsaess was appointed President, Europe, Middle East and Africa (EMEA) in April 2013.  She is responsible for the sales, marketing and distribution of products in the EMEA region.  Dr. Mazur-Hofsaess joined the Company in February 2010 as Senior Vice President, EMEA Sales and Marketing and was appointed President, EMEA Reconstructive in February 2012.  She has more than 20 years’ experience within the pharmaceutical, diagnostics and medical device sectors.  Prior to joining the Company, Dr. Mazur-Hofsaess served in various management positions at Abbott Laboratories beginning in 2001, most recently as Vice President, Diagnostics – Europe.

Mr. Nolan was appointed Group President effective June 2015.  He has responsibility for the Company’s Biologics, Extremities, Sports Medicine, Surgical, Trauma, Foot and Ankle, Office Based Technologies and Zimmer Biomet Signature Solutions businesses.  He joined the Company in November 2012 as Senior Vice President, Sales.  From January 2014 to June 2015, he served as Senior Vice President, Sales and Advanced Solutions.  Prior to joining the Company, Mr. Nolan served as President, Biomet Sports Medicine, Extremities and Trauma from 2011 to 2012 and as President, Biomet Sports Medicine from 2001 to 2011.  He joined Biomet in 1996.

Mr. Phipps was appointed Senior Vice President, General Counsel and Secretary in May 2007.  He has global responsibility for the Company’s Legal Affairs and he serves as Secretary to the Board of Directors.  Mr. Phipps

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also oversees the Company’s Government Affairs, Corporate Communication and Public Relations activities.  Previously, Mr. Phipps served as Associate General Counsel and Corporate Secretary from December 2005 to May 2007.  He joined the Company in September 2003 as Associate Counsel and Assistant Secretary.  Prior to joining the Company, he served as Vice President and General Counsel of L&N Sales and Marketing, Inc. in Pennsylvania and he practiced law with the firm of Morgan, Lewis & Bockius in Philadelphia, focusing on corporate and securities law, mergers and acquisitions and financial transactions.

Mr. Williamson was appointed Group President, Joint Reconstruction with responsibility for the Company’s Knee, Hip, Bone Cement, Patient-Matched Implants and Personalized Solutions businesses effective June 2015.  Prior to the Biomet merger, he served as Senior Vice President, Biomet and President, Global Reconstructive Joints from February 2014 to June 2015.  Prior to that, Mr. Williamson served as Biomet’s Vice President and General Manager, Global Bone Cement and Biomaterials Research from September 2011 to February 2014, and as Corporate Vice President, Global Biologics and Biomaterials from May 2006 to September 2011.  Mr. Williamson previously served as Biomet’s Vice President, Business Development from December 2003 to May 2006.  He began his career with Biomet in 1990 as a Product Development Engineer.

Mr. Yi was appointed President, Asia Pacific effective June 2015.  He is responsible for the sales, marketing and distribution of products in the Asia Pacific region.  Mr. Yi joined the Company in March 2013 as Senior Vice President, Asia Pacific.  Previously, he served as Vice President and General Manager of St. Jude Medical for Asia Pacific and Australia from 2005 to 2013.  Prior to that, Mr. Yi held several leadership positions over a ten-year period with Boston Scientific Corporation, ultimately serving as Vice President for North Asia.

AVAILABLE INFORMATION

Our Internet address is www.zimmerbiomet.com.  We routinely post important information for investors on our website in the “Investor Relations” section, which may be accessed from our homepage at www.zimmerbiomet.com or directly at http://investor.zimmerbiomet.com.  We use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under Regulation FD.  Accordingly, investors should monitor the Investor Relations section of our website, in addition to following our press releases, Securities and Exchange Commission (“SEC”) filings, public conference calls, presentations and webcasts.  Our goal is to maintain the Investor Relations website as a portal through which investors can easily find or navigate to pertinent information about us, free of charge, including:

 

our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after we electronically file that material with or furnish it to the SEC;

 

announcements of investor conferences and events at which our executives talk about our products and competitive strategies, as well as archives of these events;

 

press releases on quarterly earnings, product announcements, legal developments and other material news that we may post from time to time;

 

corporate governance information including our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Chief Executive Officer and Senior Financial Officers, information concerning our Board of Directors and its committees, including the charters of the Audit Committee, Compensation and Management Development Committee, Corporate Governance Committee and Quality, Regulatory and Technology Committee, and other governance-related policies;

 

stockholder services information, including ways to contact our transfer agent and information on how to sign up for direct deposit of dividends or enroll in our dividend reinvestment plan; and

 

opportunities to sign up for email alerts and RSS feeds to have information provided in real time.

The information available on our website is not incorporated by reference in, or a part of, this or any other report we file with or furnish to the SEC.

Item 1A.

Risk Factors  

We operate in a rapidly changing economic and technological environment that presents numerous risks, many of which are driven by factors that we cannot control or predict.  Our business, financial condition and results of

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operations may be impacted by a number of factors.  In addition to the factors discussed elsewhere in this report, the following risks and uncertainties could materially harm our business, financial condition or results of operations, including causing our actual results to differ materially from those projected in any forward-looking statements.  The following list of significant risk factors is not all-inclusive or necessarily in order of importance.  Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, also may materially adversely affect us in future periods.  You should carefully consider these risks and uncertainties before investing in our securities.

We may experience a disruption of our business activities due to the transition to a new Chief Executive Officer.

Effective as of December 19, 2017, our Board of Directors appointed Bryan C. Hanson as President and Chief Executive Officer and a member of the Board of Directors.  Recently hired executives may view the business differently than prior members of management, and over time may make changes to our strategic focus, operations, business plans, existing personnel and their responsibilities.  We can give no assurances that we will be able to properly manage any such shift in focus, or that any changes to our business would ultimately prove successful.  In addition, leadership transitions and management changes can be inherently difficult to manage and may cause uncertainty or a disruption to our business or may increase the likelihood of turnover in key officers and employees.  Our success depends in part on having a successful leadership team.  If we cannot effectively manage leadership transitions and management changes, it could make it more difficult to successfully operate our business and pursue our business goals.  We can give no assurances that we will be able to retain the services of any of our current executives or other key employees.  If we do not succeed in attracting well-qualified employees, retaining and motivating existing employees or integrating new executives and employees, our business could be materially and adversely affected.

We incurred substantial additional indebtedness in connection with the Biomet and LDR mergers and may not be able to meet all of our debt obligations.

We incurred substantial additional indebtedness in connection with the Biomet merger in 2015 and the LDR Holding Corporation (“LDR”) merger in 2016.  At December 31, 2017, our total indebtedness was $10.1 billion, as compared to $1.4 billion at December 31, 2014.  We funded the cash portion of the Biomet merger consideration, the pay-off of certain indebtedness of Biomet and the payment of transaction-related expenses through a combination of available cash-on-hand and proceeds from debt financings, including proceeds from a $7.65 billion issuance of senior unsecured notes in March 2015 and borrowings of $3.0 billion under a five-year term loan (“U.S. Term Loan A”) in June 2015.  In addition, in September 2016, we borrowed $750 million under a three-year unsecured term loan facility and utilized these funds to repay outstanding borrowings under our revolving facility incurred in connection with the acquisition of LDR.  Also, in December 2016, we issued €1.0 billion aggregate principal amount of Euro-denominated senior notes and used the proceeds to repay a portion of the U.S. dollar-denominated senior notes issued in connection with the Biomet merger.  Further, in September 2017, we borrowed 21.3 billion Japanese Yen under a five-year term loan and utilized these funds to pay down a portion of U.S. Term Loan A.  As of December 31, 2017, our debt service obligations, comprised of principal and interest (excluding capital leases and equipment notes), during the next 12 months are expected to be $1,522.4 million.  As a result of the increase in our debt, demands on our cash resources have increased.  The increased level of debt could, among other things:

 

require us to dedicate a large portion of our cash flow from operations to the servicing and repayment of our debt, thereby reducing funds available for working capital, capital expenditures, research and development expenditures and other general corporate requirements;

 

limit our ability to obtain additional financing to fund future working capital, capital expenditures, research and development expenditures and other general corporate requirements;

 

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

restrict our ability to make strategic acquisitions or dispositions or to exploit business opportunities;

 

place us at a competitive disadvantage compared to our competitors that have less debt;

 

adversely affect our credit rating, with the result that the cost of servicing our indebtedness might increase and our ability to obtain surety bonds could be impaired;

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adversely affect the market price of our common stock; and

 

limit our ability to apply proceeds from a future offering or asset sale to purposes other than the servicing and repayment of debt.

If we fail to comply with the terms of the DPA that we entered into in January 2017, we may be subject to criminal prosecution and/or exclusion from federal healthcare programs.

On January 12, 2017, we resolved previously-disclosed FCPA matters involving Biomet and certain of its subsidiaries.  As part of the settlement, we entered into a DPA with the DOJ.  A copy of the DPA is incorporated by reference as an exhibit to this report.

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 OIG-HHS 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.

We may not be able to effectively integrate acquired businesses into our operations or achieve expected cost savings or profitability from our acquisitions.

Our acquisitions involve numerous risks, including:

 

unforeseen difficulties in integrating personnel and sales forces, operations, manufacturing, logistics, research and development, information technology, communications, purchasing, accounting, marketing, administration and other systems and processes;

 

difficulties harmonizing and optimizing quality systems and operations;

 

diversion of financial and management resources from existing operations;

 

unforeseen difficulties related to entering geographic regions where we do not have prior experience;

 

potential loss of key employees;

 

unforeseen liabilities associated with businesses acquired; and

 

inability to generate sufficient revenue or realize sufficient cost savings to offset acquisition or investment costs.

As a result, if we fail to evaluate and execute acquisitions properly, we might not achieve the anticipated benefits of such acquisitions and we may incur costs in excess of what we anticipate.  These risks would likely be greater in the case of larger acquisitions.

Interruption of our manufacturing operations could adversely affect our business, financial condition and results of operations.

We have manufacturing sites all over the world.  In some instances, however, the manufacturing of certain of our product lines is concentrated in one or more of our plants.  Damage to one or more of our facilities from weather or natural disaster-related events, such as the recent hurricanes that affected our employees and operations at our Guaynabo, Puerto Rico and Ponce, Puerto Rico manufacturing facilities, or issues in our manufacturing arising from failure to follow specific internal protocols and procedures, compliance concerns relating to the QSR and Good Manufacturing Practice requirements, equipment breakdown or malfunction or other factors could adversely affect our ability to manufacture our products.  In the event of an interruption in manufacturing, we may be unable to move quickly to alternate means of producing affected products or to meet customer demand.  In the event of a significant interruption, for example, as a result of a failure to follow regulatory protocols and procedures, we may experience lengthy delays in resuming production of affected products due primarily to the need for regulatory approvals.  As a result, we may experience loss of market share, which we may be unable to recapture, and harm to our reputation, which could adversely affect our business, financial condition and results of operations.

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Disruptions in the supply of the materials and components used in manufacturing our products could adversely affect our business, financial condition and results of operations. 

We purchase many of the materials and components used in manufacturing our products from third-party vendors and we outsource some key manufacturing activities.  Certain of these materials and components and outsourced activities can only be obtained from a single source or a limited number of sources due to quality considerations, expertise, costs or constraints resulting from regulatory requirements.  In certain cases, we may not be able to establish additional or replacement vendors for such materials or components or outsourced activities in a timely or cost effective manner, largely as a result of FDA regulations that require validation of materials and components prior to their use in our products and the complex nature of our and many of our vendors' manufacturing processes.  A reduction or interruption in the supply of materials or components used in manufacturing our products; an inability to timely develop and validate alternative sources if required; or a significant increase in the price of such materials or components could adversely affect our business, financial condition and results of operations.

Moreover, we are subject to the SEC’s rule regarding disclosure of the use of certain minerals, known as “conflict minerals” (tantalum, tin and tungsten (or their ores) and gold), which are mined from the Democratic Republic of the Congo and adjoining countries.  This rule could adversely affect the sourcing, availability and pricing of materials used in the manufacture of our products, which could adversely affect our manufacturing operations and our profitability.  In addition, we are incurring additional costs to comply with this rule, including costs related to determining the source of any relevant minerals and metals used in our products.  We have a complex supply chain and we may not be able to sufficiently verify the origins of the minerals and metals used in our products through our due diligence procedures.  As a result, we may face reputational challenges with our customers and other stakeholders.

We are subject to various governmental regulations relating to the manufacturing, labeling and marketing of our products, non-compliance with which could adversely affect our business, financial condition and results of operations.

The products we design, develop, manufacture and market are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities.  The process of obtaining regulatory approvals to market these products can be costly and time consuming and approvals might not be granted for future products on a timely basis, if at all.  Delays in receipt of, or failure to obtain, approvals for future products could result in delayed realization of product revenues or in substantial additional costs.

Both before and after a product is commercially released, we have ongoing responsibilities under FDA regulations and other local, state and foreign requirements.  Compliance with these requirements, including the QSR, recordkeeping regulations, labeling and promotional requirements and adverse event reporting regulations, is subject to continual review and is monitored rigorously through periodic inspections by the FDA and other regulators, which may result in observations (such as on Form 483), and in some cases warning letters, that require corrective action, or other forms of enforcement.  If the FDA or another regulator were to conclude that we are not in compliance with applicable laws or regulations, or that any of our products are ineffective or pose an unreasonable health risk, they could ban such products, detain or seize adulterated or misbranded products, order a recall, repair, replacement, or refund of payment of such products, refuse to grant pending premarket approval applications, refuse to provide certificates for exports, and/or require us to notify healthcare professionals and others that the products present unreasonable risks of substantial harm to the public health.  The FDA or other regulators may also impose operating restrictions, including a ceasing of operations, on one or more facilities, enjoin and restrain certain violations of applicable law pertaining to our products and assess civil or criminal penalties against our officers, employees or us.  The FDA or other regulators could also issue a corporate warning letter, a recidivist warning letter, a consent decree of permanent injunction, and/or recommend prosecution.  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.

In 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.  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.  As of December 31, 2017, these warning letters remained pending.  Until the violations are corrected, we may become subject to additional regulatory action by the FDA as described above, the FDA may refuse to grant premarket approval applications and/or the FDA may refuse to grant export certificates, any of which could have a material adverse effect on our business, financial condition and results

16


of operations.  Additional information regarding these and other FDA regulatory matters can be found in Note 19 to the consolidated financial statements.

Our products and operations are also often subject to the rules of industrial standards bodies, such as the International Standards Organization.  If we fail to adequately address any of these regulations, our business could be harmed.

If we fail to comply with healthcare fraud and abuse or data privacy and security laws and regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

Our industry is subject to various federal, state and foreign laws and regulations pertaining to healthcare fraud and abuse, including the federal False Claims Act, the federal Anti-Kickback Statute, the federal Stark law, the federal Physician Payments Sunshine Act and similar state and foreign laws.  In addition, we are subject to various federal and foreign laws concerning anti-corruption and anti-bribery matters, sales to countries or persons subject to economic sanctions and other matters affecting our international operations.  Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the U.S., exclusion from participation in government healthcare programs, including Medicare, Medicaid and Veterans Administration health programs.  These laws are administered by, among others, the DOJ, the OIG-HHS, the SEC, the OFAC, the Bureau of Industry and Security of the U.S. Department of Commerce and state attorneys general.

We are also subject to federal, state and international data privacy and security laws and regulations that govern the collection, use, disclosure and protection of health-related and other personal information.  Certain of our affiliates are subject to privacy and security regulations promulgated under HIPAA.  The FDA also has issued guidance to which we may be subject concerning data security for medical devices.

International data protection laws, including the EU Data Protection Directive and member state implementing legislation, may also apply to some of our operations and restrict our ability to collect, analyze and transfer EU personal data.  Moreover, the General Data Protection Regulation, an EU-wide regulation that will be fully enforceable by May 25, 2018, will introduce new data protection requirements in the EU and substantial fines for violations of the data protection rules.

The interpretation and enforcement of the laws and regulations described above are uncertain and subject to change.  Failure to comply with U.S. and international data protection laws and regulations could result in government enforcement actions (which could include civil and/or criminal penalties), private litigation and/or adverse publicity and could negatively affect our operating results and business.

We are increasingly dependent on sophisticated information technology and if we fail to effectively maintain or protect our information systems or data, including from data breaches, our business could be adversely affected.

We are increasingly dependent on sophisticated information technology for our products and infrastructure.  As a result of technology initiatives, recently enacted regulations, changes in our system platforms and integration of new business acquisitions, including the Biomet merger, we have been consolidating and integrating the number of systems we operate and have upgraded and expanded our information systems capabilities.  We also have outsourced elements of our operations to third parties, and, as a result, we manage a number of third-party vendors who may or could have access to our confidential information.  Our information systems, and those of third-party vendors with whom we contract, require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information technology, evolving systems and regulatory standards and the increasing need to protect patient and customer information.  In addition, given their size and complexity, these systems could be vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third-party vendors and/or business partners, or from cyber-attacks by malicious third parties attempting to gain unauthorized access to our products, systems or confidential information (including, but not limited to, intellectual property, proprietary business information and personal information).  Cyber-attacks, such as those involving the deployment of malware, are increasing in their frequency, sophistication and intensity and have become increasingly difficult to detect.  If we fail to maintain or protect our information systems and data integrity effectively, we could:

 

lose existing customers;

 

have difficulty attracting new customers;

 

have problems in determining product cost estimates and establishing appropriate pricing;

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have difficulty preventing, detecting, and controlling fraud;

 

have disputes with customers, physicians, and other healthcare professionals;  

 

have regulatory sanctions or penalties imposed;

 

incur increased operating expenses;

 

incur expenses or lose revenues as a result of a data privacy breach; or

 

suffer other adverse consequences.

While we have invested heavily in the protection of our data and information technology, there can be no assurance that our activities related to consolidating the number of systems we operate, upgrading and expanding our information systems capabilities, protecting and enhancing our systems and implementing new systems will be successful.  Despite our efforts, we cannot assure you that cyber-attacks or data breaches will not occur or that systems issues will not arise in the future.  Any significant breakdown, intrusion, breach, interruption, corruption or destruction of these systems could have a material adverse effect on our business and reputation.

Our success depends on our ability to effectively develop and market our products against those of our competitors.

We operate in a highly competitive environment.  Our present or future products could be rendered obsolete or uneconomical by technological advances by one or more of our present or future competitors or by other therapies, including biological therapies.  To remain competitive, we must continue to develop and acquire new products and technologies. Competition is primarily on the basis of:

 

pricing;

 

technology;

 

innovation;

 

quality;

 

reputation; and

 

customer service.

In markets outside of the U.S., other factors influence competition as well, including:

 

local distribution systems;

 

complex regulatory environments; and

 

differing medical philosophies and product preferences.

Our competitors may:

 

have greater financial, marketing and other resources than us;

 

respond more quickly to new or emerging technologies;

 

undertake more extensive marketing campaigns;

 

adopt more aggressive pricing policies; or

 

be more successful in attracting potential customers, employees and strategic partners.

Any of these factors, alone or in combination, could cause us to have difficulty maintaining or increasing sales of our products.

If we fail to retain the independent agents and distributors upon whom we rely heavily to market our products, customers may not buy our products and our revenue and profitability may decline.

Our marketing success in the U.S. and abroad depends significantly upon our agents’ and distributors’ sales and service expertise in the marketplace.  Many of these agents have developed professional relationships with existing

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and potential customers because of the agents’ detailed knowledge of products and instruments.  A loss of a significant number of our agents could have a material adverse effect on our business and results of operations.

If we do not introduce new products in a timely manner, our products may become obsolete over time, customers may not buy our products and our revenue and profitability may decline.

Demand for our products may change, in certain cases, in ways we may not anticipate because of:

 

evolving customer needs;

 

changing demographics;

 

slowing industry growth rates;

 

declines in the musculoskeletal implant market;

 

the introduction of new products and technologies;

 

evolving surgical philosophies; and

 

evolving industry standards.

Without the timely introduction of new products and enhancements, our products may become obsolete over time.  If that happens, our revenue and operating results would suffer.  The success of our new product offerings will depend on several factors, including our ability to:

 

properly identify and anticipate customer needs;

 

commercialize new products in a timely manner;

 

manufacture and deliver instruments and products in sufficient volumes on time;

 

differentiate our offerings from competitors’ offerings; 

 

achieve positive clinical outcomes for new products; 

 

satisfy the increased demands by healthcare payors, providers and patients for shorter hospital stays, faster post-operative recovery and lower-cost procedures;

 

innovate and develop new materials, product designs and surgical techniques; and

 

provide adequate medical education relating to new products.

In addition, new materials, product designs and surgical techniques that we develop may not be accepted quickly, in some or all markets, because of, among other factors:

 

entrenched patterns of clinical practice;

 

the need for regulatory clearance; and

 

uncertainty with respect to third-party reimbursement.

Moreover, innovations generally require a substantial investment in research and development before we can determine their commercial viability and we may not have the financial resources necessary to fund the production.  In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not produce revenue in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features.

If third-party payors decline to reimburse our customers for our products or reduce reimbursement levels, the demand for our products may decline and our ability to sell our products profitably may be harmed.

We sell our products and services to hospitals, doctors, dentists and other healthcare providers, all of which receive reimbursement for the healthcare services provided to their patients from third-party payors, such as domestic and international government programs, private insurance plans and managed care programs.  These third-party payors may deny reimbursement if they determine that a device used in a procedure was not in accordance with cost-

19


effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication.  Third-party payors may also decline to reimburse for experimental procedures and devices.

In addition, third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for medical products and services.  If third-party payors reduce reimbursement levels to hospitals and other healthcare providers for our products, demand for our products may decline, or we may experience increased pressure to reduce the prices of our products, which could have a material adverse effect on our sales and results of operations.

We have also experienced downward pressure on product pricing and other effects of healthcare reform in our international markets.  If key participants in government healthcare systems reduce the reimbursement levels for our products, our sales and results of operations may be adversely affected.

The ongoing cost-containment efforts of healthcare purchasing organizations may have a material adverse effect on our results of operations.

Many customers for our products have formed group purchasing organizations in an effort to contain costs.  Group purchasing organizations negotiate pricing arrangements with medical supply manufacturers and distributors, and these negotiated prices are made available to a group purchasing organization’s affiliated hospitals and other members.  If we are not one of the providers selected by a group purchasing organization, affiliated hospitals and other members may be less likely to purchase our products, and, if the group purchasing organization has negotiated a strict compliance contract for another manufacturer’s products, we may be precluded from making sales to members of the group purchasing organization for the duration of the contractual arrangement.  Our failure to respond to the cost-containment efforts of group purchasing organizations may cause us to lose market share to our competitors and could have a material adverse effect on our sales and results of operations.

We conduct a significant amount of our sales activity outside of the U.S., which subjects us to additional business risks and may cause our profitability to decline due to increased costs.

We sell our products in more than 100 countries and derived approximately 40 percent of our net sales in 2017 from outside the U.S.  We intend to continue to pursue growth opportunities in sales internationally, including in emerging markets, which could expose us to additional risks associated with international sales and operations.  Our international operations are, and will continue to be, subject to a number of risks and potential costs, including:

 

changes in foreign medical reimbursement policies and programs;

 

unexpected changes in foreign regulatory requirements;

 

differing local product preferences and product requirements;

 

fluctuations in foreign currency exchange rates;

 

diminished protection of intellectual property in some countries outside of the U.S.;

 

trade protection measures and import or export requirements that may prevent us from shipping products to a particular market and may increase our operating costs;

 

foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S.;

 

complex data privacy requirements and labor relations laws;

 

extraterritorial effects of U.S. laws such as the FCPA;

 

effects of foreign anti-corruption laws, such as the UK Bribery Act;

 

difficulty in staffing and managing foreign operations;

 

labor force instability;

 

potentially negative consequences from changes in tax laws; and

 

political and economic instability.

Violations of foreign laws or regulations could result in fines, criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business and damage to our reputation.

20


We may have additional tax liabilities.

We are subject to income taxes in the U.S. and many foreign jurisdictions.  Significant judgment is required in determining our worldwide provision for income taxes.  In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain.  We regularly are under audit by tax authorities.  Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals.  The results of an audit or litigation could have a material effect on our financial statements in the period or periods for which that determination is made.

The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017 (the “2017 Tax Act”), with significant changes to the U.S. corporate income tax system, including a federal corporate income tax rate reduction from 35 percent to 21 percent, limitations on the deductibility of interest expense, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system.  The U.S. Treasury has provided limited guidance on aspects of the 2017 Tax Act, and we anticipate further guidance will be provided in the future.  On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), expressing its views on the application of Financial Accounting Standards Board Accounting Standards Codification Topic 740, Income Taxes, in the reporting period that includes December 22, 2017.  For the financial statements that include the reporting period in which the 2017 Tax Act was enacted, SAB 118 provides a provisional approach to reflect the income tax effects of the 2017 Tax Act.  The actual effects of the 2017 Tax Act and the final amounts recorded may differ materially from our current estimates of provisional amounts included in this Annual Report on Form 10-K.  Further, our tax expense and cash flow could be materially impacted as we finalize the financial accounting for the 2017 Tax Act, and incorporate future regulatory guidance provided by the U.S. Treasury.

We are subject to risks arising from currency exchange rate fluctuations, which can increase our costs, cause our profitability to decline and expose us to counterparty risks.

A substantial portion of our foreign revenues is generated in Europe and Japan.  The U.S. Dollar value of our foreign-generated revenues varies with currency exchange rate fluctuations.  Significant increases in the value of the U.S. Dollar relative to the Euro or the Japanese Yen, as well as other currencies, could have a material adverse effect on our results of operations.  Although we address currency risk management through regular operating and financing activities, and, on a limited basis, through the use of derivative financial instruments, those actions may not prove to be fully effective.

Pending and future product liability claims and litigation could adversely impact our financial condition and results of operations and impair our reputation.

Our business exposes us to potential product liability risks that are inherent in the design, manufacture and marketing of medical devices.  In the ordinary course of business, we are the subject of product liability lawsuits alleging that component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to patients.  As discussed further in Note 19 to the consolidated financial statements, we are defending product liability lawsuits relating to the Durom® Acetabular Component (“Durom Cup”), certain products within the NexGen Knee System, and the M2a-MagnumTM hip system.  The majority of the Durom Cup cases are pending in a federal Multidistrict Litigation (“MDL”) in the District of New Jersey (In Re: Zimmer Durom Hip Cup Products Liability Litigation); the majority of the NexGen Knee System cases are pending in a federal MDL in the Northern District of Illinois (In Re: Zimmer NexGen Knee Implant Products Liability Litigation); and the majority of the M2a-Magnum hip system cases are pending in a federal MDL in the Northern District of Indiana (In Re: Biomet M2a Magnum Hip Implant Products Liability Litigation).  We are also currently defending a number of other product liability lawsuits and claims related to various other products.  Any product liability claim brought against us, with or without merit, can be costly to defend.  Product liability lawsuits and claims, safety alerts or product recalls, regardless of their ultimate outcome, could have a material adverse effect on our business and reputation and on our ability to attract and retain customers.

Although we maintain third-party product liability insurance coverage, we have substantial self-insured retention amounts that we must pay in full before obtaining any insurance proceeds to pay for defense costs, or to satisfy a judgment or settlement.  Furthermore, even if any product liability loss is covered by our insurance, it is possible that claims against us may exceed the coverage limits of our insurance policies and we would have to pay the amount of any defense costs, settlement or judgment that is in excess of our policy limits.  Product liability claims in excess of applicable insurance could have a material adverse effect on our business, financial condition and results of operations.

21


We are substantially dependent on patent and other proprietary rights, and failing to protect such rights or to be successful in litigation related to our rights or the rights of others may result in our payment of significant monetary damages and/or royalty payments, negatively impact our ability to sell current or future products, or prohibit us from enforcing our patent and other proprietary rights against others.

Claims of intellectual property infringement and litigation regarding patent and other intellectual property rights are commonplace in our industry and are frequently time consuming and costly.  At any given time, we may be involved as either plaintiff or defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time.  While it is not possible to predict the outcome of patent and other intellectual property litigation, such litigation could result in our payment of significant monetary damages and/or royalty payments, negatively impact our ability to sell current or future products, or prohibit us from enforcing our patent and proprietary rights against others, which could have a material adverse effect on our business and results of operations.

Patents and other proprietary rights are essential to our business.  We rely on a combination of patents, trade secrets and non-disclosure and other agreements to protect our proprietary intellectual property, and we will continue to do so.  While we intend to defend against any threats to our intellectual property, these patents, trade secrets and other agreements may not adequately protect our intellectual property.  Further, our currently pending or future patent applications may not result in patents being issued to us, patents issued to or licensed by us in the past or in the future may be challenged or circumvented by competitors, and such patents may be found invalid, unenforceable or insufficiently broad to protect our technology or to provide us with any competitive advantage.  Third parties could obtain patents that may require us to negotiate licenses to conduct our business, and the required licenses may not be available on reasonable terms or at all.

In addition, intellectual property rights may be unavailable or of limited effect in some foreign countries.  If we do not obtain sufficient international protection for our intellectual property, our competitiveness in international markets could be impaired, which could limit our growth and revenue.

We also attempt to protect our trade secrets, proprietary know-how and continuing technological innovation with security measures, including the use of non-disclosure and other agreements with our employees, consultants and collaborators.  We cannot be certain that these agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information, or that third parties will not otherwise gain access to our trade secrets or proprietary knowledge.

We are involved in legal proceedings that may result in adverse outcomes.

In addition to intellectual property and product liability claims and lawsuits, we are involved in various commercial and securities litigation and claims and other legal proceedings that arise from time to time in the ordinary course of our business.  For example, as discussed further in Note 19 to the consolidated financial statements, we are defending a purported class action lawsuit, Shah v. Zimmer Biomet Holdings, Inc. et al., filed against us, certain of our current and former officers, certain current and former members of our Board of Directors, and certain former stockholders of ours who sold shares of our common stock in secondary public offerings in 2016, alleging that we and other 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.  Although we believe we have substantial defenses in these matters, litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future.  Given the uncertain nature of legal proceedings generally, we are not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome.  We could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in any particular period.

Future material impairments in the carrying value of our intangible assets, including goodwill, would negatively affect our operating results.

Our assets include intangible assets, primarily goodwill.  At December 31, 2017, we had $10.7 billion in goodwill.  The goodwill results from our acquisition activity, including the Biomet and LDR mergers, and represents the excess of the consideration transferred over the fair value of the net assets acquired.  We assess at least annually whether events or changes in circumstances indicate that the carrying value of our intangible assets may not be recoverable.  As discussed further in Note 9 to the consolidated financial statements, we recorded goodwill impairment charges of $304.7 million in 2017.  If the operating performance at one or more of our business units falls significantly below current levels, if competing or alternative technologies emerge, or if market conditions or

22


future cash flow estimates for one or more of our businesses decline, we could be required to record additional goodwill impairment charges.  Any write-off of a material portion of our unamortized intangible assets would negatively affect our results of operations.

We identified a material weakness in our internal control over financial reporting as of December 31, 2016.  While the particular material weakness has been remediated as of December 31, 2017, additional material weaknesses or relapses of this material weakness could result in a material misstatement in our financial statements.

We are responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  As discussed in Part II, Item 9A of this report, we identified a material weakness in our internal control over financial reporting as of December 31, 2016 related to management’s controls over accounting for income taxes.  A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  During 2017, we executed our remediation plans to address the material weakness.  However, if the remedial measures are not adhered to or if additional material weaknesses or significant deficiencies in internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.

Developments relating to the UK’s referendum vote in favor of leaving the EU could adversely affect us.

The UK held a referendum in June 2016 in which voters approved the UK’s voluntary exit from the EU, commonly referred to as “Brexit”.  The effects of Brexit are expected to be far-reaching.  Brexit and the perceptions as to its impact may adversely affect business activity and economic conditions in Europe and globally and could contribute to instability in global financial and foreign exchange markets.  Brexit could also have the effect of disrupting the free movement of goods, services and people between the UK and the EU; however, the full effects of Brexit are uncertain and will depend on any agreements the UK may make to retain access to EU markets.  Brexit could also lead to legal uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or replicate.  Also, as a result of Brexit, other European countries may seek to conduct referenda with respect to their continuing membership with the EU.  Given these possibilities and others we may not anticipate, as well as the lack of comparable precedent, the full extent to which our business, results of operations and financial condition could be adversely affected by Brexit is uncertain.

Anti-takeover provisions in our organizational documents could delay or prevent a change of control.

Certain provisions of our Restated Certificate of Incorporation, our Restated By-Laws and the Delaware General Corporation Law may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders.

These provisions provide for, among other things:

 

the ability of our board of directors to issue one or more series of preferred stock without further stockholder action;

 

advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;

 

certain limitations on convening special stockholder meetings; and

 

the prohibition on engaging in a “business combination” with an “interested stockholder” for three years after the time at which a person became an interested stockholder unless certain conditions are met, as set forth in Section 203 of the Delaware General Corporation Law.

These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders.  As a result, our stockholders may be limited in their ability to obtain a premium for their shares.

23


Our Restated By-Laws designate certain Delaware courts as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our Restated By-Laws provide that, unless we consent in writing to the selection of an alternative forum, a state court located within the State of Delaware (or, if no state court located in the State of Delaware has jurisdiction, the federal district court for the District of Delaware) will be the sole and exclusive forum for any stockholder (including any beneficial owner) to bring (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of the Delaware General Corporation Law or our Restated Certificate of Incorporation or our Restated By-Laws, as either may be amended from time to time, or (iv) any action asserting a claim against us or any of our directors, officers or other employees governed by the internal affairs doctrine.  Any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have received notice of and consented to the foregoing provisions.  This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees.  Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

Item 1B.

Unresolved Staff Comments

Not Applicable.

24


Item 2.

Properties

The following are our principal properties:

 

 

 

 

 

Owned /

 

Square

 

Location

 

Use

 

Leased

 

Feet

 

Warsaw, Indiana

 

Research & Development, Manufacturing, Warehousing, Marketing & Administration

 

Owned

 

 

1,900,000

 

Warsaw, Indiana

 

Corporate Headquarters & The Zimmer Biomet Institute

 

Owned

 

 

115,000

 

Warsaw, Indiana

 

Manufacturing & Warehousing

 

Leased

 

 

170,000

 

Westminster, Colorado

 

Spine Business Unit Headquarters

 

Leased

 

 

105,000

 

Jacksonville, Florida

 

CMF Business Unit Headquarters & Manufacturing

 

Owned

 

 

85,000

 

Palm Beach Gardens, Florida

 

Dental Business Unit Headquarters & Manufacturing

 

Owned

 

 

190,000

 

Palm Beach Gardens, Florida

 

Manufacturing

 

Leased

 

 

45,000

 

Southaven, Mississippi

 

Distribution Center

 

Leased

 

 

190,000

 

Parsippany, New Jersey

 

Office, Research & Development, Manufacturing, Warehousing & The Zimmer Biomet Institute

 

Leased

 

 

235,000

 

Dover, Ohio

 

Surgical Business Unit Headquarters & Manufacturing

 

Owned

 

 

140,000

 

Dover, Ohio

 

Surgical Business Unit Headquarters & Manufacturing

 

Leased

 

 

60,000

 

Austin, Texas

 

Offices & Manufacturing

 

Leased

 

 

90,000

 

Beijing, China

 

Manufacturing

 

Leased

 

 

95,000

 

Changzhou, China

 

Manufacturing

 

Owned

 

 

75,000

 

Jinhua, China

 

Manufacturing

 

Owned

 

 

135,000

 

Valence, France

 

Manufacturing

 

Owned

 

 

120,000

 

Berlin, Germany

 

Manufacturing

 

Owned

 

 

50,000

 

Eschbach, Germany

 

Distribution Center

 

Owned

 

 

100,000

 

Galway, Ireland

 

Manufacturing

 

Owned

 

 

125,000

 

Shannon, Ireland

 

Offices & Manufacturing

 

Owned

 

 

125,000

 

Hazeldonk, The Netherlands

 

Distribution Center

 

Leased

 

 

295,000

 

Ponce, Puerto Rico

 

Offices, Manufacturing & Warehousing

 

Owned

 

 

225,000

 

Singapore

 

Regional Headquarters

 

Leased

 

 

30,000

 

Bridgend, South Wales

 

Manufacturing

 

Owned

 

 

185,000

 

Bridgend, South Wales

 

Manufacturing

 

Leased

 

 

100,000

 

Valencia, Spain

 

Manufacturing

 

Owned

 

 

70,000

 

Valencia, Spain

 

Manufacturing

 

Leased

 

 

10,000

 

Winterthur, Switzerland

 

Regional Headquarters, Offices, Research & Development & Manufacturing

 

Leased

 

 

420,000

 

 

In addition to the above, we maintain sales and administrative offices and warehouse and distribution facilities in more than 40 countries around the world.  We believe that all of the facilities and equipment are in good condition, well maintained and able to operate at present levels.  We believe the current facilities, including manufacturing, warehousing, research and development and office space, provide sufficient capacity to meet ongoing demands.  

Item 3.

Legal Proceedings

Information pertaining to legal proceedings in which we are involved can be found in Note 19 to our consolidated financial statements included in Part II, Item 8 of this report and is incorporated herein by reference.

Item 4.

Mine Safety Disclosures

Not Applicable.

25


PART II

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the New York Stock Exchange and the SIX Swiss Exchange under the symbol “ZBH.”  The high and low sales prices for our common stock on the New York Stock Exchange and the dividends declared for the calendar quarters of fiscal years 2017 and 2016 are as follows:

QUARTERLY HIGH-LOW SHARE PRICES AND DECLARED DIVIDENDS

 

 

 

High

 

 

Low

 

 

Declared

Dividends

 

Year Ended December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

122.11

 

 

$

103.33

 

 

$

0.24

 

Second Quarter

 

$

129.39

 

 

$

116.54

 

 

$

0.24

 

Third Quarter

 

$

132.61

 

 

$

110.13

 

 

$

0.24

 

Fourth Quarter

 

$

124.46

 

 

$

108.72

 

 

$

0.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

107.22

 

 

$

88.27

 

 

$

0.24

 

Second Quarter

 

$

123.43

 

 

$

105.53

 

 

$

0.24

 

Third Quarter

 

$

133.19

 

 

$

119.22

 

 

$

0.24

 

Fourth Quarter

 

$

133.21

 

 

$

95.63

 

 

$

0.24

 

 

We expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the Board of Directors and may be adjusted as business needs or market conditions change.  As further discussed in Note 11 to the consolidated financial statements, our debt facilities restrict the payment of dividends under certain circumstances.

As of February 16, 2018, there were approximately 22,000 holders of record of our common stock.  A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers and other financial institutions.  On February 16, 2018, the closing price of our common stock, as reported on the New York Stock Exchange, was $120.48 per share.

The information required by this Item concerning equity compensation plans is incorporated herein by reference to Item 12 of this report.


26


Item 6.

Selected Financial Data

The financial information for each of the past five years ended December 31 is set forth below (in millions, except per share amounts):

 

 

 

2017

 

 

2016

 

 

2015 (1)

 

 

2014

 

 

2013

 

STATEMENT OF EARNINGS DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

7,824.1

 

 

$

7,683.9

 

 

$

5,997.8

 

 

$

4,673.3

 

 

$

4,623.4

 

Net earnings of Zimmer Biomet Holdings, Inc.

 

 

1,813.8

 

 

 

305.9

 

 

 

147.0

 

 

 

720.3

 

 

 

780.4

 

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

8.98

 

 

$

1.53

 

 

$

0.78

 

 

$

4.26

 

 

$

4.60

 

Diluted

 

 

8.90

 

 

 

1.51

 

 

 

0.77

 

 

 

4.20

 

 

 

4.54

 

Dividends declared per share of common stock

 

$

0.96

 

 

$

0.96

 

 

$

0.88

 

 

$

0.88

 

 

$

0.80

 

Average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

201.9

 

 

 

200.0

 

 

 

187.4

 

 

 

169.0

 

 

 

169.6

 

Diluted

 

 

203.7

 

 

 

202.4

 

 

 

189.8

 

 

 

171.7

 

 

 

171.8

 

BALANCE SHEET DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

25,964.5

 

 

$

26,684.4

 

 

$

27,160.6

 

 

$

9,658.0

 

 

$

9,595.0

 

Long-term debt

 

 

8,917.5

 

 

 

10,665.8

 

 

 

11,497.4

 

 

 

1,425.5

 

 

 

1,672.3

 

Other long-term obligations

 

 

2,291.3

 

 

 

3,967.2

 

 

 

4,155.9

 

 

 

656.8

 

 

 

583.6

 

Stockholders' equity

 

 

11,735.5

 

 

 

9,669.9

 

 

 

9,889.4

 

 

 

6,551.7

 

 

 

6,310.6

 

 

(1)

Includes the results of Biomet starting on June 24, 2015 and Biomet balance sheet data as of December 31, 2015.

27


Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and the corresponding notes included elsewhere in this Annual Report on Form 10-K.  Certain percentages presented in this discussion and analysis are calculated from the underlying whole-dollar amounts and therefore may not recalculate from the rounded numbers used for disclosure purposes.  Certain amounts in the 2016 and 2015 consolidated financial statements have been reclassified to conform to the 2017 presentation.  

On June 24, 2015, we completed our merger with Biomet and its results of operations have been included in our results starting on that date.  The Biomet merger was a transformational event for us and has had significant effects on all aspects of our business.  Accordingly, our sales and expenses have increased significantly since the merger date compared to prior periods.

EXECUTIVE LEVEL OVERVIEW

2017 Results

Net sales increased by 1.8 percent in 2017 compared to 2016 primarily due to the acquisition of LDR Holding Corporation in the third quarter of 2016 and solid performance from our Asia Pacific operating segment.  In 2017, we experienced challenges across our Knees, Hips and S.E.T. product categories as a result of production delays from our Warsaw North Campus facility.  The production shortfall directly impacted our ability to fully meet case demand.  Throughout 2017, we worked to improve our production levels at this facility, but we continued to experience insufficient inventory levels across some brands within our Knee, Hip and S.E.T. product categories which impacted our ability to increase revenue.  

Our net earnings increased significantly in 2017 compared to 2016 primarily due to a $1,272.4 million income tax benefit we recorded related to the 2017 Tax Act.  Additionally, net earnings increased in 2017 compared to 2016 due to a decrease in inventory step-up expense, lower Biomet integration-related expenses, lower performance-based compensation expense as a result of not achieving our 2017 operating plans and the recognition of $111.3 million of tax benefit as a result of lower tax rates unrelated to the impact of the 2017 Tax Act.  Partially offsetting these favorable items were $304.7 million of goodwill impairment charges on our Spine and Office Based Technologies reporting units and higher spending on quality remediation at our Warsaw North Campus facility.

2018 Outlook

In December 2017, we announced the appointment of a new Chief Executive Officer (“CEO”).  Our new CEO has begun an in-depth review of our business and formulating strategies to improve our performance.  His initial review likely will conclude during the first quarter and the implementation of those strategies will likely have an impact on our results in 2018.  In the meantime, we have identified several immediate opportunities to improve our operational execution and address certain near-term challenges.  We will continue to work toward completing our quality remediation efforts at our Warsaw North Campus facility and continue to invest in best-in-class quality management systems.  We will remain focused on fully restoring the supply of certain key brands within our Knee, Hip and S.E.T. product categories.  We also have several key product launches planned in 2018 that we believe will be a catalyst for our future performance.  

There are a few known items that are expected to impact our 2018 results.  Increased manufacturing costs related to quality remediation at our Warsaw North Campus facility in 2017 will be recognized in 2018 as we sell that inventory.  We expect ongoing benefits from the reduction of the U.S. corporate tax rate, but we plan to reinvest those savings into the business to drive sales growth.  Additionally, due to underperformance against our operating plans in 2017, we expect expenses from our performance-based compensation programs to increase if we are able to achieve our plans in 2018.  We also expect our special items expense to decrease as we complete our Biomet integration plans and substantially complete our quality remediation at our Warsaw North Campus facility.    

U.S. Tax Reform

 

2017 Tax Act: The 2017 Tax Act includes a broad range of provisions, many of which significantly differ from those contained in previous U.S. tax law.  Changes in tax law are accounted for in the period of enactment.  As such, our 2017 consolidated financial statements reflect the immediate tax effect of the 2017 Tax Act.

 

The 2017 Tax Act contains several key provisions including, among other things:

28


 

 

 

a one-time tax on the mandatory deemed repatriation of post-1986 unremitted foreign earnings and profits, referred to as the toll charge;

 

 

 

a reduction in the corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017;

 

 

 

the introduction of a new U.S. tax on certain off-shore earnings referred to as global intangible low-taxed income (“GILTI”) at an effective tax rate of 10.5 percent for tax years beginning after December 31, 2017 (increasing to 13.125 percent for tax years beginning after December 31, 2025), with a partial offset by foreign tax credits; and

 

 

 

the introduction of a territorial tax system beginning in 2018 by providing a 100 percent dividend received deduction on certain qualified dividends from foreign subsidiaries.

 

During the fourth quarter of 2017, we recorded an income tax benefit of $1,272.4 million, which was comprised of the following:

 

income tax benefit of $715.0 million related to the one-time deemed repatriation of foreign earnings.  This is composed of a $1,181.0 million benefit from the removal of a deferred tax liability we had recorded for the repatriation of foreign earnings prior to the 2017 Tax Act offset by $466.0 million for the toll charge recognized under the 2017 Tax Act.  In accordance with the 2017 Tax Act, we expect to elect to pay the toll charge in installments over eight years.  As of December 31, 2017, we have recorded current and non-current income tax liabilities related to the toll charge of $82.0 million and $384.0 million, respectively.

 

 

an income tax benefit of $557.4 million, primarily related to the remeasurement of our deferred tax assets and liabilities at the enacted corporate income tax rate of 21 percent.

The net benefit recorded was based on currently available information and interpretations made in applying the provisions of the 2017 Tax Act as of the time of filing this Annual Report on Form 10-K.  We further refined our estimates related to the impact of the 2017 Tax Act subsequent to the issuance of our earnings release for the fourth quarter of 2017.  In accordance with authoritative guidance issued by the SEC, the income tax effect for certain aspects of the 2017 Tax Act represent provisional amounts for which our accounting is incomplete, but with respect to which a reasonable estimate could be determined and recorded during the fourth quarter of 2017.  The actual effects of the 2017 Tax Act and final amounts recorded may differ materially from our current estimate of provisional amounts due to, among other things, further interpretive guidance that may be issued by U.S. tax authorities or regulatory bodies, including the SEC and the Financial Accounting Standards Board (“FASB”).  We will continue to analyze the 2017 Tax Act and any additional guidance that may be issued so we can finalize the full effects of applying the new legislation on our financial statements in the measurement period, which ends in the fourth quarter of 2018.  See Note 15 to our consolidated financial statements for additional details related to the 2017 Tax Act.

RESULTS OF OPERATIONS

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.  This sales analysis differs from our reportable operating segments, which are based upon our senior management organizational structure and how we allocate resources towards achieving operating profit goals.  We analyze sales by geography because the underlying market trends in any particular geography tend to be similar across product categories and because we primarily sell the same products in all geographies.  

As previously disclosed, sales increased significantly in 2016 when compared to prior years due to the inclusion of Biomet sales for the entire year.  Therefore, we analyze 2015 sales on a pro forma basis because it represents how the Zimmer and Biomet underlying businesses may have performed on a combined basis.  Pro forma sales assume the Biomet merger occurred on January 1, 2014 and therefore include the net sales of Biomet in 2015 prior to the closing of the merger.  

29


Net Sales by Geography

The following tables present net sales by geography and the components of the percentage changes (dollars in millions):

 

 

 

Year Ended December 31,

 

 

 

 

 

 

Volume/

 

 

 

 

 

 

Foreign

 

 

 

 

2017

 

 

2016

 

 

% Inc

 

 

Mix

 

 

Price

 

 

Exchange

 

 

Americas

 

$

4,865.6

 

 

$

4,802.2

 

 

 

1.3

 

%

 

3.7

 

%

 

(2.5

)

%

 

0.1

 

%

EMEA

 

 

1,745.2

 

 

 

1,730.4

 

 

 

0.9

 

 

 

2.1

 

 

 

(1.9

)

 

 

0.7

 

 

Asia Pacific

 

 

1,213.3

 

 

 

1,151.3

 

 

 

5.4

 

 

 

9.4

 

 

 

(3.1

)

 

 

(0.9

)

 

Total

 

$

7,824.1

 

 

$

7,683.9

 

 

 

1.8

 

 

 

4.3

 

 

 

(2.5

)

 

 

-

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

Volume/

 

 

 

 

 

 

Foreign

 

 

 

 

2016

 

 

2015

 

 

% Inc

 

 

Mix

 

 

Price

 

 

Exchange

 

 

Americas

 

$

4,802.2

 

 

$

3,662.4

 

 

 

31.1

 

%

 

33.4

 

%

 

(2.1

)

%

 

(0.2

)

%

EMEA

 

 

1,730.4

 

 

 

1,417.8

 

 

 

22.0

 

 

 

26.1

 

 

 

(0.7

)

 

 

(3.4

)

 

Asia Pacific

 

 

1,151.3

 

 

 

917.6

 

 

 

25.5

 

 

 

24.5

 

 

 

(2.5

)

 

 

3.5

 

 

Total

 

$

7,683.9

 

 

$

5,997.8

 

 

 

28.1

 

 

 

30.3

 

 

 

(1.8

)

 

 

(0.4

)

 

 

“Foreign Exchange” used in the tables in this report represents the effect of changes in foreign currency exchange rates on sales.  

The following table presents our 2016 net sales, and our 2015 pro forma net sales, by geography and the components of the percentage changes (dollars in millions):

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

Pro Forma

2015

 

 

% Inc/(Dec)

 

 

Volume/

Mix

 

 

Price

 

 

Divestiture

Impact

 

 

Foreign

Exchange

 

Americas

 

$

4,802.2

 

 

$

4,685.2

 

 

 

2.5

%

 

 

5.2

%

 

 

(1.6

)%

 

 

(0.9

)%

 

 

(0.2

)%

EMEA

 

 

1,730.4

 

 

 

1,767.9

 

 

 

(2.1

)

 

 

1.9

 

 

 

(0.6

)

 

 

(0.8

)

 

 

(2.6

)

Asia Pacific

 

 

1,151.3

 

 

 

1,064.7

 

 

 

8.1

 

 

 

8.0

 

 

 

(2.1

)

 

 

(0.7

)

 

 

2.9

 

Total

 

$

7,683.9

 

 

$

7,517.8

 

 

 

2.2

 

 

 

4.9

 

 

 

(1.5

)

 

 

(0.9

)

 

 

(0.3

)

 

 

Net Sales by Product Category

The following tables present net sales by product category and the components of the percentage changes (dollars in millions):

 

 

 

Year Ended December 31,

 

 

 

 

 

 

Volume/

 

 

 

 

 

 

Foreign

 

 

 

 

2017

 

 

2016

 

 

% Inc/(Dec)

 

 

Mix

 

 

Price

 

 

Exchange

 

 

Knees

 

$

2,737.1

 

 

$

2,752.6

 

 

 

(0.6

)

%

 

2.2

 

%

 

(2.8

)

%

 

-

 

%

Hips

 

 

1,879.1

 

 

 

1,867.9

 

 

 

0.6

 

 

 

3.6

 

 

 

(3.0

)

 

 

-

 

 

S.E.T.

 

 

1,709.1

 

 

 

1,644.4

 

 

 

3.9

 

 

 

6.0

 

 

 

(2.0

)

 

 

(0.1

)

 

Dental

 

 

418.6

 

 

 

427.9

 

 

 

(2.2

)

 

 

(0.3

)

 

 

(2.3

)

 

 

0.4

 

 

Spine & CMF

 

 

759.5

 

 

 

662.0

 

 

 

14.7

 

 

 

15.8

 

 

 

(1.4

)

 

 

0.3

 

 

Other

 

 

320.7

 

 

 

329.1

 

 

 

(2.5

)

 

 

(0.9

)

 

 

(1.7

)

 

 

0.1

 

 

Total

 

$

7,824.1

 

 

$

7,683.9

 

 

 

1.8

 

 

 

4.3

 

 

 

(2.5

)

 

 

-

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

Volume/

 

 

 

 

 

 

Foreign

 

 

 

 

2016

 

 

2015

 

 

% Inc

 

 

Mix

 

 

Price

 

 

Exchange

 

 

Knees

 

$

2,752.6

 

 

$

2,276.8

 

 

 

20.9

 

%

 

23.6

 

%

 

(2.0

)

%

 

(0.7

)

%

Hips

 

 

1,867.9

 

 

 

1,533.0

 

 

 

21.8

 

 

 

24.6

 

 

 

(2.6

)

 

 

(0.2

)

 

S.E.T.

 

 

1,644.4

 

 

 

1,214.6

 

 

 

35.4

 

 

 

36.9

 

 

 

(1.4

)

 

 

(0.1

)

 

Dental

 

 

427.9

 

 

 

335.7

 

 

 

27.5

 

 

 

25.7

 

 

 

2.1

 

 

 

(0.3

)

 

Spine & CMF

 

 

662.0

 

 

 

404.4

 

 

 

63.7

 

 

 

66.7

 

 

 

(2.9

)

 

 

(0.1

)

 

Other

 

 

329.1

 

 

 

233.3

 

 

 

41.1

 

 

 

43.4

 

 

 

(1.8

)

 

 

(0.5

)

 

Total

 

$

7,683.9

 

 

$

5,997.8

 

 

 

28.1

 

 

 

30.3

 

 

 

(1.8

)

 

 

(0.4

)

 

 

30


The following table presents our 2016 net sales, and our 2015 pro forma net sales, by product category and the components of the percentage changes (dollars in millions):

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

Pro Forma

2015

 

 

% Inc/(Dec)

 

 

Volume/

Mix

 

 

Price

 

 

Divestiture

Impact